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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 2002
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 000-25469
iVillage Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3845162
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
500-512 Seventh Avenue, New York, New York 10018
(Address of Principal Executive Offices) (Zip Code)
(212) 600-6000
(Registrant's Telephone Number, Including Area Code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 55,137,374 shares of common
stock as of August 13, 2002.
iVillage Inc.
Form 10-Q
For the Quarter ended June 30, 2002
Index
PART I FINANCIAL INFORMATION. Page(s)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31, 2001 ......................1
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2002 (Unaudited) and 2001 (Unaudited) .............................................................2
Condensed Consolidated Statements of Cash Flows for the three and six months
ended June 30, 2002 (Unaudited) and 2001 (Unaudited) .............................................................3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................30
Item 2. Changes in Securities and Use of Proceeds.......................................................30
Item 3. Defaults Upon Senior Securities.................................................................30
Item 4. Submission of Matters to a Vote of Security Holders.............................................30
Item 5. Other Information...............................................................................30
Item 6. Exhibits and Reports on Form 8-K................................................................31
Signatures.......................................................................................................32
Exhibit Index....................................................................................................33
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
iVillage Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
Assets
Current assets:
Cash and cash equivalents .................................... $ 26,681 $ 29,831
Accounts receivable, less allowance for doubtful accounts of
$1,848 and $2,286, respectively ............................ 7,963 6,722
Other current assets ......................................... 8,198 13,668
--------- ---------
Total current assets ................................ 42,842 50,221
Restricted cash .............................................. 8,474 8,474
Fixed assets, net ............................................ 19,776 21,465
Goodwill, net ................................................ 27,305 31,928
Intangible assets, net ....................................... 17,478 19,975
Other assets ................................................. 319 324
--------- ---------
Total assets ........................................ $ 116,194 $ 132,387
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ........................ $ 13,675 $ 16,070
Deferred revenue ............................................. 3,833 2,734
Deferred rent ................................................ 348 348
Current liabilities of discontinued operations, net .......... 93 103
--------- ---------
Total current liabilities ........................... 17,949 19,255
Deferred rent, net of current portion ........................ 4,100 4,273
--------- ---------
Total liabilities ................................... 22,049 23,528
Minority interest ............................................ 188 102
Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock - par value $.01, 5,000,000 shares authorized,
no shares issued and outstanding as of June 30, 2002 and
December 31, 2001, respectively ........................... -- --
Common stock - par value $.01, 200,000,000 shares authorized;
56,319,316 and 53,812,285 shares issued at June 30, 2002
and December 31, 2001, respectively; 55,115,870 and
52,608,839 shares outstanding as of June 30, 2002 and
December 31, 2001, respectively ........................... 563 538
Additional paid-in capital ................................... 548,926 544,006
Accumulated deficit .......................................... (454,281) (432,781)
Treasury stock at cost (1,203,446 shares) .................... (502) (502)
Stockholders' notes receivable ............................... (691) (1,982)
Unearned compensation and deferred advertising ............... (58) (522)
--------- ---------
Total stockholders' equity .......................... 93,957 108,757
--------- ---------
Total liabilities and stockholders' equity .......... $ 116,194 $ 132,387
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
iVillage Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues ..................................... $ 16,072 $ 11,449 $ 31,139 $ 24,022
Operating expenses:
Editorial, product development and
technology ............................ 7,302 9,191 13,983 18,047
Sales and marketing ..................... 5,471 8,519 10,672 16,958
Sales and marketing - NBC/Hearst expenses 708 2,140 2,867 2,780
Termination of NBC advertising contract.. -- -- 4,084 --
General and administrative .............. 3,308 5,634 6,122 8,844
Depreciation and amortization ........... 2,975 5,143 5,934 9,439
-------- -------- -------- --------
Total operating expenses ............ 19,764 30,627 43,662 56,068
-------- -------- -------- --------
Loss from operations ......................... (3,692) (19,178) (12,523) (32,046)
Interest income, net ......................... 122 563 285 1,421
Other income, net ............................ -- -- -- 87
Write-down of investments .................... -- -- -- (104)
Loss from unconsolidated joint venture ....... -- -- -- (127)
-------- -------- -------- --------
Net loss before minority interest and
cumulative effect of change in accounting
principle ............................... (3,570) (18,615) (12,238) (30,769)
Minority interest ............................ (34) 130 (81) 109
-------- -------- -------- --------
Net loss before cumulative effect of change in
accounting principle .................... (3,604) (18,485) (12,319) (30,660)
Cumulative effect of change in accounting
principle ............................... -- -- (9,181) --
-------- -------- -------- --------
Net loss ..................................... $ (3,604) $(18,485) $(21,500) $(30,660)
======== ======== ======== ========
Per share data:
Net loss before cumulative effect of change in
accounting principle per share .......... $ (0.07) $ (0.56) $ (0.23) $ (0.97)
Cumulative effect of change in accounting
principle per share ..................... -- -- (0.17) --
-------- -------- -------- --------
Basic and diluted net loss per share ......... $ (0.07) $ (0.56) $ (0.40) $ (0.97)
======== ======== ======== ========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share .............. 54,860 33,250 54,135 31,487
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
iVillage Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended Six months
June 30, ended June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Cash flows from operating activities:
Net loss ................................ $ (3,604) $(18,485) $(21,500) $(30,660)
Adjustments to reconcile net loss to
net cash used in operating activities:
Impairment of goodwill (change in
accounting principle) .................. -- -- 9,181 --
Depreciation and amortization ........... 2,975 5,143 5,934 9,439
Non-cash print advertising expense ...... 708 -- 1,165 --
Expense recognized in connection
with issuance of warrants and stock
options ................................ 69 680 518 1,375
Minority interest ....................... 34 (130) 81 (109)
Provision for bad debt expense .......... 18 81 (54) (21)
Deferred rent amortization .............. (86) (90) (173) (181)
Loss from unconsolidated joint venture .. -- -- -- 127
Write-down of investments ............... -- -- -- 104
Changes in operating assets and liabilities:
Accounts receivable ..................... (682) 1,527 4 4,615
Restricted cash and other assets ........ (692) (658) 5,048 900
Accounts payable and accrued expenses ... (1,888) 28 (5,751) (5,706)
Deferred revenue ........................ 664 (861) 958 (1,796)
-------- -------- -------- --------
Net cash used in operating activities ...... (2,484) (12,765) (4,589) (21,913)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets ................ (181) (1,595) (356) (4,098)
Cash paid of $10,432 less cash
acquired of $10,198 for acquisition
of Promotions.com, Inc. ................ (234) -- (234) --
Cash paid of $3,210 less cash
acquired of $14,198 for purchase of
Women.com .............................. -- 10,988 -- 10,988
Purchase of 30.1% of Cooperative
Beauty Ventures, L.L.C., net of
cash acquired of $358 .................. -- -- -- (1,142)
Investment in Cooperative Beauty
Ventures, L.L.C ........................ -- -- -- (300)
-------- -------- -------- --------
Net cash (used in) provided by
investing activities .................... (415) 9,393 (590) 5,448
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options . 665 -- 748 --
Proceeds from issuance of common
stock, net ............................. -- 19,068 -- 19,068
Principal payments on stockholders'
note receivable ........................ -- 1,291 1,291 2,583
-------- -------- -------- --------
Cash provided by financing activities ...... 665 20,359 2,039 21,651
-------- -------- -------- --------
Cash used in discontinued operations ....... -- (329) (10) (522)
Net (decrease) increase in cash for the
period ................................. (2,234) 16,658 (3,150) 4,664
Cash and cash equivalents, beginning of
period ................................. 28,915 36,969 29,831 48,963
-------- -------- -------- --------
Cash and cash equivalents, end of period ... $ 26,681 $ 53,627 $ 26,681 $ 53,627
-------- -------- -------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - The Company
Basis of Presentation
iVillage Inc. ("iVillage" or the "Company") was incorporated in the
State of Delaware on June 8, 1995 and commenced operations on July 1, 1995.
iVillage Inc. is a leading women's media company and the number one source for
women's information online. iVillage includes iVillage.com, Women.com Networks,
Inc. ("Women.com"), Public Affairs Group ("PAG"), Lamaze Publishing, The Newborn
Channel, iVillage Solutions, Promotions.com, Inc. ("Promotions.com") and
Astrology.com. iVillage.com and Women.com are leading online women's
destinations providing practical solutions and everyday support for women 18 and
over. Lamaze Publishing produces advertising-supported educational materials for
expectant and new parents. The Newborn Channel is a satellite television network
in approximately 1,100 hospitals nationwide. PAG is a comprehensive source of
information and program linkage to the women's market around the world and
offers an extensive database of women's organizations and Web sites to
subscribing companies and members. Promotions.com is an internet promotions
solution company which helps companies achieve their overall marketing and
business objectives.
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to achieve
profitable operations and/or raise additional financing through public or
private equity financings, collaborative or other arrangements with corporate
sources, or other sources of financing to fund operations. Unless the market
price of the Company's common stock increases dramatically, it is unlikely that
the Company will be able to raise funds through a public offering of its common
stock, although management believes that it could raise funds through a private
placement of its common stock. However, there is no assurance that the Company
will achieve profitable operations or that it will be able to raise adequate
financing from other sources. Due primarily to the Company's lack of
profitability, it is unlikely that the Company will be able to obtain bank
financing. Management believes that its current funds will be sufficient to
enable the Company to meet its planned expenditures through the next twelve
months. If anticipated operating results are not achieved, management has the
intent and believes it has the ability to delay or reduce expenditures so as not
to require additional financial resources, if those resources were not available
on terms acceptable to the Company, although there can be no assurances in this
regard.
The Company is subject to the risks and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for Internet
products and services. These risks include the failure to develop and extend the
Company's online service brands, the nonacceptance or rejection of the Company's
services by Web consumers, vendors, sponsors and/or advertisers and the
inability of the Company to maintain and increase the levels of traffic on its
online services, as well as other risks and uncertainties. In the event the
Company does not successfully implement its business plan, certain assets may
not be recoverable.
Unaudited Interim Financial Information
The unaudited interim condensed consolidated financial statements of
the Company as of June 30, 2002 and for the three and six months ended June 30,
2002 and 2001, respectively, included herein have been prepared in accordance
with the instructions for Form 10-Q under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and Article 10 of Regulation S-X under the
Securities Act of 1933, as amended (the "Securities Act"). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
statements. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments and appropriate inter-company elimination
adjustments, necessary to present fairly the financial position of the Company
at June 30, 2002, and the results of its operations and its cash flows for the
three and six months ended June 30, 2002 and 2001, respectively. The results for
the three and six months ended June 30, 2002 are not necessarily indicative of
the expected results for the full fiscal year or any future period.
4
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Restricted Cash
Restricted cash consists of money held for a letter of credit securing
a real estate lease for the Company's New York office space.
