________________________________________________________________________________
______
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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-26657
LIVEWORLD, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0426524
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
307 Orchard City Drive, Suite 110
Campbell, California 95008
-------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 871-5200
Former name, former address and former fiscal year,
if changed since last report:
1919 S. Bascom Ave.
Campbell, CA 95008.
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, 2001 was 25,310,872.
________________________________________________________________________________
LIVEWORLD, INC.
FORM 10-Q
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Unaudited Condensed Balance Sheets at September 30, 2001 and
December 31, 2000 3
Unaudited Condensed Statements of Operations for the three and
nine months ended September 30, 2001 and 2000 4
Unaudited Condensed Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 24
-2-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LIVEWORLD, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 3,141 $ 6,989
Short term investments - 6,980
Accounts receivable, net 1,707 2,580
Prepaid expenses and other current assets 736 1,094
-------- --------
Total current assets 5,584 17,643
Property and equipment, net 1,639 8,234
Other assets 2,952 6,169
Goodwill, net 232 2,733
-------- --------
Total assets $ 10,407 $ 34,779
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, current portion $ 48 $ 86
Accounts payable 96 1,085
Accrued liabilities 1,752 3,138
Deferred revenue 781 746
-------- --------
Total current liabilities 2,677 5,055
Notes payable, less current portion - 21
-------- --------
Total liabilities 2,677 5,076
Stockholders' equity:
Common stock 25 25
Additional paid-in-capital 134,944 135,196
Deferred stock based compensation (66) (223)
Notes receivable from stockholders (174) (172)
Accumulated deficit (126,977) (105,101)
Treasury Stock, 54,687 common shares at cost (22) (22)
-------- --------
Total stockholders' equity 7,730 29,703
-------- --------
Total liabilities and stockholders' equity $ 10,407 34,779
======== ========
See accompanying notes to the condensed financial statements.
-3-
LIVEWORLD, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------ ------------- ------------
Revenues:
Community solutions services $ 703 $ 925 $ 2,088 $ 2,244
Event services 156 931 1,096 2,297
Market research services 217 448 471 1,281
Network services - 1,445 282 5,969
-------- ------ ------- ------
Total revenue 1,076 3,749 3,937 11,791
Cost of revenue 1,109 3,973 6,093 11,710
----- ------ ------- ------
Gross margin (33) (224) (2,156) 81
Operating expenses:
Product development 708 2,205 3,352 5,905
Sales and marketing 379 2,760 2,183 12,323
General and administrative 904 2,981 4,976 8,798
Restructuring charges 347 - 851 469
Noncash advertising and promotional charges - 213 2,171 1,374
Loss on Sale of Assets - - 1,792 -
Impairment of Fixed Assets 2,302 - 2,302 -
Amortization of goodwill 18 171 2,501 513
----- ------ ------- -------
Total operating expenses 4,658 8,330 20,128 29,382
----- ------ ------- -------
Loss from operations (4,691) (8,554) (22,284) (29,301)
Interest income, net 65 455 409 1,771
------ ------ ------- -------
Net loss $(4,626) $(8,099) $(21,875) $(27,530)
====== ====== ======= =======
Basic and diluted net loss per common share $ (0.18) $(0.33) $ (0.86) $ (1.11)
====== ====== ======= =======
Weighted average basic and diluted common shares
outstanding 25,282 24,892 25,168 24,743
====== ======= ======= =======
See accompanying notes to the condensed financial statements.
-4-
LIVEWORLD, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
------------------------------------------
September 30, September 30,
2001 2000
Cash flows from operating activities: --------------- -----------------
Net loss $ (21,875) $ (27,530)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,580 3,227
Loss on sale of property and equipment 2,051 -
Impairment of Fixed Assets 2,302
Stock compensation expense (147) 244
Noncash advertising and promotional charges 2,171 1,373
Provision for accounts receivable allowance (869) 470
Changes in operating assets and liabilities:
Accounts receivable 1,743 (1,135)
Prepaid expenses and other current assets 358 43
Accounts payable (989) (2,722)
Accrued liabilities (1,386) 472
Deferred revenue 35 177
------- -------
Net cash used in operating activities (12,026) (25,381)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (324) (6,416)
Proceeds from sale of property and equipment 510 -
Cash paid for acquisition of Research Connections, Inc., net of cash acquired - (417)
Purchases of short-term investments - (4,879)
Proceeds from sale of short-term investments 6,980 33,430
Other assets 1,046 (1,505)
------- --------
Net cash provided by investing activities 8,212 20,213
------- --------
Cash flows from financing activities:
Proceeds from sale of redeemable preferred stock, net of issuance costs 25 -
Proceeds from stock option and warrant exercises - 1,212
Proceeds from repayment of stockholders' notes receivable - 46
Repayment of notes payable (59) (113)
------- --------
Net cash (used in)/provided by financing activities (34) 1,145
------- --------
Net (decrease) in cash and cash equivalents (3,848) (4,023)
Cash and cash equivalents at beginning of period 6,989 14,112
======= ========
Cash and cash equivalents at end of period $ 3,141 $ 10,089
======= ========
Cash paid during the period for interest $ 3 $ 32
======= ========
Supplemental disclosure of noncash financing activities:
Common stock issuance for acquisition of Research Connections, Inc. $ - $ 3,000
======= ========
See accompanying notes to the condensed financial statements.
-5-
LIVEWORLD, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements have been prepared by LiveWorld, Inc.
pursuant to the rules and regulations of the Securities and Exchange Commission
and include the accounts of LiveWorld, Inc. ("LiveWorld" or the "Company").
Certain information and note disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of Management, the unaudited financial statements reflect all
adjustments, consisting only of normal recurring adjustments except as described
in the footnotes, necessary for a fair presentation of the financial position at
September 30, 2001 and the results of operations for the three and nine months
ended September 30, 2001 and 2000. The condensed balance sheet at December 31,
2000 has been derived from audited financial statements as of that date. Certain
reclassifications have been made to the prior period's financial statements to
conform to the September 30, 2001 presentation. These financial statements and
notes should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission on April 2, 2001.
The results of operations for the three and nine months ended September 30,
2001 are not necessarily indicative of the results that may be expected for
future quarters or the year ending December 31, 2001.
