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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
500-512 Seventh Avenue, New York, New York 10018
- ------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 600-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [x]
The aggregate market value of the issued and outstanding voting stock
held by non-affiliates of the registrant, based upon the closing sale price of
the Common Stock on March 26, 2003 as reported on The Nasdaq SmallCap Market,
was approximately $23.95 million. Shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the outstanding Common
Stock (without reference to Exchange Act Regulation 13D-G's definition of
"beneficial ownership") have been excluded in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 26, 2003, the registrant had outstanding 55,330,877 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The documents incorporated by reference in this Form 10-K are listed in
the Exhibit Index.
iVillage Inc.
Form 10-K
Table of Contents
Page No.
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PART I
Item 1. Business.......................................................................................1
Item 2. Properties....................................................................................20
Item 3. Legal Proceedings.............................................................................21
Item 4. Submission of Matters to a Vote of Security Holders...........................................21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................22
Item 6. Selected Consolidated Financial Data..........................................................24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................................60
Item 8. Consolidated Financial Statements and Supplementary Data......................................61
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........61
PART III
Item 10. Directors and Executive Officers of the Registrant............................................62
Item 11. Executive Compensation........................................................................67
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...............................................................72
Item 13. Certain Relationships and Related Transactions................................................76
Item 14. Controls and Procedures.......................................................................78
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................79
SIGNATURES.................................................................................................83
CERTIFICATIONS..................................................................................................85
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE....................................F-1
PART I
Certain statements in this Annual Report on Form 10-K, including
certain statements contained in "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations",
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words
or phrases "can be", "expects", "may affect", "may depend", "anticipates",
"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 iVillage Inc.
("iVillage") cautions you that any forward-looking information provided by or on
behalf of iVillage 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 iVillage's
control, in addition to those risks discussed below and in iVillage's other
public filings, press releases and statements by iVillage's 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 iVillage's business, (iv)
the impact of recent and future acquisitions and joint ventures on iVillage's
business and financial condition, (v) iVillage's ability to establish and
maintain relationships with advertisers, sponsors, and other third-party
providers and partners, and (vi) the impact of pending litigation on iVillage's
business and financial condition. All such forward-looking statements are
current only as of the date on which such statements were made. iVillage does
not undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement is
made or to reflect the occurrence of unanticipated events.
Item 1. Business.
Overview
iVillage is a media company that operates the iVillage.com Web site,
Women.com Networks, Inc. (operator of the Women.com Web site) ("Women.com"),
iVillage Parenting Network, Inc.("IVPN"), Public Affairs Group, Inc.("PAG"),
Promotions.com, Inc. ("Promotions.com"), iVillage Consulting (formerly known as
iVillage Solutions), and Knowledgeweb, Inc. (operator of the Astrology.com Web
site) ("Astrology.com"). iVillage.com and Women.com are leading women's online
destinations providing practical solutions and everyday support for women 18 and
over. IVPN is a holding company for Lamaze Publishing Company ("Lamaze
Publishing"), a publisher of advertiser supported educational materials for
expectant and new parents, and iVillage Integrated Properties, Inc. ("IVIP"),
the operator of The Newborn Channel, a satellite television network broadcast in
over 1,050 hospitals nationwide, and the publisher of Baby Steps magazine. PAG
is comprised of three divisions: Business Women's Network, Diversity Best
Practices and Best Practices in Corporate Communications, each offering
extensive databases of pertinent information to subscribing companies and
members. Promotions.com provides promotions and direct marketing programs that
are integrated with customers' offline marketing initiatives.
-1-
iVillage.com is organized into channels and communities across multiple
topics of high importance to women and offers interactive services, peer
support, content and online access to experts and tailored shopping
opportunities. The major content areas include Babies, Beauty, Diet & Fitness,
Entertainment, Food, Health, Home & Garden, Horoscopes, Money, Parenting, Pets,
Pregnancy, Quizzes, Relationships and Work. iVillage facilitates use across
content areas by providing a similar look and feel within each area and across
the network, resulting in a consistent and strongly branded Web site.
iVillage is recognized as an industry leader in developing innovative
sponsorship and commerce relationships that match the desire of marketers to
reach women with the needs of iVillage.com members for relevant information and
services. Membership to iVillage.com is free and provides features such as
personal homepages, message boards and other community tools.
Page views for the iVillage network of Web sites have grown to a
monthly average of 410.0 million for the quarter ended December 31, 2002, up
from 343.3 million average monthly page views in the fourth quarter of 2001. In
February 2003, according to comScore Media Metrix, iVillage ranked 24th among
the top 100 Web and Digital Media properties with more than 18.5 million unique
visitors in the United States and had an average reach of approximately 12% of
the total online population. Also according to comScore Media Metrix, during
this period visitors spent an average of 21.2 minutes on the iVillage network
and returned an average of 2.6 times per month.
iVillage Content Areas
iVillage.com is organized around content specific areas that focus on
issues of most importance to women and provides interactive services, peer
support and online access to experts and tailored shopping opportunities.
iVillage.com is updated daily to promote content and community. The following
table provides a brief description of the features of each content area as of
December 31, 2002:
Area Description
- ---- -----------
Babies A parenting area that caters to women who are trying to
conceive, are expecting or are new parents, and includes
content, experts, message boards and weekly chats, primarily
through ParentsPlace.com.
Beauty An area offering users beauty advice, product reviews and access
to hair, makeup and skincare experts. The beauty channel,
Substance.com, is operated by a joint venture between a
subsidiary of Unilever United States, Inc. ("Unilever") and
iVillage.
Diet & Fitness A diet and fitness area which includes body
calculators, nutrition and fitness experts, message boards,
quizzes and community challenges to improve one's weight and
fitness level.
Entertainment An area which includes celebrity interviews, jokes and
entertainment-related tools and quizzes.
Food A food area providing information on meal planning, nutrition
and recipes which includes food experts and cooking basics.
-2-
Area Description
- ---- -----------
Health One of the leading consumer health Web sites on the Internet,
this area assists users in becoming better health care decision
makers through relevant articles, expert advice, message boards
and weekly chats.
Home & Garden A home and garden area offering users information, expert advice
and tools on home and gardening issues.
Horoscopes An area providing users with horoscopes, celebrity profiles,
romance charts, monthly guidance and the ability to purchase
astrology reports, primarily through Astrology.com.
Money A financial planning area providing users with information on
savings and investment strategies focusing on key life stages of
women.
Parenting A parenting area providing users with a branded online community
where parents share parenting solutions, talk with experts and
find answers and support, primarily through ParentSoup.com.
Pets An area that provides information on caring for your pet,
selecting a breed, adopting a pet and choosing a veterinarian.
Pregnancy An area for expectant parents providing information on fertility
and pregnancy, including ParentsPlace.com and Lamaze.com.
Quizzes An area offering interactive quizzes on a variety of subjects.
Relationships An area offering users information and conversation on love,
marriage, sex and family.
Work An area providing women who work from home with tools and
resources such as home office basics. The site also provides
women with tools and resources relating to professional
development and career-related issues.
iVillage believes that user support is critical in order to attract and
retain users. iVillage provides user support primarily through e-mail-based
correspondence. Help and feedback buttons are prominently displayed throughout
iVillage.com, and iVillage.com's user support staff attempts to respond to all
e-mail queries within 48 hours. In addition, community leaders provide e-mail
support for broad-ranging issues. iVillage does not charge for these services.
Sponsorship and Advertising Revenues
iVillage has derived a significant amount of its revenues to date from
the sale of sponsorships and advertisements. For the years ended December 31,
2002 and 2001, sponsorship and advertising revenues represented 78% and 81%,
respectively, of iVillage's revenues.
-3-
iVillage's strategy is focused in part on generating a majority of its
sponsorship and advertising revenues from sponsors and merchants who seek a
cost-effective means to reach women online. iVillage is aggressively working to
build its leadership position as the preeminent women's brand to the advertising
community. iVillage's online sponsorship arrangements typically differ from
traditional banner advertising in that they are designed to achieve broad
marketing objectives such as brand promotion and awareness, product
introductions and online research. Sponsorships allow iVillage to cater to the
specific goals of advertisers in the areas of impressions, product research,
market research, new product launches, list development, product information,
repositioning, new account openings, lead generation and transactions. Sponsors
also have the opportunity to develop a dialogue with their key consumer
prospects through iVillage's message boards, chats, e-mail newsletters, polls
and special events, which allows sponsors the opportunity to gain insight into
their customers. iVillage's online sponsorship arrangements generally have
longer terms than typical banner advertising placements, provide for higher cost
per thousand impressions per advertiser and independence from page views as the
sole measure of value. In addition, iVillage occasionally develops extensive
content to support the marketing initiatives of advertisers. iVillage's
sponsorship agreements can be exclusive.
iVillage advertising revenues are derived principally from long-term
and short-term advertising contracts, in which banner advertisements are
prominently displayed at the top and bottom of pages throughout iVillage's Web
sites. From each banner advertisement, viewers can hyperlink directly to the
advertiser's own Web site, thus providing the advertiser the opportunity to
directly interact with an interested customer. In recent years, iVillage has
experienced a shift from larger, higher rate, long-term sponsorship agreements
to smaller, lower rate, short-term advertising contracts.
In response to feedback from iVillage.com visitors, iVillage began
eliminating substantially all pop-up advertisements, an advertising format which
was a source of sponsorship and advertising revenue, on iVillage.com in July
2002. iVillage has replaced pop-up advertisements with advertising formats that
it believes elicit a more favorable and efficacious response from consumers.
iVillage also offers research to its sponsors, advertisers and other
customers for a fee. Through third party vendors and internal staff, iVillage
provides customers with research designed to measure the ability of online
advertising to create brand awareness and impact purchase decisions. This
research is conducted primarily through live online campaigns during which
visitors to iVillage's Web sites are invited at random to take a brief survey
designed to measure their product and brand awareness levels and their purchase
intents. This allows iVillage's sponsors and advertisers to help make their
online marketing campaigns more effective in connection with wide scale
initiatives and provides them with important aggregated demographic information
such as age, sex and income. To date, iVillage has not received a significant
portion of sponsorship and advertising revenues from paid research.
-4-
For the years ended December 31, 2002 and 2001, revenues from
iVillage's five largest customers accounted for approximately 38% and 37% of
total revenues, respectively. In 2002, three advertisers, Procter and Gamble
Company ("Procter and Gamble"), Hearst Communications, Inc. (including its
affiliates, "Hearst"), a related party, and Unilever and its affiliates,
accounted for approximately 11%, 11% and 10% of total revenues. In 2001, one
advertiser, Unilever and its affiliates, accounted for approximately 12% of
total revenues. At December 31, 2002, Procter and Gamble accounted for
approximately 26% of the net accounts receivable, and at December 31, 2001,
Hearst and Unilever and its affiliates 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 upon revenues from a small number of advertisers. In
addition, iVillage's largest advertisers have in the past varied over time, and
iVillage anticipates that they will continue to do so in the future.
Membership
iVillage believes a large and active membership base is critical to its
success. Some features of iVillage's Web sites are restricted to members.
Membership is free and available to iVillage.com visitors who disclose their
name, e-mail address, zip code, country, age and gender and choose a member name
and password to be used throughout member-only areas. Members form
iVillage.com's core audience and are its most valuable users. Community
challenges, message boards and chats are examples of iVillage members-only
benefits.
iVillage recognizes the importance of maintaining the confidentiality
of member information and has a privacy policy to protect this information. In
addition, iVillage Health is a founding member of the Health Internet Ethics, or
Hi-Ethics, organization. iVillage's current privacy policy is accessible through
a link from the iVillage.com home page as well as every Web page on
iVillage.com, including the page where a person initially registers for
membership. iVillage's current policy is to never sell or disclose to any third
party any member's personal identifying information, such as his or her name or
address, unless the member has provided consent in the form of an "opt-in" or in
certain limited situations as described in iVillage's privacy policy. For
example, in some situations, iVillage does allow a third-party partner access to
database information if it is necessary for the delivery of a member service,
such as a personal home page. In these instances, the partner has generally
agreed to be bound by iVillage's current policy. iVillage does share aggregated
member information with third parties, such as average age or geographic
dispersion. iVillage also reserves the right to offer members products and
services. iVillage may use information revealed by members and information built
from user behavior to target advertising, content and e-mail. For instance,
iVillage may, on behalf of an advertiser, send e-mail offers to all members from
a particular region or target advertisements to all users who frequent a
specific area of the site.
iVillage periodically offers its users the opportunity to purchase
certain for-pay premium services, such as newsletters, quizzes, tools and
education courses. iVillage plans to continue to offer these premium services as
well as new for-pay services to its customers in the future. In addition,
iVillage may charge users for access to its Web sites in the future. To date,
iVillage has not received a significant amount of revenues from these services,
however, iVillage is currently undertaking several initiatives to attempt to
leverage and monetize its membership base.
Women.com
Women.com is a place for women looking for information and
entertainment. Women.com features content and/or community in six departments:
Sex & Dating, Entertainment, Style & Beauty, Horoscopes, Girl Talk and Fun &
Games. The Web site provides message boards for women who want to converse about
entertainment, sex, dating, friendship, fashion trends and celebrities, among
other topics. Women.com is also a source of daily gossip and entertainment
news.
-5-
iVillage Parenting Network
IVPN publishes informational, instructional, "how to" magazines and
videos that relate to the issues and concerns of expectant parents through
Lamaze Publishing, and operates The Newborn Channel, The Newborn Channel-Spanish
(currently offered as an audio overlay to The Newborn Channel) and The Wellness
Channel (the "Channels") and publishes Baby Steps magazine through IVIP.
Lamaze Publishing offers Lamaze-related products and services. Lamaze
is a method of childbirth preparation based on the Lamaze philosophy of birth
which states that birth is "normal, natural and healthy," and "childbirth
education empowers women to make informed choices in healthcare, to assume
responsibility for their health and trust their inner wisdom." Lamaze Publishing
is the exclusive licensee of the LAMAZE mark for use in connection with consumer
publications and other communications including print, audio, visual and other
consumer oriented media. In addition, Lamaze Publishing is the exclusive
marketing agent for the LAMAZE family of marks owned by Lamaze International,
Inc. ("Lamaze International"), and operates the Lamaze.com Web site in
connection with iVillage.
During a pregnancy and immediately after the birth of a child, new
parents spend substantial amounts of time with childbirth educators and
maternity nurses seeking information on healthcare issues, the birth process and
infant care. These busy healthcare professionals typically have neither the
time, nor the resources, to create media that assist this process and allow
parents to absorb this material at their leisure.
The Lamaze Publishing business strategy is to provide superior
editorial products that target the expectant/new parent market. Lamaze
Publishing's materials are distributed through its vast network of healthcare
professionals and educators. These consumer publications are provided to the
childbirth educators and maternity nurses at no cost, and Lamaze Publishing
offsets the expenses incurred by selling print advertising and commercial
messages to advertisers who target the young family market.
Lamaze Publishing's product offerings include:
o Lamaze Parents, a leading prenatal magazine used in childbirth
education classes covering such relevant topics as prenatal
nutrition, the role of the childbirth partner and the physical
and emotional challenges of pregnancy. Childbirth educators
distribute Lamaze Parents to expectant parents on the first
night of class. Lamaze Parents had an annual circulation of
approximately 2.6 million for 2002.
o Lamaze para Padres, a leading Hispanic pre- and post-natal
magazine that reaches more than 95% of all Hispanic births in
the United States. Spanish-speaking childbirth educators and
healthcare professionals distribute Lamaze para Padres to
expectant parents on the first night of class. Lamaze para
Padres had an annual circulation of approximately 750,000 for
2002.
-6-
o Lamaze You and Your Baby, a 60-minute video textbook, has been
a leading choice of childbirth educators for the past 10
years. Its educational, how-to content on infant care is
viewed at home by expectant parents and later returned to the
childbirth educator. Lamaze You and Your Baby had an annual
circulation of approximately 2.0 million in 2002.
o Lo Mejor para Su Bebe, a 45-minute Spanish-language video
textbook, provides expectant and new parents with instruction
on infant care. This video, which is modeled after Lamaze You
and Your Baby, has been produced for the fifth year at the
direct request of Spanish-speaking childbirth educators. Lo
Mejor para Su Bebe had an annual circulation of approximately
550,000 in 2002.
o Lamaze Magazine Onserts, a leading sampling/promotion vehicle
among expectant/new parents. Lamaze Publishing provides
coupons, samples and promotional literature that are bundled
in a poly-bag with a magazine and distributed by Lamaze
Publishing's network of healthcare professionals and
childbirth educators.
o Lamaze.com, the online extension of the Lamaze media
franchise. Launched on iVillage.com in 2000, Lamaze.com
combines interactive tools with trusted expert advice on
pregnancy, childbirth and early parenting.
IVIP is the owner and operator of the Channels and Baby Steps magazine.
The Newborn Channel is a 24 hours a day, 7 days a week, satellite television
network that offers exclusive programming to new mothers in their hospital
rooms. In 2002, more than 1,050 hospitals nationwide aired The Newborn Channel
reaching an annual circulation of approximately 2.4 million mothers. Debuting in
late 2002, The Wellness Channel offers general health and wellness-based
programs covering topics such as patient's rights, alternative pain cures and
breast cancer awareness.
IVIP derives its revenue from the sale of advertising messages and
sponsorships on the Channels to third parties desiring to target pertinent
markets. In addition, in the fourth quarter of 2002, IVIP commenced a new
initiative whereby hospitals are charged an installation fee and an annual
programming fee for receiving the Channels. This initiative correlates with
anticipated upgrades in technology that will ultimately allow IVIP to customize
programming in each individual hospital site. While iVillage believes that this
new initiative will develop into a recurring source of revenues, iVillage can
make no assurance that it will be successful in this endeavor.
Baby Steps is a leading source of post-natal information and the only
magazine endorsed by the National Association of Pediatric Nurse Practitioners
(NAPNAP), a professional organization with 6,000 members nationwide. Baby Steps
debuted in November 2001, and is distributed to new mothers and fathers by
maternity nurses at hospital bedside. In 2002, Baby Steps had an annual
circulation of approximately 3.0 million.
-7-
IVIP augments Baby Steps with a promotional program that includes
coupons, samples and literature of third-party advertisers that are bundled in a
poly-bag with the magazine and distributed primarily to new parents at hospital
bedside. Advertisers view this promotional program as a vehicle to solicit, in a
highly targeted manner, the parents of newborns.
As a complement to the offline parenting media vehicles of IVPN,
iVillage also offers two Web sites that target parents on iVillage.com:
ParentsPlace.com and ParentSoup.com. ParentsPlace.com is a community where new
and expecting parents can connect, communicate and share in the joy of starting
a family, with key features such as the Baby Name Finder, Pregnancy Calendar,
First Year of Life Newsletter, Expecting Clubs, Playgroups and information from
certified healthcare experts. ParentSoup.com is designed for parents committed
to raising happy and healthy kids from toddlers to teens and includes the
Toddlers Department, Preschool Department, Development Tracker, Mothers Circles,
Thirty-Something Parents and information from certified healthcare experts. In
January 2003, the iVillage parenting-related Web sites, including
ParentsPlace.com, ParentSoup.com and Lamaze.com, were ranked 9th in the "family"
category, among the top 50 Web and Digital Media properties according to
comScore Media Metrix.
Promotions.com
On May 24, 2002, iVillage completed its acquisition of Promotions.com.
Promotions.com is comprised of two divisions: Promotions.com and Webstakes.com.
The Promotions.com division provides custom turnkey solutions to create and
manage promotions on a customer's Web site. The Promotions.com division's
revenues are derived from providing services related to the creation,
administration and implementation of online and offline promotions. Companies
that utilized the Promotions.com division's services in 2002 include Kraft Foods
North America, Inc., Nabisco Inc., Colgate-Palmolive Company, Coors Brewing
Company and Citicorp.
The Webstakes.com division provides direct marketing services for
third-party promoters and advertisers via the Internet and e-mail. Revenues from
Webstakes.com services are primarily based upon either a "cost-per-click" or a
"cost-per-action" pricing model. For a further discussion regarding
Webstakes.com's revenues, please see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview - Revenue
Recognition".
Public Affairs Group
On July 16, 2001, iVillage acquired control of PAG, a privately-held,
Washington, D.C.-based company, and is comprised of Business Women's Network
("BWN"), Diversity Best Practices ("DBP"), and Best Practices In Corporate
Communications ("BPCC"). PAG is one of the most comprehensive sources of
information and program linkage to the women's market around the world and
offers one of the most extensive databases of women's organizations and Web
sites in the nation. PAG offers several fee-based benefits and services to
subscribing companies and members including:
-8-
Service Description
- ------- -----------
Diversity A specialized service through which member companies and
Best Practices government entities share and exchange best practices around
key diversity issues through conference calls, seminars,
special reports and an online resource center.
Best Practices A member-based business resource for corporate communications
in Corporate that facilitates the development of innovative solutions and
Communications strong relationships within the corporate world and helps
boost corporate efficiency by providing conference calls,
white papers and reports, seminars and an informative online
resource center.
Business Women's Resources include: the BWN Directory of Business and
Network Resources Professional Women's Organizations which lists over 5,000
Information organizations and Web sites; the BWN Calendar of Women's
Events; and Women and Diversity WOW! Facts, an annual
compendium of more than 10,000 salient facts, figures and
statistics on and about the women's marketplace compiled from
more than 9,800 research reports.
Business BWN assists government agencies and departments in meeting the
Women's Network 5% government-wide women and minority-owned small business
Government procurement goal.
iVillage Consulting
iVillage Consulting is an interactive offering which assists companies
in the creation and development of their Web sites, digital commerce platforms
and other aspects of their technology infrastructures. Through iVillage
Consulting, iVillage provides third parties, primarily Hearst, with Web
consulting; Web site design, development and hosting; Web site traffic reporting
and analysis; content publishing; Web community building; project management;
and e-marketing initiatives.
Astrology.com
Astrology.com is a leading destination for women seeking daily
horoscopes, astrology content and personalized forecasts online. As part of
iVillage's network of Web sites, Astrology.com provides a timely, personalized
experience for the user, stimulates commerce sales of monthly and annual
astrological forecasts by subject, and creates an environment that appeals to
advertisers because of its targeting possibilities within the Web site and
through e-mail communication.
-9-
Astrology.com is a content and commerce Web site that appeals to
iVillage's core demographic of women and serves as a vehicle to drive repeat
visits to iVillage.com through the use of daily horoscopes. Astrology.com
accounts for a substantial portion of iVillage's traffic. iVillage attempts to
leverage the popularity of Astrology.com by using internal promotion and links
to attract Astrology.com users to other iVillage Web sites, resulting in higher
average page views and time spent per visit. Astrology.com has also created an
interactive commerce system that provides instantaneous, digital astrology
reports. This system consists of software which operates the Web site and is
capable of generating customized astrology reports based on input from users.
Magazine Web Sites
Pursuant to an agreement with Hearst, iVillage's Web sites include
links to eight Hearst magazine Web sites to which iVillage has online
distribution rights. Please see "Item 13. Certain Relationships and Related
Transactions" for a further description of this agreement. iVillage Consulting
produces, maintains and hosts these Hearst-branded Web sites. Various areas
within iVillage's network of Web sites link to the content from these magazine
sites. The following table describes each magazine site:
Magazine Related Web Site Description
- -------- ----------------------------
Cosmopolitan Features fashion and relationship advice aimed at the "fun,
fearless, female."
Country Living Provides lifestyle and home design ideas.
Good Housekeeping Features topics relating to food and recipes, home, family
and consumer reports.
House Beautiful Features topics relating to designing, improving or
remodeling one's home.
Marie Claire Features fashion and beauty trends.
Redbook Focuses on family, health and marriage.
Town & Country Focuses on living, arts, travel and weddings.
Victoria Offers support and advice for women entrepreneurs, including
stories and lifestyle tips.
iVillage also provides production, maintenance and hosting services
related to the Web sites of other Hearst magazines not featured on iVillage Web
sites and The Hearst Corporation's corporate Web site.
-10-
iVillageSolutions Vitamins and Supplements
In August 2002, iVillage launched its iVillageSolutions-branded vitamin
and nutraceutical supplement line (the "Supplement Line"). In connection with
the Supplement Line, iVillage developed, with the assistance of top physicians
and nutritionists, an online interactive supplement finder that recommends to
participants a list of vitamins and nutraceutical supplements based upon their
responses to questions regarding their personal health history, concerns and
goals. The Supplement Line is designed to address the changing needs of women in
all stages of life and consists of 34 nutritional supplements with
benefit-focused labels such as Mommy Must Have, Beauty Queen and Stand Tall,
which are designed to simplify vitamin selection. The Supplement Line is
currently available for purchase on the iVillage Market and is expected to soon
be available in certain offline outlets. The iVillage Market, launched in
2002 as iVillage's online marketplace, resides on the iVillage network and
allows customers to purchase iVillageSolutions products and the goods and
services of third parties online. The Supplement Line is manufactured and
distributed by a third party with which iVillage shares a portion of the profits
from each sale.
iVillageAccess Internet Service Provider
In October 2002, iVillage launched iVillageAccess, its Internet Service
Provider ("ISP") offering, that provides subscribers with unlimited Internet
access via local access numbers in over 90% of the continental United States. To
offer iVillageAccess, iVillage partnered with IP Applications, a Vancouver,
British Columbia-based provider of design, development and deployment technology
that assists in the delivery and management of private-labeled Internet
services.
iVillageAccess provides its subscribers with substantially the same
features as other major ISP offerings, including personal home pages, SPAM
e-mail filters and e-mail virus utilities, for a fee that is generally lower
when compared to such other providers. iVillageAccess subscribers pay a monthly
or annual subscription fee for Internet access and subscriptions may be
purchased on iVillage's network of Web sites.
iVillageSolutions Book Series
In July 2002, iVillage announced its collaboration with Rutledge Hill
Press to publish an iVillageSolutions branded book series. iVillage views the
iVillageSolutions books as a logical offline extension of iVillage's
award-winning and trusted content which leverages the information and advice
shared in iVillage's community areas. iVillage receives a share of the royalties
from the sale of the books and anticipates publishing approximately 6 - 12 books
per year. The topics of the books will reflect the offerings on iVillage.com and
draw on anecdotes from iVillage visitors and editors. The initial four (4) books
scheduled for release in 2003 include:
o Best Advice on Finding Mr. Right - this book provides advice
for the woman looking to find love and make her relationship
work;
o Best Advice on Life After Baby Arrives - this book addresses a
range of a new mother's needs and issues and provides comfort,
reassurance and inspiration to women facing the demanding
first months after the baby arrives;
o Quiz Therapy - this book will feature fun, insightful
self-assessments in such categories as Personality, Love,
Dating, Couples, Weddings, Home and Beauty; and
-11-
o Heirloom Recipes - this book brings together the family
recipes of the women of iVillage, and reflects the spirit in
which these recipes were originally shared.
In the first quarter of 2003, Best Advice on Finding Mr. Right and Best
Advice on Life After Baby Arrives were made available for purchase on the
iVillage Market and in major online and offline outlets including bookstores.
Alliances
iVillage pursues strategic relationships to increase its access to
customers, build brand recognition and expand its online and offline presence.
Historically, iVillage has pursued strategic alliances to reach online and
offline customers. iVillage's principal strategic alliances and relationships
include the following:
Media Arrangements
For a discussion regarding iVillage's agreements with Hearst, please
see "Item 13. Certain Relationships and Related Transactions". In addition to
the Hearst magazine Web sites, iVillage has entered into agreements with third
parties who have agreed to have traffic from their Web sites incorporated within
the iVillage network. Although iVillage is permitted to include user traffic
from these non-proprietary Web sites in the reported information regarding the
iVillage network, iVillage may not always have the ability to sell advertising
on or otherwise generate revenue from these third-party Web sites and in certain
instances iVillage pays a fee to the third party.
