Table of Contents
Corporate Information We were incorporated in California in March 1996 and will reincorporate in Delaware prior to the closing of this offering. Our principal office is located at 307 Orchard City Drive, Suite 350, Campbell, CA 95008. Our telephone number at that location is (408) 871-5200 and our Internet addresses are www.talkcity.com and www.onnow.com. Information contained on our Web sites does not constitute part of this prospectus.
About This Prospectus Unless stated otherwise, the information contained in this prospectus:
. assumes a one for two reverse stock split of the preferred stock and common stock, which is subject to stockholder approval, prior to the closing of this offering; . reflects the automatic conversion of all outstanding shares of preferred stock into shares of common stock and the conversion of all outstanding warrants to purchase preferred stock into warrants to purchase common stock prior to the closing of this offering; . assumes no exercise of the underwriters' over-allotment option; and . reflects our reincorporation in Delaware prior to the closing of this offering.
See the section of this prospectus entitled "Risk Factors" for a discussion of factors that you should consider before investing in the common stock offered in this prospectus.
TALK CITY and LIVEWORLD are our registered trademarks. We are in the process of registering ONNOW as a trademark. All trademarks and tradenames appearing in this prospectus are the property of their respective holders.
You should only rely on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus. References in this prospectus to "we," "our" and "us" refer to Talk City, Inc., unless the context otherwise requires.
Until 1999, all dealers selling shares of the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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Prospectus Summary....................................................... 4 Risk Factors............................................................. 8 Use of Proceeds.......................................................... 21 Dividend Policy.......................................................... 21 Capitalization........................................................... 22 Dilution................................................................. 23 Selected Financial Data.................................................. 24 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 25 Business................................................................. 31 Page Management................................................................. 50 Certain Transactions....................................................... 59 Principal Stockholders..................................................... 63 Description of Capital Stock............................................... 66 Shares Eligible for Future Sale............................................ 69 Underwriting............................................................... 71 Legal Matters.............................................................. 73 Experts.................................................................... 73 Available Information...................................................... 74 Index to Financial Statements.............................................. F-1 Prospectus Summary Talk City, Inc.
We are a leading Internet provider of high quality online communities and interactive services for businesses and consumers. We offer businesses a wide range of services to help them develop and expand online relationships with customers, suppliers and employees. These services include designing fully integrated, customized communities, producing online events, conducting online market research and facilitating online meetings. For consumers, we operate a network of online communities located at www.talkcity.com. Our network includes 20 topical categories, over 50 themed communities, 50 co-branded partner communities and thousands of user-generated communities. These communities offer services such as moderated chat, home pages, special event production, message boards and online event guides.
We have established partnerships across multiple industries and media forms, including partnerships with major media companies, Internet content companies and Internet service providers. We work with our partners to co-produce, co- brand and co-market community services that leverage our partners' content, brand or customer relationships. By integrating these co-branded services into our community network, we enjoy exceptional distribution, content and marketing leverage. Some of our partners include Cox Interactive Media, Inc., Hearst Communications, Inc., National Broadcasting Company, Inc., WebTV Network, Inc., a wholly-owned subsidiary of Microsoft Corporation, @Home Corporation and AT&T WorldNet Service.
Our community network has achieved critical mass in terms of traffic, registered users and the loyalty of our users. In March 1999, we had approximately 2.6 million unique visitors according to Internet Profiles Corporation, or I/PRO. These users generated over 6.6 million hours of activity on our www.talkcity.com site during March 1999. During our peak periods, which tend to be early evening hours, we have as many as 18,000 users simultaneously chatting or engaging in other interactive activities. As of March 31, 1999, we had over 2 million user registrations and, during the quarter ended March 31, 1999, we averaged approximately 200,000 new registrations per month. We believe the strong loyalty of our users and engaging nature of our programming are reflected by the significant amount of time that users spend on our site. Our users spend, on average, approximately 2.5 hours per month on our site.
Our community network provides a clean well lighted environment that is attractive to businesses, consumers, partners and advertisers. By "clean and well lighted," we mean that our community network is family-oriented, welcoming and friendly. We promote the family-oriented nature of our community through a set of published behavior standards, which are maintained by our trained city standards advisors. These city standards advisors can be called upon at any time by our users to resolve issues relating to standards violations.
The friendly tone and focused programming of Talk City is further maintained by our approximately 2,000 trained community leaders and moderators. Our community leaders and moderators facilitate interaction within our community by drawing users into conversation and encouraging them to express their ideas. They also direct the flow of the conversation to maintain the focus and quality of programming desired by our business clients and partners. Overall, the community leaders and moderators personify our friendly culture and serve as role models for our users.
In addition to changing the nature of advertising and commercial transactions, the Internet has given rise to the use of interactive business services and the formation of online communities. Businesses seek to utilize online interactive services to establish deeper and broader relationships with their customers, increase their understanding of their customers' needs and reduce their new customer acquisition costs. Online communities satisfy consumers' basic social need for communication in a convenient manner that is not limited by the same time and geographic constraints.