As a result of our restructuring and other expense measurement actions, we
have significantly reduced our cash spending and are aggressively managing our
expenses relative to our cash on hand. We may need to reduce costs, further
increase revenue and/or raise additional funds in order to meet our operating
needs, to fund expansion, to develop new or enhance existing services or
products, to respond to competitive pressures, or to acquire or invest in
complementary businesses, technologies, services or products. In addition, in
order to meet our long term liquidity needs, we may need to raise additional
funds, establish a credit facility or seek other financing arrangements.
Additional funding may not be available on favorable terms or at all.
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. Recovery of the carrying amounts of
certain assets, including property, equipment and goodwill, is dependent on
continuing as a going concern.
2. NATURE OF OPERATIONS
LiveWorld was incorporated in the state of California in March 1996 and
reincorporated in the state of Delaware in July 1999. LiveWorld is a provider of
online marketing services for businesses. The Company offers businesses a wide
range of services to help them develop and expand online relationships with
customers, suppliers and employees. These services include producing online
interactive events, conducting online market research, providing outsourced
discussion boards, clubs, chat and event feeds and designing fully integrated
customized communities. These communities offer services such as moderated chat,
home pages, special event production, message boards and online event guides.
The Company generates revenues by selling its online marketing services to
corporations of various sizes within several industries. LiveWorld has incurred
operating losses since inception through September 30, 2001. The Company had an
accumulated deficit of $127.0 million at September 30, 2001. On May 8, 2001, the
Company formally changed its name from Talk City, Inc. to LiveWorld, Inc.
-6-
3. ACCRUED LIABILITIES
Accrued liabilities consist of: September 30, December 31,
2001 2000
-------------- --------------
(In thousands)
Accrued compensation and benefits $529 $ 1,375
Accrued general and administrative expenses 552 562
Accrued sales and marketing expenses 40 321
Accrued rent 94 350
Accrued moderator expenses 20 300
Other accrued liabilities 517 230
-------------- --------------
$1,752 $ 3,138
=============== ==============
4. 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 currently comprised of three main areas
of online business, including (i) community solutions, (ii) live event services,
and (iii) market research 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
substantially all of its revenues have been earned from customers in North
America. For the three months ended September 30, 2001, one of the Company's
clients was responsible for more than 10% of its revenue. For the three months
ended September 30, 2000, one of the Company's clients was responsible for more
than 10% of its revenue. No single client was responsible for more than 10% of
revenue for the nine months ended September 30, 2001 and 2000. Total receivables
from this client were $300,000 on September 30, 2001. Total receivables from
another customer totaled $208,000 on September 30, 2001.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive loss for the three and nine months ended September 30, 2001
and 2000 equaled the net loss.
6. 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, 2001 and
2000:
September 30, September 30,
2001 2000
---------------- ---------------
(In thousands)
Common Stock Options 6,226 4,852
Common Stock Warrants 991 991
Unvested Common Stock Subject to Repurchase 1 86
--------------- ---------------
7,018 5,929
=============== ===============
The average exercise price of the Common Stock Options was $0.17 and $9.97
as of September 30, 2001 and September 30, 2000, respectively. The average
exercise price of the Common Stock Warrants was $5.83 as of September 30, 2001
and 2000.
-7-
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets."
SFAS 141 addresses the accounting for and reporting of business
combinations. SFAS 141 requires that all business combinations be accounted for
using the purchase method of accounting for acquisitions and eliminates the use
of the pooling-of-interests method. SFAS 141 is effective for all business
combinations initiated after June 30, 2001.
SFAS 142 addresses the accounting and reporting for acquired
goodwill and other intangible assets. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only method. The
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of SFAS 142. For goodwill acquired by
June 30, 2001, SFAS 142 is effective for all fiscal years beginning after
December 2001. Goodwill and intangible assets acquired after June 30, 2001
will be subject to immediate adoption of SFAS 142. The Company believes the
adoption of SFAS 142 will not have a material effect on its financial
statements.
8. RESTRUCTURING CHARGES
On July 27, 2001, the Company underwent a restructuring of
operations to further reduce expenses. As a result of the restructuring, the
Company reduced its total headcount by approximately 25 employees, or
approximately 40% of its workforce. The Unaudited Condensed Statement of
Operations for the three months ended September 30, 2001 includes a charge of
approximately $347,000 related to the restructuring, consisting entirely of
employee severance. Substantially all liabilities related to the restructuring
were paid as of September 30, 2001.
9. IMPAIRMENT OF FIXED ASSETS
In light of the restructurings that the Company has recently undertaken,
the Company recorded an impairment charge of approximately $2.3 million to
reduce the carrying amount of certain fixed assets to their estimated fair
value.
10. SUBSEQUENT EVENT
On October 17, 2001, the Company entered into a definitive agreement to
terminate the lease on its former headquarters in Campbell, California. As a
result of this agreement, LiveWorld reduced the future minimum lease payments by
approximately $13.2 million and its overall expected future obligations
associated with the lease by approximately $18 million. As part of this
agreement, the Company agreed to surrender approximately $1.5 million of its
$1.8 million letter of credit and its $122,000 deposit, which are currently
reported in Other Assets. The Company estimates that it will incur approximately
$960,000 in other charges, which include leasehold improvement write-offs,
utility charges, repairs and broker fees associated with the termination of the
lease.
On November 2, 2001, the Company announced a further restructuring,
reducing its total headcount by two employees. In addition salary reductions
were implemented for most employees, including all senior executives. The
Company expects to take a charge of approximately $53,000 for the three month
period ended December 31, 2001 related to this restructuring, consisting
entirely of employee severance.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements represent our
expectations or beliefs concerning future events and include statements
regarding our expectations or beliefs that we will not derive revenues from
advertising and sponsorships; we will incur additional operating losses for the
foreseeable future; product development expenses will decrease as the impact of
our restructurings is realized; sales and marketing expenses will decrease;
general and administrative costs will decrease; we will continue to evaluate
possible acquisitions and investments; and our available cash and cash
equivalents will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least the next three to six months. Actual
results could differ materially from those projected in the forward-looking
statements as a result of known and unknown risk factors and uncertainties, and
you should not rely on these forward-looking statements. Such factors may
include, but are not necessarily limited to: whether we will continue to incur
significant losses; our ability to generate increased revenues; the success of
our recent restructurings; the feasibility of incurring more dilution by selling
equity; our ability to increase the number of online marketing services clients,
expand our online marketing services offerings and effectively implement these
services; and attracting and retaining key personnel. In addition to the
foregoing, please see the section in this report entitled "Risk Factors That May
Affect Results of Operations and Financial Condition" for a description of other
factors that might cause actual results to differ from those projected in the
forward-looking statements herein. LiveWorld does not undertake any obligation
to publicly update any forward-looking statement to reflect events or
circumstances after the date on which any such statement is made or to reflect
the occurrence of unanticipated events.