Revenue and Receivables
Three advertisers, Unilever PLC (including its affiliates, "Unilever"),
Procter and Gamble Company ("Procter and Gamble"), and Hearst Communications,
Inc. (including its affiliates, "Hearst"), a related party, accounted for
approximately 19%, 11% and 10% of total revenues for the three months ended June
30, 2002, respectively, and 15%, 11% and 11% of total revenues for the six
months ended June 30, 2002, respectively. Our five largest advertisers accounted
for approximately 46% and 44% of total revenues for the three and six months
ended June 30, 2002, respectively. One advertiser, Unilever, accounted for
approximately 17% and 15% of our total revenues for the three and six months
ended June 30, 2001, respectively, and our five largest advertisers accounted
for approximately 31% and 30% of total revenues, respectively. At June 30, 2002,
Unilever and Procter and Gamble accounted for approximately 36% and 14% of the
net accounts receivable, respectively, and at December 31, 2001, Hearst and
Unilever accounted for approximately 14% and 10% of the net accounts receivable,
respectively.
Included in sponsorship and advertising revenues are barter
transactions, which totaled approximately $0.9 million and $1.8 million, or 7%
and 8%, of sponsorship and advertising revenues for the three and six months
ended June 30, 2002, respectively, and approximately $0.8 million and $1.3
million, or 7% and 6%, for the comparable periods in 2001.
Net Loss Per Share
Basic net loss per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common shares and common stock
equivalents outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive.
Included in the June 30, 2002 calculation of weighted average number of
shares of common stock outstanding are 387,309 shares which have not been
issued. These shares are being held for former Women.com and Promotions.com
stockholders that have not yet exchanged their respective shares for shares of
the Company as of the balance sheet date.
Stock options and warrants in the amount of 13,538,450 shares and
10,983,383 shares for the six months ended June 30, 2002 and 2001, respectively,
were not included in the computation of diluted net loss per share as they were
anti-dilutive as a result of net losses during the period presented.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 145 "Rescission of SFAS Nos. 4,
44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002"
("SFAS 145"). SFAS 145 becomes effective for financial statements issued for
fiscal years beginning after May 15, 2002. The adoption will not have a material
impact on the Company's financial position and results of operations.
In June 2002, the FASB issued Statement of Financial Accounting
Standard No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). The provisions of SFAS 146 shall be effective for exit
or disposal activities initiated after December 31, 2002. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
The principal difference between SFAS 146 and EITF 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3
was recognized at the date of an entity's commitment to an exit plan. The
adoption will not have a material impact on the Company's financial position and
results of operations.
5
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 2 - Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires all business combinations to be accounted for
using the purchase method of accounting and that certain intangible assets
acquired in a business combination shall be recognized as assets apart from
goodwill. SFAS 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS 142 also addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. This statement provides that intangible assets with indefinite lives and
goodwill will not be amortized, but will be tested at least annually for
impairment. Upon completion of the transitional impairment test, the fair value
for one of the Company's reporting units did not exceed the reporting unit's
carry amount and an impairment was recorded of approximately $9.2 million.
As a result of the adoption of SFAS 142, the Company discontinued the
amortization of goodwill effective January 1, 2002. Identifiable intangible
assets are amortized under the straight-line method over the period of expected
benefit ranging from three to ten years. The Company recharacterized acquired
workforce of approximately $0.9 million, which is no longer defined as an
acquired intangible asset under SFAS 141, as goodwill.
The following table sets forth the components of goodwill, net as of
June 30, 2002 (in thousands):
Adjustment to
purchase
January 1, 2002 Acquisition Impairment losses accounting June 30, 2002
--------------- ----------- ----------------- ---------- -------------
Reporting unit - 1 ..... $ 19,116 $ -- $ -- $ (346) $ 18,770
Reporting unit - 2 ..... 10,874 -- (9,181) -- 1,693
Reporting unit - 3 ..... 1,938 -- -- (135) 1,803
Reporting unit - 4 ..... -- 5,039 -- -- 5,039
-------- ------- --------- ------- --------
$ 31,928 $ 5,039 $ (9,181) $ (481) $ 27,305
======== ======= ========= ======= ========
Reporting unit - 1 includes the iVillage, Women.com, Astrology.com and
Cooperative Beauty Ventures, L.L.C. entities; Reporting unit - 2 includes the
Lamaze Publishing and The Newborn Channel entities; Reporting unit - 3 includes
PAG; Reporting unit - 4 includes Promotions.com (See Note 5 - Business
Acquisitions).
6
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table sets forth the components of the intangible assets
subject to amortization as of June 30, 2002 and December 31, 2001 (in
thousands):
June 30, 2002 December 31, 2001
------------------------------------ ----------------------------------
Gross Gross
Range of carrying Accumulated carrying Accumulated
useful life amount amortization Net amount amortization Net
----------- ------ ------------ --- ------ ------------ ---
Advertiser list and
customer contracts... 3-10 years $ 19,610 $(5,841) $ 13,769 $ 19,610 $ (4,288) $ 15,322
Trademarks and domain
names................ 3 years 3,144 (1,533) 1,611 2,947 (1,042) 1,905
Licensing agreement..... 10 years 2,900 (830) 2,070 2,900 (685) 2,215
Non-competition
agreements........... 1 year 810 (810) -- 810 (405) 405
Content................. 3 years 600 (572) 28 600 (472) 128
-------- ------- -------- -------- -------- --------
$ 27,064 $(9,586) $ 17,478 $ 26,867 $ (6,892) $ 19,975
======== ======== ======== ======== ========= ========
Amortization expense for the six months ended June 30, 2002 and 2001
was approximately $2.7 million and $6.0 million, respectively.
Estimated amortization expense for the years ending December 31, are as
follows (in thousands):
2002............................ $ 4,830
2003............................ 4,089
2004............................ 2,911
2005............................ 1,760
2006............................ 1,760
--------
$ 15,350
========
The following table provides a reconciliation of net loss for exclusion
of goodwill amortization:
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
--------- -------- ---------- ----------
Net loss - as reported ........... $ (3,604) $(18,485) $ (21,500) $ (30,660)
Add: Goodwill amortization ....... -- 2,668 -- 4,783
--------- -------- ---------- ----------
Net loss - adjusted .............. $ (3,604) $(15,817) $ (21,500) $ (25,877)
========= ======== ========== ==========
Per share data:
Basic and diluted net loss per
share ............................ $ (0.07) $ (0.56) $ (0.40) $ (0.97)
Add: Goodwill amortization ......... -- 0.08 -- 0.15
--------- -------- ---------- ----------
Adjusted basic and diluted net
loss per share ................... $ (0.07) $ (0.48) $ (0.40) $ (0.82)
========= ======== ========== ==========
7
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 3 - Discontinued Operations
Net current liabilities of discontinued operations as of June 30, 2002 were as
follows (in thousands):
Other current assets........................................ $ 6
Accounts payable and accrued expenses....................... (99)
-----
Net current liabilities of discontinued operations.......... $ (93)
=====
Note 4 - Related Party Transactions
National Broadcasting Company, Inc.
On February 22, 2002, the Company amended its agreement with the
National Broadcasting Company, Inc. ("NBC"), pursuant to which NBC released the
Company from its obligation to make the remaining approximately $4.6 million in
cash payments and to place any additional advertising on NBC, in exchange for
the purchase of approximately $1.3 million in telecast spots in February 2002 by
the Company and the forfeiture of its right to the remaining approximately $4.1
million of prepaid advertising. The approximately $4.1 million charge is
included in the caption "Termination of NBC advertising contract" in the
condensed consolidated statement of operations for the six months ended June 30,
2002.
AOL Time Warner Inc.
In December 2001, iVillage entered into an advertising agreement with
the America Online, Inc. division of AOL Time Warner Inc. ("AOL") pursuant to
which AOL was obligated to deliver a guaranteed amount of impressions during the
period of December 2001 through January 2002. In consideration of these
services, iVillage paid AOL $0.7 million.
In 2002, iVillage entered into a web pointing agreement with AOL,
pursuant to which AOL may provide a link to iVillage's Web site. The agreement
terminates on September 30, 2002, and in consideration of these services,
iVillage paid AOL approximately $0.2 million.
Included in the caption "Sales and marketing" in the condensed
consolidated statements of operations is approximately $0.4 million and $1.2
million of expense from the Company's AOL agreements for the three and six
months ended June 30, 2002, respectively, and approximately $1.2 million and
$2.3 million for the comparable periods in 2001.
Hearst Communications, Inc.
In January 2002, the Company signed contracts with Hearst to provide
production and certain hosting services for two additional magazine sites, as
well as The Hearst Corporation corporate Web site. The contracts for the
magazine sites had an initial term of six months, and the contract for The
Hearst Corporation corporate Web site has an initial term of one year, with
automatic renewals unless terminated. The minimum amount of production fees for
the initial term of the contracts is approximately $0.3 million.
8
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
In April 2002, the Company and Hearst amended the magazine content
license and hosting agreement to provide that, if a shortfall in production fees
occurs in the first year of the agreement, then Hearst must place additional
advertising in an amount equal to 40% of the production fee shortfall. The
Company's guaranteed advertising royalty to Hearst would be reduced on a pro
rata basis for any production fee shortfall in the first year of the agreement.
As part of the acquisition of Women.com, the Company acquired
approximately $4.9 million of prepaid print advertising in certain Hearst
magazines. These ads are currently scheduled to appear through March 2003. The
Company recognized approximately $0.7 million and $1.2 million of non-cash print
advertising expense for the three and six months ended June 30, 2002 from this
advertising. There was no non-cash print advertising expense for the comparable
periods in 2001. As of June 30, 2002, included in the caption "Other current
assets" in the condensed consolidated balance sheet is approximately $2.0
million of prepaid Hearst print advertising.
Revenues, net of the royalty payment, from Hearst for the three and six
months ended June 30, 2002 were approximately $1.6 million and $3.5 million,
respectively. For the three and six months ended June 30, 2001, revenues from
Hearst were approximately $0.1 million. As of June 30, 2002, the Company was
owed, net of royalty payments, approximately $0.1 million from Hearst.
Note 5 - Business Acquisitions
Promotions.com, Inc.
On April 18, 2002, the Company acquired 82.3% of the outstanding shares
of Promotions.com common stock, a leading promotion and direct marketing
company. On May 24, 2002, the Company acquired the remaining outstanding shares
of Promotions.com common stock through a second-step merger. The aggregate
purchase price paid was approximately $14.6 million, consisting of approximately
$10.4 million of cash (inclusive of closing costs) and 1,587,191 shares of the
Company's common stock. The difference between the purchase price and the fair
value of the acquired assets of Promotions.com of approximately $5.0 million has
been allocated on a preliminary basis to goodwill. The Company is in the process
of obtaining a purchase price allocation.
The accompanying unaudited pro forma summary presents consolidated
results of operations for the Company as if the acquisition of Promotions.com
had been consummated on January 1, 2001. The pro forma information does not
necessarily reflect the actual results that would have been achieved, nor is it
necessarily indicative of future consolidated results of the Company.
Six months ended Year ended
June 30, 2002 December 31, 2001
------------- -----------------
(in thousands, except per share data)
Revenues ............... $ 32,730 $ 71,255
Net loss from operations $(14,776) $(62,910)
Net loss ............... $(23,622) $(58,275)
Net loss per share ..... $ (0.43) $ (1.31)
9
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6 - Commitments and Contingencies
Leases
The Company leases office space and equipment, under non-cancelable
operating leases expiring at various dates through April 2015. The following is
a schedule of future minimum lease payments under non-cancelable operating
leases as of June 30, 2002:
Year ending June 30: (in thousands)
--------------------------------- ------------------
2003............................ $5,499
2004............................ 4,271
2005............................ 4,161
2006............................ 3,974
2007............................ 3,853
-------
$21,758
=======
Joint Venture
The Company is obligated to fund the ongoing business and operations of
Cooperative Beauty Ventures, L.L.C., a joint venture between the Company and
Unilever, but not to exceed $7.0 million. During 2002, the Company has not been
required to fund the operations of the venture, and as of June 30, 2002,
iVillage has contributed, in total, approximately $1.9 million to the venture.