Sponsorship Arrangements
iVillage has a number of sponsorship arrangements with leading
advertisers and sponsors, including:
o Bristol-Myers Squibb Company o Paramount Pictures Corporation
o General Electric Company o The Procter & Gamble Company
o Kraft Foods Inc. o Revlon Consumer Products Corporation
o Aventis Pharmaceuticals Inc. o The Unilever Group
o Nabisco Inc. o Weight Watchers International, Inc.
-12-
Joint Venture and International License Arrangements
iVillage has entered into the following joint venture and international
license arrangements:
o Cooperative Beauty Ventures, L.L.C. - iVillage and Unilever
have formed, through a joint venture arrangement, an
independently managed company, Cooperative Beauty Ventures,
L.L.C. d/b/a Substance.com, to provide women with a focused
community, an array of interactive, customized online
services, beauty and personal care products and personalized
product recommendations. iVillage presently owns 80.1% of the
venture and Unilever owns the remaining 19.9%. iVillage, over
the twenty-year term of the venture, is obligated to fund the
ongoing business and operations of the venture, subject to a
maximum funding obligation of $7.0 million. During 2002,
iVillage was not required to fund the operations of the
venture, and as of December 31, 2002, iVillage has contributed
approximately $1.9 million to Cooperative Beauty Ventures,
L.L.C.
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. Additionally, at
any time 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
ownership of the venture. In addition, at any time Unilever
can exercise a "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. iVillage
anticipates exercising its "call" option during 2003.
o iVillage UK Limited - In July 2000, iVillage, through a
foreign subsidiary, entered into a business arrangement with
Tesco PLC, a leading United Kingdom ("U.K.") supermarket chain
("Tesco"), to form iVillage UK Limited, a U.K. company
("iVillage UK"). iVillage, through its foreign subsidiary,
held a 50% interest in iVillage UK Limited. Through a women's
Web site (located at www.iVillage.co.uk), iVillage UK Limited
serves the women's online market in the United Kingdom and the
Republic of Ireland through a focused community and an array
of interactive, customized online solutions and services.
iVillage, through its foreign subsidiary, provided marketing,
branding, an immaterial amount of cash, intellectual property,
and other resources through online and offline activities in
support of iVillage UK Limited and its U.K. and Ireland Web
sites. Tesco agreed to provide $18.0 million in cash over the
three-year period following the establishment of the
relationship, as well as online and offline promotional
considerations. Revenues were derived primarily from
advertising and sponsorships.
In March 2003, iVillage and Tesco restructured the terms of
their joint venture so that Tesco purchased iVillage's entire
ownership interest in iVillage UK. iVillage and Tesco also
entered into a 20-year agreement, subject to earlier
termination upon the occurrence of certain events, whereby
iVillage will license to iVillage UK certain of its content
and intellectual property, including trademarks and
copyrights, for use in the U.K. and Ireland, in exchange for
the greater of a minimum monthly license fee or a percentage
of iVillage UK's gross revenues.
-13-
Sales, Marketing and Public Relations
Sales
As of March 28, 2003, iVillage had a direct sales organization
consisting of nine sales professionals and 19 sales operations staff. iVillage's
sales organization consults regularly with advertisers and agencies on design
and placement of its Web-based advertising and the production and management of
co-branded Web sites which provide information about advertisers and/or their
products and services, provides customers with advertising management analysis,
and focuses on providing a high level of customer satisfaction. iVillage also
offers paid research and cross-platform sales opportunities across its various
media properties. Five professionals concentrate primarily on advertising sales
for IVPN's Channels, video products, and print advertising sales. Eight
professionals are involved in sales of publications, seminars, subscriptions and
other products and services offered by PAG. Six professionals are involved in
sales of Promotions.com online and offline promotion services, while three
professionals are involved in sales of Webstakes.com's direct marketing
offerings.
iVillage generally seeks to hire individuals with significant
experience in selling advertising and pre-existing relationships with
advertisers in a variety of media.
Marketing and Public Relations
iVillage employs a variety of methods to promote its brands and to
attract traffic and new members, including advertising on other Internet sites,
targeted publications, radio stations, national television, cross promotional
arrangements to secure advertising and other promotional considerations. To
extend the iVillage.com brand, iVillage has also entered into several strategic
alliances with offline partners. Please see "Item 1. Business -Alliances." In
addition, iVillage leverages other audience building strategies, including
working closely with search engine submissions, news group postings and
cross-promotion to properly index materials. iVillage's marketing department
consisted of four marketing professionals as of March 28, 2003.
iVillage's internal public relations staff oversees a comprehensive
public relations program which iVillage believes is a key component of its
marketing and brand recognition strategy. Organized into two primary components
that promote iVillage and the iVillage.com brand, the program targets a trade/
business and consumer audience, respectively.
To maximize distribution of IVPN publications and the Channels, and to
gain the endorsement of the professional community for these products, IVPN
gives particular attention to marketing efforts targeted to childbirth
educators, maternity nurses and hospitals. A staff of three marketing
professionals contacts hospitals for distribution of the Channels and works with
the professional community to maintain distribution levels of IVPN's
publications and demonstrate how they can be used as teaching tools for
expectant parents and new mothers. IVPN representatives maintain contact with
the professional community through trade shows, professional conferences,
consumer publication updates and personal sales calls.
-14-
Operating Infrastructure
iVillage's Internet operating infrastructure has been designed and
implemented to support the delivery of millions of page views a day. If
necessary, iVillage can increase its capacity by adding additional servers or
entering into agreements with third parties under which iVillage would receive
credit for page views on third-party Web sites. Web pages are generated and
delivered, in response to end-users' requests, by any one of more than 100
servers. Key attributes of this infrastructure include the ability to support
growth, performance and service availability.
iVillage's servers run on the Sun Solaris, Microsoft NT and Linux
operating systems and use Netscape Enterprise, Apache and Microsoft
Corporation's IIS Web server software.
iVillage maintains all of its production servers at the New Jersey Data
Center of Exodus Communications, Inc. ("Exodus Communications") and Verio,
Inc.'s ("Verio") facilities in California. iVillage's operations are dependent
upon these companies' ability to protect their respective systems against damage
from fire, hurricanes, power loss, telecommunications failure, break-ins and
other events.
Exodus Communications provides comprehensive facilities management
services, including human and technical monitoring of all production servers 24
hours per day, seven days per week. The servers located at Verio are monitored
by iVillage's California operations staff. Exodus and Verio provide the means of
connectivity for iVillage's servers to end-users via the Internet through
multiple connections. Each facility is powered by multiple uninterruptible power
supplies and backup generators. In 2001, Exodus Communications filed for
bankruptcy protection and certain of its assets were subsequently purchased by
Cable and Wireless plc ("Cable and Wireless") in February 2002. iVillage can
make no assurance that Exodus Communications/Cable and Wireless and Verio will
be able to provide sufficient services for iVillage or that, if necessary,
iVillage will be able to engage satisfactory alternative service providers.
All of iVillage's production data, except Astrology.com, are copied to
backup tapes each night and stored at a third-party, off-site storage facility.
Astrology.com's production data is backed up on a daily basis to local storage.
iVillage does not presently have a comprehensive disaster recovery plan to
respond to system failures. iVillage keeps all of its production servers behind
firewalls for security purposes and does not allow outside access, at the
operating systems level, except via special secure channels. Strict password
management and physical security measures are followed. Computer emergency
response team alerts are read, and, where appropriate, recommended action is
taken to address security risks and vulnerabilities.
iVillage's Web sites must accommodate a high volume of traffic and
deliver frequently updated information. Components or features of iVillage's Web
sites have in the past suffered outages or experienced slower response times
because of hardware or software downtime. To date, this has not had a material
effect on iVillage's business.
Except in certain cases where an in-hospital digital delivery system is
used, IVIP's broadcasting of the Channels originates from a laser disc system
operated by Ascent Media ("Ascent"), formerly known as Group W Network Services,
from Ascent's facility in Stamford, Connecticut. The system provides an uplink
signal to a satellite operated by PanAmSat. The signal is received through a
satellite dish at each hospital and distributed to patients' rooms. Ascent
handles installation and service of all the hospital receiving equipment.
iVillage maintains business interruption insurance in the event programming is
interrupted over the designated satellite.
-15-
Competition
Competition for members, visitors, advertising and commerce is intense
and is expected to increase significantly in the future. iVillage believes that
the primary competitive factors in creating a primarily Internet-based business
are:
o functionality;
o brand recognition;
o member affinity and loyalty;
o demographic focus;
o variety of value-added services;
o ease-of-use;
o pricing;
o quality of products and services; and
o reliability and critical mass.
Other companies or sites which are primarily focused on targeting women
online include Oxygen.com and condenet.com, as well as Web sites targeted to
categories such as health. iVillage will likely also face competition in the
future from:
o developers of Web directories;
o search engine providers;
o shareware archives;
o content sites;
o commercial online services;
o direct marketing companies;
o Internet service providers; and
-16-
o other entities that attempt to or establish communities on the
Internet by developing their own or purchasing one of
iVillage's competitors.
In addition, iVillage could face competition in the future from
traditional media companies, a number of which have made significant
acquisitions of or investments in Internet companies. Further, there can be no
assurance that iVillage's competitors and potential competitors will not develop
communities that are equal or superior to iVillage or that achieve greater
market acceptance than iVillage's community.
iVillage also competes with traditional forms of media, such as
newspapers, magazines, radio and television, for advertisers and advertising
revenues. iVillage believes that the principal competitive factors in attracting
advertisers are:
o the amount of traffic on iVillage's Web sites;
o brand recognition;
o the demographics of iVillage's members and visitors;
o iVillage's ability to offer targeted audiences; and
o the overall cost-effectiveness of the advertising medium
offered by iVillage.
iVillage believes that the number of Internet companies relying on
Web-based advertising and/or subscription revenues may increase in the future.
Accordingly, iVillage may face increased competition, which could in turn have a
material adverse effect on its business, financial condition and results of
operations.
Many of iVillage's current and potential competitors, including
developers of Web directories and search engines and traditional media
companies, have:
o longer operating histories;
o significantly greater financial, technical and marketing
resources;
o greater name recognition; and
o larger existing customer bases.
These competitors are able to undertake more extensive marketing
campaigns for their brands and services, adopt more aggressive advertising and
subscription pricing policies and make more attractive offers to potential
employees, distribution partners, commerce companies, advertisers and
third-party content providers. There can be no assurance that Internet content
providers and Internet service providers, including developers of Web
directories, search engines, sites that offer professional editorial content and
commercial online services, will not be perceived by advertisers as having more
desirable Web sites for placement of advertisements. In addition, many of
iVillage's current advertising customers and strategic partners also have
established collaborative relationships with certain of iVillage's competitors
or potential competitors, and other high-traffic Web sites. Accordingly, there
can be no assurance that:
-17-
o iVillage will be able to grow its membership, traffic levels
and advertiser customer base at historical levels;
o iVillage will be able to retain its current members, traffic
levels or advertiser customers;
o iVillage will be able to attract a significant number of
paying customers for its products and services;
o competitors will not experience greater growth in traffic as a
result of these relationships which could have the effect of
making their Web sites more attractive to advertisers; or
o iVillage's strategic partners will not sever or will elect not
to renew their agreements with iVillage.
Several major publishing companies produce products that are directly
competitive with IVPN's magazines. Time Inc., G&J USA Publishing, and Meredith
Corporation all publish various pre- and post-natal publications. Disney
Publishing and Children's Television Workshop also publish general parenting
magazines. All of these publishers have substantially greater marketing,
research and financial resources than IVPN. IVPN competes by emphasizing the
highly targeted nature of its audience, product quality and the fact that its
publications are used as teaching tools by professionals, and the credibility
and trust parents place in the LAMAZE brand name.
While Lamaze Publishing's instructional videos and IVIP's The Newborn
Channel currently have no direct competitors, advertisers in this marketplace
are heavy users of daytime network television and cable television networks
targeted to young parents. The broadcasting companies that provide these
opportunities have invested substantial amounts in programming, sales and
marketing and are much better known to advertisers than IVPN, Lamaze Publishing
and IVIP. To compete, Lamaze Publishing and IVIP must convince advertisers that
advertising recall and effectiveness obtained in an educational or hospital
setting is superior to that of traditional broadcasting.
The Wellness Channel currently contends with a few direct competitors,
such as General Electric Company's the "Patient Channel", in addition to the
competition experienced by the other Channels. Although few in number, such
direct competitors possess significant financial resources, have
well-established brand names, and large existing customer bases when compared
with IVIP. To compete, IVIP must up-sell the current subscribers to, and
advertisers on, its other Channels and continue to offer superior programming to
differentiate itself from other competitors.
The iVillageSolutions Supplement Line must effectively market to and
attract the customers of competitors such as mass merchandisers, other
vitamin/supplement manufacturers, drug store chains, independent drug stores,
supermarkets and health food stores, many of which possess longer operating
histories, greater brand recognition and superior resources than iVillage.. To
compete, iVillage is leveraging its brand name, utilizing recurrent advertising
on its Web sites, and exploring distribution opportunities in addition to the
iVillage Market.
-18-
iVillageAccess competes with all other ISPs including such major
providers as AOL and MSN Network. Furthermore, iVillageAccess must also compete
with evolving technologies that provide Internet access at higher speeds than
iVillageAccess' dial-up offering, such as DSL and cable, and utilities such as
anti-spamming components and computer "virus" protections. To compete,
iVillageAccess must continue to offer its services in the dial-up market at a
competitive subscription fee, consider higher-speed access connections and
continue to offer features and utilities comparable or superior to those offered
by its competitors.
iVillage can make no assurance that it will be able to compete
successfully against iVillage's current or future competitors or that
competitive pressures faced by iVillage will not have a material adverse effect
on its business, financial condition and results of operations.
Intellectual Property, Proprietary Rights and Domain Names
iVillage regards its copyrights, service marks, trademarks, trade
names, trade dress, trade secrets, proprietary technology and similar
intellectual property as critical to its success, and relies on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, independent contractors, partners and
others to protect iVillage's proprietary rights. iVillage pursues the
registration of its trademarks and service marks in the United States, and has
applied for and obtained registration in the United States for certain of
iVillage's trademarks and service marks, including "iVillage". Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which iVillage's products and services are made
available.
iVillage has licensed in the past, and expects that it may license in
the future, certain of iVillage's proprietary rights, such as trademarks or
copyrighted material, to third parties. While iVillage attempts to ensure that
the quality of its brand is maintained by these licensees, there can be no
assurance that the licensees will not take actions that might materially
adversely affect the value of its proprietary rights or reputation, which could
have a material adverse effect on its business, financial condition and results
of operations. There can be no assurance that the steps taken by iVillage to
protect its proprietary rights will be adequate or that third parties will not
infringe or misappropriate its copyrights, trademarks, trade dress and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert claims of infringement of intellectual property or alter
proprietary rights against iVillage.
iVillage has been subject to claims and expects to be subject to legal
proceedings and claims from time to time in the ordinary course of its business,
including claims of alleged infringement of patents, trademarks and other
intellectual property rights of third parties by iVillage and its licensees.
These claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources. Further, if these claims are
successful, iVillage may be required to change its trademarks, alter its
content, alter its site format and pay financial damages. There can be no
assurance that these changes of trademarks, alteration of content or format or
payment of financial damages will not adversely affect its business, financial
condition and results of operations.
-19-
iVillage may be required to obtain licenses from others to refine,
develop, market and deliver new services. There can be no assurance that
iVillage will be able to obtain any license on commercially reasonable terms or
at all or that rights granted pursuant to any licenses will be valid and
enforceable.
Employees
As of February 28, 2003, iVillage employed 237 full-time employees, of
whom 88 were in sales and marketing, 53 were in editorial and community, 42 were
in administration and customer service, and 54 were in technology, operations
and support. None of iVillage's current employees are represented by a labor
union or are the subject of a collective bargaining agreement. iVillage believes
that relations with its employees are satisfactory.
Item 2. Properties.
iVillage is headquartered in New York, New York, and leases
approximately 84,000 square feet at 500-512 Seventh Avenue. This lease expires
on April 30, 2015. Additionally, iVillage has entered into a five-year sublease
agreement pursuant to which iVillage has subleased approximately 14,600 square
feet of the leased premises to an unrelated party, which expires in December
2006. iVillage is currently attempting to sublease an additional portion of
these leased premises.
iVillage also leases sales offices located in Chicago, Illinois, Santa
Monica, California and San Francisco, California. These leases are on a
month-to-month basis.
Women.com currently leases approximately 17,000 square feet of space in
San Mateo, California. This lease expires on August 31, 2003.
IVPN subleases approximately 7,000 square feet of space at 9 Old Kings
Highway, Darien, Connecticut. This sublease expires on June 30, 2005.
Astrology.com leases approximately 7,400 square feet of space in San
Francisco, California. This lease expires on November 30, 2005.
PAG leases approximately 6,800 square feet of space in Washington, D.C.
This lease expires in December 2006.
For additional information regarding iVillage's properties, see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources".
-20-
Item 3. Legal Proceedings.
Several plaintiffs have filed class action lawsuits in federal court
against iVillage and several of its present and former executives, and
iVillage's underwriters in connection with its March 1999 initial public
offering. A similar class action lawsuit was filed against Women.com, several of
its former executives and Women.com's 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.
In February 2003, the defendants' motion to dismiss certain of the
plaintiffs' claims was granted in part, but, for the most part, denied and the
lawsuits are now entering the discovery phase.
In June 2001, Euregio.net commenced an action in Belgium against
Women.com claiming damages in excess of 1 million Euros in connection with
certain alleged copyright infringements. Despite Women.com's arguments
challenging the jurisdiction of the Belgian court, the alleged infringements and
the amount of damages, a Belgian court issued a judgment against Women.com in
the amount of approximately 850,000 Euros (approximately $892,000 based on the
Euro exchange rate as of December 31, 2002) in January 2003. Women.com has been
advised by outside legal counsel that Euregio.net would have to commence legal
proceedings in the United States to enforce this judgment. Women.com has
appealed this judgment in the Belgian courts and will also oppose any effort by
the plaintiffs to enforce this judgment in the United States court system.
iVillage believes, with the advice of outside legal counsel, that the
lawsuits and claims asserted against it and its subsidiary pursuant to these
complaints are without merit and intends to vigorously defend against these
claims. iVillage does not believe that any of these legal proceedings will have
a material adverse effect on its business, financial condition, results of
operations and liquidity.
iVillage is not currently subject to any other material legal
proceedings. iVillage may from time to time become a party to various legal
proceedings arising in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
-21-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
iVillage's common stock traded on The Nasdaq National Market from March
19, 1999 to December 19, 2002 and has traded on The Nasdaq SmallCap Market since
December 20, 2002. On both The Nasdaq National Market and The Nasdaq SmallCap
Market, iVillage's common stock has traded under the symbol "IVIL". The
following table sets forth, for the periods indicated, the high and low bid
prices per share of the common stock as reported on The Nasdaq National Market
or The Nasdaq SmallCap Market, as applicable:
2002 High Low
- ---- ---- ---
First Quarter*..................................... $ 2.85 $ 1.63
Second Quarter*.................................... $ 2.70 $ 1.17
Third Quarter*..................................... $ 1.41 $ 0.55
Fourth Quarter**................................... $ 1.00 $ 0.52
2001 High Low
- ---- ---- ---
First Quarter*..................................... $ 2.50 $ 0.38
Second Quarter*.................................... $ 1.99 $ 0.50
Third Quarter*..................................... $ 1.55 $ 0.57
Fourth Quarter*.................................... $ 1.99 $ 0.86
* As reported on The Nasdaq National Market.
** As reported on The Nasdaq National Market from October 1, 2002 to December
19, 2002, and The Nasdaq SmallCap Market from December 20, 2002 through December
31, 2002.
On March 26, 2003, the closing sales price of iVillage's common stock
was $0.63 per share. There were 778 holders of record of iVillage's outstanding
common stock as of March 26, 2003.
iVillage has never declared or paid any cash dividends on its capital
stock. iVillage presently intends to retain future earnings, if any, to finance
the expansion of its business and does not expect to pay any cash dividends in
the foreseeable future.
-22-
Recent Sales of Unregistered Securities
On July 18, 2002, iVillage granted options under its Amended 2001
Non-Qualified Stock Option Plan to Douglas W. McCormick, Chief Executive Officer
of iVillage, to purchase 500,000 shares of iVillage common stock at an exercise
price of $1.11 per share.
In connection with its acquisition of Promotions.com in May 2002,
iVillage was obligated to issue Leasing Technologies International, Inc. ("LTI")
a warrant, expiring on June 19, 2007, to purchase 5,282 shares of iVillage's
common stock at an exercise price of $14.35. The shares underlying the warrant
and its exercise price reflect the application of the conversion ratio utilized
by iVillage in the acquisition to an outstanding warrant obligation of
Promotions.com to issue its common stock to LTI.
This grant of options and warrant issuance were exempt from
registration under the Securities Act, pursuant to Section 4(2) thereof, on the
basis that the transactions did not involve a public offering by iVillage.
Equity Compensation Plan Information
For further information regarding iVillage's equity compensation plans,
please see "Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters - Equity Compensation Plan
Information".
-23-
Item 6. Selected Consolidated Financial Data.
The iVillage selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and iVillage's consolidated financial
statements and notes to those statements and other financial information
included elsewhere in this Form 10-K. The consolidated statement of operations
data for the years ended December 31, 2002, 2001 and 2000 and the consolidated
balance sheet data as of December 31, 2002 and 2001 are derived from the audited
consolidated financial statements of iVillage included in this Form 10-K. The
consolidated balance sheet data as of December 31, 2000, 1999 and 1998 and the
consolidated statement of operations data for the years ended December 31, 1999
and 1998 are derived from iVillage's audited consolidated financial statements
that are not included in this Form 10-K. The historical annual results presented
here are not necessarily indicative of future results. iVillage acquired
Knowledgeweb, Inc. in February 1999, OnLine Psychological Services, Inc. and
Code Stone Technologies, Inc. in June 1999, Lamaze Publishing and Family Point
Inc. in August 1999, an additional 30.1% interest in Cooperative Beauty
Ventures, L.L.C. in March 2001 to increase iVillage's ownership to 80.1%,
Women.com Networks, Inc. in June 2001, a controlling interest in Public Affairs
Group, Inc. in July 2001 and an 82.3% interest in Promotions.com, Inc. in April
2002 with the remaining 17.7% interest acquired in May 2002. The financial data
reflect the results of operations of these subsidiaries since their dates of
acquisition. In April 1998 and March 1999, iVillage acquired the majority
interest and remaining minority interest in IVN, Inc (formerly known as iBaby,
Inc.). In June 2000, iVillage decided to discontinue the operations of its IVN,
Inc. subsidiary. As such, all discussion and analysis below represents solely
the continuing operations of iVillage.
Year Ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- --------- --------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues...................................... $ 59,423 $ 60,041 $ 76,352 $ 36,576 $ 12,451
--------- --------- --------- --------- ----------
Operating Expenses:
Editorial, product development and technology. 27,973 33,500 35,327 20,652 11,742
Sales and marketing........................... 30,237 36,178 54,098 63,526 28,177
General and administrative.................... 13,474 17,702 22,634 13,164 9,546
Depreciation and amortization(1).............. 11,900 23,529 37,681 25,720 5,500
Impairment of goodwill (1).................... 971 -- 98,056 -- --
---------- --------- -------- --------- ---------
Total operating expenses................. 84,555 110,909 247,796 123,062 54,965
---------- --------- -------- --------- ---------
Loss from operations.......................... (25,132) (50,868) (171,444) (86,486) (42,514)
Interest income, net ......................... 485 2,285 5,261 4,085 571
Other (expense) income, net................... (34) (43) 595 271 --
Gain (Loss) on sale of assets ................ -- 385 -- -- (504)
Minority interest............................. (74) 7 -- -- 587
Write-down of investments (2)................. -- (104) (13,496) -- --
Loss from unconsolidated joint venture........ -- (127) (422) -- --
Cumulative effect of change in accounting
principle (1)................................. (9,181) -- -- -- --
---------- --------- -------- --------- ---------
Net loss from continuing operations........... (33,936) (48,465) (179,506) (82,130) (41,860)
Preferred stock deemed dividend .............. -- -- -- (23,612) --
---------- --------- -------- --------- ----------
Net loss attributable to common stockholders
from continuing operations................ $ (33,936) $ (48,465) $(179,506) $(105,742) $ (41,860)
========== ========= ========= ========= ==========
-24-
Year Ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- --------- --------
(in thousands, except per share data)
Basic and diluted net loss per share
attributable to common stockholders from
continuing operations..................... $ (0.62) $ (1.13) $ (6.05) $ (5.06) $ (20.24)
========== ========= ========= ========= =========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share............... 54,841 42,807 29,683 20,901 2,068
========== ========= ========= ========= =========
(1) Please see Note 4 of iVillage's Notes to Consolidated Financial Statements.
(2) Please see Note 2 and Note 6 of iVillage's Notes to Consolidated Financial
Statements.
December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- --------- --------
Consolidated Balance Sheet Data: (in thousands)
Cash and cash equivalents..................... $ 21,386 $ 29,831 $ 48,963 $106,010 $ 30,825
Working capital .............................. 18,403 30,966 40,252 90,752 19,919
Total assets ................................. 100,586 132,387 132,459 312,748 45,721
Long-term liabilities......................... 3,926 4,273 4,818 -- --
Stockholders' equity.......................... 82,200 108,757 101,366 283,850 32,022
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with iVillage's
consolidated financial statements and notes to those statements and the other
financial information appearing elsewhere in this Form 10-K. In addition to
historical information, the following discussion and other parts of this Form
10-K contain forward-looking information that involves risks and uncertainties.
Overview
iVillage is a media company that operates iVillage.com, Women.com,
IVPN, PAG, Promotions.com, iVillage Consulting and Astrology.com. iVillage.com
and Women.com are leading women's online destinations providing practical
solutions and everyday support for women 18 and over. IVPN is a holding company
for Lamaze Publishing, a publisher of advertiser supported educational materials
for expectant and new parents, and IVIP, the operator of The Newborn Channel, a
satellite television network broadcast in over 1,050 hospitals nationwide, and
the publisher of Baby Steps magazine. PAG is comprised of three divisions:
Business Women's Network, Diversity Best Practices and Best Practices in
Corporate Communications, each offering extensive databases of pertinent
information to subscribing companies and members. Promotions.com provides
promotions and direct marketing programs that are integrated with customers'
offline marketing initiatives.
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.
-25-
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of iVillage's Notes to Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of iVillage's consolidated 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 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. Sponsorship and advertising revenues were approximately 78%, 81% and
92% of total revenues for the years ended December 31, 2002, 2001 and 2000,
respectively.
For contracts with multiple elements (e.g., deliverable and
undeliverable products, advertising and production revenue), iVillage allocates
revenue to each element based on evidence of its fair value. Evidence of fair
value is the price of a deliverable when it is regularly sold on a stand-alone
basis. iVillage recognizes revenue allocated to each element when the criteria
for revenue set forth above are met.
Included in sponsorship and advertising revenues are revenues from
advertising placements in IVPN's publications, videos and Web site, and
satellite broadcasts on the Channels. In addition, revenues are generated
through a promotional program that offers advertisers the ability to distribute
samples, coupons and promotional literature to new and expectant parents.
Revenues from IVPN accounted for approximately 27%, 25% and 20% of sponsorship
and advertising revenues for the years ended December 31, 2002, 2001 and 2000,
respectively.
-26-
Sponsorship and advertising revenues also include revenues from
Promotions.com which generates revenues through Webstakes.com, a Web site
dedicated to Internet sweepstakes and promotions, and Promotions.com, a full
service integrated promotions services group.