Overview
We provide online community-based relationship marketing and support
services for businesses to market to and support their customers and employees.
From inception through September 2001, our operating activities have primarily
been focused on:
o developing the quality environment of our services;
o building sales momentum and developing programs and content;
o developing a comprehensive computer software and hardware infrastructure;
o recruiting personnel; and
o raising capital.
From inception through early 2001, we also owned and operated a
consumer destination site, www.talkcity.com. During that period we also focused
on developing the Talk City brand, expanding the site's audience and usage of
services, establishing operating relationships with our network participants and
generating advertising revenue on the Talk City site.
Substantially all of our revenues are fee based and derived from the
sale of our online marketing services. Our online marketing services include
consulting on the use and implementation of online communities, designing,
operating and moderating customized communities, producing online events,
conducting online market research and facilitating online meetings. These
services help businesses develop and expand online relationships with customers,
suppliers and employees. Revenues derived from online marketing services are
recognized ratably over the term of the contract period,
which coincides with when the services are performed, provided that the
collection of the receivable is probable.
Cost of revenues includes payroll and related expenses associated
with content and production personnel who conduct online
market research, implement customized communities, and produce online
-9-
events. Also included are moderator costs, Internet communication charges
and server-related costs to support our Web site.
Operating expenses consist primarily of product development, sales and
marketing, general and administrative and interest expenses. Product development
expenses consist primarily of salaries, payroll taxes and benefits and
expenditures related to software development, quality engineering and product
marketing. Sales and marketing expenses consist primarily of advertising and
promotion costs, salaries, commissions and other related costs of sales and
marketing personnel and program expenses, public relations costs and other
marketing expenses. General and administrative expenses consist of salaries,
payroll taxes and benefits and related costs for general corporate functions,
including executive management, finance, human resources, facilities, legal and
fees for other professional services.
Sales and marketing expenses exclude noncash advertising and promotional
charges related to our advertising on the NBC television network and in
magazines owned by Hearst along with promotional services attributable to the
operating agreements with NBC. These advertising activities are paid for through
noncash in-kind investments. This in-kind program includes $7.2 million of
television commercials and print ads valued at rates discounted from the rate
card to be incurred from 1998 through 2001. These amounts were determined based
on the fair value of our common stock and warrants exchanged for the services
received. At September 30, 2001, all of the Company's non-cash in-kind
investments were fully amortized.
We incurred losses of $1.3 million in 1996, $6.4 million in 1997, $15.7
million in 1998, $40.1 million in 1999, $41.6 million in 2000, and $21.9 million
through the first nine months of 2001. These losses include noncash advertising
and promotional charges of $19.6 million through September 30, 2001. At
September 30, 2001, we had an accumulated deficit of $127.0 million. We
anticipate that we will incur additional operating losses for the foreseeable
future.
On July 27, 2001, the Company underwent a restructuring of operations to
further reduce expenses. As a result of the restructuring, the Company reduced
its total headcount by 25 employees, or approximately 40% of its workforce. In
addition the Company implemented an across-the-board salary reduction program.
The Unaudited Condensed Statement of Operations for the three months ended
September 30, 2001 includes a charge of approximately $347,000 for the quarter
ended September 30, 2001 related to the restructuring, consisting entirely of
employee severance.
-10-
Results of Operations
The following table sets forth, for the periods indicated, thepercentage of
net revenue represented by certain items reflected in LiveWorld's Condensed
Financial Statements:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
----- ---- ----- ----
Net revenue 100 % 100 % 100 % 100 %
Cost of revenue 103 106 155 99
----- --- ----- ---
Gross margin (3) (6) (55) 1
Operating expenses:
Product development 66 59 85 50
Sales and marketing 35 74 55 105
General and administrative 84 80 126 75
Restructuring charges 32 -- 22 4
Non-cash advertising and promotional charges -- 6 55 12
Loss on Sale of Assets -- -- 46 --
Impairment of Fixed Assets 214 -- 58 --
Amortization of goodwill 2 5 64 4
----- ---- ---- -----
Total operating expenses 433 222 511 249
----- ---- ---- -----
Operating loss (436) (228) (566) (248)
Interest income, net 6 12 10 15
------ ------ ------ ------
Net loss (430)% (216)% (556)% (233)%
==== ==== ==== ====
Net Revenue. Net revenue decreased 71% to approximately $1.1 million for
the three months ended September 30, 2001, from $3.7 million for the three
months ended September 30, 2000, a decrease of approximately $2.6 million. This
decrease was primarily the result of decreased advertising sales as the Company
sold off the advertising business in May 2001. In addition, revenue for the fee
based services, particularly live events and market research, was also lower as
a result of the more difficult economic conditions. Revenue for certain
fee-based services such as consulting, moderation and discussion boards
increased. For the nine months ended September 30, 2001, net revenue decreased
67%, to $3.9 million, from $11.8 million for the nine months ended September 30,
2000. This decrease is primarily the result of lower advertising revenue as well
as lower fee-based services as a result of a slowdown in marketing spending by
clients in response to the changing economic conditions. This decrease was
partially offset by revenue of $338,000 from the one-year operating agreement
executed in connection with the sale of the consumer unit and associated web
site, www.talkcity.com. Substantially all of LiveWorld's revenue is derived
within North America.
Cost of Revenue. Cost of revenue was $1.1 million, or 103% of total
revenue, for the three months ended September 30, 2001, compared to $4.0
million, or 106% of total revenue, for the three months ended September 30,
2000. Cost of revenue decreased in absolute dollars by $2.9 million compared to
the same period in the prior year, which was primarily due to lower
personnel-related costs resulting from the reductions in headcount stemming from
the recent restructurings. Cost of revenue was $6.1 million, or 155% of total
revenue, for the nine months ended September 30, 2001, compared to $11.7
million, or 99% of total revenue, for the nine months ended September 30, 2000.
Cost of revenue decreased in absolute dollars by $5.6 million compared to the
same period in the prior year, primarily due to lower personnel-related costs
resulting from the headcount reductions that were part of the recent
restructurings.