Litigation
In the normal course of business, iVillage is subject to proceedings,
lawsuits and other claims. Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at June 30, 2002 cannot be ascertained. While these matters could
affect the operating results of any one quarter when resolved in future periods
and while there can be no assurance with respect thereto, management believes
that after final disposition, any monetary liability or financial impact to
iVillage from matters described would not be material to the consolidated
financial statements.
Several plaintiffs have filed class action lawsuits against the
Company, several of its present and former executives and its underwriters in
connection with its March 1999 initial public offering. A similar class action
lawsuit was filed against the Company's Women.com subsidiary, several of its
former executives and its underwriters in connection with Women.com's October
1999 initial public offering. The complaints generally assert claims under the
Securities Act, the Exchange Act and rules promulgated by the Securities and
Exchange Commission (the "SEC"). The complaints seek class action certification,
unspecified damages in an amount to be determined at trial, and costs associated
with the litigation, including attorneys' fees.
The Company believes that the lawsuits and claims asserted against
iVillage and Women.com pursuant to these class action complaints are without
merit and intends to vigorously defend against these claims. The Company does
not believe that these class action lawsuits will have a material adverse
effect on the Company's business, financial condition or results of operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements in this Quarterly Report on Form 10-Q, including
certain statements contained in this Item 2 constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. The words or phrases "can be," "expects," "may affect,"
"may depend," "believes," "estimate," "project," and similar words and phrases
are intended to identify such forward-looking statements. Such forward-looking
statements are subject to various known and unknown risks and uncertainties and
we caution you that any forward-looking information provided by or on our behalf
is not a guarantee of future performance. Actual results could differ materially
from those anticipated in such forward-looking statements due to a number of
factors, some of which are beyond our control, in addition to those risks
discussed below and in our other public filings, press releases and statements
by our management, including (i) the volatile and competitive nature of the
media industry, (ii) changes in domestic and foreign economic, political and
market conditions, (iii) the effect of federal, state and foreign regulation on
our business, (iv) the impact of recent and future acquisitions and joint
ventures on our business and financial condition, (v) our ability to establish
and maintain relationships with advertisers, sponsors, and other third party
providers and partners, and (vi) the impact of pending litigation on our
business and financial condition. All such forward-looking statements are
current only as of the date on which such statements were made. We do 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
iVillage is a leading women's media company and the number one source
for women's information online. iVillage includes iVillage.com, Women.com, PAG,
Lamaze Publishing, The Newborn Channel, iVillage Solutions, Promotions.com and
Astrology.com. iVillage.com and Women.com are leading online women's
destinations providing practical solutions and everyday support for women 18 and
over. Lamaze Publishing produces advertising supported educational materials for
expectant and new parents. The Newborn Channel is a satellite television network
broadcast in approximately 1,100 hospitals nationwide. PAG offers an extensive
database of women's organizations and Web sites to subscribing companies and
members. Promotions.com is an internet promotions solution company which helps
companies achieve their overall marketing and business objectives.
The discussion and analysis below includes the results of operations of
Cooperative Beauty Ventures, L.L.C. since March 1, 2001, Women.com since June
18, 2001, PAG since July 16, 2001 and Promotions.com since April 19, 2002.
Cooperative Beauty Ventures, L.L.C. was accounted for under the equity method of
accounting prior to March 1, 2001.
Financial Reporting Release No. 60, which was recently released by the
SEC, requires all companies to include a discussion of critical accounting
policies or methods used in the preparation of financial statements. The
following is a brief discussion of the more significant accounting policies and
methods used by iVillage.
Revenue Recognition
To date, iVillage's revenues have been derived primarily from the sale
of sponsorship and advertising contracts. Sponsorship revenues are derived
principally from contracts ranging from one to three years. Sponsorships are
designed to support the customer's broad marketing objectives, including brand
promotion, awareness, product introductions and online research. Sponsorship
agreements typically include the delivery of impressions on iVillage's Web sites
and occasionally the design and development of customized sites that enhance the
promotional objectives of the sponsor. An impression is the viewing of
promotional material on a Web page, which may include banner advertisements,
links, buttons or other text or images. As part of certain sponsorship
agreements, sponsors who also sell products may provide iVillage with a
commission on sales of their products generated through iVillage's Web sites. To
date, these amounts have not been significant.
Advertising revenues are derived principally from short-term
advertising contracts in which iVillage typically guarantees a minimum number of
impressions or pages to be delivered to users over a specified period of time
for a fixed fee. Sponsorship and advertising revenues are recognized ratably in
the period in which the advertisement is displayed, provided that iVillage has
no continuing obligations and the collection of the receivable is reasonably
assured, at the lesser of the ratio of impressions delivered over total
guaranteed impressions or the straight-line basis over the term of the contract.
To the extent that minimum guaranteed impressions are not met, iVillage defers
recognition of the corresponding revenues until the guaranteed impressions are
achieved.
11
In recent quarters, iVillage has experienced a shift from the larger,
higher-rate, long-term sponsorship agreements that were prevalent a few years
ago to smaller, lower-rate, short-term advertising agreements. The increase in
these short-term agreements has made it more difficult for iVillage to
accurately project future quarterly revenues.
Included in sponsorship and advertising revenues are revenues from
advertising placements in Lamaze Publishing's publications, videos and Web site,
and satellite broadcasts on The Newborn Channel. In addition, revenues are
generated through a sampling and coupon program, which offers advertisers the
ability to distribute samples, coupons and promotional literature to new and
expectant parents.
Sponsorship and advertising revenues also include revenues from
Promotions.com, Inc., which generates revenues through the Web sites
Webstakes.com, a Web site dedicated to Internet sweepstakes and promotions, and
Promotions.com, a full service integrated Internet promotions services group.
Webstakes.com revenues are derived principally from service contracts
whereby the Company recognizes revenues based on either a "cost-per-click" or a
"cost-per-action" pricing model. The contracts typically include cancellation
clauses ranging from 30 to 60 days. Revenue is recognized ratably over the
period during which the Company provides promotions services, provided that no
significant obligations remain and collection of the resulting receivable is
reasonably assured. With a cost-per-click pricing model, the Company generally
guarantees a minimum number of advertising impressions, and/or times that the
Company's visitors are delivered to its customer's Web site. To the extent that
these minimum guarantees are not met, the Company defers recognition of the
corresponding revenues until the guaranteed levels are achieved. Revenue is
recognized differently in a cost-per-action pricing model, which requires the
Company to not only deliver the aforementioned, but also a specific user action
such as purchasing a product or registering as a member of the customer's Web
site in order for the Company to earn revenue. The Company recognizes revenue
related to the cost-per-action pricing model when the specific action has been
performed on its customer's Web site.
Promotions.com revenues are derived principally from contracts in which
the Company typically provides custom turnkey services for the creation,
administration and implementation of a promotion on a customer's Web site. The
Company's revenue recognition policy related to Promotions.com services is also
to recognize revenues ratably over the period during which the Company provides
promotions services, provided that no significant obligations remain and
collection of the resulting receivable is reasonably assured.
Sponsorship and advertising revenues also include barter revenues,
which generally represent exchanges by iVillage of advertising space on its Web
sites for reciprocal advertising space on or traffic from other Web sites.
Revenues and expenses from these barter transactions are recorded based upon the
fair value of the advertisements delivered. Fair value of advertisements
delivered is based upon iVillage's recent practice of receiving cash from
similar advertisers. Barter revenues are recognized when the advertisements are
displayed on iVillage.com and its affiliated properties. Barter expenses are
generally recognized when iVillage's advertisements are displayed on the
reciprocal Web sites or properties, which is typically in the same period as
when advertisements are displayed on iVillage.com and its affiliated properties,
and are included as part of sales and marketing expenses. Revenues from barter
transactions were approximately $1.8 million and $1.3 million for the six months
ended June 30, 2002 and 2001, respectively.
iVillage Solutions is a business unit within iVillage that provides
production and back-end provisioning for customers in need of these services.
iVillage recognizes revenues from production services based upon actual hours
worked at iVillage's negotiated hourly rates and/or fixed fees stipulated in
contracts.
12
PAG is a comprehensive source of information and program linkage to the
women's market around the world and offers an extensive database of women's
organizations and Web sites to subscribing companies and members. Revenues from
PAG are generated primarily through subscription-based programs that convey
current best practices for women and diversity issues in the workplace. iVillage
recognizes revenue from these subscriptions ratably over the term of the
contract.
Revenues from the e-commerce portion of Astrology.com consist of the
sale of astrological charts and other related products to visitors to the
Astrology.com Web site. iVillage recognizes revenues from Astrology.com product
sales, net of any discounts, when products are shipped to customers and the
collection of the receivable is reasonably assured.
iVillage received fees from licensing portions of its content in
connection with its agreement with PlanetRx.com, Inc. These fees were recognized
on a straight-line basis over the life of the contract, which ended in the first
quarter of 2002.
iVillage has and expects to continue to receive revenues from new
initiatives involving subscription-based properties, the sale of iVillage-
branded products and the sale of research. While iVillage believes that one or
more of these new initiatives will develop into a recurring source of revenues,
iVillage can make no assurance that it will be successful in any of these
endeavors.
Goodwill
Goodwill is not subject to amortization and is tested for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset may be impaired. The impairment test consists of a comparison of the
fair value of goodwill with its carrying amount. If the carrying amount of
goodwill exceeds its fair value, an impairment loss shall be recognized in an
amount equal to that excess. After an impairment loss is recognized, the
adjusted carrying amount of goodwill is its new accounting basis.
Intangible Assets
iVillage assesses the recoverability of its intangible assets by
determining whether the unamortized balance over its remaining life can be
recovered through forecasted cash flows. If undiscounted forecasted cash flows
indicate that the unamortized amounts will not be recovered, an adjustment is
made to reduce the net amounts to an amount consistent with forecasted future
cash flows discounted at a rate commensurate with the risk associated when
estimating future discounted cash flows. Future cash flows are based on trends
of historical performance and management's estimate of future performance,
giving consideration to existing and anticipated competitive and economic
conditions.