Webstakes.com revenues are derived principally from service contracts
whereby Webstakes.com 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. With a cost-per-click pricing model,
Webstakes.com generally guarantees a minimum number of times that
Webstakes.com's visitors are delivered to its customer's Web site. Webstakes.com
recognizes revenue related to its cost-per-click pricing model when a visitor
has been delivered to the customer's Web site and the collection of the
corresponding receivable is reasonably assured. Revenue is recognized
differently in a cost-per-action pricing model, which requires Webstakes.com to
not only deliver the aforementioned minimums, 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 Webstakes.com to earn revenue. Webstakes.com recognizes
revenue related to the cost-per-action pricing model when the specific action
has been performed on its customer's Web site and the collection of the
corresponding receivable is reasonably assured.
Promotions.com revenues are derived principally from contracts in which
Promotions.com typically provides custom turnkey services for the creation,
administration and implementation of a promotion on a customer's Web site.
Promotions.com's revenue recognition policy related to its services is to
recognize revenues as deliverables are met and/or ratably over the period during
which Promotions.com provides promotions services, provided that no significant
obligations remain in a contract 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's Web sites. Barter expenses are generally recognized when
iVillage's advertisements are displayed on the reciprocal Web sites or
properties, which typically is the same period as when advertisements are
displayed on iVillage's Web sites, and are included as part of sales and
marketing expenses. Revenues from barter transactions were approximately $3.6
million, $2.8 million and $3.6 million for the years ended December 31, 2002,
2001 and 2000, respectively.
iVillage Consulting 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 its negotiated hourly rates and/or fixed fees stipulated in contracts.
PAG is a comprehensive source of information and program linkage that
serves as an international platform for diversity and women offering to
subscribing companies and members an extensive database of women's
organizations, best practices and guidance in the areas of workplace diversity,
women and corporate communications. Revenues from PAG are generated primarily
through subscription-based programs that convey current best practices for women
and diversity issues in the workplace and the hosting of an annual two-day event
that focuses on women and diversity. iVillage recognizes revenue from PAG
subscriptions ratably over the term of the subscription agreement or when the
events are held.
-27-
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, the
collection of the receivable is reasonably assured and no further obligation
remains.
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 received revenues from new initiatives involving
subscription-based properties, the sale of iVillage-branded products and
services, the sale of third-party products and services and the sale of
research. During the third quarter of 2002, iVillage began selling
iVillageSolutions-branded consumer products through the iVillage Market located
on iVillage.com. Through an agreement with a third party, iVillage receives a
revenue share on each sale of such products and bears no fulfillment risks.
During the fourth quarter of 2002, iVillage launched iVillageAccess, iVillage's
ISP offering. iVillageAccess' Internet access is provided through an agreement
with a third party and iVillage receives a revenue share on each subscriber. In
the first quarter of 2003, iVillage released two iVillageSolutions-branded
books, through an agreement with a publisher, and expects to release others
throughout 2003. iVillage receives a royalty on each book purchased. iVillage
recognizes revenues from these new initiatives when products are shipped and/or
provided to the customer, the collection of the receivable is reasonably assured
and no further obligation remains. 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 is 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.
-28-
Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and
reporting for the disposal of long-lived assets. The objectives of SFAS 144 are
to address significant issues relating to the implementation of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and to develop a single accounting model, based on
the framework established in SFAS 121, for the long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired. SFAS 144 retains
the fundamental provisions of SFAS 121 regarding the recognition and measurement
of the impairment of long-lived assets to be held and used. The Company reviews
for impairment of long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In general, the Company will recognize an
impairment when the sum of undiscounted future cash flows is less than the
carrying amount of such assets. The measurement for such impairment loss is
based on the fair value of the asset.
Fixed Assets
Depreciation of equipment, furniture and fixtures, and computer
software is provided for by the straight-line method over their estimated useful
lives ranging from three to five years. Amortization of leasehold improvements
is provided for over the lesser of the term of the related lease or the
estimated useful life of the improvement. The cost of additions, and
expenditures which extend the useful lives of existing assets, are capitalized,
and repairs and maintenance costs are charged to operations as incurred.
iVillage continually evaluates whether current events or circumstances warrant
adjustments to the carrying value or estimated useful lives of fixed assets in
accordance with the provisions of SFAS 144.
Income Taxes
iVillage recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax bases of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
-29-
Results of Operations
The following table sets forth iVillage's results of operations
expressed as a percentage of total revenues:
Year Ended December 31,
----------------------------
2002 2001 2000
-------- -------- -------
Revenues.................................... 100% 100% 100%
---- ---- ----
Operating expenses:
Editorial, product development and
technology............................. 47 56 46
Sales and marketing...................... 51 60 71
General and administrative............... 22 29 30
Depreciation and amortization............ 20 39 49
Impairment of goodwill................... 2 -- 128
----- ----- -----
Total operating expenses.............. 142 185 324
----- ----- -----
Loss from operations........................ (42) (85) (225)
===== ===== =====
Net loss from continuing operations......... (57)% (81)% (235)%
===== ====== =====
Comparison of Years Ended December 31, 2002 and December 31, 2001
Revenues
Revenues were approximately $59.4 million for the year ended December
31, 2002, which represents a decline of 1% when compared with 2001. The decline
in revenues was primarily due to a decrease in year over year sponsorship and
advertising revenues of approximately $5.0 million and licensing fees of
approximately $2.5 million, offset by: the acquisitions of PAG and
Promotions.com resulting in identifiable incremental revenues of approximately
$1.8 million and $2.6 million, respectively; an increase in iVillage Consulting
revenue of approximately $1.3 million; and identifiable revenues from new
initiatives involving online subscription-based properties and research
resulting in identifiable revenues of approximately $0.6 million and $1.1
million, respectively. Sponsorship and advertising revenues were $46.1 million
for the year ended December 31, 2002, compared to $48.6 million for the
corresponding period in 2001. Sponsorship and advertising revenues accounted for
approximately 78% and 81% of total revenues for the years ended December 31,
2002 and 2001, respectively. Revenues from IVPN accounted for approximately 27%
and 25% of sponsorship and advertising revenues for the years ended December 31,
2002 and 2001, respectively. Revenues from Promotions.com accounted for
approximately 6% of sponsorship revenues for the year ended December 31, 2002.
Since Promotions.com was acquired in 2002, there are no comparative numbers for
the corresponding period in 2001.
In recent years, 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 trend has
made it more difficult for iVillage to both achieve period-to-period revenue
growth and accurately project future quarterly revenues.
Included in sponsorship and advertising revenues are barter
transactions, which accounted for approximately 8% and 6% of sponsorship and
advertising revenues for the years ended December 31, 2002 and 2001,
respectively.
Included in revenues are production fees received from work performed
(primarily for Hearst, a related party) by iVillage Consulting, which accounted
for approximately 7% and 5% of total revenues for the years ended December 31,
2002 and 2001, respectively.
-30-
Included in revenues are subscription-based fees derived from the
services provided by PAG, which accounted for approximately 6% and 3% of total
revenues for the years ended December 31, 2002 and 2001, respectively.
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 6% and 11% of total revenues for the years ended
December 31, 2002 and 2001, respectively. Total revenues from this revenue
stream decreased by approximately $2.5 million year over year due to the
expiration of a licensing agreement in the first quarter of 2002.
Included in revenues are fees from new initiatives involving online
subscription-based properties and the sale of research, which accounted for
approximately 3% and less than 1% of total revenues for the years ended December
31, 2002 and 2001, respectively. These new initiatives were commenced in the
later part of 2001.
For the years ended December 31, 2002 and 2001, respectively, revenues
from iVillage's five largest customers accounted for approximately 38% and 37%
of total revenues. In 2002, three advertisers, Procter and Gamble, Hearst, a
related party, and Unilever and its affiliates, accounted for approximately 11%,
11% and 10% of total revenues. In 2001, one advertiser, Unilever and its
affiliates, accounted for approximately 12% of total revenues. At December 31,
2002, Procter and Gamble accounted for approximately 26% of the net accounts
receivable, and at December 31, 2001, Hearst and Unilever and its affiliates
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, including Procter and Gamble, Unilever and Hearst. iVillage's
contracts with Procter and Gamble and Unilever expire in June 2003 and
iVillage's contract with Hearst expires in June 2004. iVillage can make no
assurances as to whether these expiring contracts will be renewed, or if so
renewed, that they will be on similar terms as the expiring agreements. Because
iVillage's largest customers have varied over time in the past, 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.
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 year ended December 31, 2002 were approximately
$28.0 million, or 47% of total revenues. Editorial, product development and
technology expenses were approximately $33.5 million, or 56% of total revenues,
for the corresponding period in 2001. The decrease between the comparable
twelve-month periods was primarily attributable to decreases in: salaries,
severance and related benefits of approximately $3.8 million; renegotiation of
agreements which provide support, content and serving of impressions to
iVillage's Web sites of approximately $1.3 million; and lower facility costs
resulting in a decreased facilities allocation of approximately $1.1 million.
The aforementioned reductions were offset slightly by incremental costs
associated with the acquisition of Promotions.com of approximately $0.8 million.
Editorial, product development and technology expenses decreased as a percentage
of total revenues for the twelve months ended December 31, 2002, when compared
to the same period in 2001, as a result of the significant benefits recognized
from cost reduction initiatives beginning in 2001 and into 2002, as compared to
the slight decline in revenues.
-31-
Sales and Marketing. Sales and marketing expenses consist primarily of
costs related to distribution agreements, payroll and 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 year ended December 31, 2002 were approximately $30.2 million,
or 51% of total revenues. Sales and marketing expenses were approximately $36.2
million, or 60% of total revenues, for 2001. The decrease in sales and marketing
expenses for the twelve-month period ended December 31, 2002, as compared to
2001, was primarily attributable to: the benefits of cost reduction initiatives
implemented beginning in 2001 and into 2002 which resulted in an approximately
$8.5 million decrease in advertising expenses; a decrease in payroll, severance,
commission and related benefits of approximately $3.6 million; and lower
facility costs resulting in a decreased facilities allocation of approximately
$0.8 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 $0.6 million and $1.9 million, respectively. Sales
and marketing expenses decreased as a percentage of total revenues for the
twelve months ended December 31, 2002, as compared to the same period in 2001,
due to the significant benefits recognized from these cost reduction initiatives
as compared to the slight decline in revenue.
Included in sales and marketing expenses are barter transactions, which
amounted to approximately 11% of total sales and marketing costs during the year
ended December 31, 2002, compared to 8% of total sales and marketing costs
during 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 year ended
December 31, 2002 were $13.5 million, or 22% of total revenues. For the
comparable period in 2001, general and administrative expenses were $17.7
million, or 29% of total revenues. The decrease in general and administrative
expenses for the comparable twelve-month periods was primarily due to: a
decrease in salaries, severance and related benefits of approximately $2.9
million; a decrease in professional fees and facilities allocation of
approximately $0.2 million and $0.3 million, respectively; and a payment to the
former Chief Executive Officer and lease termination costs in 2001 of
approximately $1.3 million and $1.5 million, respectively, partially offset by:
the acquisitions of PAG and Promotions.com resulting in incremental costs of
approximately $0.7 million and $0.5 million, respectively; higher insurance
costs of approximately $0.5 million; and the reserve for stockholder notes
receivable of approximately $0.4 million. General and administrative expenses
decreased as a percentage of total revenues for the twelve months ended December
31, 2002, when compared to the comparable period in 2001, as a result of the
significant benefits recognized from cost reduction initiatives as compared to
the slight decline in revenue.
-32-
In the ordinary course of business, iVillage 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. For
the year ended December 31, 2002, iVillage reversed approximately $1.5 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 year ended December 31, 2002 were approximately $11.9 million, or 20% of
total revenues. For the comparable period in 2001, depreciation and amortization
expenses were $23.5 million, or 39% of total revenues, respectively. The dollar
decrease in depreciation and amortization for the comparable twelve-month
periods was primarily due to the adoption of the provisions of SFAS No. 142.
"Goodwill and Other Intangible Assets" ("SFAS 142") which, among other things,
provides that goodwill will no longer be amortized.
Interest Income, Net
Interest income, net includes primarily interest income from iVillage's
cash balances and interest earned on stockholders' notes receivable. Interest
income, net for the twelve months ended December 31, 2002 was approximately $0.5
million, or 1% of total revenues. For the comparable period in 2001, interest
income, net was $2.3 million, or 4% of total revenues. The decrease between 2002
and 2001 was due to lower average net cash and cash equivalents balances, lower
interest rates in 2002 as compared to 2001 and the repayment of a National
Broadcasting Company, Inc. ("NBC") loan in the first quarter of 2002 compared to
a full year of interest payments received on this note in 2001.
Income Taxes
As of December 31, 2002, iVillage had approximately $239.7 million of
net operating loss carryforwards for federal tax reporting purposes available to
offset future taxable income. iVillage's federal net operating loss
carryforwards expire beginning in 2010. Certain future changes in the share
ownership of iVillage, as defined in the Tax Reform Act of 1986, may restrict
the utilization of carryforwards. A valuation allowance has been recorded for
the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset due to the lack of iVillage's earnings history.
-33-
Net Loss
iVillage recorded a net loss of approximately $33.9 million, or $0.62
per share, for the year ended December 31, 2002. For 2001, iVillage recorded a
net loss of approximately $48.5 million, or $1.13 per share. The decrease in net
loss for the twelve months ended December 31, 2002 compared to the same period
in 2001 was primarily due to a decrease in operating expenses (excluding the
impairment of goodwill) of approximately $27.3 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 in connection with
the transitional impairment test and an approximately $1.0 million goodwill
impairment charge in the fourth quarter of 2002 associated with the annual
impairment test. Please see Note 4 of iVillage's Notes to Consolidated Financial
Statements for further details regarding these charges.
Comparison of Years Ended December 31, 2001 and December 31, 2000
In June 2000, iVillage discontinued the operations of its IVN, Inc.
subsidiary (formerly known as iBaby, Inc.). Therefore, all discussion and
analysis below represents solely iVillage's continuing operations.
Revenues
Revenues were approximately $60.0 million for the year ended December
31, 2001, which represents a decline of 21% when compared with 2000. The
decrease in revenues was primarily due to an overall downturn in the online
advertising sector which contributed to significantly lower sponsorship and
advertising revenues, offset by revenues from the Women.com and PAG acquisitions
of approximately $8.6 million and $1.9 million, respectively. Sponsorship and
advertising revenues were approximately $48.6 million for the year ended
December 31, 2001, compared to approximately $69.9 million for 2000. Sponsorship
and advertising revenues accounted for approximately 81% and 92% of total
revenues for the years ended December 31, 2001 and 2000, respectively. Revenues
from Lamaze Publishing and The Newborn Channel accounted for approximately 25%
and 20% of sponsorship and advertising revenues for the years ended December 31,
2001 and 2000, respectively.
Included in sponsorship and advertising revenues are barter
transactions, which accounted for approximately 6% and 5% of sponsorship and
advertising revenues for the years ended December 31, 2001 and 2000,
respectively.
Included in revenues are production fees received from work performed
(primarily for Hearst, a related party) by the iVillage Consulting unit, which
accounted for approximately 5% of total revenues for the year ended December 31,
2001. Since iVillage Consulting was a new unit formed in 2001, there are no
comparative numbers for the corresponding period in 2000.
Included in revenues are subscription-based fees derived from the
services provided by PAG, which accounted for approximately 3% of total revenues
for the year ended December 31, 2001. PAG was acquired in the third quarter of
2001 and consequently there are no comparative numbers for the corresponding
period in 2000.
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 11% and 8% of total revenues for the years ended
December 31, 2001 and 2000, respectively.
-34-
For the years ended December 31, 2001 and 2000, revenues from
iVillage's five largest customers accounted for approximately 37% and 23% of
total revenues, respectively. One customer, Unilever, accounted for
approximately 12% of iVillage's total revenues for the year ended December 31,
2001. No one customer accounted for greater than 10% of total revenues for the
year ended December 31, 2000. At December 31, 2001, Hearst, a related party, and
Unilever accounted for approximately 14% and 10% of the net accounts receivable,
respectively, and at December 31, 2000, Ford Motor Media accounted for
approximately 11% of the net accounts receivable.
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 and 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 year ended December 31, 2001 were approximately
$33.5 million, or 56% of total revenues. Editorial, product development and
technology expenses were approximately $35.3 million, or 46% of total revenues,
for the corresponding period in 2000. The decrease between the comparable
twelve-month periods was primarily attributable to the decrease of salaries and
related benefits, consultant fees and licensing fees of approximately $2.6
million, $1.3 million and $0.4 million, respectively, offset by: the
acquisitions of Women.com and an additional 30.1% interest in Cooperative Beauty
Ventures, L.L.C., to increase iVillage's ownership to 80.1%, which resulted in
incremental costs of approximately $2.2 million and $0.5 million, respectively;
and severance costs for terminated employees of approximately $0.6 million.
Editorial, product development and technology expenses increased as a percentage
of total revenues for the twelve months ended December 31, 2001, as compared to
the comparable period in 2000, as a result of a larger percent decline in
revenues as compared to the decline in editorial, product development and
technology expenses.
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 year ended December 31, 2001 were approximately $36.2
million, or 60% of total revenues. Sales and marketing expenses were
approximately $54.1 million, or 71% of total revenues, for 2000. The dollar
decrease in sales and marketing expenses for the twelve-month period ended
December 31, 2001, as compared to 2000, was primarily attributable to:
iVillage's continued cost reduction initiatives, which resulted in an
approximately $14.1 million decrease in advertising expenses; and a decrease in
salaries, commissions and related benefits of approximately $5.0 million, offset
by: severance for terminated employees of approximately $0.8 million; and the
acquisitions of Women.com, PAG, and an additional 30.1% interest in Cooperative
Beauty Ventures, L.L.C. to increase iVillage's ownership to 80.1%, which
resulted in incremental costs of approximately $5.0 million, which includes
approximately $1.8 million of non-cash print advertising expenses from Hearst
publications assumed in the Women.com acquisition. Sales and marketing expenses
decreased as a percentage of total revenues for the twelve months ended December
31, 2001, compared to the comparable period in 2000, as a result of a larger
percent decline in sales and marketing expenses as compared to the decline in
revenues.
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Included in sales and marketing expense are barter transactions, which
amounted to approximately 8% of sales and marketing costs during the twelve
months ended December 31, 2001, compared to approximately 7% of sales and
marketing costs of the comparable period in 2000.
General and Administrative. General and administrative expenses consist
primarily of: payroll, related expenses and benefits for general corporate
overhead, including executive management, finance, allocated facilities, human
resources and legal; severance costs for terminated employees;
non-capitalizeable costs associated with the acquisition of Women.com; lease
restructuring costs; and other professional fees. General and administrative
expenses for the year ended December 31, 2001 were approximately $17.7 million,
or 29% of total revenues. For the comparable period in 2000, general and
administrative expenses were approximately $22.6 million, or 30% of total
revenues. The decrease in general and administrative expenses for the comparable
twelve-month period was primarily due to a decrease in: salaries and related
benefits of approximately $0.9 million; consultant and professional fees of
approximately $3.0 million; recruiting fees of approximately $1.0 million;
expenses incurred for international endeavors of approximately $0.9 million;
costs associated with iVillage's New York office space of approximately $0.4
million; offset by: a lump-sum payout to iVillage's former Chief Executive
Officer of approximately $1.3 million; increased severance costs of
approximately $0.3 million; and lease termination costs of approximately $1.5
million. General and administrative expenses decreased slightly as a percentage
of total revenues for the twelve months ended December 31, 2001, compared to the
comparable period in 2000, as a result of a larger percent decline in general
and administrative expenses as compared to the decline in revenues.
Depreciation and Amortization. Depreciation and amortization expenses
for the year ended December 31, 2001 were approximately $23.5 million, or 39% of
total revenues. For 2000, depreciation and amortization expenses were
approximately $37.7 million, or 49% of total revenues. The dollar decrease
between 2001 and 2000 was primarily attributable to a reduction in amortization
expense resulting from the impairment of goodwill recorded in the third quarter
of 2000, relating to the acquisitions of OnLine Psychological Services, Inc. and
Code Stone Technologies, Inc., Lamaze Publishing and Family Point Inc, offset
partially by goodwill amortization associated with the acquisition of an
additional 30.1% interest in Cooperative Beauty Ventures, L.L.C. in the first
quarter of 2001 and Women.com in the second quarter of 2001. Please see Note 4
and Note 6 of iVillage's Notes to Consolidated Financial Statements for a
further discussion regarding these charges.
-36-
Interest Income, Net
Interest income, net, includes primarily, interest income from
iVillage's cash balances and interest earned on stockholders' notes receivable.
Interest income, net for the twelve months ended December 31, 2001 was
approximately $2.3 million, or 4% of total revenues. For 2000, interest income,
net was approximately $5.3 million, or 7% or total revenues. The decrease
between 2000 and 2001 was due to a lower average net cash and cash equivalents
balances and lower interest rates in 2001 than in 2000.
Net Loss
iVillage recorded a net loss of approximately $48.5 million, or $1.13
per share, for the year ended December 31, 2001. For 2000, iVillage recorded a
net loss of approximately $191.4 million, or $6.45 per share. The improvement in
net loss from 2000 to 2001 resulted primarily from: a charge for the impairment
of goodwill of approximately $98.1 million in the third quarter of 2000; the
write-down of marketable and non-marketable investments of approximately $8.4
million ($0.3 million in the fourth quarter of 2000 and $8.1 million in the
second quarter of 2000), the decline of which was considered other than
temporary; the write-down of a note receivable of approximately $5.1 million in
the third quarter of 2000; an estimated loss on the sale of iBaby, Inc. assets
of approximately $7.1 million; and a reduction in iVillage's operating expenses
in 2001 of approximately $38.8 million, offset by a decrease in revenues of
approximately $16.3 million. See Notes 2, 4 and 6 of iVillage's Notes to
Consolidated Financial Statements for a further discussion regarding these
charges.
Recent Events
In March 2003, iVillage and Tesco restructured the terms of their joint
venture so that Tesco purchased iVillage's entire ownership interest in iVillage
UK. iVillage and Tesco also entered into a 20-year agreement, subject to earlier
termination upon the occurrence of certain events, whereby iVillage will license
to iVillage UK certain of its content and intellectual property, including
trademarks and copyrights, for use in the U.K. and Ireland in exchange for the
greater of a minimum monthly license fee or a percentage of iVillage UK's gross
revenues.
Liquidity and Capital Resources
Financial Reporting Release No. 61, 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 December 31, 2002, iVillage had approximately $21.4 million in
cash and cash equivalents and approximately $8.5 million of restricted cash.
Cash equivalents include money market accounts. The restricted cash includes
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 and at times these balances
exceed insurable amounts.
-37-
iVillage has sustained net losses and negative cash flows from
operations since its inception and expects to continue to incur such losses in
the near future. 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
financing, collaborative or other arrangements with corporate sources, through
the launch of new subscription or other revenue-generating initiatives or other
sources of financing to fund operations. 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 securities, however, management
does believe that it may be possible to raise funds through a private placement
of its securities. iVillage can make no assurance that it will achieve
profitable operations, or that iVillage will be able to obtain adequate
financing from other sources in the event it becomes necessary. Due primarily to
iVillage's lack of profitability, it is unlikely that iVillage would be able to
obtain bank financing. Management believes that iVillage's current funds will be
sufficient to enable it to meet iVillage's planned expenditures through the next
twelve months. If anticipated operating results are not achieved, management
believes it has the ability to delay or reduce expenditures, so as not to
require additional financial resources if such resources were not available on
terms acceptable to iVillage, although there can be no assurances in this
regard.
In the past, iVillage 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. In 2002, iVillage paid approximately $ 0.9 million for
severance and related costs for staff reduction and acquisition-related layoffs.
In February 2003, iVillage announced a further expense reduction
initiative with the goal of reducing annualized costs by approximately $10.0
million. iVillage expects to achieve these savings through a reduction of the
costs it pays to outside vendors, further real estate consolidation and
additional employee staff reductions. iVillage's ability to maintain a cash
balance at December 31, 2003 comparable to its cash balance at December 31, 2002
is dependent upon iVillage's ability to implement these cost reductions,
increase advertising, sponsorship, subscription and other revenues, and/or raise
additional financing.
Net cash used in operating activities decreased to approximately $8.7
million for the year ended December 31, 2002, from approximately $45.6 million
for the year ended 2001. The overall decrease in net cash used in operating
activities for the year ended December 31, 2002 compared to the comparable
period in 2001 was primarily from: a decrease in net loss, less adjustments, of
approximately $13.3 million; a smaller decrease in accounts payable and accrued
expenses in 2002 of approximately $16.6 million, primarily from liabilities paid
in 2001 resulting from the Women.com acquisition; a larger decrease in
restricted cash and other assets in 2002 of approximately $2.4 million primarily
due to the one-time charge for the termination of an agreement with NBC; and an
increase in deferred revenue of approximately $0.6 million in 2002 as compared
to a decrease of approximately $5.8 million in 2001. The decrease in net loss
was primarily due to a decrease in operating expenses (excluding the impairment
of goodwill) of approximately $27.3 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 in connection with the
transitional impairment test and an approximately $1.0 million goodwill
impairment charge in the fourth quarter of 2002 associated with the annual
impairment test.
-38-
Net cash used in investing activities was approximately $1.8 million
for the year ended December 31, 2002, and cash provided by investing activities
was approximately $4.0 million for the year ended December 31, 2001. The overall
increase in net cash used in investing activities for the year ended December
31, 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 approximately $11.0 million and the acquisition of Promotions.com in
the second quarter of 2002 resulting in net cash used of approximately $0.9
million. This was partially offset by lower fixed asset purchases in 2002 of
$4.4 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.
Net cash provided by financing activities amounted to approximately
$2.0 million for the year ended December 31, 2002, compared to approximately
$23.1 million for the year ended December 31, 2001. The overall decrease in cash
provided by financing activities for the year ended December 31, 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 $18.9 million and a decrease in principal payments received for
stockholders' notes receivable of approximately $3.9 million in 2002.
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
provided that iVillage will fund the ongoing business and operations of this
venture, not to exceed $7.0 million, and terminated Unilever's funding
obligation. During 2002, iVillage was not required to fund the operations of the
venture, and as of December 31, 2002, iVillage has contributed, in total,
approximately $1.9 million to the venture.
Currently, 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. At any time, 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,
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. iVillage anticipates exercising its "call" option
during 2003. 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 December 31, 2002, iVillage has earned approximately $13.7
million under the advertising agreement with the remaining approximately $0.8
million to be earned between the period January 1, 2003 through June 30, 2003.
-39-
Pursuant to an amended and restated magazine content license and
hosting agreement with Hearst, Hearst has committed to purchase from iVillage
between approximately $16.4 million and $18.2 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 approximately $2.6
million during the three-year term of the agreement. This amount would be
reduced on a pro rata basis if Hearst fails to expend its stated annual minimum
in production fees in any year of the agreement. In addition, if a shortfall
in production fees occurs in 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. During the third quarter of 2002, this
agreement was amended to eliminate the provision for an early termination fee
and to lower the minimum guaranteed fee to Women.com to approximately $9.6
million. Women.com has earned approximately $8.8 million under this advertising
agreement through December 31, 2002, and approximately $0.8 million of the
advertising purchase commitment remains from January 1, 2003 through June 30,
2003.
In December 2001, concurrent with the termination of Women.com's
interactive services agreement with America Online, Inc. ("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 provided a link to iVillage's Web site. The agreement
terminated 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 one-year financial advisory
agreement with Allen & Company Incorporated ("Allen & Company") pursuant to
which Allen & Company 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 approximately $0.5 million in April 2002, which fee was to
be credited towards any additional fees payable to Allen & Company for services
rendered pursuant to this agreement.
-40-
On April 18, 2002, iVillage acquired 82.3% of the outstanding shares of
Promotions.com common stock. On May 24, 2002, iVillage acquired the remaining
outstanding shares of Promotions.com common stock through a second-step merger.
The aggregate purchase price paid was approximately $15.2 million, consisting of
approximately $11.1 million of cash (inclusive of closing costs) and 1,587,191
shares of iVillage common stock. This $11.1 million of cash included
approximately $9.8 million of cash, which represented the net cash on the
balance sheet of Promotions.com.