-11-
Product Development. Product development expenses for the three months
ended September 30, 2001 and 2000 were approximately $708,000, or 66% of total
revenue, and $2.2 million, or 59% of total revenue, respectively. Product
development expenses for the nine months ended September 30, 2001 and 2000 were
approximately $3.4 million, or 85% of total revenue, and $5.9 million, or 50% of
total revenue, respectively. The decrease in absolute dollars was primarily
attributable to lower personnel-related costs as a result of the Company's
restructurings. LiveWorld expects that product development expenses will
decrease slightly for the foreseeable future as the impact of the July 2001
restructuring is more fully realized.
Sales and Marketing. Sales and marketing expenses for the three months
ended September 30, 2001 and 2000 were approximately $379,000, or 35% of total
revenue, and approximately $2.8 million, or 74% of total revenue, respectively.
Sales and marketing expenses for the nine months ended September 30, 2001 and
2000 were approximately $2.2 million, or 55% of revenue, and $12.3 million, or
105% of revenue, respectively. The decrease in absolute dollars in sales and
marketing expenses for the quarter and for the first nine months of 2001 was
primarily attributable to a decrease in online advertising expenses and by a
decrease in sales personnel and associated expenses. LiveWorld expects that
sales and marketing expenses will remain constant or decrease slightly in
absolute dollars in the foreseeable future.
General and Administrative. General and administrative expenses for the
three months ended September 30, 2001 and 2000 were approximately $904,000, or
84% of total revenue, and $3.0 million, or 80% of total revenue, respectively.
General and administrative expenses for the nine months ended September 30, 2001
and 2000 were approximately $5.0 million, or 126% of total revenue, and $8.8
million, or 75% of total revenue, respectively. The expenses for the nine months
ended September 30, 2001 include the result of a realized gain of $250,000 from
the sale of the Company's minority investment in Matchnet, which had previously
been written down to $0. The decrease in general and administrative costs was
also attributable to a reduction in headcount. LiveWorld expects that general
and administrative costs will decrease in the future, as the Company realizes
the benefits of the July 2001 restructuring and the lower costs resulting from
the smaller office space for our headquarters.
Non-cash Advertising and Promotional Charges. Noncash advertising and
promotional charges for the three months ended September 30, 2001 and 2000 were
$0, and $213,000, or 6% of total revenue, respectively. For the nine months
ended September 30, 2001 and 2000, noncash advertising and promotional charges
were $2.2 million, or 55% of total revenue, and $1.4 million, or 12% of total
revenue, respectively. The increase in noncash and promotional charges for the
nine-month period ended 9/30/01 was primarily due to increased amortization of
advertising provided under the Hearst advertising agreement. All noncash in-kind
investments were fully amortized as of June 30, 2001.
Restructuring. Pursuant to the July 2001 restructuring, and the associated
reduction in workforce of 25 employees, or approximately 40% of the total
workforce, the Unaudited Condensed Statement of Operations for the three months
ended September 30, 2001 includes a charge of approximately $347,000. This
charge is comprised of costs for employee severance. Substantially all
liabilities related to the restructuring were paid as of September 30, 2001.
Such restructuring charges represent 32% of revenue for the three months ended
September 30, 2001. There was no similar charge in the same period in 2000. We
cannot be certain that additional expenditures or charges will not be required
in the future. In addition, LiveWorld cannot be certain that its restructuring
will be successfully accepted or adopted by the market, including its current
investors or securities 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, our business could suffer.
Amortization of Goodwill. For the three months ended September 30, 2001,
the Company recorded a charge of $18,000 for the amortization of goodwill. This
compares to a charge of $171,000 for the three months ended September 30, 2000.
For the nine months ended September 30, 2001, and September 30, 2000, including
an impairment charge of approximately $2.3 million in the quarter ended June 30,
2001, amortization of goodwill was $2.5 million and $513,000, respectively.
-12-
Loss on Sale of Assets. For the nine months ended September 30, 2001, the
Company recorded a charge of $1.8 million in connection with the sale of its
consumer unit, its web site, www.talkcity.com, and the associated server
infrastructure. There was no similar charge for the nine months ended September
30, 2000.
Impairment of Fixed Assets. In light of the restructurings that the Company
has recently undertaken the Company recorded an impairment charge of
approximately $2.3 million, to reduce the carrying amount of certain fixed
assets to their estimated fair values. There was no similar charge for the nine
months ended September 30, 2000.
Interest Income, Net. Interest income, net, includes income from
LiveWorld's cash and investments and expenses related to its equipment financing
obligations. Interest income, net for the three months ended September 30, 2001
and 2000 was approximately $65,000 and $455,000, respectively. Interest income,
net for the nine months ended September 30, 2001 and 2000 was approximately
$409,000 and $1.8 million, respectively. The reduction in interest income, net,
resulted from declining interest income on lower cash, cash equivalent and
short-term investment balances, as well as lower interest rates earned on
balances.
Income Taxes. FASB Statement No. 109 provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. Based
upon historical operating performance and the reported cumulative net losses in
all prior years, LiveWorld has provided a full valuation allowance against its
net deferred tax assets. The Company evaluates the realizability of the deferred
tax assets on a quarterly basis.
Liquidity and Capital Resources
Since our inception in March 1996, we have financed our operations
primarily through the private placement of our preferred stock, our initial
public offering in July 1999 and, to a lesser extent, through equipment
financing. As of September 30, 2001, we had approximately $3.1 million in cash
and cash equivalents.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we allocate to our product
development, system infrastructure, marketing and selling our services and other
factors. Additionally, we will continue to evaluate possible acquisitions of and
investments in complementary businesses, technologies, services or products and
to expand our sales and marketing programs. As a result of our restructuring and
other expense measurement actions we have significantly reduced our cash
spending and are aggressively managing our expenses relative to our cash on
hand. We may need to raise additional funds in order to meet our operating
needs, to fund expansion, to develop new or enhance existing services or
products, to respond to competitive pressures, or to acquire or invest in
complementary businesses, technologies, services or products. In addition, in
order to meet our long term liquidity needs, we may need to raise additional
funds, establish a credit facility or seek other financing arrangements.
Additional funding may not be available on favorable terms or at all.
Net cash used in operating activities was approximately $12.0 million and
$25.4 million for the nine months ended September 30, 2001 and 2000,
respectively. Cash used in operating activities in each of these periods was
primarily the result of net operating losses excluding the effects of non-cash
advertising expenses and depreciation and amortization.