Results of Operations
Revenues
Revenues were approximately $16.1 million and $31.1 million for the
three and six months ended June 30, 2002, respectively, which represents an
increase of approximately 40% and 30%, respectively, when compared with the
corresponding periods' revenues of approximately $11.4 million and $24.0 million
in 2001. The increase in revenues for the six months ended June 30, 2002, as
compared to 2001, was primarily due to the acquisitions of Women.com, PAG and
Promotions.com resulting in identifiable incremental revenues of approximately
$0.9 million, $1.5 million, and $0.8 million, respectively, as well as revenues
from new initiatives involving online subscription-based properties and research
resulting in revenues of approximately $0.5 million and $1.1 million,
respectively. Sponsorship and advertising revenues were approximately $13.1
million and $23.3 million for the three and six months ended June 30, 2002,
respectively, compared to approximately $10.0 million and $21.1 million for the
corresponding periods in 2001. Sponsorship and advertising revenues accounted
for approximately 82% and 75% of total revenues for the three and six months
ended June 30, 2002, respectively, compared to 87% and 88% of total revenues for
the corresponding periods in 2001. Revenues from Lamaze Publishing and The
Newborn Channel accounted for approximately 22% and 25% of sponsorship and
advertising revenues for the three and six months ended June 30, 2002,
respectively, compared to approximately 29% for the corresponding periods in
2001. Revenues from Promotions.com accounted for approximately 6% and 3% of
sponsorship and advertising revenues for the three and six months ended June 30,
2002, respectively. Promotions.com was acquired in the second quarter of 2002,
and consequently there are no comparative numbers for the corresponding periods
in 2001.
13
Included in sponsorship and advertising revenues are barter
transactions, which accounted for approximately 7% and 8% of sponsorship and
advertising revenues for the three and six months ended June 30, 2002,
respectively, and approximately 8% and 6% of sponsorship and advertising
revenues for the corresponding periods in 2001.
Included in revenues are production fees received from work performed
(primarily for Hearst) by the iVillage Solutions unit, which accounted for
approximately 7% and 8% of total revenues for the three and six months ended
June 30, 2002, respectively. Since iVillage Solutions was a new unit formed in
the third quarter of 2001, there are no comparative numbers for the
corresponding periods in 2001.
Included in revenues are subscription-based fees derived from the
services provided by PAG which accounted for approximately 5% of total revenues
for the three and six months ended June 30, 2002, respectively. PAG was acquired
in the third quarter of 2001, and consequently there are no comparative numbers
for the corresponding periods in 2001.
Included in revenues are fees received from licensing portions of
iVillage's content, and fees from chart sales through Astrology.com, which
accounted for approximately 5% and 7% of total revenues for the three and six
months ended June 30, 2002, respectively, compared to 13% and 12% of total
revenues for the corresponding periods in 2001.
Included in revenues are fees from new initiatives involving online
subscription-based properties and the sale of research which accounted for
approximately 2% and 5% of total revenues for the three and six months ended
June 30, 2002, respectively. These new initiatives were commenced in the later
part of 2001, and consequently there are no comparative numbers for the
corresponding periods in 2001.
For the three and six months ended June 30, 2002, revenues from
iVillage's five largest advertisers accounted for approximately 46% and 44% of
total revenues, respectively. Three advertisers, Unilever, Procter and Gamble,
and Hearst accounted for approximately 19%, 11% and 10% of total revenues for
the three months ended June 30, 2002, respectively, and 15%, 11% and 11% of
total revenues for the six months ended June 30, 2002, respectively. One
advertiser, Unilever, accounted for approximately 17% and 15% of total revenues
for the three and six months ended June 30, 2001, respectively, and iVillage's
five largest advertisers accounted for approximately 31% and 30% of total
revenues, respectively. At June 30, 2002, Unilever and Procter and Gamble
accounted for approximately 36% and 14% of the net accounts receivable,
respectively, and at December 31, 2001, Hearst and Unilever accounted for
approximately 14% and 10% of the net accounts receivable, respectively.
Operating Expenses
Editorial, Product Development and Technology.
Editorial, product development and technology expenses consist
primarily of payroll and related expenses for the editorial, technology, Web
site design and production staffs, severance costs for terminated employees, the
cost of communications, related expenditures necessary to support iVillage's Web
sites, software development, technology and support operations, and an
allocation of facility expenses, which is based on the number of personnel.
Editorial, product development and technology expenses for the three and six
months ended June 30, 2002 were approximately $7.3 million and $14.0 million,
or 45% of total revenues, respectively. Editorial, product development and
technology expenses were approximately $9.2 million and $18.0 million, or 80%
and 75% of total revenues, respectively, for the corresponding periods in 2001.
The decrease between the comparable six month periods was primarily attributable
to a decrease of salaries, severance and related benefits of approximately $2.3
million, renegotiation of expenditures which provide support, content and
serving of impressions to iVillage's Web sites of approximately $0.6 million,
lower production costs for Lamaze Publishing's publications of approximately
$0.5 million, and lower facility costs resulting in a decreased facilities
allocation of approximately $0.5 million. These reductions were offset slightly
by incremental costs associated with the acquisitions of Promotions.com and PAG
of approximately $0.3 million and $0.1 million, respectively. Editorial, product
development and technology expenses decreased as a percentage of total revenues
for the six months ended June 30, 2002, as compared to the same period in 2001,
as a result of the benefits recognized from cost reduction initiatives
implemented throughout 2001 and into 2002, coupled with an increase in revenues.
14
Sales and Marketing.
Sales and marketing expenses consist primarily of costs related to
distribution agreements, payroll and related expenses for sales and marketing
personnel, severance costs for terminated employees, commissions, advertising
and other marketing-related expenses, and an allocation of facility expenses,
which is based on the number of personnel. Sales and marketing expenses for the
three and six month periods ended June 30, 2002 were approximately $6.2 million
and $17.6 million, or 38% and 57% of total revenues, respectively. Sales and
marketing expenses were approximately $10.7 million and $19.7 million, or 93%
and 82%, of total revenues, respectively, for the comparable periods in 2001.
The dollar decrease in sales and marketing expenses for the six month period
ended June 30, 2002, as compared to 2001, was primarily attributable to the
benefits of cost reduction initiatives implemented throughout 2001 and into 2002
which resulted in an approximately $2.6 million decrease in advertising
expenses, a decrease in payroll, severance, commission and related benefits of
approximately $2.8 million, a decrease in AOL distribution costs of
approximately $1.1 million, and lower facility costs resulting in a decreased
facilities allocation of approximately $0.6 million partially offset by the
negotiated advertising spend and termination of an advertising agreement with
NBC resulting in charges of approximately $1.3 million and $4.1 million,
respectively, as well as incremental sales and marketing expenses related to the
PAG and Promotions.com acquisitions of approximately $0.8 million and $0.4
million, respectively. Sales and marketing expenses decreased as a percentage of
total revenues for the six months ended June 30, 2002, as compared to the same
period in 2001, as a result of the benefits recognized from cost reduction
initiatives implemented throughout 2001 and into 2002, coupled with an increase
in revenues.
Included in sales and marketing expenses are barter transactions, which
amounted to approximately 14% and 9% of sales and marketing costs during the
three and six months ended June 30, 2002, respectively, compared to 7% of sales
and marketing expenses for the comparable periods in 2001.
General and Administrative.
General and administrative expenses consist primarily of payroll,
related expenses and benefits for the executive management, finance, allocated
facilities, human resources and legal employees, severance costs for terminated
employees, general corporate overhead, and other professional fees. General and
administrative expenses for the three and six months ended June 30, 2002 were
approximately $3.3 million and $6.1 million, or 21% and 20% of total revenues,
respectively. For the comparable periods in 2001, general and administrative
expenses were approximately $5.6 million and $8.8 million, or 49% and 37% of
total revenues, respectively. The decrease in general and administrative
expenses for the comparable six month period was primarily due to a decrease in
salaries, severance and related benefits of approximately $1.6 million, a
payment to the former Chief Executive Officer of approximately $1.3 million in
2001, partially offset by the acquisitions of PAG and Promotions.com resulting
in incremental costs of approximately $0.4 million and $0.2 million,
respectively. General and administrative expenses decreased as a percentage of
total revenues for the six months ended June 30, 2002, compared to the
comparable period in 2001, as a result of the benefits recognized from cost
reduction initiatives implemented throughout 2001 and into 2002, coupled with an
increase in revenues.
In the ordinary course of business, the Company utilizes estimates to
determine the accrual of certain operating expenses. These estimates are
reviewed on an ongoing basis to determine the adequacy of these accruals. During
the second quarter of 2002, the Company reversed approximately $0.4 million of
accruals included in operating expenses due to a change in estimate on services
previously provided. This amount was offset by additional accruals for various
operating expenses.
Depreciation and Amortization.
Depreciation and amortization expenses for the three and six months
ended June 30, 2002 were approximately $3.0 million and $5.9 million, or 19% of
total revenues, respectively. For the comparable periods in 2001, depreciation
and amortization expenses were approximately $5.1 million and $9.4 million, or
45% and 39% of total revenues, respectively. The dollar decrease in depreciation
and amortization for the comparable six month period was primarily due to the
adoption of the provisions of SFAS 142.
15
Interest Income, Net
Interest income, net includes primarily interest income from iVillage's
cash balances. Interest income, net for the three and six months ended June 30,
2002 was approximately $0.1 million and $0.3 million, or 1% of total revenues,
respectively. For the same periods in 2001, interest income, net was
approximately $0.6 million and $1.4 million, or 5% and 6% of total revenues,
respectively. The decrease between 2002 and 2001 was due to lower average net
cash and cash equivalents balances and lower interest rates in 2002 as compared
to 2001.
Net Loss
iVillage recorded a net loss of approximately $3.6 million and $21.5
million, or $0.07 and $0.40 per share, respectively, for the three and six
months ended June 30, 2002. For the same periods in 2001, iVillage recorded a
net loss of approximately $18.5 million and $30.7 million, or $0.56 and $0.97
per share, respectively. The decrease in net loss for the six months ended June
30, 2002 compared to the same period in 2001 was primarily due to the increase
in revenues of approximately $7.1 million, a decrease in operating expenses of
approximately $12.4 million, partially offset by the adoption of SFAS 142 which
resulted in a change of accounting principle charge of approximately $9.2
million in the first quarter of 2002.
Liquidity and Capital Resources
Financial Reporting Release No. 61, which was recently released by the
SEC, requires all companies to include a discussion to address, among other
things, liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments. iVillage currently does not maintain any off-balance
sheet arrangements.
As of June 30, 2002, iVillage had approximately $26.7 million in cash
and cash equivalents and approximately $8.5 million of restricted cash. Cash
equivalents consist primarily of money market accounts. The restricted cash
consists of money held for a letter of credit collateralizing a real estate
lease for iVillage's New York office space. iVillage maintains its cash and cash
equivalents in highly rated financial institutions.
iVillage has sustained net losses and negative cash flows from
operations since its inception. iVillage's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to achieve
profitable operations and/or raise additional financing through public or
private equity financings, collaborative or other arrangements with corporate
sources, or other sources of financing to fund operations. Unless the market
price of the Company's common stock increases dramatically, it is unlikely that
the Company will be able to raise funds through a public offering of its common
stock, although management believes that it may be possible to raise funds
through a private placement of its common stock. However, iVillage can make no
assurance that it will achieve profitable operations or that it will be able to
raise adequate financing from other sources. Due primarily to the Company's lack
of profitability, it is unlikely that the Company will be able to obtain bank
financing. Management believes that iVillage's current funds will be sufficient
to enable iVillage to meet its planned expenditures through the next twelve
months. If anticipated operating results are not achieved, management has the
intent and believes it has the ability to delay or reduce expenditures so as not
to require additional financial resources, if those resources were not available
on terms acceptable to iVillage, although there can be no assurances in this
regard.
iVillage has and expects to continue to reduce its costs. In the past,
the Company has achieved cost reductions through increased managerial
efficiencies and several expense reduction initiatives targeted at certain
expenses, including without limitation, reduced advertising, targeted staff
reductions and reduced company employee benefit plan costs, as well as other
initiatives.