In January 2003, iVillage received a notice of determination from the
City of New York Department of Finance regarding outstanding commercial rent
taxes. iVillage is currently in discussions with the Department of Finance
regarding this matter.
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 December 31, 2002 for the next five years:
Year ending December 31: (in thousands)
------------------------ --------------
2003........................................ $ 4,668
2004........................................ 4,218
2005........................................ 4,115
2006........................................ 3,983
2007........................................ 3,729
-------
$20,713
In January 2003, iVillage received from the landlord of its New York
headquarters $0.3 million for reimbursement of certain construction expenses.
iVillage expects to receive the remaining approximately $0.5 million for
reimbursement of certain construction expenses within the next quarter. iVillage
maintains $8.5 million of restricted cash that is held for a letter of credit
collateralizing this lease. iVillage is currently in preliminary negotiations
with the landlord of this property to reduce its future lease commitments.
In the normal course of business, iVillage enters into contracts that
contain a variety of representations and warranties and which provide general
indemnifications. iVillage's maximum exposure under these arrangements is
unknown. However, based on experience, iVillage expects the risk of loss to be
remote.
iVillage's capital requirements depend on numerous factors, including:
o market acceptance of iVillage's services;
o the amount of resources iVillage devotes to investments in its
business, including entering into joint ventures with and/or
the acquisition of other entities;
-41-
o the resources iVillage devotes to marketing
o the resources iVillage devotes to building the infrastructure
necessary to enable iVillage to sell subscription-based
products and services.; and
o the resources iVillage devotes to selling iVillage's products
and services.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS
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. Management believes the adoption of SFAS 145 will not have a material
impact on iVillage's financial position and results of operations.
In June 2002, the FASB issued SFAS 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 ("EITF") 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 SFAS 146's 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. Management believes the
adoption of SFAS 146 will not have a material impact on iVillage's financial
position and results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. The
interpretation requires an entity to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. iVillage does
not expect this interpretation to have a material impact on its consolidated
financial position or results of operations.
In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF No.
00-21"). The guidance in EITF No. 00-21 is effective for revenue arrangements
entered into for fiscal years beginning after June 15, 2003. EITF No. 00-21
addresses certain aspects of the accounting by a company for arrangements under
which it will perform multiple revenue-generating activities. Specifically, EITF
No. 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earnings processes for revenue recognition purposes. EITF No. 00-21
also addresses how arrangement consideration should be measured and allocated to
the separate units of accounting in the arrangement. The Company is currently
reviewing the impact that EITF No. 00-21 will have on future results of
operations, but upon initial review, the Company does not believe EITF No. 00-21
will have significant impact on our accounting for multiple element
arrangements.
-42-
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No.
123" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123")to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on the reported results. SFAS 148
is effective for fiscal years and interim periods ending after December 15,
2002. iVillage continues to account for stock-based employee compensation under
the intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees".
Risk Factors That May Affect Results of Operations and Financial Condition
The risks and uncertainties described below are not the only ones faced
by iVillage. Additional risks and uncertainties not presently known to iVillage
or that are currently deemed immaterial may also impair iVillage's business,
financial condition and results of operations. These risks should be read in
conjunction with the other information set forth in this Form 10-K.
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 and services 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 and services;
o strengthen user loyalty;
o offer compelling content and desirable consumer products and
services;
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
-43-
o attract, retain and motivate qualified personnel.
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 of approximately $33.9 million for the year ended December
31, 2002, $48.5 million for the year ended December 31, 2001, and $191.4 million
for the year ended December 31, 2000. As of December 31, 2002, iVillage's
accumulated deficit was approximately $466.7 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 major 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 years ended December 31, 2002 and 2001,
respectively, revenues from iVillage's five largest customers accounted for
approximately 38% and 37% of total revenues.
In 2002, Procter and Gamble, Hearst and Unilever accounted for
approximately 11%, 11% and 10% of total revenues, respectively. In 2001,
Unilever accounted for approximately 12% of total revenues. At December 31,
2002, Procter and Gamble accounted for approximately 26% of the net accounts
receivable, 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. Additionally, iVillage's contracts with Procter and Gamble and
Unilever expire in June 2003 and iVillage's contract with Hearst expires in June
2004. iVillage can make no assurances as to whether the expiring contracts of
Procter and Gamble, Unilever and Hearst will be renewed, or if so renewed, that
they will be on similar terms as the existing agreements. Because iVillage's
largest customers have varied over time in the past, 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.
-44-
iVillage's common stock may be delisted from The Nasdaq SmallCap Market and, if
delisted, trading in iVillage's common stock would decrease substantially and
the market price of iVillage's common stock may decline further.
On December 20, 2002, iVillage's common stock was transferred from The
Nasdaq National Market to The Nasdaq SmallCap Market after having failed to
qualify for continued listing on The Nasdaq National Market. This transfer was
necessitated by iVillage's failure to maintain a minimum per share bid price of
$1.00 for 10 consecutive trading days after receipt of a letter dated September
17, 2002 from The Nasdaq Stock Market, Inc. ("Nasdaq"). iVillage currently has
until September 12, 2003 to regain compliance with The Nasdaq SmallCap Market's
minimum per share bid price requirement. In the event that iVillage's common
stock fails to maintain a minimum per share bid price of $1.00 for a minimum of
10 consecutive trading days during such grace period, iVillage may receive
written notification that its securities will be delisted pursuant to Nasdaq's
listing requirements or may receive an additional 90 days to demonstrate
compliance if iVillage then meets the initial listing criteria for The Nasdaq
Small Cap Market. In the event that iVillage's common stock maintains a minimum
per share bid price of $1.00 for a minimum of 30 consecutive days and meets the
other listing requirements, iVillage may apply to be reinstated on The Nasdaq
National Market. In the event that, after September 12, 2003, iVillage receives
written notification that its securities will be delisted, iVillage may appeal
the Nasdaq staff's determination to a Nasdaq Listing Qualifications Panel.
If iVillage's common stock is delisted from trading, the market price
of iVillage's common stock may decline further, possibly to zero, and it may
have a material adverse effect on the ability of iVillage's stockholders to sell
their shares. The delisting of iVillage's common stock would also make it more
difficult for iVillage to raise additional financing.
iVillage's quarterly and annual 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 and annual revenues and results of operations. In addition, iVillage's
operating results are likely to fluctuate significantly from fiscal quarter to
quarter, and year to year, 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 advertising or electronic
commerce;
o the unpredictability of iVillage's success in its new revenue
and cost reduction initiatives;
o bankruptcies or other payment defaults of companies that are a
source of revenues;
o volatility in the media market and the high number of
companies decreasing their marketing budgets;
o changes in the level of traffic on its network of Web sites;
and
o fluctuations in marketing expenses and technology
infrastructure costs.
iVillage's revenues for the foreseeable future will remain primarily
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 fiscal quarter or year, which may materially and adversely affect its
business, financial condition and results of operations.
-45-
In one or more future fiscal quarters or years, 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 fiscal period are lower than
anticipated, iVillage may be unable to reduce spending in that fiscal period. 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 twelve 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. 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.
As a result of the national economy's slowdown, 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.
-46-
As of March 26, 2003, Hearst owned approximately 29.1% 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 March 26, 2003, Hearst owned approximately 29.1% of the
outstanding shares of iVillage's common stock. 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.
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 By-Laws 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 market saturation;
o lack of availability of cost-effective, high-speed service;
o consumers returning to traditional or alternative sources for
information, shopping and services; and
-47-
o privacy concerns, including those related to the ability of
Web sites to gather information about users without their
knowledge or consent and the increase in unrequested
"spamming" e-mail solicitations.
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, computer "viruses" 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, and iVillage fails to
develop significant alternative sources of revenue, 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 sales and/or licensing of content, products and services, consumer
reluctance to subscribe to or pay for such content, products 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.
-48-
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 years 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's business would be harmed by a decline in user traffic.
iVillage's business is inherently dependent upon high user traffic
levels. The rates charged to advertisers and sponsors and the number of products
and services sold by iVillage are directly related to the number of visitors to
iVillage's Web sites. User traffic from certain Web sites that are
non-proprietary to iVillage are sometimes included in the reported information
regarding iVillage's network of Web sites. These properties include certain of
the Hearst magazines and other parties who have agreed to have traffic from
their Web sites incorporated within the iVillage network. There is no guarantee
that the number of visitors to iVillage's Web sites will not decline or that
Hearst or other third parties will continue to permit inclusion of their Web
sites as part of the iVillage network for traffic reporting purposes. Any
decline in user traffic levels could have a material adverse effect on
iVillage's business, financial condition and results of operations.
iVillage may not be able to expand its business through acquisitions and joint
ventures 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:
-49-
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.
Acquisitions and investments may also 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 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. For example,
iVillage's failure to promptly or adequately implement the World Wide Web
Consortium's Platform for Privacy Preferences, or P3P, standards could result in
reduced user traffic to iVillage's Web sites or regulatory and/or legal claims
if iVillage's P3P policy does not conform to iVillage's written privacy policy
posted on its Web sites. 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. Due to expense reduction initiatives over the last several years,
iVillage has not upgraded certain aspects of its technology infrastructure.
-50-
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. Mr. McCormick's current employment agreement expires in May
2003 and there can be no guarantee that iVillage and Mr. McCormick will be able
to agree on a new employment arrangement past such date. 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 financial condition and 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.
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 forecast 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, and do so accurately and reliably. 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.
-51-
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, IP Applications for ISP services and
Trellix Corporation for personal home pages. 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.
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 Hearst, Rho Capital Partners,
Inc. and AOL Time Warner Inc., 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.
iVillage's magazine content license and hosting agreement with Hearst
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 Hearst 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.
-52-
iVillage's business could be affected by future terrorist attacks or acts of
war.
Although none of the terrorist attacks in the United States in recent
years have had a direct material adverse effect on iVillage's business,
financial condition or results of operations, iVillage cannot assure you that
future terrorist attacks in the United States, and particularly in New York City
where iVillage's headquarters are located, acts of war involving the United
States, or any response of the United States Government to any future terrorist
actions or acts of war, would not negatively affect iVillage through further
disruption of the economy, financial markets or otherwise. The proximity of
iVillage's headquarters to certain possible targets in New York City could also,
in the event of war or 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 or act of war.
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;
o Web search and retrieval and other online service companies,
commonly referred to as portals, such as AOL, Microsoft
Corporation's MSN service 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 Time Inc.
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.
-53-
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/Cable
and Wireless 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, iVillage cannot assure you that Exodus
Communications, which has filed for bankruptcy protection and has had certain of
its assets subsequently purchased by Cable and Wireless, and Verio, will be able
to provide sufficient services for iVillage or that iVillage will be able to, if
so desired, engage satisfactory alternative service providers.
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 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 and IVPN, iVillage
distributes publications and broadcasts, over its Web sites and the Channels,
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.
-54-
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, the
iVillageSolutions book series, Web page formats, Web business methods or any
third-party content it publishes or broadcasts. 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.
-55-
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.
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.
The perception of security and privacy concerns, whether or not valid,
may indirectly inhibit market acceptance of iVillage's use of personal data.
iVillage's failure to implement P3P standards could discourage users from using
iVillage's Web sites, products and services and from providing their personal
data to iVillage. 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. Recently, several states have also proposed/and or
adopted privacy-related legislation that prohibits unsolicited solicitations via
e-mail (commonly known as "spamming") which contain significant monetary
penalties for violations.
-56-
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, however, that address issues such as user privacy, pricing and
taxation, content, copyrights, distribution, antitrust matters and the
characteristics and quality of products and services. 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 is subject to legal proceedings that could result in liability and
damage to its business.
From time to time, iVillage has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its business,
as well as two securities class action lawsuits. iVillage is unable to determine
the amount for which it potentially could be liable since a number of these
lawsuits do not specify an amount for damages sought, and iVillage maintains
insurance, or believes it is entitled to indemnification from third parties,
which may cover some or all of the claims, should they be successful. Such
proceedings and claims, even if not meritorious, could require the expenditure
of significant financial and managerial resources, which could harm iVillage's
business. iVillage believes it has meritorious defenses to all the claims
currently made against iVillage. Litigation, however, is inherently uncertain
and iVillage may not prevail in these suits. iVillage cannot predict whether
future claims will be made or the ultimate resolution of any existing or future
claim.
iVillage's operation of IVPN poses a number of risks that could materially
adversely affect iVillage's business strategy.
There are a number of risks in operating IVPN related to Lamaze
Publishing, Baby Steps magazine and the Channels, which are all 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;
-57-
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 and IVIP's publications, on
The Newborn Channel and The Newborn Channel-Spanish, and
health-related information on The Wellness Channel;
o iVillage's ability to continue to sell advertising and
sponsorships on its Web sites and IVPN's magazines, videos and
the Channels;
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 IVPN in an efficient and timely manner could result in a disruption
of operations of IVPN that could have a material adverse effect on iVillage's
business strategy.
iVillage's business would be harmed if transmission of the Channels were
interrupted.
The Channels are broadcast to participating hospitals via either a
satellite television network broadcast or an in-hospital digital delivery
system. There is a risk that the satellite or the in-hospital delivery system
from which the transmissions are sent may malfunction, interrupting broadcasts
of the Channels. Furthermore, extreme adverse weather conditions or third
parties could damage or disable receivers and transmitters on the ground
hindering transmission of the Channels' signal. In the event this occurs, there
may be a period of time before transmission of all or some of the Channels could
resume. Any interruption in iVillage's ability to transmit the Channels could
have an adverse effect on its business.
iVillage's operation of the iVillageAccess ISP poses a number of risks that
could materially adversely affect iVillage's business, financial condition and
results of operations.
There are a number of risks involved in the operation of the
iVillageAccess ISP, including:
o the competitiveness of the ISP industry;
o iVillage's limited experience in operating an ISP;
o iVillage's ability to identify and predict trends in a timely
manner that may impact consumers' tastes for subscription to
an ISP;
o patterns of subscriber acquisition and retention, and seasonal
trends relating to subscriber usage of iVillageAccess;
o the competence of the third parties that iVillage relies on
for technical and customer service support and the overall
operation of iVillageAccess;
o the effectiveness of iVillage's revenue sharing arrangements
and other strategic alliances in connection with the operation
of iVillageAccess;
-58-
o changes in operating expenses due to marketing and other
subscriber acquisition costs, and/or telecommunications
expenses;
o changes in government regulation of ISPs could negatively
impact iVillage by decreasing revenues and increasing costs;
and
o iVillage's ability to protect its systems from any
telecommunications failures, security breaches, power loss, or
software-related system failures.
iVillageAccess may not be able to compete with other companies offering faster,
more advanced, Internet connection technologies.
Currently, iVillageAccess only provides for a dial-up connection to the
Internet. Due to the increased speeds of alternative Internet services
connections, such as broadband services like DSL and cable technologies, the
demand for such alternatives has rapidly increased. iVillage cannot provide any
assurances as to the demand for dial-up Internet connections in the future.
Although iVillage is considering whether to provide broadband services, it
cannot guarantee that in the event it chose to do so that iVillage (i) would
have adequate access to such technologies at favorable rates, (ii) would be able
to partner with providers of broadband services, or (iii) would have adequate
capital to take advantage of any existing or future opportunities to provide
broadband services. iVillage competes in the market for Internet connections
with many ISP companies that possess significant financial resources, have
well-established brand names, and large existing customer bases. In many
markets, these ISP companies already offer, or are expected to offer, broadband
Internet access. iVillage's inability to compete with other dial-up Internet
service providers, those ISP companies offering broadband services, or other
competitors offering advanced Internet connection technologies, could have a
material adverse effect on iVillage's business, financial condition and results
of operations.
iVillage's sale of iVillageSolutions products, its line of vitamins, minerals,
and supplements, poses a number of risks that could materially adversely affect
iVillage's business, financial condition and results of operations.
There are a number of risks involved in the sale of the Supplement
Line, including:
o the competitiveness of the vitamin, mineral and supplement
industry;
o iVillage's limited experience in operating as a retailer of
vitamins, minerals and supplements;
o iVillage's ability to identify and predict trends in a timely
manner that may impact consumers' tastes for vitamins,
minerals and supplements;
o iVillage's ability to effectively market to and attract
customers of competitors such as mass merchandisers, drug
store chains, independent drug stores, supermarkets and health
food stores;
o the competence of the third parties that iVillage relies on
for the development, manufacture and distribution of the
iVillageSolutions products;
-59-
o the reluctance of consumers to purchase vitamins, minerals and
supplements online;
o the effectiveness of iVillage's revenue sharing arrangements
and other strategic alliances in connection with the sale of
iVillageSolutions products;
o changes in operating expenses due to customer acquisition
costs including manufacturing, marketing and distribution
expenses; and
o changes in government regulation of vitamins, minerals and
supplements could negatively impact iVillage by decreasing
revenues and increasing costs.
iVillage may face potential products liability based upon its iVillageSolutions
products.
As with other retailers, distributors and manufacturers of products
that are ingested, iVillage faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in injury or
death. iVillage may be subjected to various product liability claims, including,
among others, that its products contain contaminants or include inadequate
instructions as to use or inadequate warnings concerning side effects and
interactions with other substances. iVillage carries insurance in the types and
amounts that management considers reasonably adequate to cover the risks
associated with the operations of this business. There can be no assurance,
however, that such insurance will continue to be available at a reasonable cost
or, if available, will be adequate to cover liabilities.
Government regulation could add additional costs to doing business in the
vitamin, mineral and supplement industry.
The manufacturing, processing, formulating, packaging, labeling and
advertising of the iVillageSolutions products are subject to regulation by
federal agencies, including the Federal Drug Administration, the Federal Trade
Commission, the United States Department of Agriculture and the Environmental
Protection Agency. These activities may also be regulated by various agencies of
the states, localities and foreign countries to which iVillageSolutions products
may be distributed.
iVillage cannot (i) guarantee that existing laws and regulations have
been properly interpreted and applied to the iVillageSolutions products, (ii)
predict the nature of any future laws, regulations, interpretations or
applications, or (iii) determine what effect additional governmental regulations
or administrative orders, when and if promulgated, would have on the
manufacture, sale and distribution of iVillageSolutions products. Such changes
may require the reformulation of certain products to meet new standards, the
recall or discontinuance of certain products not capable of reformulation,
expanded documentation of the properties of certain products, expanded or
different labeling, or scientific substantiation. Any or all of such
requirements could ultimately have a material adverse effect upon iVillage's
business, financial condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
None.
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Item 8. Consolidated Financial Statements and Supplementary Data.
The financial statements required by Item 8 are included in this Form
10-K beginning on Page F-2.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-61-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers
The following table sets forth the directors and executive officers of
iVillage, their ages and the positions held by them with iVillage as of March
15, 2003.
Name Age Position
- ---- --- --------
Douglas W. McCormick (b)............ 53 Chief Executive Officer and Chairman of the Board
Nancy Evans (c)..................... 53 Editor-in-Chief and Director
Steven A. Elkes..................... 41 Executive Vice President, Operations and Business
Affairs
Scott Levine........................ 38 Chief Financial Officer
Richard Caccappolo.................. 37 Senior Vice President, iVillage Consulting
Jane Tollinger...................... 60 Senior Vice President, Operations and Business Affairs
Cathleen P. Black (b)............... 58 Director
Kenneth A. Bronfin (a).............. 43 Director
John T. (Jack) Healy (a)............ 63 Director
Habib Kairouz (c)................... 36 Director
Lennert J. Leader (a)............... 48 Director
Edward T. Reilly (c)................ 56 Director
Daniel H. Schulman (b).............. 45 Director
Alfred Sikes (c).................... 63 Director
- ------------------
(a) Class I director
(b) Class II director
(c) Class III director
Douglas W. McCormick, age 53, has been a director of iVillage since
February 1999 and Chairman of the Board since April 2001. From April 2000
through July 2000, he served as President of iVillage and has been iVillage's
Chief Executive Officer since July 2000. From 1998 to April 2000, Mr. McCormick
was President of McCormick Media, a media consulting firm. From 1993 to 1998,
Mr. McCormick was President and Chief Executive Officer of Lifetime Television
Network, a joint venture of The Hearst Corporation and The Walt Disney Company.
Mr. McCormick held various other positions at Lifetime from 1984 to 1993 in the
sales, marketing and research areas. Mr. McCormick also serves on the boards of
directors of Streetmail.com, Zilo.com, and Myers Consulting Group, and serves on
Streetmail.com's Compensation Committee. Mr. McCormick received an M.B.A. from
the Columbia University School of Business and a B.A. in speech/communications
from the University of Dayton.
-62-
Nancy Evans, age 53, is a founder of iVillage, has been Editor-in-Chief
since June 1995 and a director since December 1998. Ms. Evans was also Co-
Chairperson of the Board from December 1998 through April 2001. Prior to
founding iVillage, Ms. Evans created Family Life magazine in 1991, which she
published in partnership with Jann Wenner. From 1987 to 1991, Ms. Evans served
as President and Publisher of Doubleday. Prior to her employment at Doubleday,
Ms. Evans was Vice President and Editor-In-Chief of the Book-of-the-Month Club,
where she launched the Children's Book-of-the-Month Club. Ms. Evans graduated
from Skidmore College with a B.A. and is also a graduate fellow at Columbia
University.
Steven A. Elkes, age 41, has been Executive Vice President, Operations
and Business Affairs since July 2000 and Secretary since October 1999. From
April 1999 to July 2000, Mr. Elkes was Senior Vice President, Business Affairs.
From August 1996 to April 1999, Mr. Elkes held various management positions at
iVillage, including Vice President, Business Affairs. From August 1993 to August
1996, Mr. Elkes was Vice President Credit/ Structured Finance at CNA Insurance
Company. From August 1991 to August 1993, Mr. Elkes served as Assistant Vice
President at CNA Insurance Company. Mr. Elkes received his M.B.A. from Baruch
College and his B.A. from Grinnell College.
Scott Levine, age 38, has been Chief Financial Officer since January
2001. From September 2000 until January 2001, Mr. Levine was Senior Vice
President, Finance and interim Chief Financial Officer. From February 1999 to
September 2000, Mr. Levine was Vice President, Controller and Chief Accounting
Officer. Mr. Levine has also been Chief Operating Officer of PAG since March
2003. From July 1998 to February 1999, Mr. Levine was Controller for FundTech
Ltd., a financial software company. From April 1997 to July 1998, Mr. Levine was
the Controller of AmeriCash, Inc., an operator of a network of automated teller
and electronic commerce machines. From 1993 to 1997, Mr. Levine was employed by
Coopers & Lybrand L.L.P. Mr. Levine is a Certified Public Accountant and
received his M.B.A. from Baruch College and his B.A. from State University of
New York, Buffalo.
Richard Caccappolo, age 37, has been Senior Vice President, iVillage
Consulting since November 2001. From September 2000 until November 2001, Mr.
Caccappolo was Chief Technology Officer and Senior Vice President of Product
Development. From March 1999 to September 2000, Mr. Caccappolo served as Chief
Technology Officer of iVillage. From January 1998 to March 1999, Mr. Caccappolo
served as the Chief Technology Officer of Kodak Polychrome Graphics, a supplier
of products and services to graphics arts industries. From October 1994 to
December 1997, Mr. Caccappolo served as Sun Chemicals' Director, Information
Systems - Europe. Mr. Caccappolo received his M.B.A. from New York University,
Leonard N. Stern School of Business and his B.S. from Cornell University.
Jane Tollinger, age 60, has been Senior Vice President, Operations and
Business Affairs since September 2000 and from June 2000 to September 2000
served as Vice President, Business Affairs. From June 1999 to June 2000, Ms.
Tollinger served on several advisory boards. From September 1993 through June
1999, Ms. Tollinger served as Executive Vice President of Lifetime Television
Network. Prior to September 1993, Ms. Tollinger held various management
positions at Lifetime Television Network. Prior to joining Lifetime Television
Network, Ms. Tollinger was an attorney with Columbia Pictures and previous to
that was an associate with the Coudert Brothers law firm. Ms. Tollinger received
a J.D. from Columbia Law School, an M.A. from Harvard University and a B.A. from
Beloit College.
-63-
Cathleen P. Black, age 58, has been a director of iVillage since June
2001. Since January 1996, Ms. Black has served as the President, Hearst
Magazines, a division of The Hearst Corporation. Ms. Black is also a Senior Vice
President of The Hearst Corporation. From 1991 to December 1995, Ms. Black
served as the President and Chief Executive Officer of the Newspaper Association
of America. From 1983 to 1991, Ms. Black was the President and Publisher of USA
Today. Ms. Black also serves as a director of The Coca-Cola Company,
International Business Machines Corporation and The Hearst Corporation. Ms.
Black received a B.A. from Trinity College.
Kenneth A. Bronfin, age 43, has been a director of iVillage since May
2002. Mr. Bronfin is President of Hearst Interactive Media, a unit of The Hearst
Corporation, and has been with The Hearst Corporation since 1996. Prior to
joining The Hearst Corporation, Mr. Bronfin was with NBC, as a founder of the
Interactive Media Group as well as General Manager of NBC's digital television
group and Vice President of NBC Cable and Business Development. Mr. Bronfin was
also Director of Business Development for NBC Technology and was Director of
NBC's Broadcast Engineering Group. Mr. Bronfin serves as a director of Circle
Company Associates, Eink Corporation and Scene7, Inc. Mr. Bronfin received an
M.B.A. from the Wharton School of the University of Pennsylvania and a B.S. in
Electrical Engineering from the University of Virginia.
John T. (Jack) Healy, age 63, has been a director of iVillage since
November 2000. Since January 1997, Mr. Healy has been a Principal of H.A.M.
Media Group, L.L.C. From July 1996 to July 1998, Mr. Healy served as a
consultant to The Walt Disney Company and ABC International Television. From
August 1970 to July 1996, Mr. Healy held various positions, most recently as
President, ABC International Operations and Executive Vice President, ABC Cable
& International, at Capital Cities/ABC Inc. Mr. Healy also serves as a director
of StoryFirst Communications, Inc. Mr. Healy received a Masters of Economics and
a B.A. from Brooklyn College.
Habib Kairouz, age 36, has been a director of iVillage since March
1998. Currently, Mr. Kairouz is a Managing Partner of Rho Capital Partners,
Inc., an investment company focusing on venture capital investments, and has
been with Rho since 1993. He also serves as a director for a number of private
companies. Mr. Kairouz received a B.S. in Engineering and a B.A. in Economics
from Cornell University and an M.B.A. in Finance from Columbia University.
Lennert J. Leader, age 48, has been a director of iVillage since July
1998. Mr. Leader became President of the Venture Group of AOL Time Warner
Investments upon the merger of AOL and Time Warner Inc. in January 2001. Prior
to the merger, Mr. Leader served as President of AOL Investments, a division of
AOL, beginning in February 1998. Mr. Leader served as Senior Vice President,
Chief Financial Officer and Treasurer of AOL from September 1989 until July
1998. Prior to joining AOL, Mr. Leader was Vice President-Finance of LEGENT
Corporation, a computer software and services company, from March 1989 to
September 1989, and Chief Financial Officer of Morino, Inc., a computer software
and services company, from 1986 to March 1989 and Director of Finance from 1984
to 1986. Prior to joining Morino, Inc. in 1984, he was an audit manager at Price
Waterhouse. Mr. Leader serves as a director of Multex.com, Inc. Mr. Leader
received a B.S. in Accounting from the University of Baltimore.
-64-
Edward T. Reilly, age 56, has been a director of iVillage since April
2001. Since June 2001, Mr. Reilly has been President and Chief Executive Officer
of the American Management Association and is a former Chairman of the Board of
the Advertising Council, a private nonprofit organization. From June 2000 to May
2001, Mr. Reilly focused his activities on serving on several boards, including
the Board for the National Council of La Raza and as Trustee of Lynchburg
College. From May 1997 to June 2000, Mr. Reilly was President and Chief
Executive Officer of Big Flower Holdings, Inc., an integrated marketing and
advertising services company. From April 1996 to May 1997, Mr. Reilly was
President and Chief Operating Officer of Big Flower Holdings, Inc. Prior to
April 1996, Mr. Reilly held various management positions at McGraw-Hill
Companies and McGraw-Hill Broadcasting, most recently as President of
McGraw-Hill Broadcasting. Mr. Reilly received a B.B.A. from St. Francis College.