Net cash provided by investing activities was approximately $8.2 million
and $20.2 million for the nine months ended September 30, 2001 and 2000,
respectively. Cash provided by investing activities for the nine months ended
September 30, 2001 was the primarily the result of sales of short-term
investments and the proceeds from the sale of assets, partially offset by
purchases of equipment. Cash provided by investing
-13-
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.
Net cash used in financing activities was approximately $34,000 for the
nine months ended September 30, 2001. Net cash provided by financing activities
was $1.1 million for the nine months ended September 30, 2000. Net cash used in
financing activities for the nine months ended September 30, 2001 consisted of
principal payments on notes payable. 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.
As of September 30, 2001, the Company's principal commitments consisted of
obligations outstanding under operating leases. In October 1999, the Company
signed a nine-year, three and one-half month lease for a new 56,000 square foot
corporate headquarters in Campbell, California, which commenced on December 15,
1999 and which has since been terminated (as further discussed in Note 9 to the
financial statements and as discussed below). As security for the lease, the
Company provided a $2,100,000 letter of credit, which was to have been reduced
by $300,000 per year after every twelve months through December 14, 2005,
provided no default has occurred. As of September 30, 2001, a $1,800,000
certificate of deposit with a one-year maturity was held as collateral by a bank
for guarantee of the letter of credit. The certificate of deposit is included in
Other Assets. Future minimum lease payments under all non-cancelable operating
leases totaled approximately $13.9 million as of September 30, 2001. As
described in the Note 9 to the financial statements, on October 8, 2001,
LiveWorld entered into a definitive agreement to terminate the lease. As a
result of this agreement, LiveWorld reduced the future minimum lease payments by
approximately $13.2 million, and the overall anticipated obligation associated
with the lease by approximately $18 million.
Risk Factors That May Affect Results of Operations and Financial Condition
LiveWorld may need substantial additional capital to fund continued business
operations in 2002 and cannot be sure that additional financing will be
available
LiveWorld may require additional capital to fund its business operations.
The rate at which LiveWorld utilizes its capital is affected by the operational
and developmental costs incurred and the extent to which LiveWorld becomes
profitable on a cash-flow basis. To date, LiveWorld has not been profitable on a
cash-flow basis and substantial capital has been used to fund the operating
losses. LiveWorld incurred losses of $1.3 million in 1996, $6.4 million in 1997,
$15.7 million in 1998, $40.1 million in 1999, $41.6 million in 2000, and $21.9
million through the first nine months of 2001. LiveWorld cannot assure you that
it will operate at or near levels that are necessary to become profitable on a
cash-flow basis. Since inception, LiveWorld has experienced negative cash flow
from operations and expects to experience significant negative cash flow from
operations for the near future.
LiveWorld continues to evaluate alternative means of financing to meet its
needs. We may need to raise additional funds in order to meet our operating
needs, to fund expansion, to develop new or enhance existing services or
products, to respond to competitive pressures, or to acquire or invest in
complementary businesses, technologies, services or products. In addition, in
order to meet our long term liquidity needs, we may need to raise additional
funds, establish a credit facility or seek other financing arrangements.
Additional funding may not be available on favorable terms or at all.
-14-
If LiveWorld is not able to obtain such capital, it may take actions to
conserve its cash balances, including significantly reducing its operating
expenses, downsizing its corporate headquarters staff and closing existing
facilities, all of which could have a material adverse effect on its business,
financial condition and LiveWorld's ability to reduce losses or generate
profits. For example, in September 2000, December 2000, March 2001, May 2001 and
July 2001, LiveWorld underwent separate restructurings.
In the past, LiveWorld has funded its operating losses and capital
expenditures through proceeds from equity offerings and, to a lesser extent,
proceeds from debt financing and equipment leases. Changes in equity markets in
the past year have adversely affected LiveWorld's ability to raise equity
financing and have adversely affected the markets for debt financing and
equipment leasing for companies with a history of losses such as LiveWorld. If
LiveWorld raises additional funds through the issuance of equity, equity-linked
or debt securities, those securities may have rights, preferences or privileges
senior to those of the rights of its common stock and, in light of LiveWorld's
current market capitalization, LiveWorld's stockholders may experience
substantial dilution.
LiveWorld's common stock was delisted from Nasdaq, which could result in a
decrease in liquidity of our stock
LiveWorld common stock was delisted from trading on the Nasdaq National
Market due to a failure to comply with the required $1.00 minimum bid price, and
it now trades on the over-the-counter bulletin board market under the symbol
LVWD.OB. This delisting could result in significantly decreased liquidity for
LiveWorld stock, making it much more difficult to purchase or sell LiveWorld
stock or obtain accurate quotations as to the price of the Company's securities.
LiveWorld's stock price has traded far below the initial offering price and
could remain at this low price, which could affect its ability to acquire other
companies, leave it vulnerable to take over attempts and result in securities
class action litigation
Since LiveWorld's initial public offering in July 1999, the market price of
its common stock has traded at or significantly below the initial offering price
of $12.00 per share, and has traded below $1.00 continuously since October 2000.
If the price per share does not increase, the Company's investors may incur a
substantial loss on their investment. In addition, the sustained depression of
the market price of its common stock may hamper the Company's ability to conduct
business, and in particular, could make it more difficult to pursue acquisitions
of potential complementary businesses, leaving it vulnerable to a hostile
takeover and result in securities class action litigation.
LiveWorld's stock price may continue to be depressed due to broad economic,
market and industry factors beyond its control
LiveWorld's stock price may continue to be depressed due to a variety of
factors, including factors beyond its control. These broad market and industry
factors could continue to harm the market price of its Common Stock, regardless
of the Company's performance. These factors include:
o announcements of or new programming by the Company or its competitors,
including the Company's announcement of its restructurings;
o conditions or trends in the Internet services industry;
o changes in the market valuations of Internet companies;
o additions or departures of key personnel; and
o sales of substantial amounts of its Common Stock or other securities in
the open market.
General political and economic conditions, such as recession or interest
rate or currency rate fluctuations, also could harm the market price of the
Company's Common Stock.