16
Net cash used in operating activities decreased to approximately $2.5
million for the three months ended June 30, 2002, from $12.8 million for the
comparable period in 2001. Net cash used in operating activities decreased to
approximately $4.6 million for the six months ended June 30, 2002, from
approximately $21.9 million for the same period in 2001. The overall decrease in
net cash used in operating activities for the six months ended June 30, 2002
compared to the comparable period in 2001 was primarily from a decrease in net
loss, less adjustments, of approximately $15.1 million, a larger decrease in
restricted cash and other assets in 2002 of approximately $4.1 million primarily
due to the one-time charge for the termination of the NBC agreement, and a
decrease in deferred revenue of approximately $1.0 million in 2002 as compared
to an increase of approximately $1.8 million in 2001, partially offset by a
smaller decrease in accounts receivable of approximately $4.6 million. The
decrease in net loss, less adjustments, was primarily due to an increase in
revenues of approximately $7.1 million, a decrease in operating expenses of
approximately $12.4 million, partially offset by the adoption of SFAS 142 which
resulted in a change of accounting principle charge of approximately $9.2
million in the first quarter of 2002.
Net cash used in investing activities was approximately $0.4 million
and $0.6 million for the three and six months ended June 30, 2002, respectively.
This compares to net cash provided by investing activities of approximately $9.4
million and $5.4 million, respectively, for the three and six months ended June
30, 2001. The overall increase in net cash used in investing activities for the
six months ended June 30, 2002 compared to the comparable period in 2001 was
primarily due to the acquisition of Women.com in the second quarter of 2001
resulting in net cash acquired of $11.0 million. This amount was partially
offset by lower fixed asset purchases in 2002 of $3.7 million and the purchase
of an additional 30.1% interest in Cooperative Beauty Ventures, L.L.C. of
approximately $1.1 million in the first quarter of 2001.
Cash provided by financing activities amounted to approximately $0.7
million and $2.0 million for the three and six months ended June 30, 2002,
respectively, compared to approximately $20.4 million and $21.7 million for the
three and six months ended June 30, 2001, respectively. The overall decrease in
cash provided by financing activities for the six months ended June 30, 2002
compared to the comparable period in 2001 was primarily attributable to the
purchase of shares of common stock and warrants by Hearst and other former
Women.com stockholders in the second quarter of 2001 resulting in net proceeds
of approximately $19.1 million.
In March 2001, iVillage purchased an additional 30.1% of Cooperative
Beauty Ventures, L.L.C. from Unilever for $1.5 million, thereby increasing its
ownership to 80.1%. The agreement revised iVillage's funding obligation and
provides that iVillage will fund the ongoing business and operations of this
venture, not to exceed $7.0 million, and terminates Unilever's funding
obligation. During 2002, the Company has not been required to fund the
operations of the venture, and as of June 30, 2002, iVillage has contributed, in
total, approximately $1.9 million to the venture.
Unilever can exercise a "put" option to require iVillage to purchase
Unilever's remaining ownership interest in the venture for fair market value at
any time after September 30, 2002, or at any earlier time if the venture permits
any person to use the "Substance" mark other than in connection with the
venture's business or the venture fails to use the "Substance" mark in
connection with its business from and after May 1, 2001. At any time on or after
September 30, 2002, iVillage can exercise a "call" option to require Unilever to
sell its remaining interest in the venture to iVillage for fair market value;
provided, however, that Unilever can exercise a "call" option superior to
iVillage's "call" option to purchase a portion of iVillage's interest in the
venture for fair market value, up to a limit of 50% of the venture's ownership.
These "put" and "call" options must be paid in cash. If iVillage was required to
purchase Unilever's remaining ownership interest in the venture pursuant to the
exercise of one of these options, iVillage does not believe the amount of cash
payable would be material and expects that it would fund this obligation with
its working capital. In addition, at any time on or after September 30, 2002,
Unilever can exercise a "call" option to purchase a portion of iVillage's
membership interest in the venture for fair market value, up to a limit of 50%
of the venture's ownership. As a result of the purchase transaction described
above, iVillage gained operational control of the venture and the venture was
consolidated within iVillage's financial statements beginning in March 2001.
iVillage's February 2000 advertising agreement with Unilever, as
amended, provides for a Unilever advertising purchase commitment of $14.5
million. Through June 30, 2002, iVillage has earned approximately $12.5 million
under the advertising agreement with the remaining approximately $2.0 million to
be earned between the period July 1, 2002 through June 30, 2003.
17
Pursuant to an amended and restated magazine content license and
hosting agreement with Hearst, Hearst has committed to purchase from iVillage
between $15.0 million and $21.0 million of production and advertising services
over a three-year period beginning in June 2001. This agreement also provides
for revenue sharing between Hearst and iVillage with respect to advertising
revenues obtained by iVillage from the Hearst magazine Web sites and iVillage's
other Web sites containing substantial Hearst content. This revenue-sharing
arrangement requires that iVillage pay Hearst a royalty payment, based on net
advertising revenues, of at least $3.9 million during the three-year term of the
agreement. This amount would be reduced on a pro rata basis if Hearst fails to
expend a minimum of $5.0 million in production fees in any year of the
agreement. In addition, if a shortfall in production fees occurs in the any year
of the agreement, then Hearst must place additional advertising in an amount
equal to 40% of the production fee shortfall.
Women.com has been party to a multi-year advertising agreement with
Procter and Gamble since July 2000. iVillage has earned approximately $5.0
million under this advertising agreement through June 30, 2002, and
approximately $6.0 million of the advertising purchase commitment remains from
July 1, 2002 through June 30, 2003.
In December 2001, concurrent with the termination of Women.com's
agreement with AOL, iVillage entered into an advertising agreement with AOL
pursuant to which AOL delivered a guaranteed number of impressions during the
period from December 2001 through January 2002. In consideration of these
services, iVillage paid AOL $0.7 million. In 2002, iVillage entered into a web
pointing agreement with AOL, pursuant to which AOL may provide a link to
iVillage's Web site. The agreement terminates on September 30, 2002, and in
consideration of these services, iVillage paid AOL approximately $0.2 million.
On February 22, 2002, iVillage amended its advertising and promotional
agreement with NBC, pursuant to which NBC released iVillage from its obligation
to make the remaining approximately $4.6 million in cash payments and to place
any additional advertising on NBC, in exchange for the purchase of approximately
$1.3 million in telecast spots in February 2002 by iVillage and the forfeiture
of iVillage's right to the remaining approximately $4.1 million of prepaid
advertising.
In March 2002, iVillage entered into a new one-year financial advisory
agreement with Allen & Company Incorporated ("Allen & Company") pursuant to
which Allen & Company has agreed to act as iVillage's financial advisor with
respect to various matters from time to time. iVillage paid Allen & Company an
initial non-refundable fee of $505,000 in April 2002, which fee shall be
credited towards any additional fees payable to Allen & Company for services
rendered pursuant to this agreement.
On April 18, 2002, the Company acquired 82.3% of the outstanding shares
of Promotions.com common stock. On May 24, 2002, the Company acquired the
remaining outstanding shares of Promotions.com common stock through a
second-step merger. The aggregate purchase price paid was approximately $14.6
million, consisting of approximately $10.4 million of cash (inclusive of closing
costs) and 1,587,191 shares of the Company's common stock.
iVillage leases office space and equipment under non-cancelable
operating leases expiring at various dates through April 2015. The following is
a schedule of future minimum lease payments under noncancelable operating leases
as of June 30, 2002 for the next five years:
Year ending June 30: (in thousands)
2003................................................. $ 5,499
2004................................................. 4,271
2005................................................. 4,161
2006................................................. 3,974
2007................................................. 3,853
--------
$ 21,758
========
In 2002, iVillage anticipates receiving from the landlord of its New
York headquarters the remaining approximately $0.8 million for reimbursement of
certain construction expenses.
18
iVillage's capital requirements depend on numerous factors, including:
o market acceptance of its services;
o the amount of resources iVillage devotes to investments in the
iVillage network, including entering into joint ventures with
and/or the acquisition of other entities;
o the resources iVillage devotes to marketing; and
o the resources iVillage devotes to selling its services and
brand promotions.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS Nos. 4,
44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002".
SFAS 145 becomes effective for financial statements issued for fiscal years
beginning after May 15, 2002. The adoption will not have a material impact on
the Company's financial position and results of operations.
In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities". The provisions of SFAS 146 shall be effective
for exit or disposal activities initiated after December 31, 2002. SFAS 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS 146 and EITF 94-3 relates to its requirements
for recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized
at the date of an entity's commitment to an exit plan. The adoption will not
have a material impact on the Company's financial position and results of
operations.
Risk Factors That May Affect Results of Operations and Financial Condition
iVillage may face difficulties encountered in the new and rapidly evolving
markets in which it operates.
iVillage faces many of the risks and difficulties frequently
encountered in new and rapidly evolving markets, including the Internet
advertising and consumer products markets. These risks and difficulties include
iVillage's ability to:
o attract a larger audience to the iVillage network of Web
sites;
o increase awareness of the iVillage brand and iVillage-branded
products;
o strengthen user loyalty;
o offer compelling content and desirable consumer products;
o maintain current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of
industries;
o respond effectively to competitive pressures;
o continue to develop and upgrade iVillage's technology; and
o attract, retain and motivate qualified personnel.
19
iVillage has not achieved profitability and has recent and anticipated
continuing losses.
iVillage has not achieved profitability and iVillage expects to
continue to incur operating losses for the foreseeable future. iVillage incurred
net losses attributable to common stockholders of approximately $21.5 million
for the six months ended June 30, 2002, $48.5 million for the year ended
December 31, 2001, and $191.4 million for the year ended December 31, 2000. As
of June 30, 2002, iVillage's accumulated deficit was approximately $454.3
million.
iVillage cannot make any assurances that it will achieve sufficient
revenues for profitability. Even if iVillage does achieve profitability,
iVillage cannot make any assurances that it will be able to sustain or increase
profitability on a quarterly or annual basis. If revenues grow slower than
iVillage anticipates, or if operating expenses exceed iVillage's expectations or
cannot be adjusted accordingly, its business, financial condition and results of
operations will be materially adversely affected. Because iVillage's strategy
includes acquisitions of, and joint ventures with, other businesses, acquisition
and joint venture expenses and any cash used to make these acquisitions and
joint ventures will reduce its available cash.
iVillage has a small number of customers and the loss of a number of these
customers could adversely affect its business, financial condition and results
of operations.