We believe our business services and online community network provide significant benefits to businesses, consumers, advertisers and partners, as summarized below:
Customers Benefits
Businesses .Online community-based marketing, sales and support solutions .Professional production and moderated environment .Reduced customer acquisition and maintenance costs Consumers .Welcoming and friendly culture .Family-oriented environment .Variety of interactive programming Advertisers .Positive, effective branding venue .Segmented, targetable and mainstream audience .Loyal, engaged viewers Partners .Professional production and moderated environment .Critical mass of traffic and variety of programming .Co-branding and customization of community services Our objective is to be the leading provider of high quality online communities and interactive services for businesses and consumers. Key elements of our strategy include:
. expanding the range of our business services; . building awareness of the Talk City brand and increasing the size of our consumer audience; . driving increased sponsorship, and advertising revenues; . increasing the frequency and duration of visits to our consumer sites; . increasing our ecommerce services; and . expanding the breadth and depth of our partner network.
The Offering
Common stock offered by us............ shares Common stock to be outstanding after the offering......................... shares Use of proceeds....................... For general corporate purposes, principally brand promotion, expansion of our sales and marketing operations and our partner and moderator networks. Proposed Nasdaq National Market Symbol............................... TCTY Shares That May Be Issued After The Offering You should be aware that we are permitted, and in some cases obligated, to issue shares of common stock in addition to the common stock to be outstanding after the offering. If and when we issue these shares, the percentage of the common stock you own may be diluted. The following is a summary of additional shares of common stock that we have currently approved for issuance after the offering:
. 2,523,951 shares of common stock that have been set aside under our 1996 stock option plan, employee stock purchase plan and director option plan; and . 1,318,246 shares of common stock that have been set aside in connection with warrants to purchase our common stock.
Summary Financial Information (in thousands, except per share data) The following table summarizes the financial data for our business. The pro forma net loss per share data reflects our sale in April 1999 of additional preferred stock for aggregate proceeds of $20.0 million, our issuance of preferred stock and warrants in connection with the NBC and Hearst agreements in April 1999, and the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock.
Three Months
March 29, 1996 Years Ended Ended
(Inception) to December 31, March 31,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
Statement of Operations Data: Business services.......... $ -- $ 25 $ 522 $ 60 $ 357 Advertising and sponsorships.............. 14 183 931 65 623 Total revenues........... 14 208 1,453 125 980 Operating expenses, including noncash advertising and promotional charges....... 1,358 6,938 16,745 3,026 8,033 Loss from operations....... (1,344) (6,730) (15,292) (2,901) (7,053) Net loss applicable to common stockholders....... (1,316) (6,429) (16,217) (2,911) (6,971) Net loss per share: Basic and diluted......... $ (0.49) $ (2.10) $ (4.92) $ (0.87) $ (1.90) Weighted average shares... 2,679 3,068 3,295 3,332 3,661 Pro forma net loss per share: Basic and diluted......... $ (1.66) $ (0.47) Weighted average shares... 9,762 14,741
The following table is a summary of our balance sheet data. The pro forma data reflects our sale in April 1999 of additional preferred stock for aggregate proceeds of $20.0 million, our issuance of preferred stock and warrants in connection with the NBC and Hearst agreements in April 1999, and the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock. The as adjusted column reflects the sale of shares of common stock in this offering after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
As of March 31, 1999 Actual Pro Forma As Adjusted
Balance Sheet Data: Cash, cash equivalents and short-term investments.................................. $ 9,224 $29,223 $ Working capital............................... 7,768 39,250 Total assets.................................. 14,572 46,054 Long-term obligations, net of current portion...................................... 237 237 Redeemable convertible preferred stock and warrants..................................... 39,979 -- Total stockholders' equity (deficit).......... (28,359) 43,102
Risk Factors You should carefully consider the following factors and other information in this prospectus before you decide to invest in our shares of common stock. If any of the negative events referred to below occur, our business could suffer.
Risks Related To Our Business Our business is difficult to evaluate because our operating history is limited It is difficult to evaluate our business and our prospects because our operating history is limited and therefore our revenue and income potential is unproven. We initiated our online operations in April 1996, and have recently experienced significant growth of our company and expansion of our services offerings. As a result, we face many risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets like the Internet. In addition, our revenue model is new and relatively unproven. The success of our business model will depend on our ability to generate multiple revenue streams through our community network. To be successful, we must, among other things, develop and market products and services that achieve broad market acceptance by our users, business clients and advertisers. Our inability to generate multiple revenue streams will harm our business.