-15-
If the recent restructurings of LiveWorld, designed to increase awareness of and
refocus the Company's business on online marketing services, are not accepted,
the Company's results of operations may decrease and the business may be
adversely affected
In June 2000, the Company underwent a restructuring of operations to more
clearly focus LiveWorld as an online marketing services provider, pursuant to
which it reorganized its business into four main areas of operations, which
include online live events services, market research services, community
solutions, and network and syndication services. As a result of the June
restructuring, the Company reduced its total headcount by 35 employees, or
approximately 15% of its total workforce. In December 2000, the Company
underwent a separate restructuring to further align the Company to sell and
implement fee-based services. As a result of the December restructuring, the
Company reduced its total headcount by 55 employees, or 30% of the total
workforce. On March 16, 2001, the Company announced a further restructuring to
recognize changes in the economic environment and complete its transition to a
100% fee-based marketing services model, including a reduction of its total
headcount by 30%. On May 18, 2001 the Company announced a further restructuring
and reduced its headcount by 21 employees, or 25% of the workforce. On July 27,
2001, LiveWorld further reduced headcount by 25 employees, or 40% of the
workforce. If the restructurings do not increase awareness or generate sales of
the Company's online marketing services at the level it anticipates, or at all,
the Company's management and other resources will have been expended with no
increase in revenues, which could decrease its results of operations, and
otherwise adversely affect the business.
The reductions in workforce related to the restructurings could result in market
uncertainty and decreased employee morale
The reductions in LiveWorld's workforce as a result of the restructurings
could result in market concerns about the operations of the Company. Workforce
reductions sometimes result in operational concerns about a company in the
market and, while the Company's reductions were in connection with the
restructurings, the Company may not be able to respond adequately to reports of
securities analysts or the market. In addition, the Company must take the
appropriate steps to sustain and prevent any decrease in employee morale due to
the reductions in workforce.
Fluctuations in quarterly operating results may cause the stock price to decline
The Company's operating results in one or more future quarters may be below
the expectations of its investors, and as a result the price of its Common Stock
could decline. LiveWorld expects that its quarterly operating results will
continue to fluctuate significantly and be affected by many factors, the more
important of which include:
o general economic conditions;
o its dependence on increased online marketing services revenues;
o the length of its sales cycle;
o its ability to increase its audience of loyal, engaged clients and
consumers;
o management of growth; and
o potential technical difficulties or system down time affecting the
Internet generally or the Company specifically.
These factors are described in more detail in the risk factors described
below. Many of these factors are beyond the Company's control.
-16-
LiveWorld's growth will depend on its ability to increase its online
marketing services revenues
LiveWorld has derived, and will continue to derive, a substantial portion
of its revenues from the sale of online marketing services. If the Company does
not continue to develop online marketing services revenues, its revenues may not
meet its expectations or may decline and LiveWorld will need to revise its
revenue model to reflect this. The Company's growth and future success will
depend on its ability to increase the number of its online marketing services
clients, expand its online marketing services offerings, effectively implement
these services and increase the average revenue per project and per client.
LiveWorld's ability to generate significant online marketing services revenues
will also depend, in part, on its ability to create new online marketing
services offerings without diluting the value of its existing programs.
Current and potential competitors could decrease LiveWorld's market share and
harm its business
Increases in the number of companies competing for the attention and
spending of businesses, could result in price reductions, reduced margins or
loss of market share, any of which could decrease LiveWorld's revenues and
contribute to the Company not achieving profitability and failing. The barriers
to entry in the Internet marketing services market are low and the Company
expects the number of its competitors to increase. LiveWorld competes for
business clients with numerous companies, including Prospero Technologies
Corporation, Yahoo Broadcast, PeopleLink and Participate.com.
Year to year revenue growth in past periods may not be indicative of future
growth
The Company achieved significant revenue growth in 2000 as compared to
1999, although the Company has experienced sequential declines in quarterly
revenue from the second quarter of 2000 through the third quarter of 2001.
Accurate predictions of future growth are difficult because of its limited
operating history as well as of the rapid changes in its markets as a result of
increased competition, evolving technology and clients' business requirements.
Accordingly, current and potential investors should not rely on past revenue
growth as a prediction of future growth.
LiveWorld's variable sales cycle may cause the Company to incur substantial
expenses and expend management time without generating the corresponding
revenues, which would slow its cash flow
LiveWorld's sales cycle varies in length of time. During the sales cycle,
the Company may expend substantial funds and management resources without
generating corresponding revenues. The time between the date of its initial
contact with a potential client and the execution of a contract with that client
typically ranges from a few weeks for smaller agreements to several months for
larger agreements. Its sales cycle is also subject to delays as a result of
factors over which the Company has little or no control, including the
following:
o budgetary constraints;
o internal acceptance reviews;
o the success and continued internal support of online marketing services
clients; and
o the possibility of cancellation or delay of projects by online
marketing services clients.
The length and uncertainty of its sales cycle also may harm its billing and
collection efforts. The length of the sales cycle might prevent the Company from
rendering its services on a more accelerated basis, which slows its cash flow
and reduces its ability to fund the expenditures the Company incurs during the
sales cycle.
-17-
LiveWorld's growth will depend upon the acceptance of the Internet as an
attractive medium for its online marketing services clients
LiveWorld's current and potential business clients must accept the Internet
as an attractive and sustainable substitute medium for the traditional methods
to which they are accustomed. The market for online marketing services may not
continue to develop and may not be sustainable. The Internet, as an online
marketing services solution, has not been available for a sufficient period of
time for the Company to gauge its effectiveness as compared with traditional
methods, such as trade shows, phone and mail surveys and video conferencing.
LiveWorld's paid moderators could be viewed as employees rather than independent
contractors, which could subject the Company to adverse tax and employee benefit
consequences
LiveWorld treats its paid moderators, consisting of approximately 229
individuals as of September 30, 2001, as independent contractors. The Company's
paid moderators sign independent contractor agreements and are paid a flat
monthly fee or per hour. Laws governing the distinction between independent
contractors and employees are not entirely clear, and some jurisdictions may
rule that the Company's paid moderators are employees rather than independent
contractors. If this happens, the Company could be subject to substantial tax
and employee benefit liabilities as well as other penalties.
LiveWorld's volunteer community leaders could be viewed as employees, which
would substantially increase its operating expenses
If the Company's active volunteer community leaders, consisting of
approximately 620 individuals as of September 30, 2001, were viewed as
employees, LiveWorld could be subject to payment of back wages and other
penalties, and its operating expenses could substantially increase. From time to
time, former volunteers of other companies have filed complaints with the
Labor Department and class action lawsuits claiming they were treated like
employees and should have been paid.