iVillage depends on a limited number of customers for a significant
portion of its revenues. For the three and six months ended June 30, 2002,
revenues from iVillage's five largest advertisers accounted for approximately
46% and 44% of total revenues, respectively. Three advertisers, Unilever,
Procter and Gamble, and Hearst accounted for approximately 19%, 11%, and 10% of
total revenues for the three months ended June 30, 2002, respectively, and 15%,
11% and 11% of total revenues for the six months ended June 30, 2002,
respectively. One advertiser, Unilever, accounted for approximately 17% and 15%
of total revenues for the three and six months ended June 30, 2001,
respectively, and iVillage's five largest advertisers accounted for
approximately 31% and 30% of total revenues, respectively. At June 30, 2002,
Unilever and Procter and Gamble accounted for approximately 36% and 14% of the
net accounts receivable, respectively, and at December 31, 2001, Hearst and
Unilever accounted for approximately 14% and 10% of the net accounts receivable,
respectively. iVillage anticipates that its results of operations in any given
period will continue to depend to a significant extent on revenues from a small
number of customers. In addition, iVillage's largest customers have in the past
varied over time, and iVillage anticipates that they will continue to do so in
the future. Consequently, the loss of even a small number of iVillage's largest
customers at any one time may adversely affect iVillage's business, financial
condition and results of operations, unless iVillage is able to enter into a
sufficient number of new comparable contracts.
iVillage's quarterly revenues and operating results are not indicative of future
performance, are difficult to forecast and have been and are likely to continue
to fluctuate.
iVillage does not believe that period-to-period comparisons of its
operating results are necessarily meaningful nor should they be relied upon as
reliable indicators of future performance, thus making it difficult to forecast
quarterly revenues and results of operations. In addition, iVillage's operating
results are likely to fluctuate significantly from quarter to quarter as a
result of several factors, many of which are outside iVillage's control, and any
of which could materially harm iVillage's business. These factors include:
o fluctuations in the demand for Internet advertising or
electronic commerce;
o bankruptcies or other payment defaults of companies that are a
source of advertising revenues;
o volatility in the Internet market and the high number of
companies decreasing their marketing budgets;
o changes in the level of traffic on its network; and
o fluctuations in marketing expenses and technology
infrastructure costs.
iVillage's revenues for the foreseeable future will remain dependent on
user traffic levels and advertising activity on its Web sites. Future revenues
are difficult to forecast. iVillage may be unable to adjust spending quickly
enough to offset any unexpected reduction in revenues in a particular quarter,
which may materially and adversely affect its business, financial condition and
results of operations.
20
In one or more future quarters, iVillage's results of operations may
fall below the expectations of securities analysts and investors. If iVillage's
results of operations fall below expectations, the trading price of its common
stock would likely be materially adversely affected. In addition, if the
revenues of iVillage in any particular quarter are lower than anticipated,
iVillage may be unable to reduce spending in that quarter. If iVillage has a
shortfall in revenues in relation to its expenses, then iVillage's business,
financial condition and results of operations would be materially adversely
affected.
iVillage may need to raise additional capital and its prospects for obtaining
additional financing are uncertain.
iVillage currently anticipates that its existing cash and cash
equivalents will be sufficient to meet its anticipated capital expenditures and
working capital requirements for at least the next 12 months. However, the
amount of cash and cash equivalents that iVillage will need in the future cannot
be accurately predicted and depends on many factors, including the amount of
revenues received and expenses incurred in connection with the operation of its
business including the costs of integrating the operations of Promotions.com.
Accordingly, iVillage may need to raise additional funds in the future to fund
its operations. iVillage can make no assurances that additional financing will
be available to iVillage on acceptable terms, or at all. In particular, unless
the market price of iVillage's common stock increases dramatically, it is
unlikely that iVillage will be able to raise funds through a public offering of
its common stock. Due to iVillage's lack of profitability, it is also unlikely
that iVillage would be able to obtain any bank financing. If anticipated
operating results are not achieved, management of iVillage has the intent and
believes it has the ability to delay or reduce expenditures so as not to require
additional financial resources if those resources were not available on terms
acceptable to iVillage, although iVillage can make no assurances in this regard.
The downturn in the economy has raised uncertainties concerning iVillage's
business prospects.
The national economy has recently experienced a slowdown. As a result,
many of iVillage's customers have experienced difficulty in maintaining their
current operations and implementing their business plans. Many of these
customers have reduced their spending on iVillage's products and services,
and/or may not be able to discharge their current payables and other obligations
to iVillage. The non-payment or late payment of amounts due to iVillage from a
significant customer, or the non-payment or late payment by multiple customers
which, in the aggregate, are substantial would materially adversely affect
iVillage's business, financial condition and results of operations.
As of June 30, 2002, Hearst owned approximately 29.0% of the outstanding shares
of iVillage common stock and had three representatives on the iVillage Board of
Directors; therefore, Hearst is able to significantly influence iVillage's
corporate direction and policies.
As of June 30, 2002, Hearst owned approximately 29.0% of the
outstanding shares of iVillage's common stock, assuming that all of the shares
of Women.com Networks, Inc. held by former Women.com stockholders and all of the
shares of Promotions.com, Inc. held by former Promotions.com stockholders had
been exchanged for shares of iVillage common stock, in which case there would
have been 55,503,179 shares of iVillage common stock outstanding. In addition,
Hearst holds a warrant entitling it to purchase 2,065,695 shares of iVillage's
common stock.
Pursuant to an amended and restated stockholder agreement entered into
between Hearst and iVillage on June 20, 2001, iVillage appointed three
representatives of Hearst to its board of directors, with one Hearst designee
appointed to each class of director. The amended and restated stockholder
agreement provides that the number of Hearst representatives is subject to
reduction if Hearst's ownership of iVillage common stock falls below certain
threshold levels. There is also a Hearst representative on each of iVillage's
nominating and compensation committees.
Hearst's board representation and stock ownership allows Hearst to
significantly influence iVillage's corporate direction and policies, including
any mergers, acquisitions, consolidations, strategic relationships or sales of
assets. This board representation and stock ownership may also discourage or
prevent transactions involving an actual or potential change of control,
including transactions in which iVillage stockholders would otherwise receive a
premium for their shares. In addition, the interests of Hearst, which owns or
has significant investments in other businesses, including cable television
networks, newspapers, magazines and electronic media, may from time to time be
competitive with, or otherwise diverge from, iVillage's interests, particularly
with respect to new business opportunities and future acquisitions.
21
Although Hearst is required to vote all shares that it holds in excess
of 25% (subject to adjustment) of iVillage's outstanding voting securities in
accordance with the recommendation of iVillage's Board of Directors, Hearst may
effectively control certain stockholder actions, including approving changes to
iVillage's Certificate of Incorporation or Bylaws and adopting or changing
equity incentive plans. Hearst's effective control over stockholder actions may
also determine the outcome of any merger, consolidation, sale of all or
substantially all of iVillage's assets or other form of change of control that
iVillage might consider.
iVillage's business will be harmed if Internet usage does not continue to grow.
iVillage's market is new and rapidly evolving. iVillage's business
would be adversely affected if Internet usage does not continue to grow,
particularly usage by women. A number of factors may inhibit Internet usage,
including:
o inadequate network infrastructure;
o security concerns; o inconsistent quality of service;
o lack of availability of cost-effective, high-speed service;
o consumers returning to traditional or alternative sources for
information, shopping and services; and
o privacy concerns, including those related to the ability of
Web sites to gather information about users without their
knowledge or consent.
If Internet usage continues to grow significantly, Internet
infrastructure may not be able to support the demands placed on it by this
growth and its performance and reliability may decline. In addition, Internet
service providers and Web sites have experienced interruptions in their services
as a result of the bankruptcies of Internet service and infrastructure
providers, outages and other delays occurring throughout the Internet network
infrastructure. If these service interruptions frequently occur in the future,
Internet usage, including the usage of iVillage's Web sites, could grow more
slowly or decline.
The market for Internet advertising is still developing. If the Internet fails
to gain further acceptance as a medium for advertising, iVillage would have
slower revenue growth than expected and would incur greater than expected
losses.
iVillage expects to continue to derive a substantial portion of its
revenues from sponsorships and advertising for the foreseeable future, as demand
and market acceptance for Internet advertising continues to develop.
Accordingly, iVillage's business depends on market acceptance of the Internet as
a medium for advertising. Although iVillage derives a portion of its revenues
from fees for Internet content and services, consumer reluctance to subscribe to
or pay for Internet content and services may limit iVillage's ability to
supplement Internet advertising as a substantial source of revenue in the
foreseeable future.
Although there are currently several standards to measure the
effectiveness of Internet advertising, the industry has had difficulty
convincing potential advertisers that Internet advertising is a significant
advertising medium. Advertisers and advertising agencies that have historically
relied on traditional forms of advertising may be reluctant or slow to adopt
online advertising. In addition, advertisers and advertising agencies that use
the Internet as an advertising medium may find online advertising to be less
effective for promoting their products and services than traditional advertising
media, including television, radio and print. Advertisers and advertising
agencies that have invested substantial resources in traditional methods of
advertising may also be reluctant to reallocate their resources to online
advertising. Moreover, software programs that limit or prevent advertising from
being delivered to an Internet user's computer are available. Widespread
adoption of this software could adversely affect the commercial viability of
Internet advertising. The market for online advertising also depends on the
overall growth and acceptance of electronic commerce. If the markets for online
advertising and electronic commerce fail to develop or develop more slowly than
iVillage expects, or if it is unable to adapt to new forms of Internet
advertising, iVillage would have slower than expected revenue growth and would
incur greater than expected losses, and its business and financial condition
would be harmed.
22
Furthermore, different pricing models are used to sell advertising on
the Internet and it is difficult to predict which, if any, of the models will
emerge as the industry standard. For example, in recent quarters iVillage has
experienced a shift from the larger, higher-rate, long-term sponsorship
agreements that were prevalent a few years ago to smaller, lower-rate,
short-term advertising agreements. This makes it difficult to project iVillage's
future advertising rates and revenues.
iVillage may not be able to expand its business through acquisitions and joint
ventures if iVillage is unable to compete successfully for acquisition
candidates and/or joint venture partners and, even if iVillage is successful in
this regard, iVillage's operations may be adversely affected as a result of an
acquisition or joint venture.
iVillage's business strategy includes growth through business
combinations, acquisitions and joint ventures. iVillage's business could be
harmed if it is unable to implement this business strategy. iVillage's ability
to implement this business strategy depends in large part on iVillage's ability
to compete successfully with other entities for acquisition candidates and joint
venture partners. Factors affecting iVillage's ability to compete successfully
in this regard include:
o iVillage's financial condition relative to the financial
condition of its competitors; and
o the attractiveness of iVillage's common stock as potential
consideration for entering into these types of transactions as
compared to the common stock of other entities competing for
these opportunities.
Many of the entities with which iVillage competes for acquisition
candidates and joint venture partners have greater financial resources than
those of iVillage. In addition, iVillage's acquisition program has been
materially adversely affected by the substantial decline in the market price of
iVillage's common stock over the last several years.
If, despite these factors, iVillage is successful in entering into
additional business combinations, acquisitions and joint ventures, iVillage's
business, financial condition and results of operations could be materially and
adversely affected if iVillage is unable to integrate the operations of the
acquired companies or joint ventures. iVillage's ability to integrate the
operations of the acquired companies or joint ventures will depend, in part, on
iVillage's ability to overcome or address:
o the difficulties of assimilating the operations and personnel
of the acquired companies and the potential disruption of
iVillage's ongoing business as a result of these assimilation
efforts;
o the difficulties of establishing a new joint venture,
including the need to attract and retain qualified personnel
and the need to attract customers and advertisers;
o the need to incorporate successfully the acquired or shared
technology or content and rights into iVillage's products and
media properties;
o the difficulties of maintaining uniform standards, controls,
procedures and policies; and
o the potential impairment of relationships with employees and
customers as a result of any integration of new management
personnel or reduction of personnel.