Daniel H. Schulman, age 45, has been a director of iVillage since
February 1999. Since September 2001, Mr. Schulman has been Chief Executive
Officer of Virgin Mobile USA, a cellular phone service provider. From May 2000
through May 2001, Mr. Schulman served as President and Chief Executive Officer
of Priceline.com Inc. From June 1999 to May 2000, Mr. Schulman was President and
Chief Operating Officer of Priceline.com. From October 1998 to June 1999, Mr.
Schulman was an Executive Vice President at AT&T Corp. and was President of AT&T
WorldNet Services from January 1997 to October 1998. From January 1996 to
January 1997, Mr. Schulman was Vice President of Business Services at AT&T Corp.
From December 1994 to January 1996, he served as Marketing Vice President at
AT&T Corp. Mr. Schulman is a director of Symantec Corporation, a provider of
Internet security software for business and personal computing, and Net2Phone,
an Internet protocol telecommunications company. Mr. Schulman received an M.B.A.
from New York University and a B.S. from Middlebury College. In March 2003, Mr.
Schulman informed iVillage that he was resigning as a member of iVillage's Board
of Directors effective March 31, 2003.
Alfred Sikes, age 63, has been a director of iVillage since June 2001.
Mr. Sikes has been a consultant to The Hearst Corporation since January 2002.
From March 1993 to December 2001, Mr. Sikes served as both Vice President of The
Hearst Corporation and President of Hearst Interactive Media, a unit of The
Hearst Corporation. From August 1989 to January 1993, Mr. Sikes served as
Chairman of the Federal Communications Commission. Mr. Sikes also serves as a
director of Hughes Electronics Corporation, a satellite television and
communications provider, and Cymfony Inc., a research and information service
technology provider. Mr. Sikes received a B.A. from Westminster College and a
J.D. from the University of Missouri Law School.
-65-
Classified Board of Directors
iVillage's Board of Directors is divided into three classes,
denominated Class I, Class II and Class III, the terms of which expire
successively over a three-year period. Currently, the term of the Class II
directors expires in 2003, the term of the Class III directors expires in 2004,
and the term of the Class I directors expires in 2005.
Hearst Board Representation
On June 18, 2001, iVillage entered into a stockholder agreement with
Hearst and iVillage and Hearst amended and restated such stockholder agreement
on June 20, 2001. Pursuant to the amended and restated stockholder agreement,
iVillage is required to appoint three representatives of Hearst to separate
classes of the iVillage Board of Directors. iVillage must appoint one of these
representatives to its Nominating Committee and one to its Compensation
Committee. In addition, the amended and restated stockholder agreement requires
that iVillage appoint five independent directors to its Board of Directors. An
independent director is defined as any person who is not and has not been for
the past three years affiliated with Hearst or its affiliates or an employee of
iVillage or any of its subsidiaries. Pursuant to the amended and restated
stockholder agreement, Messrs. Bronfin and Sikes and Ms. Black are members of
iVillage's Board of Directors as designees of Hearst, with Mr. Sikes and Ms.
Black also being members of iVillage's Compensation Committee and Nominating
Committee, respectively.
Under the amended and restated stockholder agreement, so long as Hearst
or its affiliates holds at least 10% of the outstanding voting securities of
iVillage, Hearst may recommend and iVillage's Nominating Committee must
recommend to iVillage's Board of Directors that number of nominees of Hearst or
its affiliates as follows:
o so long as Hearst holds at least 14,547,723 shares of iVillage
common stock, Hearst may designate three nominees;
o so long as Hearst holds at least 12,001,871 shares of iVillage
common stock, but less than 14,547,723 shares of iVillage
common stock, Hearst may designate two nominees; and
o so long as Hearst holds at least 1,818,466 shares of iVillage
common stock, but less than 12,001,871 shares of iVillage
common stock, Hearst may designate one nominee.
If, after the election of directors pursuant to the above requirements,
the number of voting securities held by Hearst decreases below the stated
thresholds, any Hearst designees serving on iVillage's Board of Directors must
immediately resign. If the number of voting securities held by Hearst falls
below 1,818,466 shares of iVillage common stock, all Hearst designated directors
must immediately resign. However, if the number of voting securities held by
Hearst returns to 1,818,466 shares or more of iVillage common stock, all rights
and obligations under the amended and restated stockholder agreement revive for
the duration of the term of the amended and restated stockholder agreement. The
amended and restated stockholder agreement terminates on June 20, 2006 unless
earlier terminated by iVillage and Hearst. Upon any early termination, any
Hearst designees serving on the iVillage Board of Directors must immediately
resign.
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Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Exchange Act and the rules thereunder,
iVillage's executive officers and directors and persons who own more than 10% of
a registered class of iVillage's equity securities are required to file with the
SEC and Nasdaq reports of their ownership of, and transactions in, iVillage's
common stock. Based solely on a review of copies of such reports furnished to
iVillage, or written representations that no reports were required, iVillage
believes that during the fiscal year ended December 31, 2002, its executive
officers and directors complied with the Section 16(a) requirements except that
(i) Mr. Leader failed to timely file a Form 4 concerning an open market purchase
of 200 shares of iVillage common stock by a family trust in March 1999, which
omission was corrected by filing a Form 5 in February 2003, and (ii) a Form 3
was not timely filed upon Mr. Bronfin's election as a director of iVillage in
May 2002, which omission was corrected by filing a Form 3 in February 2003.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the compensation earned for services
rendered to iVillage in all capacities for the fiscal years ended December 31,
2002, 2001 and 2000 by iVillage's Chief Executive Officer, iVillage's four next
most highly compensated executive officers who earned more than $100,000 during
the fiscal year ended December 31, 2002, and one former executive officer of
iVillage who would have been one of the four next most highly compensated
executive officers but for the fact that such individual was no longer an
employee of iVillage at December 31, 2002 (collectively, the "Named Executive
Officers").
Long-Term
Compensation
-------------
Awards
--------------
Annual Compensation Securities
----------------------------------------- Underlying All Other
Other Annual Options/SARs Compensation
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) (#) (1) ($) (2)
- --------------------------- ---- ---------- --------- ---------------- ------------ ------------
Douglas W. McCormick (3).... 2002 499,993 200,000 -- 500,000 96
Chairman and Chief 2001 499,992 150,000 -- 1,500,000 96
Executive Officer 2000 252,780 -- -- 1,010,000 --
Nancy Evans................. 2002 325,008 130,000 -- -- 96
Editor-in-Chief 2001 325,008 130,000 -- 125,000 96
2000 325,144 84,000 -- 260,000 120
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Long-Term
Compensation
-------------
Awards
--------------
Annual Compensation Securities
------------------------------------- Underlying All Other
Other Annual Options/SARs Compensation
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) (#) (1) ($) (2)
- --------------------------- ---- ---------- --------- ---------------- ------------ ------------
Steven A. Elkes............... 2002 309,000 123,600 -- -- 96
Executive Vice President, 2001 293,808 130,000 -- 226,250 96
Operations and Business 2000 242,578 168,790 -- 128,333 120
Affairs
Vanessa Benfield (4).......... 2002 300,000 -- 119,052 -- 96
Former Senior Vice 2001 51,408 10,000 -- 125,000 --
President, Sales 2000 -- -- -- -- --
Scott Levine.................. 2002 262,000 104,800 -- -- 96
Chief Financial Officer 2001 249,244 118,000 -- 150,000 96
2000 171,404 156,693 -- 75,000 120
Jane Tollinger (5)............ 2002 260,000 104,000 -- -- 96
Senior Vice President, 2001 234,008 72,200 -- 175,000 96
Operations and Business 2000 106,915 -- -- 125,000 --
Affairs
(1) Options were granted under iVillage's 1995 Amended and Restated
Employee Stock Option Plan, Amended and Restated 1999 Employee Stock
Option Plan, Amended and Restated 1999 Non-Qualified Stock Option Plan
(as amended by Amendment No. 2) or 2001 Non-Qualified Stock Option
Plan, as amended, and generally vest 1/4 one year after the date of
employment and the remainder in equal quarterly installments over the
next three years (unless the Named Executive Officer has already been
an iVillage employee for one year or more, in which case stock option
grants immediately begin to vest in equal quarterly installments over
the next four years), except for (i) 500,000 options granted in 2002 to
Mr. McCormick which vest quarterly over three years, (ii) 1,500,000
options granted in 2001 to Mr. McCormick which vest 1/3 on the date of
grant and thereafter in equal annual installments over two years; (iii)
10,000 options granted in 2000 to Mr. McCormick which were fully vested
on the date of grant; and (iv) 1,000,000 options granted in 2000 to Mr.
McCormick which vest as described in "--Employment Arrangements" below.
(2) Represents the value of premiums paid by iVillage on behalf of the
Named Executive Officers for term life and accidental death and
dismemberment insurance policies.
(3) Mr. McCormick joined iVillage in April 2000 as President and was
appointed Chief Executive Officer in July 2000.
(4) Ms. Benfield joined iVillage in October 2001 as Senior Vice President,
Sales. Ms. Benfield resigned from her employment with iVillage in
December 2002. Amounts included in the "Other Annual Compensation"
column for Ms. Benfield represent sales commissions paid by iVillage to
Ms. Benfield.
(5) Ms. Tollinger joined iVillage in June 2000 as Vice President, Business
Affairs
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Employment Arrangements
On November 29, 2000, iVillage entered into an employment agreement
with Douglas W. McCormick. Mr. McCormick's employment agreement provides for an
annual base salary of $500,000 and eligibility to receive a bonus pursuant to
iVillage's bonus plan of up to forty percent (40%) of his base salary upon
satisfaction of objectives determined by the Board of Directors or the
Compensation Committee. In 2002, the Board of Directors increased Mr.
McCormick's target bonus to eighty percent (80%) of his base salary. Pursuant to
this employment agreement, iVillage also granted Mr. McCormick options to
purchase shares of its common stock which expire 7 years after the date of
grant. Specifically, Mr. McCormick was granted options to purchase: (a) 600,000
shares of iVillage's common stock at an exercise price equal to $1.25 per share
(the fair market value of the common stock on the effective date of the
employment agreement); (b) 200,000 shares of common stock at an exercise price
of $3.50 per share; and (c) 200,000 shares of common stock at an exercise price
of $5.00 per share. Each grant of options described above vests in equal
quarterly installments commencing three (3) months from the effective date of
the employment agreement over a period of thirty (30) months. See "Item 11.
Executive Compensation - Summary Compensation Table" and "- Option Grants in
Last Fiscal Year" for information regarding additional stock options granted to
Mr. McCormick.
Mr. McCormick's employment agreement is effective as of November 29,
2000 for a period of thirty (30) months. Pursuant to the employment agreement,
if Mr. McCormick voluntarily terminates his employment without "good reason" (as
defined in the agreement) or is terminated "for cause" (as defined in the
agreement) prior to the expiration of the employment agreement, iVillage shall
pay him base compensation and benefits through the effective date of his
termination and iVillage will have no obligation to pay Mr. McCormick his base
salary, any bonus or other compensation (including options) for the remainder of
the term of the employment agreement. If Mr. McCormick is terminated without
cause or resigns for good reason prior to the expiration of the initial term of
the employment agreement, iVillage shall pay him his base compensation and
benefits through the effective date of termination and shall pay him cash equal
to his base salary for a twelve (12) month period, to be paid monthly, and the
normal vesting of any options issued to Mr. McCormick shall continue over this
twelve (12) month period.
iVillage has also entered into agreements with Messrs. Elkes and Levine
and Ms. Tollinger. These agreements provide that if the senior executive
officer's employment is terminated "without cause" (as defined in the
agreements) or the officer resigns for "good reason" (as defined in the
agreements), iVillage shall pay that senior executive officer his or her base
compensation and benefits for twelve months plus the maximum bonus or incentive
the senior executive officer would have earned under any of iVillage's bonus or
incentive plans. Any unvested stock options held by the senior executive officer
will continue to vest for such twelve-month period and the period during which
the senior executive officer must exercise his or her options will extend for an
additional two years after termination. In addition, these agreements provide
that any unvested stock options held by the senior executive officer will
immediately vest upon a "change of control" (as defined in the agreements) of
iVillage.
In addition, iVillage is party to an agreement with Ms. Evans pursuant
to which Ms. Evans is entitled to payment of her then base salary for twelve
months if she is terminated without cause by iVillage.
Furthermore, iVillage has made certain grants of stock options to
senior executive employees under iVillage's stock option plans. These stock
option agreements provide that any unvested stock options held by the senior
executive officer will immediately vest upon a "change of control" (as defined
in such agreements) of iVillage.
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Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to
stock options granted to each of the Named Executive Officers during the fiscal
year ended December 31, 2002. iVillage has never granted any stock appreciation
rights. The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by iVillage's Board
of Directors. The potential realizable value is calculated based on the term of
the option at its time of grant (seven years). It is calculated assuming that
the fair market value of common stock on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the option and
that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the SEC and do not reflect iVillage's estimate of future stock price growth.
Percent of Potential Realizable
Number of Total Options Value at Assumed
Securities Granted to Exercise Annual Rates of Stock
Underlying Employees in Price Per Expiration Price Appreciation for
Options Granted Fiscal Year Share Date Option Term
---------------- ------------- ---------- ---------- -----------------------
(#) (%) ($/Sh) 5% ($) 10% ($)
---------------- ------------- ---------- ---------- -----------------------
Douglas W. McCormick........ 500,000 (1) 36 $1.11 7/18/09 780,941 1,081,538
Nancy Evans................. -- -- -- -- -- --
Steven A. Elkes............. -- -- -- -- -- --
Vanessa Benfield............ -- -- -- -- -- --
Scott Levine................ -- -- -- -- -- --
Jane Tollinger.............. -- -- -- -- -- --
(1) Please see Note 1 to "Executive Compensation - Summary Compensation Table"
for information concerning the vesting schedule of this option.
Fiscal Year-End Option Values
The following table sets forth information with respect to the Named
Executive Officers concerning stock options held during the fiscal year ended
December 31, 2002 and exercisable and unexercisable options held as of December
31, 2002. No options were exercised during fiscal 2002 by any of the Named
Executive Officers. The value of unexercised in-the-money options at fiscal
year-end is based on $0.94 per share, the assumed fair market value of the
common stock at December 31, 2002, less the exercise price per share.
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-The-Money Options at Fiscal
Year-End (#) Year-End
------------------------------ -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------ ----------- ------------ ----------- --------------
Douglas W. McCormick....................... 1,883,124 1,161,875 -- --
Nancy Evans................................ 383,543 194,791 -- --
Steven A. Elkes............................ 214,714 196,537 -- --
Vanessa Benfield........................... 31,250 0 -- --
Scott Levine............................... 117,290 147,710 -- --
Jane Tollinger............................. 128,437 171,563 -- --
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Director Compensation
Directors do not currently receive any cash compensation from iVillage
for their service as a member of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. From time to time, certain directors of iVillage have
received grants of options to purchase shares of iVillage's common stock
pursuant to the 1995 Amended and Restated Employee Stock Option Plan, the 1999
Acquisition Stock Option Plan and the Amended and Restated 1999 Employee Stock
Option Plan. Under iVillage's 1999 Director Option Plan, non-employee directors
are eligible to receive non-discretionary, automatic stock option grants.
On May 23, 2002, Messrs. Healy, Kairouz, Leader, Reilly and Schulman
were each granted an option to purchase 1,666 shares of iVillage's common stock
at an exercise price of $2.03 per share pursuant to the 1999 Director Option
Plan.
On April 5, 2001, iVillage's Board of Directors adopted a policy
regarding the initial grant of stock options to purchase iVillage's common stock
for new non-employee directors of iVillage who do not beneficially own, and are
not affiliated with any entity that does beneficially own, greater than one
percent (1%) of the then outstanding shares of iVillage common stock. Pursuant
to such policy upon his or her initial election or appointment to the Board of
Directors of iVillage, such non-employee director shall be granted options to
purchase 30,000 shares of iVillage's common stock on the following terms: (i) an
exercise price equal to the fair market value of iVillage's common stock on the
date of grant, (ii) an option term of seven years from the date of grant, (iii)
vesting twenty-five percent (25%) per year over four years commencing on the
one-year anniversary of the date of grant, and (iv) such other terms as are
provided in the applicable stock option plan under which such options are
granted, with the exception of an acceleration of vesting upon a change in
control of iVillage.
Members of iVillage's Board of Directors who are designees of Hearst
have waived participation in all of iVillage's Director Compensation Plans.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2002, John T. Healy, Alfred
Sikes and Daniel H. Schulman served on the Compensation Committee. None of these
individuals either during or prior to their tenure on the Compensation Committee
was an officer or employee of iVillage or any of its subsidiaries and no
"compensation committee interlocks" existed during fiscal 2002. Please see "Item
13. Certain Relationships and Related Transactions" for a description of
iVillage's transactions with Hearst. Mr. Sikes is currently a consultant to, and
was formerly an officer of, The Hearst Corporation, an affiliate of Hearst.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth certain information regarding the
beneficial ownership of iVillage's common stock as of March 14, 2003 for:
o each person known by iVillage to beneficially own more than 5%
of the common stock;
o each director or director nominee of iVillage;
o each Named Executive Officer; and
o all directors, director nominees, and executive officers of
iVillage as a group.
Number of Shares
Name of Beneficial Owner Beneficially Held (1) Percent of Class (%) (1)
- ------------------------ --------------------- ------------------------
Hearst Communications, Inc. (2)............................. 18,184,653 31.7
959 Eighth Avenue
New York, NY 10019
Douglas W. McCormick (3).................................... 2,557,584 4.5
Lennert J. Leader (4)....................................... 2,173,776 3.9
Habib Kairouz (5)........................................... 1,896,415 3.4
Nancy Evans (6)............................................. 688,712 1.2
Steven A. Elkes (7)......................................... 264,020 *
Jane Tollinger (8).......................................... 247,500 *
Scott Levine (9)............................................ 144,251 *
Daniel H. Schulman (10)..................................... 75,834 *
Edward T. Reilly (11)....................................... 56,667 *
John T. Healy (12).......................................... 32,084 *
Vanessa Benfield (13)....................................... 31,250 *
Alfred Sikes (14)........................................... 11,161 *
Cathleen P. Black........................................... 11,160 *
Kenneth A. Bronfin.......................................... 161 *
All directors and executive officers as a group (15 8,366,589 14.3
persons) (15) ...........................................
- -----------------
*Less than one percent of the outstanding common stock.
(1) Unless otherwise indicated, the address for each listed director or
officer is c/o iVillage Inc., 500-512 Seventh Avenue, New York, New
York 10018. As used in this table, "beneficial ownership" means the
sole or shared power to vote or direct the voting or to dispose or
direct the disposition of any security. For purposes of this table, a
person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from March 14, 2003 through the exercise of
any option or warrant. Shares of common stock subject to options or
warrants that are currently exercisable or exercisable within 60 days
are deemed outstanding for computing the ownership percentage of the
person holding such options or warrants, but are not deemed
outstanding for computing the ownership percentage of any other
person. The amounts and percentages are based upon 55,330,877 shares
of common stock issued and outstanding as of March 14, 2003. This
number does not include (i) 1,203,446 shares of stock classified as
treasury stock, (ii) 188,877 shares of common stock reserved for
issuance to former stockholders of Women.com in exchange for
cancellation of their Women.com stock certificates, and (iii) 13,909
shares of common stock reserved for issuance to former stockholders of
Promotions.com in exchange for cancellation of their Promotions.com
stock certificates.
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(2) According to an Amended Schedule 13D filed on June 22, 2001, each of
Hearst Magazines Property, Inc. ("Hearst Magazines"), Communications
Data Services, Inc. ("CDS"), Hearst Holdings, Inc. ("Hearst
Holdings"), The Hearst Corporation and The Hearst Family Trust (the
"Trust") may be deemed to beneficially own the 18,184,653 shares
registered in the name of Hearst. Hearst Magazines has the power to
direct the voting and disposition of the 18,184, 653 shares as the
controlling stockholder of Hearst. CDS has the power to direct the
voting and disposition of the 18,184,653 shares as the sole
stockholder of Hearst Magazines. Hearst Holdings has the power to
direct the voting and disposition of the 18,184,653 shares as the sole
stockholder of CDS. The Trust and The Hearst Corporation have the
power to direct the voting and disposition of the 18,184,653 shares as
the direct or indirect sole stockholders of The Hearst Corporation and
Hearst Holdings, respectively. Accordingly, Hearst shares the power to
direct the voting and disposition of the 18,184,653 shares
beneficially owned by it, and Hearst Magazines, CDS, Hearst Holdings,
The Hearst Corporation and the Trust share the power to direct the
voting and disposition of the 18,184,653 shares beneficially owned by
Hearst. The 18,184,653 shares include 2,065,695 shares of common stock
issuable upon the exercise of a warrant; provided, however, that the
warrant is not exercisable unless at the time of exercise the average
closing price of iVillage common stock exceeds $3.75 for 15
consecutive trading days.
(3) Includes (a) options to purchase 2,069,584 shares of common stock
exercisable within 60 days from March 14, 2003 and (b) 3,000 shares of
common stock beneficially owned by Mr. McCormick's wife. Mr. McCormick
disclaims beneficial ownership of the shares of common stock held by
his wife.
(4) Consists of 2,161,075 shares of common stock beneficially owned by AOL
Time Warner Inc. Mr. Leader is the President of the Venture Group of
AOL Time Warner Investments. As such, Mr. Leader may be deemed to have
voting power or investment power over the securities beneficially
owned by AOL Time Warner Inc. Mr. Leader disclaims beneficial
ownership of the shares of common stock beneficially owned by AOL Time
Warner Inc. Includes (a) 200 shares owned by a family trust of which
Mr. Leader is the trustee, and (b) options to purchase 12,501 shares
of common stock exercisable within 60 days from March 14, 2003.
iVillage has been informed by AOL Time Warner that Mr. Leader is
obligated to transfer such options or the benefit of such options to
AOL or AOL Time Warner.
(5) Includes 1,672,319 shares beneficially owned by Rho Capital Partners.
Based on information provided by Rho Capital Partners, Rho Capital
Partners may be deemed to be the beneficial owner of 1,672,319 shares
pursuant to an investment advisory relationship by which Rho Capital
Partners exercises voting and investment control over the 1,672,319
shares registered in the name of a number of investment vehicles. Mr.
Kairouz is a stockholder of Rho Capital Partners. In such capacity,
Mr. Kairouz may be deemed to share voting and investment control of
the 1,672,319 shares beneficially owned by Rho Capital Partners. Mr.
Kairouz disclaims beneficial ownership of these shares other than an
insignificant number of shares in which Mr. Kairouz has a pecuniary
interest. Includes options to purchase 29,168 shares of common stock
exercisable within 60 days from March 14, 2003.
(6) Includes (a) options to purchase 389,480 shares of common stock
exercisable within 60 days from March 14, 2003 and (b) 81,166 shares
of common stock beneficially owned by the Evans/Wishman 1998
Irrevocable Trust. Ms. Evans disclaims beneficial ownership of the
shares of common stock held by the Evans/Wishman 1998 Irrevocable
Trust.
(7) Includes options to purchase 246,328 shares of common stock exercisable
within 60 days from March 14, 2003.
(8) Includes options to purchase 147,500 shares of common stock exercisable
within 60 days from March 14, 2003.
(9) Includes options to purchase 131,147 shares of common stock exercisable
within 60 days from March 14, 2003.
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(10) Consists of options to purchase 75,834 shares of common stock
exercisable within 60 days from March 14, 2003.
(11) Includes options to purchase 31,667 shares of common stock
exercisable within 60 days from March 14, 2003.
(12) Consists of options to purchase 32,084 shares of common stock
exercisable within 60 days from March 14, 2003.
(13) Consists of options to purchase 31,250 shares of common stock
exercisable within 60 days from March 14, 2003. Ms. Benfield resigned
as an executive officer of iVillage in December 2002.
(14) Includes (a) 161 shares of common stock beneficially owned by Mr.
Sikes' wife and (b) 1,000 shares of common stock held by the Whitestone
Foundation. The Whitestone Foundation is a family owned trust of which
Mr. Sikes is a trustee.
(15) Includes options to purchase 3,340,997 shares of common stock
exercisable within 60 days from March 14, 2003.
Equity Compensation Plan Information
The following table provides information as of December 31, 2002 with
respect to shares of iVillage common stock that may be issued under its existing
equity compensation plans, including iVillage's 1995 Amended and Restated
Employee Stock Option Plan ("1995 ESOP"), 1997 Amended and Restated Acquisition
Stock Option Plan ("1997 ASOP"), Amended and Restated 1999 Employee Stock Option
Plan ("1999 ESOP"), 1999 Acquisition Stock Option Plan ("1999 ASOP"), 1999
Director Option Plan, Amended and Restated 1999 Non-Qualified Stock Option Plan
("1999 NQSOP"), 1999 Employee Stock Purchase Plan ("1999 ESPP") and Amended 2001
Non-Qualified Stock Option Plan ("2001 NQSP"). For a further description of each
of these plans (excluding the 1999 ESPP which is described below), please see
Note 8 of iVillage's Notes to Consolidated Financial Statements.
A number of iVillage's equity compensation plans were approved by
iVillage's stockholders, but were subsequently amended without stockholder
approval. iVillage's 1995 ESOP and 1999 ESOP were so amended to increase the
number of securities underlying each plan by 289,049 and 1,812,545 shares,
respectively. In addition, iVillage repriced certain outstanding options under
each of the 1995 ESOP and 1997 ASOP in September 1997 without stockholder
approval. Consequently, iVillage has characterized all shares underlying the
1995 ESOP, 1997 ASOP and 1999 ESOP as "not approved by security holders" in the
table below, notwithstanding the fact that each of these plans initially were
approved by iVillage's stockholders.
The table does not include information with respect to equity
compensation plans of companies acquired by iVillage that were terminated as
part of, or subsequent to, such acquisitions.
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Number of securities
remaining available for
Weighted-average future issuance under
Number of securities to exercise price of equity compensation plans
be issued upon exercise outstanding (excluding securities
of outstanding options, options, warrants reflected
Plan Category warrants and rights and rights in column (a))
- ------------- ------------------- ------------------ ------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders (1)........... 330,999 $ 13.08 204,658 (2)
Equity compensation
plans not approved by
security holders (3)......... 10,360,028 $ 4.48 1,360,588 (4)
Total (5)................... 10,691,027 $ 4.75 1,565,246 (4)
(1) Consists of the 1999 ASOP, 1999 Director Option Plan and 1999 ESPP.
(2) Includes shares available for future issuance under the 1999 ESPP. As
of December 31, 2002, none of the 83,333 shares reserved for issuance
under this plan had been issued.
(3) Consists of the 1995 ESOP, 1997 ASOP, 1999 ESOP, 1999 NQSOP and the
2001 NQSOP and a warrant to purchase 5,282 shares of iVillage's common
stock held by Leasing Technologies International, Inc., that is
exercisable through June 9, 2007, at an exercise price of $14.35,
assumed by iVillage in connection with its acquisition of
Promotions.com.
(4) Includes 160,481 shares of common stock available for future issuance
under the 1999 ESOP that could be issued as restricted stock.
(5) The table does not include information for an equity compensation plan
assumed by iVillage in connection with its acquisition of Family Point
Inc. No additional options may be granted under this plan and no
options are currently outstanding or exercisable.