LiveWorld's chief executive officer and chief community officer are critical to
its business, and they may not remain with the Company in the future
LiveWorld's future success will depend, to a significant extent, on the
continued services of Peter Friedman, its Chairman of the Board and Chief
Executive Officer, and Jenna Woodul, its Chief Community Officer. The loss of
the services of Mr. Friedman or Ms. Woodul could cause the Company to incur
increased operating expenses and divert other senior management time in
searching for their replacements. The loss of their services could also harm its
reputation, as its business clients and advertisers and network participants
could become concerned about its future operations. The Company does not have
long-term employment agreements with Mr. Friedman or Ms. Woodul, and the Company
does not maintain any key person life insurance policies.
LiveWorld must continually attract and retain its sales, engineering and other
key personnel or the Company will be unable to execute its business strategy
LiveWorld's future success also will depend on its ability to attract,
retain and motivate highly skilled sales, engineering and other key personnel.
Competition for such personnel is intense, and the Company may be unable to
successfully attract, integrate or retain sufficiently qualified personnel.
LiveWorld may be unable to consummate potential acquisitions or investments or
successfully integrate them with its business, which could slow its growth
strategy
As part of its strategy to expand its online marketing services if
resources permit, the Company may acquire or make investments in complementary
businesses, technologies, services or products if appropriate
-18-
opportunities arise. LiveWorld may be unable to identify suitable acquisition or
investment candidates at reasonable prices or on reasonable terms. Additionally,
regardless of whether suitable candidates are available, the Company may be
unable to consummate future acquisitions or investments, in part due to the low
market price if its stock and the limited availability of cash, which could harm
the Company's growth strategy. If LiveWorld does acquire a company or make other
types of acquisitions, the Company could have difficulty integrating the
acquired services, personnel or technologies. These difficulties could disrupt
its ongoing business, distract its management and employees, and increase its
expenses.
System failures or slow downs would harm the Company's reputation and thus
reduce its attractiveness to its current and future business clients, users,
network participants and advertisers
System failures would harm the Company's reputation and reduce its
attractiveness to businesses, network participants and advertisers. LiveWorld's
ability to attract potential business clients, network participants and
advertisers to promote its brand will depend significantly on the performance of
its network infrastructure. In addition, a key element of its strategy is to
effectively perform its online marketing services for its business clients in
order to increase the usage of its online marketing services by business
clients. Increased usage of the Company's online marketing services could strain
the capacity of its infrastructure, resulting in a slowing or outage of its
services and reduced traffic to its Web sites. LiveWorld may be unable to
improve its technical infrastructure in relation to increased usage of its
services. In addition, the Company's users depend on Internet service providers,
online service providers and other Web site operators for access to its Web
sites. Many of these providers and operators have also experienced significant
outages in the past, and they could experience outages, delays and other
difficulties due to system failures unrelated to the Company's systems.
LiveWorld's communications and other computer hardware operations are subject to
disruptions which are out of its control and for which the Company may not have
adequate insurance
A disaster could severely damage the Company's ability to deliver its
products and services to its customers. LiveWorld depends on its ability to
maintain and protect its facilities, which include communications hardware and
other computer hardware operations. These operations, which are separate from
its principal offices, are located at facilities in San Jose, California. San
Jose may exist on or near a known earthquake fault zone. In addition, earlier
this year, California experienced power outages due to a shortage in the supply
of power within the state. If they resume, power outages could interrupt our
operations and also the operations of our vendors and subcontractors within the
state of California. Although the facilities in which we host our computer
systems are designed to be fault tolerant, the systems are susceptible to damage
from fire, floods, earthquakes, power loss, telecommunications failures, and
similar events, such as computer viruses or electronic break-ins, any of which
could disrupt its Web sites. Although we maintain general business insurance
against fires, floods and some general business interruptions, there can be no
assurance that the amount of coverage will be adequate in any particular case.
LiveWorld must keep pace with rapid technological change and the intense
competition of the Internet industry in order to succeed
LiveWorld's market is characterized by rapidly changing technologies,
frequent new product and service introductions and evolving industry standards.
The growth of the Internet and intense competition in the industry exacerbate
these market characteristics. In addition, in recent months many
Internet-related companies, similar to LiveWorld, have consolidated or
restructured in order to remain competitive within the Internet industry. To
succeed, LiveWorld will need to effectively implement its restructurings,
integrate the various software programs and tools required to enhance and
improve its service offerings and manage its business. Any enhancements or new
services or features must meet the requirements of its current and prospective
clients and must achieve significant market acceptance. The Company's success
also will depend on its ability to adapt to rapidly changing technologies by
continually improving the performance features and reliability of its services.
The Company may experience difficulties that could delay or prevent the
successful
-19-
development, introduction or marketing of new services. LiveWorld could also
incur substantial costs if it needs to modify its services or infrastructure to
adapt to these changes.
Changes in government regulation could limit LiveWorld's Internet activities or
result in additional costs of doing business on the Internet
Although few laws or regulations exist that specifically regulate
communications on the Internet, LiveWorld expects more stringent laws and
regulations to be enacted due to the popularity and use of the Internet. Any new
legislation or regulations or the application of existing laws and regulations
to the Internet could limit user volume and increase operating expenses. In
addition, the application of existing laws to the Internet is uncertain and may
take years to resolve and could expose the Company to substantial liability for
which LiveWorld might not be indemnified by the content providers or other third
parties. Existing laws and regulations currently, and new laws and regulations
are likely to address a variety of issues, including the following:
o user privacy and expression;
o the rights and safety of children;
o information security;
o the convergence of traditional channels with Internet commerce; and
o taxation and pricing.
If Internet Service Providers become regulated in a manner similar to long
distance telephone carriers, Internet growth may slow, which would cause the
Company's revenues to decrease
If Internet growth slows due to proposals to regulate Internet Service
Providers in a way similar to long distance telephone carriers, LiveWorld's
volume and the demand for its online marketing services would decline, causing
its revenues to decrease. The use of the Internet has burdened the existing
telecommunications infrastructure and led to interruptions in phone service in
areas with high Internet use. Several telecommunications companies and local
telephone carriers have petitioned the Federal Communications Commission to
regulate Internet Service Providers and online service providers in a manner
similar to long distance telephone carriers and to impose access fees. If this
were to occur, the costs of communicating on the Internet could increase
substantially, potentially slowing the growth in use of the Internet.