We have incurred losses since inception and we may be unable to achieve profitability We incurred net losses for each period since inception and we may be unable to achieve profitability in the future. As of March 31, 1999, we had an accumulated deficit of approximately $30.3 million, including noncash advertising and promotional charges of $4.3 million. Since inception we have funded our business primarily from the sale of our stock, not from cash generated by our business. Although revenues have increased significantly in recent periods, you should not rely on past performance as any indication of future growth rates or operating results. We expect to continue to incur significant operating expenditures, as well as noncash advertising and promotional charges, and as a result we will need to generate significant revenues to achieve and maintain profitability. Our business may be harmed if our revenues increase more slowly than we expect, or if operating expenses exceed our expectations or cannot be adjusted to compensate for lower than expected revenues. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
Fluctuations in our quarterly operating results may harm our stock price We expect that our quarterly operating results will fluctuate significantly due to many factors, including:
. our dependence on increased business services and advertising and sponsorship revenues; . expansion of our sales force; . uncertain adoption of the Internet as an advertising medium; . the length of our sales cycle, particularly our business services sales cycle; . our dependence on our partner network; . our ability to increase our audience of loyal, engaged users;
. management of growth; . intense competition; and . potential technical difficulties or system down time affecting the Internet generally or us specifically.
These factors are described in more detail in the risk factors described below. Many of these factors are beyond our control. It is likely that our operating results in one or more future quarters may be below the expectations of securities analysts, you or other investors, and as a result the price of our common stock would certainly decline.
We rely heavily on business services revenue, and our growth will depend on our ability to increase our business services revenues We derive a substantial portion of our revenues from the sale of business services, including designing fully integrated, customized communities, producing online events, conducting online market research and facilitating online meetings. We expect to continue to rely on these revenues for the foreseeable future. Business services represented 12% of our total revenues in 1997, 36% of our total revenues in 1998 and 36% of our total revenues in the three months ended March 31, 1999. Our growth and future success will depend on our ability to increase the number of our business services clients, expand our business services offerings, effectively implement these services and increase the average revenue per project and per client. We have only recently begun to hire business services sales personnel. If we do not continue to develop business services revenues, our business could suffer.
Our ability to generate significant business services revenues will also depend, in part, on our ability to create new business services offerings without diluting the value of our existing programs. In addition, our business clients must accept the Internet as an attractive and sustainable substitute medium for the traditional methods to which they are accustomed. The Internet as a business services solution has not been available for a sufficient period of time for us to gauge its effectiveness as compared with traditional methods, such as trade shows, phone and mail surveys and video conferencing. The market for business services may not continue to develop and may not be sustainable.
We rely heavily on advertising and sponsorship revenues, and if our advertising and sponsorship revenues decline, our business would suffer We currently derive a substantial portion of our revenues from sponsorships and advertising, and expect to continue to do so. As a result, our success is highly dependent on the increased use of the Internet as an advertising medium. Most of our current or potential advertising customers have little or no experience using the Internet for advertising purposes and they have allocated only a limited portion of their advertising budgets to Internet advertising. Use of the Internet by consumers is at a very early stage of development, and market acceptance of the Internet as a medium for advertising is subject to a high level of uncertainty. No standards are widely accepted to measure the effectiveness of Internet advertising. If these standards do not develop, existing sponsors or advertisers may not continue their current level of Internet-based programming, and sponsors or advertisers who are not currently advertising on the Internet may be reluctant to do so. Our business would be harmed if the market for Internet advertising fails to develop or develops slower than expected.
Our advertising contracts are typically short-term, and guarantee the advertiser a minimum number of impressions, or times that an advertisement is seen by users of our sites. If minimum impression levels are not achieved for any reason, we may be required to provide additional impressions after the contract term, which could reduce the availability of advertising inventory and harm our business. If minimum guaranteed impressions are not met, we defer recognition of the corresponding revenues until guaranteed impression levels are achieved.
Our uncertain sales cycle could harm our business Our sales cycle, particularly with our business clients, is generally lengthy and uncertain. The time between the date of our initial contact with a potential client and the execution of a contract with that potential client typically ranges from a few weeks for smaller agreements to several months for larger agreements. Our sales cycle is also subject to delays as a result of factors over which we have little or no control, including the following:
. budgetary constraints; . internal acceptance reviews; . the success and continued internal support of advertisers', business services clients' and partners' own development efforts; and . the possibility of cancellation or delay of projects by advertisers, business services clients or partners.
During the sales cycle, we may expend substantial funds and management resources without generating corresponding revenues, which would harm our business.
We rely on our partner network for user volume, revenues and increased brand recognition Our strategy and operations are heavily dependent on the network of partners with whom we co-produce, co-brand and co-market our services. Our brand visibility, user volume, revenues and cost structure are dependent on maintaining and increasing our network of partners and effectively implementing the associated joint activities. We may be unable to maintain our existing partner relationships, or establish new relationships, and some or all of these relationships may not be effective. We may have to incur substantial expenses to grow and maintain our partner network and implement our partnering programs.
The agreements we have entered into with major media companies and our other partners typically have fixed terms of varying but limited duration. We cannot assure you that any of these agreements will be renewed upon expiration of their initial term. In addition, some of these agreements may permit our partners to terminate or substantially limit their performance obligations prior to the expiration of their initial terms.