1999 Employee Stock Purchase Plan
iVillage adopted the 1999 ESPP in December 1998, and reserved 83,333
shares of iVillage's common stock for issuance thereunder. To date, however, no
shares have been issued under the 1999 ESPP. The 1999 ESPP, which is intended to
qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code"), is administered by iVillage's Board of Directors or by its Compensation
Committee. Under the 1999 ESPP, iVillage may withhold a specified percentage
(not to exceed 15%) of each salary payment to participating employees over
certain offering periods. Any employee who is employed for at least 20 hours per
week for at least five consecutive months in a calendar year, with or by
iVillage or by a majority-owned subsidiary of iVillage, is eligible to
participate in the 1999 ESPP. Unless the Board of Directors or the Compensation
Committee determines otherwise, each offering period runs for 24 months and is
divided into four consecutive purchase periods of approximately six months.
The price at which iVillage's common stock may be purchased under the
1999 ESPP is equal to 85% of the fair market value of iVillage's common stock on
the first day of the applicable offering period or the last day of the
applicable purchase period, whichever is lower. Participants may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment. The maximum
number of shares that a participant may purchase on the last day of any offering
period is determined by dividing the payroll deductions accumulated during the
purchase period by the purchase price. However, no person may purchase shares
under the 1999 ESPP to the extent such person would own 5% or more of the total
combined value or voting power of all classes of the capital stock of iVillage
or of any of its subsidiaries, or to the extent that such person's rights to
purchase stock under all employee stock purchase plans would accrue at a rate
that exceeds $25,000 worth of stock for any calendar year. The Board of
Directors may amend the 1999 ESPP at any time. The 1999 ESPP will terminate in
December 2009, unless terminated earlier in accordance with its provisions.
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Item 13. Certain Relationships and Related Transactions.
Pursuant to an agreement with AOL that expired in December 2001, AOL
was obligated to provide iVillage anchor tenant distribution on certain AOL
channels, guaranteed impressions and other services. In consideration of these
services, iVillage paid AOL approximately $0.3 million in 2002.
Pursuant to an agreement with AOL that expired in June 2002, AOL was
obligated to distribute through the AOL network a customized version of
iVillage's Astrology.com Web Site and content, and provide guaranteed
impressions and other services. iVillage paid AOL approximately $0.4 million in
2002 as consideration for these services.
Concurrent with the termination of certain agreements with AOL, in
December 2001 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 provides a link to iVillage's Web site. The agreement
terminated on September 30, 2002, and in consideration of these services,
iVillage paid AOL approximately $0.2 million. Lennert J. Leader, an iVillage
director, is President of the Venture Group of AOL Time Warner Investments.
iVillage is a party to a stockholder agreement with Hearst. For a
discussion of the terms of this agreement, please see "Item 10. Directors and
Executive Officers of the Registrant - Hearst Board Representation".
iVillage is a party to a magazine content license and hosting agreement
with Hearst. Under this agreement, iVillage is obligated to provide production
and hosting services for certain Web sites affiliated with selected Hearst
magazines, including Good Housekeeping, Redbook, Cosmopolitan, and Country
Living. These Web sites are part of the iVillage network. The magazine sites are
on URLs owned by Hearst.
Under the magazine content license and hosting agreement, iVillage
agreed to provide Hearst with Web site production and hosting services,
including the creation of original site content which will be owned by Hearst.
In consideration for these services, Hearst agreed to:
o pay iVillage approximately $10.2 million for production
services during the three-year term of the agreement
(approximately $4.5 million in year one, $2.8 million in year
two and $2.9 million in year three);
o place approximately $8.0 million of Hearst advertising during
the three-year term of the agreement (approximately $2.2
million in year one and $2.9 million in each of years two and
three) on iVillage's Web sites, which amount may be increased
in any year of the agreement if Hearst fails to pay iVillage
the required fees for production services as described above.
If such a shortfall in production fees occurs in any year of
the agreement, Hearst must place additional advertising in an
amount equal to 40% of the production fee shortfall; and
o grant to iVillage a right of first offer on any new
Internet-based development projects initiated by Hearst that
are appropriate for inclusion on the iVillage network of Web
sites.
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The agreement also provides for revenue sharing between iVillage and
Hearst with respect to advertising revenues obtained by iVillage from the Hearst
magazine Web sites and other iVillage 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 is reducible pro rata
if Hearst fails to expend at least $5 million in production fees in any year of
the agreement.
Additionally, iVillage is entitled to a commission derived from the
sale of Hearst magazine subscriptions made through iVillage's network of Web
sites. This commission is equal to thirty percent of gross revenues from such
sales.
The magazine content license and hosting agreement expires on June 18,
2004. However, the agreement may be terminated by either party immediately upon
written notice to the other party in the event of bankruptcy, insolvency or a
change of control of the other party.
Pursuant to the magazine content license and hosting agreement and
other agreements, iVillage recognized revenues of approximately $7.3 million
from Hearst, offset partially by royalty payments to Hearst of approximately
$0.8 million, in 2002. See Note 5 of iVillage's Notes to Consolidated Financial
Statements.
As of March 26, 2003, Hearst owned approximately 29.1% of the
outstanding iVillage common stock, and had three designees, Messrs. Bronfin and
Sikes and Ms. Black, on iVillage's Board of Directors.
iVillage has entered into indemnification agreements with its executive
officers and directors containing provisions which may require iVillage, among
other things, to indemnify its officers and directors against any and all
expenses (including attorney's fees and all other costs, expenses and
obligations incurred in connection with investigating, defending, being a
witness in or participating in or preparing to defend, being a witness in or
participating in any action, suit, proceeding, alternative dispute resolution
mechanism, hearing, inquiry or investigation), judgments, fines, penalties, and
amounts paid in settlement of any pending, threatened or completed action, suit,
claim, hearing, proceeding or alternative dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other including all taxes
imposed on such payment that may arise by reason of their status or service as
officers or directors, other than liabilities arising from willful misconduct of
a culpable nature, and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
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Item 14. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
iVillage's management maintains disclosure controls and procedures,
which it has designed to ensure that material information related to iVillage,
including its consolidated subsidiaries, is made known to its disclosure
committee on a regular basis. In response to recent legislation and proposed
regulations, iVillage's management reviewed iVillage's internal control
structure and its disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c)). Although iVillage's management believes its
existing disclosure controls and procedures are adequate to enable iVillage to
comply with its disclosure obligations, as a result of such review, iVillage's
management has implemented minor changes, primarily to formalize and document
the procedures already in place. iVillage's management also established a
disclosure committee which consists of certain members of iVillage's management.
After the formation of iVillage's disclosure committee and within 90
days prior to the filing of this Annual Report on Form 10-K for the period
ending December 31, 2002, the disclosure committee carried out an evaluation,
under the supervision and with the participation of iVillage's management,
including its Chief Executive Officer, Douglas W. McCormick, and Chief Financial
Officer, Scott Levine, of the effectiveness of the design and operation of
iVillage's disclosure controls and procedures. Based upon that evaluation,
Messrs. McCormick and Levine concluded that iVillage's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by iVillage in the reports that it files or submits under the Exchange Act is
(i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and (ii) accumulated and communicated to
iVillage's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
iVillage's management, including its Chief Executive Officer and Chief
Financial Officer, does not expect that its disclosure controls or internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management, despite the existence of the controls. The
design of any system of controls is also based, in part, upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. As time goes by, controls may become inadequate because of
changes in conditions, or the degree of compliance with such policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Changes in Internal Controls.
There were no significant changes in iVillage's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation. As there were no significant deficiencies or
material weaknesses discovered, no corrective actions were taken.
-78-
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of this Report:
1. The following consolidated financial statements are included in Item 8 of
this Report:
Page Number in
this Report
----------------------------
Report of Independent Accountants................................................ F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001..................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002,
2001 and 2000.................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2002, 2001 and 2000.............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002,
2001 and 2000.................................................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
2. Financial Statement Schedule:
Page Number in
this Report
----------------------------
Schedule I - Valuation and Qualifying Accounts................................... S-1
All other schedules to the consolidated financial statements for which
provision is made in the accounting regulations of the SEC are not required
under the related instructions or are inapplicable and therefore have been
omitted.
-79-
3. Exhibits:
Exhibit
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).
4.1 Form of Registrant's common stock certificate (incorporated by
reference from Exhibit 4.1 to Registration Statement File No.
333-68749).
10.1 Form of Indemnification Agreement between the Registrant and its
directors and officers (incorporated by reference from Exhibit
10.1 to Registration Statement File No. 333-68749).
10.2 1995 Amended and Restated Employee Stock Option Plan of the
Registrant (incorporated by reference from Exhibit 10.2 to
Registration Statement File No. 333-68749).
10.3 1997 Amended and Restated Acquisition Stock Option Plan of the
Registrant (incorporated by reference from Exhibit 10.3 to
Registration Statement File No. 333-68749).
10.4 Amended and Restated 1999 Employee Stock Option Plan of the
Registrant (incorporated by reference from Exhibit 99.1 to
Registration Statement File No. 333-31988).
10.5 1999 Director Option Plan of the Registrant (incorporated by
reference from Exhibit 10.5 to Registration Statement File No.
333-85437).
10.6 1999 Employee Stock Purchase Plan of the Registrant
(incorporated by reference from Exhibit 10.6 to Registration
Statement File No. 333-85437).
10.7 1999 Acquisition Stock Option Plan of the Registrant
(incorporated by reference from Exhibit 10.7 to Registration
Statement File No. 333-85437).
10.8 Amended and Restated 1999 Non-Qualified Stock Option Plan, as
amended by Amendment Number 2 (incorporated by reference from
Exhibit 10.8 to Registration Statement File No. 333-84532).
-80-
Exhibit
Number Description
- ------ -----------
10.9 Amended 2001 Non-Qualified Stock Option Plan of the Registrant
(incorporated by reference from Exhibit 10.1 to the Registrant's
Form 10-Q Quarterly Report for the period ended June 30, 2002,
File No. 000-25469).
10.10 Form of Non-Competition, Non-Disclosure and Assignment of
Inventions Agreement dated September 9, 1995, and Amendment
dated May 6, 1996, between the Registrant and Nancy Evans
(incorporated by reference from Exhibit 10.18 to Registration
Statement File No. 333-68749).
10.11 Lease, dated March 14, 2000, between 500-512 Seventh Avenue
Limited Partnership and the Registrant (incorporated by
reference from Exhibit 10.1 to the Registrant's Form 10-Q
Quarterly Report for the period ended March 31, 2000, File No.
000-25469).
10.12 First Amendment to Lease, dated as of June 7, 2000, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.3 to the Registrant's
Form 10-Q Quarterly Report for the period ended September 30,
2000, File No. 000-25469).
10.13 Second Amendment to Lease, dated January 10, 2001, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.28 to Registration
Statement File No. 333-56150).
10.14 Third Amendment to Lease, dated October 17, 2001, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.2 to the Registrant's
Form 10-Q Quarterly Report for the period ended September 30,
2001, File No. 000-25469).
10.15 Fourth Amendment to Lease, dated December 3, 2001, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.22 to Registration
Statement File No. 333-84532).
10.16 Letter Agreement, dated December 23, 2002, between the
Registrant and 500-512 Seventh Avenue Limited Partnership.
10.17 License Agreement, dated as of September 8, 2000, among Lamaze
International, Inc., Lamaze Publishing Company and the
Registrant (incorporated by reference from Exhibit 10.2 to the
Registrant's Form 10-Q Quarterly Report for the period ended
September 30, 2000, File No. 000-25469).
10.18 Amendment to License Agreement, dated as of January 1, 2003,
among Lamaze International, Inc., Lamaze Publishing Company and
the Registrant.
10.19 Employment Agreement, dated November 29, 2000, between Douglas
W. McCormick and the Registrant (incorporated by reference from
Exhibit 10.31 to Registration Statement File No. 333-56150).
-81-
Exhibit
Number Description
- ------ -----------
10.20 Amended and Restated Securities Purchase Agreement, dated as of
February 22, 2001, between the Registrant and Hearst
Communications, Inc. (incorporated by reference from Exhibit
10.32 to Registration Statement File No. 333-56150).
10.21 Amended and Restated Stockholder Agreement, dated as of June 20,
2001, between the Registrant and Hearst Communications, Inc.
(incorporated by reference from Exhibit 10.26 to Registration
Statement File No. 333-84532).
10.22 Amended and Restated Magazine Content License and Hosting
Agreement, dated January 29, 2001, between Hearst
Communications, Inc. and Women.com Networks, Inc. (incorporated
by reference from Exhibit 10.27 to Registration Statement File
No. 333-84532).
10.23 Form of Amendment Number Two to Amended and Restated Magazine
Content License and Hosting Agreement (incorporated by reference
from Exhibit 10.35 to Registration Statement File No.
333-56150).
10.24 Amendment Number Three to Amended and Restated Magazine Content
License and Hosting Agreement, dated as of April 5, 2002,
between the Registrant and Hearst Communications, Inc.
(incorporated by reference from Exhibit 10.34 to Registration
Statement File No. 333-84532).
10.25 Promissory Note, dated June 5, 1998, in the amount of $500,000
between Candice Carpenter and the Registrant (incorporated by
reference from Exhibit 10.23 to Registration Statement File No.
333-68749).
10.26 Amendment No. 1 to Promissory Note, dated as of April 1, 2001,
between Candice Carpenter and the Registrant (incorporated by
reference from Exhibit 10.22.1 to Registrant's Form 10-K Annual
Report for the period ended December 31, 2000, File No.
000-25469).
10.27 Amendment No. 2 to Promissory Note, dated as of December 19,
2002, between the Registrant and Candice Carpenter.
10.28 Form of Severance Agreement between the Registrant and certain
executive officers of the Registrant.
21 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350.
99.2 Certification of 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 November 13, 2002 and December 20,
2002, each reporting under Item 5.
-82-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: March 31, 2003 By: /s/ Douglas W. McCormick
--------------------------
Douglas W. McCormick
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Douglas W. McCormick Chairman and Chief Executive Officer March 31, 2003
- ------------------------------------- (Principal Executive Officer)
Douglas W. McCormick
/s/ Scott Levine Chief Financial Officer March 31, 2003
- ------------------------------------- (Principal Financial and
Scott Levine Accounting Officer)
/s/ Kenneth A. Bronfin Director March 31, 2003
- -------------------------------------
Kenneth A. Bronfin
/s/ Cathleen P. Black Director March 31, 2003
- -------------------------------------
Cathleen P. Black
/s/ Nancy Evans Director March 31, 2003
- -------------------------------------
Nancy Evans
/s/ John T. Healy Director March 31, 2003
- -------------------------------------
John T. Healy
/s/ Habib Kairouz Director March 31, 2003
- -------------------------------------
Habib Kairouz
83
Signature Capacity Date
--------- -------- ----
Director March __, 2003
- -------------------------------------
Lennert J. Leader
/s/ Edward T. Reilly Director March 31, 2003
- -------------------------------------
Edward T. Reilly
/s/ Daniel H. Schulman Director March 31, 2003
- -------------------------------------
Daniel H. Schulman
/s/ Alfred Sikes Director March 31, 2003
- -------------------------------------
Alfred Sikes
84
Certification
I, Douglas W. McCormick, certify that:
1. I have reviewed this annual report on Form 10-K of iVillage Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Douglas W. McCormick
--------------------------
Douglas W. McCormick
Chief Executive Officer
85
Certification
I, Scott Levine, certify that:
1. I have reviewed this annual report on Form 10-K of iVillage Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Scott Levine
-------------------------
Scott Levine
Chief Financial Officer
86
iVILLAGE INC. AND SUBSIDIARIES
Index of Consolidated Financial Statements and
Financial Statement Schedule
The following consolidated financial statements of iVillage Inc. are included in
Item 8:
Report of Independent Accountants........................................... F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001................ F-3
Consolidated Statements of Operations for the Years
Ended December 31, 2002, 2001 and 2000...................................... F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000...................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001 and 2000...................................... F-6
Notes to Consolidated Financial Statements............................. F-7-F-36
Schedule I - Valuation and Qualifying Accounts.............................. S-1
All other schedules to the consolidated financial statements for which
provision is made in the accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable
and therefore have been omitted.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of iVillage Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15 on page 79 present fairly, in all material respects,
the financial position of iVillage Inc. and its subsidiaries at December 31,
2002 and December 31, 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15 on page 79 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 10, 2003
Except for Note 12 as to which the date is March 17, 2003
F-2
iVILLAGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------------
2002 2001
--------- ---------
Assets
Current assets:
Cash and cash equivalents................................ $ 21,386 $ 29,831
Accounts receivable, less allowance for doubtful accounts
of $1,310 and $2,286, respectively..................... 5,336 6,722
Other current assets..................................... 5,960 13,668
--------- ---------
Total current assets............................... 32,682 50,221
Restricted cash............................................. 8,474 8,474
Fixed assets, net........................................... 17,157 21,465
Goodwill, net............................................... 24,617 31,928
Intangible assets, net...................................... 17,367 19,975
Other assets................................................ 289 324
--------- ---------
Total assets....................................... $ 100,586 $ 132,387
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.................... $ 10,319 $ 16,070
Deferred revenue......................................... 3,514 2,734
Deferred rent............................................ 348 348
Net current liabilities of discontinued operations....... 98 103
--------- ---------
Total current liabilities.......................... 14,279 19,255
Deferred rent, net of current portion....................... 3,926 4,273
--------- ---------
Total liabilities.................................. 18,205 23,528
Minority interest........................................... 181 102
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $.01, 5,000,000 shares authorized,
no shares issued and outstanding at December 31, 2002 and
2001, respectively...................................... -- --
Common stock - par value $.01, 200,000,000 shares authorized;
56,531,785 and 53,812,285 shares issued at December 31, 2002
and 2001, respectively; 55,328,339 and 52,608,839 shares
outstanding at December 31, 2002 and 2001, respectively.. 565 538
Additional paid-in capital.................................. 549,203 544,006
Accumulated deficit......................................... (466,717) (432,781)
Treasury stock at cost (1,203,446 shares) .................. (502) (502)
Stockholders' notes receivable.............................. (262) (1,982)
Unearned compensation and deferred advertising.............. (87) (522)
--------- ---------
Total stockholders' equity......................... 82,200 108,757
--------- ---------
Total liabilities and stockholders' equity......... $ 100,586 $ 132,387
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
iVILLAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31,
------------------------------------------------
2002 2001 2000
---------- --------- ---------
Revenue.................................................... $ 59,423 $ 60,041 $ 76,352
Operating expenses:
Editorial, product development and technology......... 27,973 33,500 35,327
Sales and marketing................................... 21,731 30,211 46,711
Sales and marketing - NBC/Hearst expenses ...... 4,422 5,967 7,387
Termination of NBC advertising contract .............. 4,084 -- --
General and administrative............................ 13,474 17,702 22,634
Depreciation and amortization......................... 11,900 23,529 37,681
Impairment of goodwill................................ 971 -- 98,056
---------- --------- ---------
Total operating expenses.......................... 84,555 110,909 247,796
---------- --------- ---------
Loss from operations....................................... (25,132) (50,868) (171,444)
Interest income, net....................................... 485 2,285 5,261
Other (expense) income, net................................ (34) (43) 595
Write-down of investments.................................. -- (104) (13,496)
Loss from unconsolidated joint venture..................... -- (127) (422)
Gain on sale of assets..................................... -- 385 --
---------- --------- ---------
Net loss before minority interest and cumulative effect of
change in accounting principle. ...................... (24,681) (48,472) (179,506)
Minority interest.......................................... (74) 7 --
---------- --------- ---------
Net loss before cumulative effect of change in accounting
principle............................................. (24,755) (48,465) (179,506)
Cumulative effect of change in accounting principle........ (9,181) -- --
---------- --------- ---------
Net loss from continuing operations........................ (33,936) (48,465) (179,506)
Discontinued operations.................................... -- -- (11,922)
---------- --------- ---------
Net loss................................................... $ (33,936) $ (48,465) $(191,428)
========== ========== =========
Per share data:
Net loss before cumulative effect of change in accounting
principle per share................................... $ (0.45) $ (1.13) $ (6.05)
Cumulative effect of change in accounting principle per share (0.17) -- --
---------- --------- ---------
Net loss from continuing operations per share.............. (0.62) (1.13) (6.05)
Discontinued operations per share.......................... -- -- (0.40)
---------- --------- ---------
Basic and diluted net loss per share....................... $ (0.62) $ (1.13) $ (6.45)
========== ========== =========
Weighted average shares of common stock outstanding used in
computing basic and diluted net loss per share........ 54,841 42,807 29,683
========== ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
iVILLAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Unearned
Compensation
and
Common Stock Additional Treasury Stockholders' Deferred
---------------- Paid-In Stock Notes Advertising Accumulated
Shares Amount Capital at Cost Receivable Cost Deficit Total
---------- ------ --------- ---------- --------- ------------ ------------ ------------
Balance at January 1, 2000... 29,591,778 $ 296 $ 494,899 $ -- $ (12,188) $ (6,269) $ (192,888) $ 283,850
Additional costs in
connection with secondary
public offering............ (451) (451)
Issuance of common stock in
connection with the
exercise of stock options.. 114,992 1 897 898
Extension of stock option
life....................... 413 413
Notes receivable due from
stockholders in connection
with exercise of options... (166) (166)
Amortization of unearned
compensation and deferred
advertising costs.......... 3,044 3,044
Repayment of stockholders'
notes receivable........... 5,206 5,206
Net loss..................... (191,428) (191,428)
---------- ----- --------- ------ ------ ----- ---------- --------
Balance at December 31, 2000. 29,706,770 297 495,758 -- (7,148) (3,225) (384,316) 101,366
Issuance of common stock in
connection with business
acquisition, net........... 14,776,469 148 28,339 28,487
Issuance of common stock in
connection with rights
offering, net.............. 9,324,000 93 19,907 20,000
Issuance of common stock in
connection with the
exercise of stock options.. 5,046 2 2
Repurchase of common stock... (1,203,446) (502) (502)
Amortization of unearned
compensation and deferred
advertising costs.......... 2,703 2,703
Repayment of stockholder's
note receivable............ 5,166 5,166
Net loss..................... (48,465) (48,465)
---------- ----- --------- ------ ------ ----- ---------- --------
Balance at December 31, 2001. 52,608,839 538 544,006 (502) (1,982) (522) (432,781) 108,757
Issuance of common stock in
connection with business
acquisition, net........... 2,131,971 21 4,119 4,140
Issuance of common stock in
connection with the
exercise of stock options.. 587,529 6 742 748
Issuance of stock options to
consultant................. 51 (51) --
Modification of stock option
terms...................... 285 285
Amortization of unearned
compensation and deferred
advertising costs.......... 486 486
Repayment of stockholder
notes receivable........... 1,291 1,291
Reserve of stockholder note
receivable................. 429 429
Net loss..................... (33,936) (33,936)
---------- ----- --------- ------ ------ ----- ---------- --------
Balance at December 31, 2002. 55,328,339 $ 565 $ 549,203 $ (502) $ (262) $ (87) $ (466,717) $ 82,200
========== ===== ========= ====== ====== ===== ========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
iVILLAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-----------------------------------------------
2002 2001 2000
----------- ------------ -----------
Cash flows from operating activities:
Net loss................................................ $ (33,936) $ (48,465) $ (191,428)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 11,900 23,529 37,681
Expense recognized in connection with
issuance/modification of terms of warrants and stock
options............................................... 771 2,703 3,457
Deferred rent........................................... (347) (357) (170)
Non-cash print advertising expense....................... 2,720 1,765 --
Impairment of goodwill (including change in accounting
principle).............................................. 10,152 -- 98,056
Reserve for stockholder notes receivable................ 429 -- --
Minority interest........................................ 74 (7) --
Bad debt expense........................................ 552 -- 277
Loss from unconsolidated joint venture................... -- 127 422
Write-down of investments................................ -- 104 13,496
Gain on sale of assets.................................. -- (385) --
Loss from discontinued operations........................ -- -- 11,922
Changes in operating assets and liabilities:
Accounts receivable................................... 2,025 3,921 (1,521)
Restricted cash and other assets...................... 5,761 3,314 (9,633)
Accounts payable and accrued expenses................. (9,437) (26,021) 4,396
Deferred revenue...................................... 639 (5,788) (6,345)
------ ------ -------
Net cash used in operating activities of continuing
operations............................................ (8,697) (45,560) (39,390)
------ ------ -------
Cash flows from investing activities:
Purchase of fixed assets................................ (881) (5,254) (16,745)
Cash paid of $11,099 less cash acquired of $10,198 for
acquisition of Promotions.com, Inc.................... (901) -- --
Cash paid of $3,210 less cash acquired of $14,198 for
purchase of Women.com Networks, Inc................... -- 10,988 --
Cash paid of $500 less cash acquired of $232 for purchase
of Public Affairs Group, Inc.......................... -- (268) --
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) --
Investment in marketable and non-marketable securities.. -- -- (1,000)
------ ------ -------
Net cash (used in) provided by investing activities of
continuing operations .............................. (1,782) 4,024 (17,745)
------ ------ -------
Cash flows from financing activities:
Principal payments on stockholders' notes receivable.... 1,291 5,166 5,206
Proceeds from exercise of stock options................. 748 2 730
Proceeds (payments) from issuance of common stock, net.. -- 18,910 (451)
Principal payments on long-term debt and capital leases. -- (449) --
Repurchase of common stock.............................. -- (502) --
------ ------ -------
Net cash provided by financing activities of continuing
operations.......................................... 2,039 23,127 5,485
------ ------ -------
Cash used in discontinued operations....................... (5) (723) (5,397)
Net decrease in cash for the period........................ (8,445) (19,132) (57,047)
Cash and cash equivalents, beginning of period............. 29,831 48,963 106,010
------ ------ -------
Cash and cash equivalents, end of period................... $ 21,386 $ 29,831 $ 48,963
====== ====== =======
Cash paid during the period for interest................... $ 52 $ 32 $ 78
====== ====== =======
Cash paid during the period for taxes...................... $ 163 $ 572 $ 295
====== ====== =======
Supplemental disclosure of non-cash investing and financing activities:
During 2001, iVillage acquired Women.com Networks, Inc. primarily through the
issuance of stock (see Note 6).
During 2002, iVillage acquired Promotions.com, Inc. partially through the
issuance of stock (see Note 6).
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Organization and Basis of Presentation
iVillage is a media company that operates the iVillage.com Web site,
Women.com Networks, Inc. (operator of the Women.com Web site) ("Women.com"),
iVillage Parenting Network, Inc.("IVPN"), Public Affairs Group, Inc.("PAG"),
Promotions.com, Inc. ("Promotions.com"), iVillage Consulting (formerly known as
iVillage Solutions), and Knowledgeweb, Inc. (operator of the Astrology.com Web
site) ("Astrology.com"). iVillage.com and Women.com are leading women's online
destinations providing practical solutions and everyday support for women 18 and
over. IVPN is a holding company for Lamaze Publishing Company ("Lamaze
Publishing"), a publisher of advertiser supported educational materials for
expectant and new parents, and iVillage Integrated Properties, Inc. ("IVIP"),
the operator of The Newborn Channel, a satellite television network broadcast in
over 1,050 hospitals nationwide, and the publisher of Baby Steps magazine. PAG
is comprised of three divisions: Business Women's Network, Diversity Best
Practices and Best Practices in Corporate Communications, each offering
extensive databases of pertinent information to subscribing companies and
members. Promotions.com provides promotions and direct marketing programs that
are integrated with customers' offline marketing initiatives.
iVillage has sustained net losses and negative cash flows from
operations since its inception and expects to continue to incur losses in the
near future. 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, through the launch
of new subscription or other revenue-generating initiatives or other sources of
financing to fund operations. 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 securities, however management believes that it
could raise funds through a private placement of its securities. iVillage can
make no assurances that it will achieve profitable operations or that iVillage
will be able to obtain adequate financing from other sources. Due primarily to
iVillage's lack of profitability, it is unlikely that iVillage 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 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
iVillage's online service brands, the non-acceptance or rejection of iVillage's
services by Web consumers, vendors, sponsors and/or advertisers and the
inability of iVillage to maintain and increase the levels of traffic on its
online services, as well as other risks and uncertainties. In the event iVillage
does not successfully implement its business plan, certain assets may not be
recoverable.