LiveWorld may be subject to liability for publishing or distributing content
over the Internet
LiveWorld may be subject to claims relating to content that is published on
or downloaded from its Web sites. The Company also could be subject to liability
for content that is accessible from its Web sites through links to other Web
sites. Although LiveWorld carries general liability and multimedia liability
insurance, the Company's insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify the Company for all liability that may be imposed. In
addition, any claims like this, with or without merit, would result in the
diversion of its financial resources and management personnel.
LiveWorld may be liable for misappropriation by others of its users' personal
information
If third parties were able to penetrate the Company's network security or
otherwise misappropriate its users' personal information, LiveWorld could be
subject to liability. These could include claims for impersonation or other
similar fraud claims.
-20-
LiveWorld may be liable for its use or sale of its users' personal information
LiveWorld currently uses its users' personal information internally to
determine how to improve its services, applications and features, and to target
its advertisements and communications. The Company also uses this information
externally to provide its advertisers with the demographics of its user base.
LiveWorld may, in the future, sell its user information on an aggregate, not
individual, basis. LiveWorld could be subject to liability claims by its users
for misuses of personal information, such as for unauthorized marketing
purposes. In addition, the Federal Trade Commission has previously investigated
various Internet companies regarding their use of personal information. The
Company could incur additional expenses if new regulations regarding the use of
personal information are introduced or if its privacy practices are
investigated.
Possible infringement of LiveWorld's intellectual property rights by third
parties could substantially increase its operating expenses and harm its ability
to conduct business
Other parties may assert claims of infringement of intellectual property or
other proprietary rights against LiveWorld, and in fact, the Company has been
subject to such claims in the past. These claims, even if without merit, could
require the Company to expend significant financial and managerial resources.
Furthermore, if claims like this were successful, LiveWorld might be required to
change its trademarks, alter its content or pay financial damages, any of which
could substantially increase its operating expenses. The Company also may be
required to obtain licenses from others to refine, develop, market and deliver
new services. LiveWorld may be unable to obtain any needed license on
commercially reasonable terms or at all, and rights granted under any licenses
may not be valid and enforceable. LiveWorld has been subject to claims and
expects to be subject to legal proceedings and claims from time to time in the
ordinary course of its business, including claims of alleged infringement of
trademarks and other intellectual property rights of third parties by the
Company and its licensees.
If LiveWorld raises additional capital through the issuance of new securities,
existing stockholders will incur additional dilution
In order to meet its liquidity needs, the Company may need to raise
additional capital. However, if the Company raises additional capital through
the issuance of new securities, its stockholders will be subject to additional
dilution. In addition, any new securities issued may have rights, preferences or
privileges senior to those securities held by the Company's current
stockholders.
LiveWorld's undesignated Preferred Stock may inhibit potential acquisition bids
for the Company, cause the market price for its Common Stock to fall and
diminish the voting rights of the holders of its Common Stock
If the Company's Board of Directors issues Preferred Stock, potential
acquirers may not make acquisition bids for the Company, the Company's stock
price may fall and the voting rights of existing stockholders may diminish as a
result. The Board has the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series. The Board can fix the price, rights, preferences,
privileges and restrictions of the Preferred Stock without any further vote or
action by the stockholders.
LiveWorld has anti-takeover defenses that could delay or prevent an acquisition
of the Company
Provisions of LiveWorld's Certificate of Incorporation, Bylaws and Delaware
law could make it more difficult for a third party to acquire the Company, even
if doing so would be beneficial to the stockholders
-21-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
LiveWorld's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company does not use derivative
financial instruments in its investment portfolio. LiveWorld places its
investments with high quality issuers and, by policy, limits the amount of
credit risk exposure to any one issuer. The Company is averse to principal loss
and ensures the safety and preservation of its invested funds by limiting
default, market and reinvestment risk. LiveWorld classifies its cash equivalents
and short-term investments as "fixed rate" if the rate of return on such
instruments remains fixed over their term. These "fixed rate" instruments
include fixed rate commercial paper, corporate notes, and market auction
preferred securities. We classify our cash equivalents and short-term
investments as "variable rate" if the rate of return on such investments varies
based on the change in a predetermined index or set of indices during their
term. These "variable rate" investments primarily include money market accounts
held at various securities brokers and banks. The table below presents the
amounts and related weighted average interest rates of the Company's investment
portfolio at September 30, 2001:
Average Book Fair
Interest Rate Value Value
----------------- --------- --------
(In thousands)
Cash and Cash equivalents:
Fixed rate 2.85% $1,138 $1,138
Variable rate 3.06% 2,003 2,003
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During Q3, 2001 the Company filed a lawsuit in San Jose, CA against
MatchNet PLC and SocialNet, Inc., to collect money the Company believes is owed
in the form of past due invoices and under a 1999 operating agreement between
the Company and SocialNet, obligations which LiveWorld contends MatchNet
expressly agreed to perform. The total amount of money the Company is seeking is
approximately $1.1 Million. The Company, although confident in the merits of its
claim, by definition cannot be assured of prevailing in this legal action and as
such is not recording this money as revenue or cash in its financial statements
at this time.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1(1) Agreement and Plan of Reorganization between the Company and
Research Connections, Inc., dated January 3, 2000.
2.2(2) Purchase Agreement, dated as of May 16, 2001, by and between myESP
Acquisition Corporation, a Delaware corporation, and LiveWorld,
Inc., a Delaware corporation.
2.3(2) Web Site Services and Maintenance Agreement, dated as of May 16,
2001, by and between LiveWorld, Inc., a Delaware corporation and
myESP Acquisition Corporation, a Delaware corporation.
3.2(3) Second Amended and Restated Certificate of Incorporation of the
Company.
3.3(3) Bylaws of the Company.
4.1(3) Form of the Company's Common Stock certificate.
4.2(3) Third Amended and Restated Shareholders Rights Agreement, dated
April 23, 1999, between the Company and the parties named therein,
as amended on May 26, 1999.
-22-
______________
(1) Incorporated by reference from the Company's Annual Report on Form 10-K
for the period ended December 31, 1999.
(2) Incorporated by reference from the Company's Report on Form 8-K, filed on
May 31, 2001.
(3) Incorporated by reference from the Company's 424(b) Prospectus, dated
July 19, 1999, as declared effective by the Securities and Exchange
Commission on July 19, 1999
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 2001.
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIVEWORLD, INC.
(Registrant)
Date: November 14, 2001 By: /s/ Peter H. Friedman
-------------------------------------
Peter H. Friedman
President and Chief Executive Officer
(principal financial or chief financial
officer and duly authorized signatory)
-24-