In addition, effecting acquisitions could require use of a significant
amount of iVillage's available cash. Furthermore, iVillage may have to issue
equity or equity-linked securities to pay for future acquisitions, and any of
these issuances could be dilutive to existing and future stockholders. In
addition, acquisitions and investments may have negative effects on iVillage's
reported results of operations due to acquisition-related charges, amortization
of acquired technology and other intangibles, and/or potential liabilities
associated with the acquired businesses or joint ventures. Any of these
acquisition-related risks or costs could harm iVillage's business, financial
condition and results of operations.
iVillage may be unable to respond to the rapid technological change in its
industry.
iVillage's market is characterized by rapidly changing technologies,
frequent new product and service introductions and evolving industry standards.
The recent growth of the Internet and intense competition in iVillage's industry
exacerbates these market characteristics. To achieve its goals, iVillage needs
to effectively integrate the various software programs and tools required to
enhance and improve its product offerings and manage its business. iVillage's
future success will depend on its ability to adapt to rapidly changing
technologies by continually improving the performance features and reliability
of its services. iVillage may experience difficulties that could delay or
prevent the successful development, introduction or marketing of new products
and services. In addition, iVillage's new enhancements must meet the
requirements of iVillage's current and prospective users and must achieve
significant market acceptance. iVillage also could incur substantial costs if it
needs to modify its services or infrastructure to adapt to these changes.
23
Seasonal and cyclical patterns may adversely affect iVillage's business.
iVillage believes that advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If iVillage's market makes the transition from an
emerging to a more developed market, seasonal and cyclical patterns may develop
also in its market, which, if similar to those in traditional media, may result
in lower advertising revenues in the first and third calendar quarters of each
year. In addition, traffic levels on iVillage's Web sites typically fluctuate
during the summer and year-end vacation and holiday periods. These seasonal and
cyclical patterns may adversely affect iVillage's business, financial condition
and results of operations.
iVillage's uncertain sales cycles could adversely affect its business.
The time between the date of initial contact with a potential
advertiser or sponsor and the execution of a contract with the advertiser or
sponsor is often lengthy, typically six weeks for smaller agreements and longer
for larger agreements, and is subject to delays over which iVillage has little
or no control, including:
o advertisers' and sponsors' budgetary constraints;
o advertisers' and sponsors' internal acceptance reviews;
o the success and continued internal support of advertisers' and
sponsors' own development efforts; and
o the possibility of cancellation or delay of projects by
advertisers or sponsors.
During the sales cycle, iVillage may expend funds and management
resources and yet not obtain sponsorship or advertising revenues. Accordingly,
iVillage's results of operations for a particular period may be adversely
affected if sales to advertisers or sponsors forecasted in a particular period
are delayed or do not otherwise occur.
iVillage relies on third parties to adequately measure the demographics of its
user base and delivery of advertisements on iVillage's Web sites. iVillage's
business would be harmed if these third parties fail to provide these services
to iVillage.
It is important to iVillage's advertisers that iVillage accurately
measure the demographics of its user base and the delivery of advertisements on
iVillage's Web sites. iVillage depends on third parties to provide many of these
measurement services. If these third parties are unable or unwilling to provide
these services to iVillage in the future, iVillage would need to perform them or
obtain them from another provider. This could cause iVillage to incur additional
costs or cause interruptions in its business until these services are replaced.
Companies may choose not to advertise on iVillage's Web sites or may pay less
for advertising if they perceive iVillage's demographic measurements are not
reliable. Either of these events could adversely affect iVillage's business.
iVillage may not be able to deliver various services if third parties fail to
provide reliable software, systems and related services to iVillage.
iVillage depends on various third parties for software, systems and
related services. For example, iVillage relies on Doubleclick Inc.'s software
for the placement of advertisements, Trellix Corporation for personal space home
pages and Mail2World, Inc. for e-mail. Several of the third parties which
provide software and services to iVillage have a limited operating history, have
relatively immature technology and are themselves dependent on reliable delivery
of services from others. As a result, iVillage's ability to deliver various
services to its users may be adversely affected by the failure of these third
parties to provide reliable software, systems and related services to iVillage.
If iVillage is unable to deliver the services that its users expect, its
business, financial condition and results of operations could be materially
adversely affected.
24
iVillage's principal investors' investments in its competitors may result in
conflicts of interest that could be adverse to iVillage.
iVillage's principal investors, such as AOL Time Warner, Rho Capital
Partners, Inc. and Hearst, may have conflicts of interests by virtue of
investments in other companies that may compete with iVillage. These investments
may result in a conflict of interest for iVillage's principal investors or
result in the diversion of attractive business opportunities from iVillage's
principal investors to another company. iVillage is unable to determine all of
the competing investments held by these principal investors. In addition,
iVillage does not have the ability to constrain the investment activity of any
of its principal investors and therefore cannot predict the extent of any future
investments in businesses that are competitive with iVillage.
Restrictions on iVillage's ability to enter into sponsorship, advertising or
other business relationships with Hearst's competitors may adversely affect
iVillage's business.
In connection with iVillage's acquisition of Women.com in June 2001,
iVillage entered into a magazine content license and hosting agreement with
Hearst. That agreement restricts iVillage's ability to enter into relationships
with competitors of Hearst and those restrictions may prevent iVillage from
expanding its network and enhancing its content and the visibility of iVillage's
brand, and may cause iVillage to forego potential advertising revenues from
competitors of Hearst. Specifically, the agreement provides that iVillage may
not, without Hearst's consent:
o enter into any agreement to include in iVillage's network any
Web sites for magazines that compete with Hearst magazines;
o display on the magazine Web sites any advertising or other
promotional materials from magazines that compete with Hearst
magazines; or
o display on an iVillage Web page the brands, logos, trademarks
or proprietary content of both Hearst and a Hearst competitor.
iVillage's business could be affected by future terrorist attacks.
Although neither the terrorist attacks on the World Trade Center in
September 2001 nor the late 2001 bio-terrorist attacks on various organizations
have had a material adverse effect on iVillage's business, operations or
financial condition, iVillage cannot assure you that future terrorist attacks in
the United States, and particularly in New York City where iVillage's
headquarters are located, or the response of the U.S. government to the recent
or any future terrorist actions, would not negatively affect iVillage through
further disruption of the economy or financial markets, or otherwise. The
proximity of iVillage's headquarters to certain possible terrorist targets in
New York City could also, in the event of future terrorist attacks, result in
damage to or destruction of iVillage's headquarters as well as the permanent or
temporary loss of key personnel. iVillage has not yet fully developed a disaster
recovery plan and iVillage cannot guarantee that iVillage's insurance coverage
would adequately reimburse iVillage for any damages suffered as a result of a
terrorist attack.
There is intense competition among Internet-based businesses and publishing
companies focused on women, and this competition could result in price
reductions, reduced margins or loss of market share.
There are a large number of Web sites competing for the attention and
spending of members, users and advertisers. iVillage's Web sites compete for
members, users and advertisers with the following types of companies:
o online services or Web sites targeted at women, such as
Oxygen.com and condenet.com;
o cable networks targeting women, such as Oxygen Media, Inc.,
Women's Entertainment Network and Lifetime Television;
25
o Web search and retrieval and other online service companies,
commonly referred to as portals, such as AOL, Terra Networks,
S.A. and Yahoo! Inc.;
o e-commerce companies such as Amazon.com, Inc.; and
o publishers and distributors of traditional media, such as
television, radio and print.
Increased competition could result in price reductions, reduced margins
or loss of market share, any of which could adversely affect iVillage's
business, financial condition and results of operations.
Lamaze Publishing's magazines directly compete with publishers of pre-
and post-natal publications such as Gruner and Jahr, Primedia and AOL Time
Warner. These publishers have substantially greater marketing, research and
financial resources than Lamaze Publishing. Increased competition may result in
less advertising in Lamaze Publishing's magazines and a decline in Lamaze
Publishing's advertising rates, which could adversely affect its business,
financial condition and results of operations.
iVillage's business would be harmed if iVillage's systems fail or experience a
slowdown.
Substantially all of iVillage's communications hardware and some of its
other computer hardware operations are located at Exodus Communications'
facilities in New Jersey and Verio's facilities in California. Fire, floods,
earthquakes, power loss, telecommunications failures, break-ins and similar
events could damage these systems. System failures may adversely affect
iVillage's user traffic, which could adversely affect its revenues and operating
results and harm its reputation with users, advertisers and commerce partners.
Computer viruses, electronic break-ins or other similar disruptive problems,
such as those historically experienced by several leading Web sites, could also
adversely affect iVillage's Web sites.
iVillage's insurance policies may not adequately compensate it for any
losses that may occur due to any failures or interruptions in its systems.
iVillage does not presently have any secondary "off-site" systems or a formal
disaster recovery plan. In addition, Exodus Communications filed for bankruptcy
protection and iVillage cannot assure you that Exodus Communications will be
able to continue to provide sufficient services for iVillage or that iVillage
will be able to engage a satisfactory alternative service provider.
iVillage's Web sites must accommodate a high volume of traffic and
deliver frequently updated information. iVillage's Web sites have in the past
experienced slower response times or decreased traffic for a variety of reasons.
These occurrences have not had a material effect on iVillage's business. These
types of occurrences in the future could cause users to perceive iVillage's Web
sites as not functioning properly and therefore cause them to use another Web
site or other methods to obtain information.
In addition, iVillage's users depend on Internet service providers,
online service providers and other Web site operators for access to iVillage's
Web sites. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to iVillage's systems.
iVillage may incur liability for the information iVillage publishes or the
products and services iVillage has sold.
iVillage's business, financial condition and results of operations
could be materially and adversely affected if iVillage were to become liable for
damage claims based on information published by it or products and services sold
by it. For example, iVillage has been in the past, and may be in the future,
subject to claims for defamation, negligence, copyright or trademark
infringement, personal injury or other legal theories relating to the
information iVillage publishes on its Web sites. These types of claims have been
brought, sometimes successfully, against providers of Internet services in the
past. In addition, iVillage could be subjected to claims based upon the content
that is accessible from iVillage's Web sites through links to other Web sites or
through content and materials that may be posted by members in chat rooms or
bulletin boards.
In addition, through iVillage.com, Women.com, Lamaze Publishing and
iVillage Integrated Properties, Inc., iVillage distributes publications and
broadcasts over its Web sites, The Newborn Channel and The Wellness Channel
information and advice regarding healthcare, childbirth, infant care and
financial and tax issues. iVillage may be exposed to liability claims in
connection with this information.
26
iVillage also offers e-mail services through a third-party vendor,
which may subject iVillage to potential risks, such as liabilities or claims
resulting from unsolicited e-mail, lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail services.
Consumers and/or government regulators may also sue iVillage if any of
the products or services that it sells are found to be defective, fail to
perform properly or injure the user. iVillage may also face potential liability
in connection with the sale of products and services by its e-commerce and other
partners. Although iVillage's agreements with its partners typically contain
provisions intended to limit iVillage's liability, these limitations may not
prevent or protect against all possible claims.
iVillage's insurance, which covers commercial general liability, may
not adequately protect iVillage against these claims. Liability claims could
require iVillage to spend significant time and money in litigation and to pay
significant damages. As a result, liability claims, whether or not successful,
could seriously damage iVillage's reputation and iVillage's business. iVillage
may also be forced to implement expensive measures to alter the way iVillage's
services are provided to avoid potential liability.