F-7
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures
Principles of Consolidation
The consolidated financial statements include the accounts of iVillage
and its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
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. Sponsorship and advertising revenues were approximately 78%, 81% and
92% of total revenues for the years ended December 31, 2002, 2001 and 2000,
respectively.
For contracts with multiple elements (e.g., deliverable and
undeliverable products, advertising and production revenue), the Company
allocates revenue to each element based on evidence of its fair value. Evidence
of fair value is the price of a deliverable when it is regularly sold on a
stand-alone basis. The Company recognizes revenue allocated to each element when
the criteria for revenue set forth above are met.
Included in sponsorship and advertising revenues are revenues from
advertising placements in IVPN'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. Revenues from IVPN accounted for approximately 27%, 25% and 20% of
sponsorship and advertising revenues for the years ended December 31, 2002, 2001
and 2000, respectively.
F-8
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
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 Webstakes.com 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. With a cost-per-click pricing model,
Webstakes.com generally guarantees a minimum number of times that
Webstakes.com's visitors are delivered to its customer's Web site. Webstakes.com
recognizes revenue related to its cost-per-click pricing model when a visitor
has been delivered to the customer's Web site and the collection of the
corresponding receivable is reasonably assured. Revenue is recognized
differently in a cost-per-action pricing model, which requires Webstakes.com to
not only deliver the aforementioned minimums, 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 Webstakes.com to earn revenue. Webstakes.com recognizes
revenue related to the cost-per-action pricing model when the specific action
has been performed on its customer's Web site and the collection of the
corresponding receivable is reasonably assured.
Promotions.com revenues are derived principally from contracts in which
Promotions.com typically provides custom turnkey services for the creation,
administration and implementation of a promotion on a customer's Web site.
iVillage's revenue recognition policy related to Promotions.com services is to
recognize revenues as deliverables are met and/or ratably over the period during
which iVillage 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 $3.6 million, $2.8 million and $3.6 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
iVillage Consulting 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 its negotiated hourly rates and/or fixed fees stipulated in contracts.
F-9
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
PAG is a comprehensive source of information and program linkage that
serves as an international platform for diversity and women offering an
extensive database of women's organizations, best practices and guidance in the
areas of workplace diversity, women and corporate communications 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 and the hosting of an annual two-day event
focusing on women and diversity. iVillage recognizes revenue from these
subscriptions ratably over the term of the subscription agreement or when the
events are held.
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, the
collection of the receivable is reasonably assured and no further obligations
remain.
iVillage has received revenues from new initiatives involving
subscription-based properties, the sale of iVillage-branded products and
services, the sale of third-party products and services and the sale of
research. During the third quarter of 2002, iVillage began selling
iVillageSolutions-branded consumer products through the iVillage Market located
on iVillage.com. Through an agreement with a third party, iVillage receives a
revenue share on each sale of such products and bears no fulfillment risks.
During the fourth quarter of 2002, iVillage launched iVillageAccess, iVillage's
ISP offering. iVillageAccess' Internet access is provided through an agreement
with a third party and iVillage receives a revenue share on each subscriber. In
the first quarter of 2003, iVillage released two iVillageSolutions-branded
books, through an agreement with a publisher, and expects to release others
throughout 2003. iVillage receives a royalty on each book purchased. iVillage
recognizes revenues from these new initiatives when products are shipped and/or
provided to the customer, the collection of the receivable is reasonably assured
and no further obligation remains. To date, iVillage has not generated
significant revenue through these offerings.
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.
In 2002, 2001 and 2000, respectively, revenues from iVillage's five
largest customers accounted for approximately 38%, 37% and 23% of total
revenues. In 2002, three advertisers, Procter and Gamble Company ("Procter and
Gamble"), Hearst Communications, Inc. (including its affiliates, "Hearst"), a
related party, and Unilever PLC (including its affiliates, "Unilever") accounted
for approximately 11%, 11% and 10% of total revenues. In 2001, one advertiser,
Unilever, accounted for approximately 12% of total revenues, and in 2000, no one
advertiser accounted for more than 10% of total revenues. At December 31, 2002,
Procter and Gamble accounted for approximately 26% of the net accounts
receivable, and at December 31, 2001, Hearst and Unilever accounted for
approximately 14% and 10% of the net accounts receivable, respectively.
F-10
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts. iVillage
maintains its cash and cash equivalents in highly rated financial institutions,
and at times these balances exceed insurable amounts.
Restricted Cash
Restricted cash includes money held for a letter of credit
collateralizing a real estate lease for iVillage's New York office space.
Fair Value of Financial Instruments
The carrying amounts of iVillage's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities.
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. (See Note 4-
Goodwill and Intangible Assets)
Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and
reporting for the disposal of long-lived assets. The objectives of SFAS 144 are
to address significant issues relating to the implementation of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and to develop a single accounting model, based on
the framework established in SFAS 121, for the long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired. SFAS 144 retains
the fundamental provisions of SFAS 121 regarding the recognition and measurement
of the impairment of long-lived assets to be held and used. The Company reviews
for impairment of long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In general, the Company will recognize an
impairment when the sum of undiscounted future cash flows is less than the
carrying amount of such assets. The measurement for such impairment loss is
based on the fair value of the asset. (See Note 4 - Goodwill and Intangible
Assets)
F-11
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
Fixed Assets
Depreciation of equipment, furniture and fixtures, and computer
software is provided for by the straight-line method over their estimated useful
lives ranging from three to five years. Amortization of leasehold improvements
is provided for over the lesser of the term of the related lease or the
estimated useful life of the improvement. The cost of additions, and
expenditures which extend the useful lives of existing assets, are capitalized,
and repairs and maintenance costs are charged to operations as incurred.
iVillage continually evaluates whether current events or circumstances warrant
adjustments to the carrying value or estimated useful lives of fixed assets in
accordance with the provisions of SFAS 144. (See Note 3 - Fixed Assets)
Investments
iVillage enters into certain equity investments for the promotion of
business and strategic purposes. Management determines the appropriate
classification of its investments in marketable securities at the time of
purchase and evaluates such investments at each balance sheet date.
iVillage's marketable investments are classified as available-for-sale
as of the balance sheet date and are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity until realized. Non-marketable investments are recorded at the lower of
cost or fair value. For all investment securities, unrealized losses that are
determined to be other than temporary are recognized in calculating net income
or loss.
Included in the caption "Write-down of investments" in the consolidated
statements of operations are approximately $0.1 million and $8.4 million of
losses recognized for the write-down of iVillage's marketable and non-marketable
investments whose decline in value was determined to be other than temporary for
2001 and 2000, respectively. (See Note 2-Significant Accounting Policies and
Procedures-PlanetRx.com)
PlanetRx.com
In September 1999, iVillage paid approximately $7.5 million to
PlanetRx.com for 371,103 shares of series D preferred stock of PlanetRx.com,
which was converted into the same number of shares of PlanetRx.com common stock
upon the closing of PlanetRx.com's initial public offering in October 1999.
During 2000, the investment in PlanetRx.com was written down approximately $7.4
million, and in March 2001 the remaining $0.1 million investment was written off
due to a decline in value deemed to be other than temporary.
Advertising Costs
Advertising costs are expensed as incurred and are included in the
sales and marketing lines in the accompanying consolidated statements of
operations. Advertising costs, including barter expense, included in sales and
marketing were approximately $12.4 million, $11.0 million and $19.1 million for
the years ended December 31, 2002, 2001 and 2000, respectively. At December 31,
2002 and 2001 approximately $0.9 million and $8.8 million of advertising costs
were prepaid, respectively.
F-12
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
Barter expense was approximately $3.4 million, $2.8 million and $3.6
million for the years ended December 31, 2002, 2001, and 2000, respectively.
Web Site Development Costs
During 2000, iVillage adopted the consensus in the Financial Accounting
Standards Board ("FASB") Emerging Issues Task Force ("EITF") Issue No. 00-2,
Accounting for Web Site Development Costs, which requires that certain costs to
develop Web sites be capitalized or expensed, depending on the nature of the
costs. Amortization of Web site development costs is provided for by the
straight-line method over the estimated useful life of two years. During 2002
and 2001, no development expenses were capitalized, however capitalized
development costs were acquired with the acquisition of an additional 30.1% of
Cooperative Beauty Ventures, L.L.C. Amortization expense of Web site development
costs from continuing operations was approximately $1.2 million, $0.9 million
and no amounts for the years ended December 31, 2002, 2001 and 2000,
respectively. (See Note 6-Business Acquisitions and Dispositions - Cooperative
Beauty Ventures, L.L.C.)
Income Taxes
iVillage recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax bases of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Reclassifications
Certain reclassifications have been made in the prior period
consolidated financial statements to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Significant estimates and assumptions made by iVillage include those
related to the useful lives of fixed assets and intangible assets, the
recoverability of fixed assets, goodwill, intangible assets and deferred tax
assets, the allowance for doubtful accounts and the accrual of certain operating
expenses.
F-13
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
Accrued Expenses
In the ordinary course of business, iVillage 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. For
the year ended December 31, 2002, iVillage reversed approximately $1.5 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.
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 and common stock equivalent
shares outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive.
Included in the December 31, 2002 calculation of weighted average
number of shares of common stock outstanding are 205,523 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
iVillage as of the balance sheet date.
Stock options and warrants in the amount of 12,791,027, 14,015,664 and
7,365,760 shares for the years ended December 31, 2002, 2001 and 2000,
respectively, were not included in the computation of diluted earnings per share
as they are anti-dilutive as a result of net losses during the periods
presented.
Stock-Based Compensation
iVillage applies Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock option issuances, and has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). No compensation cost related to grants of stock
options was reflected in Net loss, as all options granted under the plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. Compensation cost related to the modification of stock option
terms is measured at the quoted market price of iVillage's common stock at the
measurement date and is amortized to expense over the vesting period. Had
compensation cost for iVillage's stock options been determined based on the fair
value of the stock options at the grant date for awards in 2002, 2001 and 2000
consistent with the provisions of SFAS 123, iVillage's net loss would have been
adjusted to the pro forma amounts indicated below:
F-14
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
December 31,
------------------------------------------------
2002 2001 2000
------------ ------------ -----------
($ in thousands, except per share data)
Net loss - as reported...................... $(33,936) $(48,465) $(191,428)
========= ========= ==========
Net loss - pro forma........................ $(42,901) $(57,413) $(199,140)
========= ========= ==========
Net loss per share - as reported .......... $ (0.62) $ (1.13) $ (6.45)
========= ========= =========
Net loss per share - pro
forma....................................... $ (0.78) $ (1.34) $ (6.71)
========= ========= =========
Because options vest over several years and additional option grants
are expected to be made in future years, the above pro forma results are not
representative of the pro forma results for future years.
The weighted average assumptions used for grants made in 2002, 2001 and
2000 are as follows:
Options granted during the
year ended December 31,
--------------------------------------
2002 2001 2000
----------- ----------- ----------
Risk-free interest rate............. 3.71% 4.38% 6.04%
Expected option life................ 4 years 4 years 4 years
Dividend yield...................... 0.00% 0.00% 0.00%
Volatility.......................... 108.00% 120.00% 110.00%
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. iVillage has had no other comprehensive income items to
report.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS 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. Management believes the adoption of
SFAS 145 will not have a material impact on iVillage's financial position and
results of operations.
F-15
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2-Significant Accounting Policies and Procedures -- (Continued)
In June 2002, the FASB issued SFAS 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 SFAS 146's 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. Management believes the
adoption of SFAS 146 will not have a material impact on iVillage's financial
position and results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. The
interpretation requires an entity to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. iVillage does
not expect this interpretation to have a material impact on its consolidated
financial position or results of operations.
In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF No.
00-21"). The guidance in EITF No. 00-21 is effective for revenue arrangements
entered into for fiscal years beginning after June 15, 2003. EITF No. 00-21
addresses certain aspects of the accounting by a company for arrangements under
which it will perform multiple revenue-generating activities. Specifically, EITF
No. 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earnings processes for revenue recognition purposes. EITF No. 00-21
also addresses how arrangement consideration should be measured and allocated to
the separate units of accounting in the arrangement. The Company is currently
reviewing the impact that EITF No. 00-21 will have on future results of
operations, but upon initial review, the Company does not believe EITF No. 00-21
will have significant impact on our accounting for multiple element
arrangements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No.
123" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on the
reported results. SFAS 148 is effective for fiscal years and interim periods
ending after December 15, 2002. iVillage continues to account for stock-based
employee compensation under the intrinsic value method of APB 25.
F-16
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 3-Fixed Assets
Fixed assets consist of the following:
December 31,
-----------------------
2002 2001
--------- ---------
(in thousands)
Computer equipment.................................. $ 16,971 $ 15,559
Capitalized software................................ 3,936 3,682
Hospital video equipment............................ 3,146 3,074
Leasehold improvements.............................. 15,157 14,820
Furniture and fixtures.............................. 3,560 3,558
Capitalized development costs....................... 2,640 2,640
--------- ---------
45,410 43,333
Less, accumulated depreciation and amortization..... (28,253) (21,868)
--------- ---------
$ 17,157 $ 21,465
========= =========
Depreciation and amortization of fixed assets from continuing
operations was approximately $6.4 million, $7.1 million and $5.5 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
Note 4-Goodwill and Intangible Assets
Effective January 1, 2002, iVillage adopted SFAS No. 141, "Business
Combinations" ("SFAS 141") and SFAS 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 Reporting unit - 2, as defined below, did not exceed the
reporting unit's carry amount and an impairment was recorded of approximately
$9.2 million in the first quarter of 2002, and is included in the caption
"Cumulative effect of change in accounting principle" in the consolidated
statements of operations. Upon completion of the annual impairment test, the
fair value of Reporting unit - 4, as defined below, did not exceed the reporting
unit's carry amount and an impairment was recorded of approximately $1.0 million
in the fourth quarter of 2002.
As a result of the adoption of SFAS 142, iVillage 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 two to ten years. iVillage recharacterized acquired
workforce of approximately $1.0 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
December 31, 2002 and December 31, 2001 (in thousands):
Adjustment to
December 31, Impairment purchase December 31,
2001 Acquisition losses accounting 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 -- 2,995 (971) 327 2,351
-------- -------- --------- --------- --------
$ 31,928 $ 2,995 $ (10,152) $ (154) $ 24,617
======== ======== ========= ========= ========
F-17
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4-Goodwill and Intangible Assets -- (Continued)
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 6 - Business
Acquisitions and Dispositions).
The following table sets forth the components of the intangible assets
subject to amortization as of December 31, 2002 and December 31, 2001 (in
thousands):
December 31, 2002 December 31, 2001
---------------------------------------- ---------------------------------
Gross Gross
Range of carrying Accumulated carrying Accumulated
useful life amount amortization Net amount amortization Net
----------- ------ ------------ ------------ ---------- ------------- -----
Advertiser and member
lists and customer
contracts 2-10 years $ 21,150 $(7,803) $ 13,347 $ 19,610 $ (4,288) $ 15,322
Trademarks and domain
names 3 years 3,424 (2,009) 1,415 2,947 (1,042) 1,905
Licensing agreement 10 years 2,900 (975) 1,925 2,900 (685) 2,215
Technology 3 years 890 (210) 680 -- -- --
Non-competition
agreements 1 year 810 (810) -- 810 (405) 405
Content 3 years 600 (600) -- 600 (472) 128
-------- -------- -------- -------- -------- --------
$ 29,774 $(12,407) $ 17,367 $ 26,867 $ (6,892) $ 19,975
======== ========= ======== ======== ========= ========
Amortization expense from continuing operations for the years ended
December 31, 2002, 2001 and 2000 was approximately $5.5 million, $16.6 million
and $32.2 million, respectively.
Estimated amortization expense for the years ending December 31, are as
follows (in thousands):
2003............................ $ 5,056
2004............................ 3,743
2005............................ 1,987
2006............................ 1,760
2007............................ 1,760
--------
$ 14,306
========
During 2000, iVillage recorded a charge of approximately $98.1 million
for the impairment of goodwill relating to certain 1999 acquisitions. The
approximately $98.1 million charge consists of the following: OnLine
Psychological Services, Inc. and Code Stone Technologies, Inc. - $17.7 million,
Lamaze Publishing - $62.0 million, and Family Point Inc. - $18.4 million. This
non-cash charge represents the difference between the historical book value of
the goodwill and the discounted estimated future cash flows expected from the
related operations. iVillage estimated future cash flows based upon historical
results, sales backlog and sales targets and detailed expense projections. In
addition, when developing these future projections iVillage considered business
trends, prospects and market and economic conditions. Yearly amortization of the
impaired goodwill was approximately $26.6 million.
F-18
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4-Goodwill and Intangible Assets -- (Continued)
The following table provides a reconciliation of net loss from
continuing operations for exclusion of goodwill amortization:
Year ended December 31,
---------------------------------------
2002 2001 2000
--------- --------- ----------
Net loss from continuing operations-as reported...... $ (33,936) $ (48,465) $ (179,506)
Addback: Goodwill amortization....................... -- 12,510 26,451
--------- --------- ----------
Net loss from continuing operations - adjusted....... $ (33,936) $ (35,955) $ (153,055)
========= ========= ==========
Per share data:
Basic and diluted net loss from continuing
operations per share................................. $ (0.62) $ (1.13) $ (6.05)
Addback: Goodwill amortization per share............. -- 0.29 0.89
--------- --------- ----------
Adjusted basic and diluted net loss from
continuing operations per share...................... $ (0.62) $ (0.84) $ (5.16)
========= ========= ==========
Note 5-Related-Party Transactions
America Online, Inc. (a division of AOL Time Warner Inc. ("AOL"))
On December 31, 1998, iVillage entered into an interactive services
agreement with AOL (the "1998 AOL Agreement"), which superseded a prior
agreement. The 1998 AOL Agreement provided for iVillage to receive anchor tenant
distribution on certain AOL channels, guaranteed impressions, and other
services. In consideration for such services iVillage was obligated to (i) pay
AOL minimum quarterly payments of approximately $0.9 million until March 31,
1999, approximately $0.6 million from April 1, 1999 through December 31, 1999
and approximately $0.8 million from January 1, 2000 through December 31, 2000,
and (ii) provide up to $2.0 million of advertising to AOL, as defined in the
1998 AOL Agreement. The 1998 AOL Agreement expired on December 31, 2000 and was
extended until December 31, 2001 for a monthly fee of approximately $0.3
million. At December 31, 2002 and 2001, no amounts and approximately $0.3
million were owed to AOL in connection with the 1998 AOL Agreement,
respectively.
On February 20, 2000, iVillage entered into an interactive services
agreement with AOL (the "Astrology AOL Agreement"), under which AOL distributed
through the AOL network a customized version of iVillage's Astrology.com Web
site and content, and provided guaranteed impressions, and other services. In
consideration for such services iVillage was obligated to pay AOL monthly
installments of $22,500 until June 6, 2000, an upfront payment of $0.7 million
in June 2000, and six quarterly installments of approximately $0.4 million
commencing on September 6, 2000. The Astrology AOL Agreement expired on June 5,
2002. At December 31, 2002 and 2001, no amounts were owed to AOL in connection
with the Astrology AOL Agreement, respectively, however, iVillage recorded a
prepaid expense of approximately $0.2 million at December 31, 2001, as a result
of advance payments.
F-19
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5-Related-Party Transactions -- (Continued)
Women.com, a subsidiary of iVillage acquired in June 2001, was party to
an interactive services agreement with AOL (the "Women.com AOL Agreement"). The
Women.com AOL Agreement was set to expire in March 2002 unless mutually
extended; provided, however, that AOL had the option for a two-year period to
use one or more of the Women.com trademarks or trade names as keywords or
text-based links from the AOL network to the Women.com Web site. In
consideration for AOL carrying certain content of Women.com, Women.com received
guaranteed impressions and other services. Women.com was obligated to pay AOL
approximately $5.7 million in carriage fees during the term of the Women.com AOL
Agreement. In addition, under the Women.com AOL Agreement, AOL had the exclusive
right to sell or license advertisements through Women.com's Astronet online area
residing on the AOL network and was entitled to a revenue share on such
advertising.
In addition, Women.com had entered into two amendments to the Women.com
AOL Agreement pursuant to which Women.com agreed to pay AOL an additional
carriage fee of approximately $3.5 million in consideration of AOL providing
Women.com with guaranteed placements for Astronet content in the horoscopes area
of the AOL network and the right to be the exclusive provider of horoscopes
content on ICQ.com. As a result of these amendments the Women.com AOL Agreement
was scheduled to expire in June 2002.
On December 14, 2001, Women.com terminated the Women.com AOL Agreement,
which had a remaining financial commitment of approximately $2.1 million. In
consideration of the early termination of the Women.com AOL Agreement, Women.com
incurred fees of $0.7 million.
In December 2001, iVillage entered into an advertising agreement with
AOL pursuant to which AOL was obligated to deliver a guaranteed amount 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 provided a link to iVillage's Web site. The agreement
terminated 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 consolidated
statements of operations is approximately $1.3 million, $4.6 million and $4.1
million of expense from iVillage's AOL agreements for the years ended December
31, 2002, 2001 and 2000, respectively.
National Broadcasting Company, Inc.
During 1998, as amended in March 1999, iVillage entered into a stock
purchase agreement with the National Broadcasting Company, Inc. ("NBC") pursuant
to which iVillage issued shares of Preferred Stock and warrants in exchange for
a promissory note of approximately $15.5 million. The note, which bore interest
at the rate of 5% per annum, was payable in twelve installments of approximately
$1.4 million, payable quarterly, beginning April 1, 1999.
F-20
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5-Related-Party Transactions -- (Continued)
The fair value of the warrants of approximately $8.4 million was
recorded in stockholders' equity as deferred advertising costs and was amortized
over the three-year advertising agreement. The fair value of the warrants was
determined using the Black-Scholes option pricing model.
In addition, among other things, iVillage agreed to purchase, for cash,
$8.5 million per year of advertising and promotional spots during 2000 and 2001,
respectively. In February 2001, iVillage further amended its November 1998
agreement with NBC to provide for an extension of time during which iVillage
must purchase its advertising or promotional spots on the NBC network. The
revised terms required iVillage to purchase approximately $11.6 million of
advertising or promotional spots between January 30, 2001 and December 31, 2002,
with $3.0 million of such spots being telecast during the year 2001 and the
remaining approximately $8.6 million during the year 2002. During 2001, iVillage
purchased approximately $1.6 million of advertising or promotional spots and the
parties orally agreed to defer the remaining advertising commitment for 2001
until a mutually agreed upon period in the future. During 2000, iVillage
purchased approximately $4.8 million of advertising or promotional spots.
On February 22, 2002, iVillage amended its 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 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 consolidated statement of operations for the year
ended December 31, 2002.
During 2002 and 2001, no amounts and approximately $7.0 million were
paid to NBC, respectively. As of December 31, 2002 and 2001, included in the
caption "Other current assets" in the consolidated balance sheets are no amounts
and approximately $5.4 million for prepaid advertising or promotion spots,
respectively.
Hearst Communications, Inc.
On February 5, 2001, iVillage entered into a securities purchase
agreement with Hearst and amended and restated such agreement on February 22,
2001. Pursuant to the terms of the amended and restated securities purchase
agreement, Hearst agreed to purchase from iVillage 9,324,000 shares of
iVillage's common stock and a warrant exercisable for 2,100,000 shares of
iVillage's common stock at $0.01 per share less the amounts of common stock and
warrants purchased by the other former Women.com stockholders pursuant to a
rights offering. In addition, under the amended and restated securities purchase
agreement, Hearst agreed to purchase, or was required to purchase, additional
shares of iVillage's common stock in the event of any shortfall in the amount of
Women.com's cash and working capital on March 31, 2001. Finally, Hearst was
required to purchase from iVillage additional shares of iVillage's common stock
in the event that in excess of 2% of the Women.com stockholders exercised
appraisal rights.
F-21
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5-Related-Party Transactions -- (Continued)
Accordingly, on June 18, 2001, Hearst purchased 9,171,343 shares of
iVillage's common stock and a warrant to purchase 2,065,695 shares of iVillage's
common stock for an aggregate purchase price of approximately $19.7 million.
Hearst did not purchase any shares of iVillage's common stock pursuant to the
shortfall provisions and the appraisal rights provisions of the amended and
restated securities purchase agreement described above.
As a condition to Hearst's obligation to purchase shares of iVillage's
common stock and warrant pursuant to the amended and restated securities
purchase agreement, iVillage agreed to conduct a rights offering under which
each former Women.com stockholder as of April 16, 2001, other than Hearst, would
have the opportunity to purchase their pro rata portion of the 9,324,000 shares
of iVillage's common stock and warrant exercisable for 2,100,000 shares of
iVillage's common stock offered to Hearst. On June 15, 2001, the rights offering
was completed and, shortly thereafter, iVillage issued to the former Women.com
stockholders, other than Hearst, 152,657 shares of iVillage's common stock and
warrants to purchase an additional 34,305 shares of iVillage's common stock for
an aggregate purchase price of approximately $0.3 million.
The warrants for common stock are not exercisable unless at the time of
exercise the average closing price of iVillage's common stock exceeds $3.75 for
15 consecutive trading days.
On June 18, 2001, and as amended and restated on June 20, 2001,
iVillage entered into a stockholder agreement with Hearst pursuant to which
iVillage is required to appoint a maximum of three representatives of Hearst to
separate classes of iVillage's Board of Directors. The number of representatives
from Hearst is determined by the amount of shares of iVillage's common stock
held by Hearst or its affiliates. Currently, Hearst has three designees on
iVillage's Board of Directors.
The amended and restated stockholder agreement terminates on June 20,
2006 unless earlier terminated by iVillage and Hearst. Upon any early
termination, any Hearst designees serving on iVillage's Board of Directors must
immediately resign.
As part of the merger with Women.com, iVillage assumed an amended and
restated magazine content license and hosting agreement with Hearst. Under this
agreement, and as further amended by iVillage and Hearst on June 18, 2001 and in
April 2002, iVillage will provide production and hosting services for certain
Web sites affiliated with selected Hearst magazines. In consideration for these
services, Hearst agreed to:
o pay iVillage approximately $10.2 million for production
services during the three-year term of the agreement
(approximately $4.5 million in year one, $2.8 million in year
two and $2.9 million in year three);
o place approximately $8.0 million of Hearst advertising during
the three-year term of the agreement (approximately $2.2
million in year one and $2.9 million in each of years two and
three) on the iVillage network, which amount may be increased
in any year of the agreement if Hearst fails to pay iVillage
the required fees for production services as described above.
If such a shortfall in production fees occurs in any year of
the agreement, Hearst must place additional advertising in an
amount equal to 40% of the production fee shortfall; and
F-22
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5-Related-Party Transactions -- (Continued)
o grant to iVillage a right of first offer on any new
Internet-based development projects initiated by Hearst that
are appropriate for inclusion on the iVillage network.
The agreement also provides for revenue sharing between iVillage and
Hearst with respect to advertising revenues obtained by iVillage from the Hearst
magazine Web sites and other Web sites of iVillage 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 failed to expend at least $5 million in production fees
in any year of the agreement.
Additionally, iVillage is entitled to a commission derived from the
sale of Hearst magazine subscriptions made through iVillage's network of Web
sites. This commission is equal to thirty percent of gross revenues.
The magazine content license and hosting agreement, as amended, expires
on June 18, 2004. However, the agreement may be terminated by either party
immediately upon written notice to the other party in the event of a bankruptcy,
insolvency or a change of control of the other party.
In 2002, iVillage 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. Additionally, iVillage, from time to
time, has provided other production services outside the scope of the amended
magazine content license and hosting agreement at negotiated rates.
As part of the merger with Women.com, iVillage acquired approximately
$4.9 million of prepaid print advertising in certain Hearst magazines. These ads
are currently scheduled to appear through March 2003. iVillage recognized
approximately $2.7 million and $1.8 million of expense for the years ended
December 31, 2002 and 2001, respectively, from this advertising. As of December
31, 2002 and 2001, included in the caption "Other current assets" in the
consolidated balance sheets is approximately $0.4 million and $3.1 million of
prepaid Hearst print advertising, respectively.