Possible infringement by third parties of iVillage's intellectual property
rights, or claims of intellectual property infringement asserted against
iVillage, could harm iVillage's business.
iVillage cannot be certain that the steps it has taken to protect its
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate iVillage's proprietary rights. Enforcing iVillage's
intellectual property rights could entail significant expense and could prove
difficult or impossible. Any infringement or misappropriation by third parties
could have a material adverse effect on iVillage's future financial results.
Furthermore, iVillage has invested resources in acquiring domain names
for existing and potential future use. iVillage cannot guarantee that iVillage
will be entitled to use these domain names under applicable trademark and
similar laws or that other desired domain names will be available.
Although iVillage believes that its technologies do not infringe upon
the intellectual property rights of others, third parties have in the past
asserted, and could assert in the future, claims of patent, trademark or
copyright infringement or misappropriation of creative ideas or formats against
iVillage with respect to iVillage's use of domain names, iVillage's content, Web
page formats, Web business methods or any third-party content it carries.
iVillage expects that participants in iVillage's markets will continue to be
subject to infringement claims. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention, require iVillage to enter into costly royalty or licensing
arrangements or prevent iVillage from using important technologies, ideas or
formats, any of which could materially harm iVillage's business, financial
condition or results of operations.
iVillage may face potential liability for its privacy practices.
Growing public concern about privacy and the collection, distribution
and use of information about individuals may subject iVillage to increased
regulatory scrutiny and/or litigation. If iVillage is accused of violating the
stated terms of iVillage's privacy policy, iVillage may be forced to expend
significant amounts of monetary and human resources to defend against these
accusations. iVillage also may be required to make changes to its present and
planned products or services. These consequences, together with any resulting
liability for iVillage's privacy practices, could have a material adverse effect
on iVillage's business, financial condition and results of operations.
iVillage may be liable if third parties misappropriate iVillage's users'
personal information.
If third parties were able to penetrate iVillage's network security or
otherwise misappropriate its users' personal information or credit card
information, iVillage could be subject to liability arising from claims related
to, among other things, unauthorized purchases with credit card information,
impersonation or other similar fraud claims or other misuse of personal
information, such as for unauthorized marketing purposes. In addition, the
Federal Trade Commission and state agencies have investigated various Internet
companies regarding their use of personal information. iVillage could incur
additional expenses if new regulations regarding the use of personal information
are introduced or if iVillage's privacy practices are investigated.
27
Consumer protection privacy regulations could impair iVillage's ability to
obtain information about its users, which could result in decreased advertising
revenues.
If iVillage becomes unable to collect personal data from a sufficient
number of the users of its network, iVillage may lose significant advertising
revenues. iVillage generally asks its members and users to "opt-in" to receive
special offers and other direct marketing opportunities from iVillage, its
advertisers and partners. iVillage's network also requests and obtains personal
data from users who register to become members of the network. Registration as a
member is required in order for users to have full access to the services
offered by iVillage's network. Personal data gathered from members is used to
tailor content to them and is provided, on an aggregate basis, to advertisers to
assist them in targeting their advertising campaigns to particular demographic
groups. The attractiveness of iVillage's network to current or prospective
advertisers depends in part on iVillage's ability to provide user data to
support this tailoring capability. Privacy concerns may cause users to resist
providing this personal data, however. Even the perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of iVillage's use of personal data. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
users that the data may be used by marketing entities to direct product
promotion and advertising to the user. Other countries and political entities,
such as the European Economic Community, have adopted legislation or regulations
containing these notification and privacy requirements.
iVillage's network also uses "cookies" to track user behavior and
preferences. A cookie is information keyed to a specific server, file pathway or
directory location that is stored on a user's hard drive, possibly without the
user's knowledge, but is generally removable by the user. Information gathered
from cookies is used by iVillage to tailor content to users of iVillage's
network and may also be provided to advertisers on an aggregate basis. In
addition, advertisers may themselves use cookies to track user behavior and
preferences. A number of Internet commentators, advocates and governmental
bodies in the United States and other countries have urged the passage of laws
limiting or abolishing the use of cookies. If these laws are passed, it may
become more difficult for iVillage to tailor content to its users, making
iVillage's network less attractive to users. Similarly, the unavailability of
cookies may restrict the use of tailored advertising, making iVillage's network
less attractive to advertisers and causing iVillage to lose significant
advertising revenues.
Government regulation and legal uncertainties could add additional costs to
doing business on the Internet.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future that address issues such as user privacy, pricing and taxation,
content, copyrights, distribution, antitrust matters and the characteristics and
quality of products and services, however. Moreover, it may take years to
determine the extent to which existing laws relating to issues such as property
ownership, obscenity, libel and personal privacy are applicable to the Internet
or whether laws and regulations from jurisdictions whose laws do not currently
apply to iVillage's business will become applicable. Any new laws or regulations
relating to the Internet could adversely affect iVillage's business.
Due to the global nature of the Internet, it is possible that, although
iVillage's transmissions over the Internet originate primarily in New York, the
governments of other states and foreign countries might attempt to regulate
iVillage's business activities. In addition, because iVillage's service is
available over the Internet in multiple states and foreign countries, these
jurisdictions may require iVillage to qualify to do business as a foreign
corporation in each of these states or foreign countries, which could subject
iVillage to taxes and other regulations.
iVillage's operation of Lamaze Publishing, The Newborn Channel and The
Wellness Channel poses a number of risks that could materially adversely affect
iVillage's business strategy.
There are a number of risks in operating Lamaze Publishing, The Newborn
Channel and The Wellness Channel, which are primarily non-Internet businesses,
including:
o the competitiveness of the media, television and publishing
industries;
o iVillage's limited experience in operating a multi-media
publishing and television company;
28
o iVillage's ability to identify and predict trends in a timely
manner that may impact consumer tastes in baby-related
information in Lamaze Publishing's publications and on The
Newborn Channel and health-related information on The Wellness
Channel;
o iVillage's ability to continue to sell advertising and
sponsorships on its Web sites and in Lamaze Publishing's
magazines, videos and Web site, and on The Newborn Channel and
The Wellness Channel;
o iVillage's ability to continue to commercialize and protect
the Lamaze mark; and
o iVillage's ability to maintain and market the Lamaze.com Web
site.
iVillage's inability to perform the functions required for the
operation of Lamaze Publishing, The Newborn Channel and The Wellness Channel in
an efficient and timely manner could result in a disruption of operations of
Lamaze Publishing, The Newborn Channel and The Wellness Channel that could have
a material adverse effect on iVillage's business strategy.
iVillage's business would be harmed if transmission of The Newborn Channel or
The Wellness Channel were interrupted.
Through iVillage Integrated Properties, Inc., iVillage operates The
Newborn Channel, a satellite television network broadcast in approximately 1,100
hospitals in the United States. iVillage has also commenced broadcasting of The
Wellness Channel in selected hospitals via an in-hospital digital delivery
system. There is a risk that the satellite or in-hospital delivery system from
which the transmissions are sent may malfunction, interrupting broadcasts of The
Newborn Channel or The Wellness Channel, respectively. In the event this occurs,
there may be a period of time before transmission of The Newborn Channel or The
Wellness Channel can re-commence. Any interruption in iVillage's ability to
transmit The Newborn Channel or The Wellness Channel could have an adverse
effect on its business. In addition, extreme adverse weather or third parties
could damage or disable receivers and transmitters on the ground and hinder
transmissions.
If iVillage fails to attract and retain key personnel, iVillage's business would
be materially adversely affected.
iVillage's future success depends to a significant extent on the
continued services of iVillage's senior management and other key personnel,
particularly Douglas W. McCormick, iVillage's Chairman of the Board and Chief
Executive Officer. The loss of the services of Mr. McCormick would likely harm
iVillage's business. iVillage currently does not maintain "key person" life
insurance for any of iVillage's senior management.
iVillage may be unable to retain its key employees or attract,
assimilate or retain other highly qualified employees in the future. iVillage
has from time to time experienced, and expects to continue to experience,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications as a result of its relatively low common stock price. As a
result, iVillage has in the past and may in the future incur increased salaries
and benefits. If iVillage does not succeed in attracting new personnel or
retaining and motivating its current personnel, iVillage's business will be
materially adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
29
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Our 2002 Annual Meeting of Stockholders was held on May 23, 2002. In
the election of directors, the three director nominees were elected with the
following votes:
Number of Votes
---------------------------------
Nominee For Withheld
---------- ---------- --------
Kenneth A. Bronfin................... 45,488,528 113,365
John T. (Jack) Healy................. 45,488,548 113,345
Lennert J. Leader..................... 45,450,319 151,574
The stockholders voted in favor of the ratification of the appointment
of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year
ended December 31, 2002 as follows:
Number of Votes
---------------------------------------------
For Against Abstain
----------- ------- -------
Ratification of Appointment of
Auditors........................ 45,588,689 12,029 1,175
Item 5. Other Information.
Not Applicable.
30
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
Number Description
3.1 Restated Certificate of Incorporation of the
Registrant (incorporated by reference from Exhibit
3.1 to the Registrant's Form 10-Q Quarterly Report
for the period ended September 30, 2001, File No.
000-25469).
3.2 By-Laws of the Registrant (incorporated by
reference from Exhibit 3.2 to the Registrant's
Form 10-Q Quarterly Report for the period ended
June 30, 2001, File No. 000-25469).
10.1 Amended 2001 Non-Qualified Stock Option Plan of
the Registrant.
10.2 Web Pointing Agreement, dated as of June 18, 2002,
between the Registrant and America Online, Inc.
11 Statement re: computation of earnings per share.
99.1 Certification of Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.
(b) Reports on Form 8-K.
--------------------
Reports on Form 8-K were filed on May 3, 2002, reporting under Item 2
and Item 7, and May 7, 2002 and May 24, 2002, each reporting under Item
5 and Item 7.
31
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.
iVILLAGE INC.
(Registrant)
Dated: August 14, 2002 By: /s/ Douglas W. McCormick
----------------------------------
Douglas W. McCormick
Chairman and Chief Executive
Officer (Principal Executive
Officer)
Dated: August 14, 2002 By: /s/ Scott Levine
----------------------------------
Scott Levine
Chief Financial Officer (Principal
Accounting and Financial Officer)
32
EXHIBIT INDEX
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of the
Registrant (incorporated by reference from Exhibit
3.1 to the Registrant's Form 10-Q Quarterly Report
for the period ended September 30, 2001, File No.
000-25469).
3.2 By-Laws of the Registrant (incorporated by
reference from Exhibit 3.2 to the Registrant's
Form 10-Q Quarterly Report for the period ended
June 30, 2001, File No. 000-25469).
10.1 Amended 2001 Non-Qualified Stock Option Plan of
the Registrant.
10.2 Web Pointing Agreement, dated as of June 18, 2002,
between the Registrant and America Online, Inc.
11 Statement re: computation of earnings per share.
99.1 Certification of Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.
33