Revenues which are recorded net of the royalty payment, from Hearst,
for the years ended December 31, 2002 and 2001 were approximately $6.4 million
and $4.3 million, respectively. As of December 31, 2002, iVillage owed a net
amount of approximately $7,000 to this stockholder. As of December 31, 2001,
iVillage was owed a net amount of approximately $0.7 million from this
stockholder.
Stockholder Note Receivable
In June 1998, iVillage accepted a non-recourse promissory note in the
principal amount of $0.5 million (the "Note") from its then chief executive
officer ("Former CEO"). The Note is collateralized by 20,000 shares of
iVillage's common stock which is held by iVillage. Interest was payable annually
on December 31 of each year, commencing December 31, 1998, at the rate of 5.58%.
During 2000, the maturity date of the outstanding principal balance on the Note
was extended to December 31, 2002, from the initial maturity date of June 5,
2001.
F-23
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5-Related-Party Transactions -- (Continued)
In December 2002, the maturity date of the outstanding principal
balance of the Note was extended to December 31, 2004, from the previous amended
maturity date of December 31, 2002. Additionally, interest is payable monthly at
the per annum rate of 5.58%. In December 2002, iVillage provided for a reserve
against the Note of approximately $0.4 million to reflect its approximate
realizable value. The note is recorded as a stockholder note receivable and
classified as a reduction of equity. Payments received in 2002 and 2001 for
interest totaled $27,900 and $83,700, respectively.
In October 2000, as amended in April 2001, iVillage entered into an
agreement with the Former CEO, to provide that she would resign as a member of
iVillage's Board of Directors but would remain an iVillage employee available
for special projects at the request of iVillage's current Chief Executive
Officer and board of directors through December 31, 2002. In consideration, the
Former CEO received a one-time lump sum cash payment of $1,327,900 (less an
interest payment of $27,900 on the Note to iVillage) in lieu of the salary,
bonus and other payments set forth in her October 2000 agreement with iVillage
and received a monthly salary of $3,758 in 2001 and $3,190 in 2002 (each were
less set-offs for interest payments on the Note). iVillage's obligation to pay
the Former CEO's salary terminated on December 31, 2002. The amendment also
provided that the Former CEO surrender 333,334 iVillage stock options with an
exercise price of $24.00 and 75,000 iVillage stock options with an exercise
price of $17.17 to iVillage.
Note 6-Business Acquisitions and Dispositions
iBaby, Inc.
In June 2000, iVillage decided to discontinue the operations of iBaby,
Inc. ("iBaby"). iVillage recorded a loss on disposal of approximately $7.1
million, which includes a loss on sale of assets of approximately $3.6 million
and an estimated loss from operations during the phase-out period of
approximately $3.4 million. Results of these operations have been classified as
discontinued operations.
In July 2000, iVillage sold certain assets of iBaby to Babygear.com,
Inc. Under the Asset Purchase Agreement dated July 6, 2000, iVillage received a
convertible promissory note of approximately $9.7 million. Pursuant to the terms
of the Asset Purchase Agreement, in October 2000 the note was converted into
890,198 shares of Babygear.com Series C Convertible Preferred Stock. Subsequent
to the conversion of the note, Babygear.com filed for bankruptcy.
In calculating the loss on sale of assets, iVillage valued the note at
$5.1 million as of June 30, 2000, due to uncertainties surrounding the
recoverability of the convertible note. At September 30, 2000, the convertible
note was fully reserved due to uncertainties surrounding Babygear.com's ability
to sustain their operations, and is included in the caption "Write-down of
investments" in the consolidated statements of operations.
F-24
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 6-Business Acquisitions and Dispositions -- (Continued)
The loss on sale of assets was calculated as follows (in thousands):
Estimated value of convertible promissory note....... $ 5,100
Inventory............................................ (1,707)
Fixed assets, net.................................... (780)
Goodwill, net........................................ (6,231)
-------
Loss on sale of iBaby assets......................... $(3,618)
=======
Net revenue and loss from discontinued operations for 2002, 2001 and 2000 were
as follows (in thousands):
2002 2001 2000
-------- ------- ---------
Net revenue........................... $ -- $ -- $ 4,891
======== ======= =========
Loss from discontinued operations.... $ -- $ -- $ (11,922)
======== ======= =========
Net current liabilities of discontinued operations as of December 31, 2002 and
2001 were as follows (in thousands):
2002 2001
---- ----
Other current assets................................ $ 6 $ 6
Accounts payable and accrued expenses............... (104) (109)
------- -------
Net current liabilities of discontinued operations.. $ (98) $ (103)
======= =======
Cooperative Beauty Ventures, L.L.C.
On February 15, 2000, iVillage and Unilever announced the formation of
an independently managed company to provide women within a highly focused
community with an array of interactive, customized online services, beauty and
personal care products and personalized product recommendations. Unilever and
iVillage planned to provide cash, intellectual property, marketing and other
resources. Unilever provided capital as well as sponsorship and promotional
initiatives. iVillage provided its Beauty channel, capital, intellectual
property, services and promotion. iVillage's funding obligations were not to
exceed in the aggregate $1.5 million in calendar year 2000 and $2.0 million in
calendar year 2001, however any unused funding for calendar year 2000 or 2001
would be carried over and used in calendar year 2001 or 2002, respectively.
In March 2001, iVillage purchased 30.1% of Cooperative Beauty Ventures,
L.L.C. d/b/a Substance.com (the "venture") from Unilever for $1.5 million
increasing its ownership to 80.1%. The difference between the purchase price and
the fair value of the 30.1% acquired of approximately $1.5 million has been
recorded as goodwill. The agreement provides that iVillage will fund the ongoing
business and operations of the venture, but not to exceed $7.0 million, and
terminates Unilever's funding obligation. During 2002, iVillage was not required
to fund the operations of the venture, and as of December 31, 2002, iVillage has
contributed approximately $1.9 million to the venture.
As a result of the purchase transaction described above, iVillage
gained operational control of the venture and the venture has been consolidated
within iVillage's financial statements beginning in March 2001. Prior to
consolidation, the venture was accounted for under the equity method of
accounting and iVillage recognized losses from the joint venture of
approximately $0.1 million and $0.4 million for 2001 and 2000, respectively.
F-25
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 6-Business Acquisitions and Dispositions -- (Continued)
Currently, Unilever can exercise a "put" option to require iVillage to
purchase Unilever's remaining ownership interest in the venture for fair market
value. Additionally, iVillage can exercise a "call" option to require Unilever
to sell its remaining interest in the venture to iVillage for fair market value;
provided 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 ownership of the venture.
Furthermore, Unilever can exercise a "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 ownership of the venture. iVillage anticipates exercising its "call"
option during 2003.
Women.com Networks, Inc.
On June 18, 2001, iVillage acquired all of the outstanding stock of
Women.com, the operator of a leading women's online destination. The aggregate
purchase price paid was approximately $33.1 million consisting of approximately
$3.2 million in cash (inclusive of closing costs) and 15,519,838 shares of
iVillage's common stock. The difference between the purchase price and the fair
value of the acquired net assets of Women.com of approximately $20.7 million has
been recorded as goodwill.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows (in
thousands):
Working capital......................................... 3,136
Fixed assets............................................ 1,456
Customer contracts and related customer relationships... 4,910
Trademarks and domain names............................. 2,000
Non-competition agreements.............................. 810
Goodwill................................................ 20,773
----------
$ 33,085
==========
Public Affairs Group, Inc.
On July 16, 2001, iVillage acquired control of PAG, a comprehensive
source of information and program linkage that serves as an international
platform for diversity and women offering an extensive database of women's
organizations, best practices and guidance in the areas of workplace diversity,
women and corporate communications to subscribing companies and members. The
purchase price was approximately $0.6 million. The difference between the
purchase price and the fair value of the acquired net assets of PAG of
approximately $1.8 million has been allocated to goodwill.
F-26
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 6-Business Acquisitions and Dispositions -- (Continued)
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows (in
thousands):
Working capital...................................... $ (1,167)
Goodwill............................................. 1,803
----------
$ 636
==========
Promotions.com, Inc.
On April 18, 2002, iVillage acquired 82.3% of the outstanding shares of
common stock of Promotions.com, a promotion and direct marketing company. On May
24, 2002, iVillage acquired the remaining outstanding shares of Promotions.com
common stock through a second-step merger. The aggregate purchase price paid was
approximately $15.2 million, consisting of approximately $11.1 million of cash
(inclusive of closing costs) and 1,587,191 shares of iVillage's common stock.
This $11.1 million of cash included approximately $9.8 million of cash, which
represented the net cash on the balance sheet of Promotions.com. The difference
between the purchase price and the fair value of the acquired net assets of
Promotions.com of approximately $3.0 million has been recorded as goodwill. Upon
completion of the annual impairment test required by SFAS 142, the fair value of
Promotions.com did not exceed its carry amount and an impairment was recorded of
approximately $1.0 million in the fourth quarter of 2002.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows (in
thousands):
Working capital...................................... $ 8,103
Fixed assets......................................... 1,196
Customer contracts and member list................... 1,540
Technology........................................... 890
Trademarks and domain names.......................... 477
Goodwill............................................. 2,995
------------
$ 15,201
============
The accompanying unaudited pro forma summary presents consolidated
results of operations for iVillage as if the acquisitions of Women.com and
Promotions.com had been consummated on January 1, 2000. The acquisition of PAG
and the additional 30.1% interest in Cooperative Beauty Ventures, L.L.C. would
not have had a significant impact on the pro forma information. 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
iVillage.
2002 2001 2000
--------- --------- ----------
(in thousands, except per share data)
Revenues...................... $ 61,014 $ 81,453 $ 146,633
Loss from operations.......... $ (27,477) $ (89,423) $ (331,721)
Net loss...................... $ (36,150) $ (86,807) $ (351,568)
Net loss per share............ $ (0.65) $ (1.55) $ (6.27)
F-27
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 7 - Detail of Certain Balance Sheet Accounts
2002 2001
-------- -------
(in thousands)
Other current assets:
Prepaid publication costs......................... $ 1,716 $ 1,280
Prepaid expenses, other........................... 1,700 2,006
Reimbursement from landlord....................... 1,262 847
Prepaid advertising............................... 874 8,748
Due from affiliate................................ 106 185
Other............................................ 302 602
------- -------
$ 5,960 $13,668
======= =======
Accounts payable and accrued expenses:
Accounts payable.................................. $ 2,969 $ 2,504
Sales commissions, payroll and related benefits... 1,385 5,125
Corporate and real estate taxes................... 906 459
Professional fees................................. 718 629
Accrued rent and other facility costs............. 634 1,856
Advertising expenses.............................. 316 1,001
Third party service providers..................... 165 1,091
Other............................................. 3,226 3,405
------- -------
$10,319 $16,070
======== =======
Note 8-Stock Option Plans
1995 Amended And Restated Employee Stock Option Plan
In 1995, iVillage's Board of Directors and stockholders adopted
iVillage's 1995 Amended and Restated Employee Stock Option Plan (as amended, the
"ESOP"). The ESOP provides for the granting, at the discretion of the Stock
Option Committee of the Board of Directors (the "SOC"), of: (i) options that are
intended to qualify as incentive stock options, within the meaning of Section
422 of the Internal Revenue Code of 1986 (the "Code"), as amended, to employees
and (ii) options not intended to so qualify to employees, officers, consultants
and directors. The total number of shares of common stock for which options may
be granted under the ESOP is 1,802,549.
The exercise price of all stock options granted under the ESOP is
determined by the SOC at the time of grant. The maximum term of each option
granted under the ESOP is 10 years from the date of grant. Options shall become
exercisable at such times and in such installments as the SOC shall provide in
the terms of each individual option.
The exercise price of all of the options under the ESOP ranges from
$0.56-$40.38, and is determined based upon the fair market value of iVillage's
common stock on the date of grant. Generally, the options vest 25% after one
year, 0.0625% quarterly thereafter, unless the employee has over one year of
continuing service with iVillage, in which case, the options will vest 0.0625%
every quarter, and expire 5-10 years from the date of grant.
F-28
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 8-Stock Option Plans -- (Continued)
As of December 31, 2002, there were 178,194 shares available for future
grants under the ESOP.
1997 Amended and Restated Acquisition Stock Option Plan
In May 1997, iVillage's Board of Directors and stockholders adopted
iVillage's 1997 Amended and Restated Acquisition Stock Option Plan (as amended,
the "ASOP"). The ASOP provides for the granting, at the discretion of the SOC
of: (i) options that are intended to qualify as incentive stock options, within
the meaning of Section 422 of the Code, as amended, to directors who are
employees of iVillage or any of its subsidiaries, or as part of one or more of
such acquisitions and (ii) options not intended to so qualify to employees,
officers, consultants and directors of iVillage, or as part of one or more of
such acquisitions. The total number of shares of common stock for which options
may be granted under the ASOP is 360,726.
The exercise price of all stock options granted under the ASOP is
determined by the SOC at the time of grant. The maximum term of each option
granted under the ASOP is 10 years from the date of grant. Options shall become
exercisable at such times and in such installments as the SOC shall provide in
the terms of each individual option.
Generally, the options vest 25% after one year, 0.0625% quarterly
thereafter, unless the employee has over one year of continuing service with
iVillage, in which case, the options will vest 0.0625% every quarter, and expire
7-10 years from the date of grant. The exercise price of all of the options
under the ASOP ranges from $1.76 to $6.00, and is determined based upon the fair
market value of iVillage's common stock on the date of grant.
As of December 31, 2002, no shares were available for future grants
under the ASOP.
1999 Employee Stock Option Plan
In 1999, iVillage's Board of Directors and stockholders adopted
iVillage's Amended and Restated 1999 Employee Stock Option Plan (as amended, the
"1999 ESOP"). The 1999 ESOP provides for the granting, at the discretion of the
SOC, of: (i) options that are intended to qualify as incentive stock options,
within the meaning of Section 422 of the Code, as amended, to employees and (ii)
options not intended to so qualify to employees, officers, consultants, and
directors. The total number of shares of common stock for which options may be
granted under the 1999 ESOP is 2,840,163.
The exercise price of all stock options granted under the 1999 ESOP is
determined by the SOC at the time of grant. The maximum term of each option
granted under the 1999 ESOP is 10 years from the date of grant. Options shall
become exercisable at such times and in such installments as the SOC shall
provide in the terms of each individual option.
The exercise price of all of the options under the 1999 ESOP ranges
from $1.24-$113.75, and is determined based upon the fair market value of
iVillage's common stock on the date of grant. Generally, the options vest 25%
after one year, 0.0625% quarterly thereafter, unless the employee has over one
year of continuing service with iVillage, in which case, the options will vest
0.0625% every quarter, and expire 5-10 years from the date of grant.
F-29
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 8-Stock Option Plans -- (Continued)
As of December 31, 2002, there were 160,481 shares available for future
grants under the 1999 ESOP.
1999 Acquisition Stock Option Plan
In 1999, iVillage's Board of Directors and stockholders adopted
iVillage's 1999 Acquisition Stock Option Plan (as amended, the "1999 ASOP"). The
1999 ASOP provides for the granting, at the discretion of the SOC, of: (i)
options that are intended to qualify as incentive stock options, within the
meaning of Section 422 of the Code, as amended, to employees of iVillage or any
of its subsidiaries, or as part of one or more of such acquisitions and (ii)
options not intended to so qualify to employees, officers, consultants, and
directors of iVillage, or as part of one or more of such acquisitions. The total
number of shares of common stock for which options may be granted under the 1999
ASOP is 333,333.
The exercise price of all stock options granted under the 1999 ASOP is
determined by the SOC at the time of grant. The maximum term of each option
granted under the 1999 ASOP is 10 years from the date of grant. Options shall
become exercisable at such times and in such installments as the SOC shall
provide in the terms of each individual option.
Generally, the options vest 25% after one year, 0.0625% quarterly
thereafter, unless the employee has over one year of continuing service with
iVillage, in which case, the options will vest 0.0625% every quarter, and expire
7-10 years from the date of grant. The exercise price of all of the options
under the 1999 ASOP ranges from $1.24-$24.00, and is determined based upon the
fair market value of iVillage's common stock on the date of grant.
As of December 31, 2002, there were 14,648 shares available for future
grants under the 1999 ASOP.
1999 Non-Qualified Stock Option Plan
In 1999, iVillage's Board of Directors adopted iVillage's 1999
Non-Qualified Stock Option Plan (as amended, the "NQSOP"). The NQSOP provides
for the granting, at the discretion of the SOC, of options to employees. The
total number of shares of common stock for which options may be granted under
the NQSOP is 5,682,000.
The exercise price of all stock options granted under the NQSOP is
determined by the SOC at the time of grant. The maximum term of each option
granted under the NQSOP is 10 years from the date of grant. Options shall become
exercisable at such times and in such installments as the SOC shall provide in
the terms of each individual option.
The exercise price of all of the options under the NQSOP ranges from
$0.50-$25.38, and is determined based upon the fair market value of iVillage's
common stock on the date of grant. The options vest 25% after one year, and then
0.0625% quarterly thereafter, unless the employee has over one year of
continuing service with iVillage, in which case, the options will vest 0.0625%
every quarter, and expire 10 years from the date of grant.
F-30
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 8-Stock Option Plans -- (Continued)
As of December 31, 2002, there were 348,820 shares available for future
grants under the NQSOP.
Director Option Plan
In 1999, iVillage's Board of Directors and stockholders adopted
iVillage's 1999 Director Option Plan ("DOP"). The DOP provides for the automatic
grant of 1,666 non-qualified stock options to non-employee members of iVillage's
Board of Directors on the date of each annual stockholders' meeting. The total
number of shares of common stock for which options may be granted under the DOP
is 133,333.
The exercise price of all stock options granted under the DOP is the
fair market value at the time of grant. The maximum term of each option under
the DOP is 10 years from the date of grant.
The exercise price of all of the options under the DOP ranges from
$1.07 to $25.38, and is determined based upon the fair market value of
iVillage's common stock on the date of grant. Generally, the options vest 25% on
each anniversary of the grant date.
As of December 31, 2002, 106,677 shares were available for future
grants under the DOP.
2001 Non-Qualified Stock Option Plan
In 2001, iVillage's Board of Directors adopted iVillage's 2001
Non-Qualified Stock Option Plan (as amended, the "2001 NQSOP"). The 2001 NQSOP
provides for the granting, at the discretion of the SOC, of options to
employees. The total number of shares of common stock for which options may be
granted under the 2001 NQSOP is 2,000,000.
The exercise price of all stock options granted under the 2001 NQSOP is
determined by the SOC at the time of grant. The maximum term of each option
granted under the 2001 NQSOP is 10 years from the date of grant. Options shall
become exercisable at such times and in such installments as the SOC shall
provide in the terms of each individual option.
The exercise price of all of the options under the 2001 NQSOP ranges
from $0.70 to $1.39, and is determined based upon the fair market value of
iVillage's common stock on the date of grant. The options vest 25% after one
year, and then 0.0625% quarterly thereafter, unless the employee has over one
year of continuing service with iVillage, in which case, the options will vest
0.0625% every quarter, and expire 10 years from the date of grant.
F-31
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 8-Stock Option Plans -- (Continued)
As of December 31, 2002, there were 673,093 shares available for future
grants under the 2001 NQSOP.
A summary of the status and activity of all of iVillage's stock option
plans is as follows:
Weighted
Average Exercise
Options Price Per Share
------------ ----------------
Outstanding, January 1, 2000................ 4,911,203 $ 19.27
Granted..................................... 4,199,112 $ 7.90
Exercised................................... (114,992) $ 5.18
Expired/Canceled............................ (2,575,099) $ 18.07
------------ -------
Outstanding, December 31, 2000.............. 6,420,224 $ 12.53
Granted..................................... 7,274,270 $ 1.26
Exercised................................... (5,046) $ 0.57
Expired/Canceled............................ (2,111,662) $ 11.03
------------ -------
Outstanding, December 31, 2001.............. 11,577,786 $ 5.34
Granted..................................... 1,395,587 $ 1.55
Exercised................................... (587,529) $ 1.26
Expired/Canceled............................ (1,700,099) $ 7.38
------------ -------
Outstanding, December 31, 2002.............. 10,685,745 $ 4.74
============ =======
Options exercisable at December 31, 2002.... 5,588,353 $ 6.24
============ =======
Options exercisable at December 31, 2001.... 4,254,014 $ 7.67
============ =======
Options exercisable at December 31, 2000.... 1,851,947 $ 14.76
============ =======
Information about stock options outstanding as of December 31, 2002 is as
follows:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Actual Range of Exercise Prices at 12/31/02 Life Price at 12/31/02 Price
------------------------------- -------------- ------------- ----------- ----------- ------------
$ 0.50 - $ 0.75.................... 168,625 7.00 $ 0.62 45,499 $ 0.59
$ 0.78 - $ 1.16.................... 604,164 6.60 $ 1.08 25,630 $ 0.96
$ 1.19 - $ 1.78.................... 6,244,269 6.70 $ 1.28 3,067,394 $ 1.30
$ 1.80 - $ 2.55.................... 625,311 6.30 $ 2.00 29,543 $ 2.14
$ 3.00 - $ 3.94.................... 229,939 7.30 $ 3.44 189,939 $ 3.43
$ 5.00 - $ 7.50.................... 1,448,554 4.00 $ 5.94 1,258,609 $ 5.79
$ 7.69 - $ 9.45.................... 204,755 4.30 $ 8.02 140,298 $ 8.15
$ 15.25 - $ 22.19.................... 264,255 4.10 $ 17.61 191,409 $ 17.58
$ 23.69 - $ 33.56.................... 752,361 5.10 $ 24.96 519,368 $ 25.18
$ 35.94 - $ 44.25.................... 135,184 3.20 $ 41.18 113,383 $ 41.16
$ 55.25 - $ 72.94.................... 5,678 3.20 $ 66.01 4,962 $ 66.02
$ 96.75 - $113.75.................... 2,650 3.30 $ 100.92 2,319 $ 100.92
---------- ----- ---------- --------- ----------
$ 0.50 - $113.75.................... 10,685,745 6.00 $ 4.74 5,588,353 $ 6.24
========== ===== ========== ========= ==========
401(k) Plan
iVillage offers its eligible employees the opportunity to participate
in a defined contribution retirement plan qualifying under the provisions of
Section 401(k) of the Internal Revenue Code. Each employee is eligible to
contribute, on a tax-deferred basis, a portion of annual earnings not to exceed
certain federal income tax limitations. iVillage may contribute at iVillage's
discretion, a percentage of the participant's pre-tax contribution.
Additionally, iVillage may elect to make a profit-sharing contribution, at its
discretion. No contributions were made by iVillage for the years ended December
31, 2002, 2001 and 2000, respectively.
F-32
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 9 - Commitments and Contingencies
Leases
iVillage leases office 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
December 31, 2002 for the next five years:
Year ending December 31: (In thousands)
----------------------- --------------
2003................................................ $ 4,668
2004................................................ 4,218
2005................................................ 4,115
2006................................................ 3,983
2007................................................ 3,729
---------
$ 20,713
=========
In March 2000, iVillage entered into a fifteen-year lease for
approximately 105,000 square feet at 500-512 Seventh Avenue in which iVillage
has consolidated its New York City operations. Pursuant to the terms of the
lease, iVillage anticipates receiving approximately $5.1 million, as amended,
for reimbursement of certain construction expenses. The benefit of the
reimbursement has been deferred and will be recognized ratably over the life of
the lease. iVillage received approximately $3.8 million in January 2001,
approximately $0.5 million in April 2001 and $0.3 million in January 2003 as
partial reimbursement of construction costs. The letter of credit securing the
real estate lease, which is classified as "Restricted cash" on the consolidated
balance sheet, is approximately $8.5 million.
Rent expense from continuing operations was approximately $3.3 million,
$5.2 million and $4.4 million for the years ended December 31, 2002, 2001 and
2000, respectively.
Joint Ventures
In July 2000, iVillage, Tesco PLC, and Tesco.com formed an
international joint venture, iVillage UK Limited, to serve the women's online
market in the United Kingdom and the Republic of Ireland. iVillage UK Limited
functions as an independently managed entity and provides women in the UK and
the Republic of Ireland with a highly focused community and an array of
interactive, customized online solutions and services including content
channels, tools, planners, quizzes, message boards, chats and newsletters. Tesco
provides capital and promotional initiatives, and iVillage provides its brand,
intellectual property, content and consulting services.
(See Note 12 - Subsequent Events)
iVillage is obligated to fund the ongoing business and operations of
Cooperative Beauty Ventures, L.L.C., a consolidated entity, but not to exceed
$7.0 million. As of December 31, 2002, iVillage has contributed approximately
$1.9 million. (See Note 6-Business Acquisitions and Dispositions-Cooperative
Beauty Ventures, L.L.C.)
F-33
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 9 - Commitments and Contingencies -- (Continued)
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 December 31, 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,
with the advice of outside legal counsel, 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 in federal court
against iVillage and several of its present and former executives, and
iVillage's underwriters in connection with its March 1999 initial public
offering. A similar class action lawsuit was filed against Women.com, several of
its former executives and Women.com's underwriters in connection with
Women.com's October 1999 initial public offering. The complaints generally
assert claims under the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended (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.
In February 2003, the defendants' motion to dismiss certain of the
plaintiffs' claims was granted in part, but, for the most part, denied and the
lawsuits are now entering the discovery phase.
In June 2001, Euregio.net commenced an action in Belgium against
Women.com claiming damages in excess of 1 million Euros in connection with
certain alleged copyright infringements. Despite Women.com's arguments
challenging the jurisdiction of the Belgian court, the alleged infringements and
the amount of damages, a Belgian court issued a judgment against Women.com in
the amount of approximately 850,000 Euros (approximately $892,000 based on the
Euro exchange rate as of December 31, 2002) in January 2003. Women.com has been
advised by outside legal counsel that Euregio.net would have to commence legal
proceedings in the United States to enforce this judgment. Women.com has
appealed this judgment in the Belgian courts and will also oppose any effort by
the plaintiffs to enforce this judgment in the United States court system.
iVillage, with the advice of outside legal counsel, believes that the
lawsuits and claims asserted against it and its subsidiary pursuant to these
complaints are without merit and intends to vigorously defend against these
claims. iVillage does not believe that any of these legal proceedings will have
a material adverse effect on its business, financial condition, results of
operations and liquidity.
Note 10-Capital Stock
Warrants
As of December 31, 2002, 2001 and 2000, iVillage has 2,105,282,
2,437,878 and 945,536 warrants outstanding with a weighted average exercise
price of $0.05, $2.22 and $13.24 per share, respectively. During 2002 and 2001,
respectively, 337,878 and 607,658 warrants with a weighted average exercise
price of $15.96 and $11.73 expired.
F-34
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 10-Capital Stock -- (Continued)
Treasury Stock
On September 20, 2001, iVillage announced its intention to acquire, in
open market transactions, up to 2,000,000 shares of its Common Stock, par value
$.01 per share (the "Common Stock"), subject to and in compliance with the
provisions and limitations of Rule 10b-18 of the Exchange Act. Purchases were
made several times during September 2001 at prevailing market prices. The source
of funds for the purchase of the shares was iVillage's general corporate funds,
and all shares purchased are held in treasury. During 2001, iVillage repurchased
167,859 shares at a cumulative cost of $129,313.
On October 1, 2001, iVillage announced a buyback of its common stock
from Capital Guardian Trust Company, a major stockholder of iVillage, and
iVillage purchased, off market, approximately 1,000,000 shares and iVillage's
Chairman and Chief Executive Officer and certain Company officers and directors
purchased in aggregate approximately 750,000 additional shares, all at a market
discount. The cost of the buyback for iVillage was approximately $0.4 million.
Note 11-Income Taxes
The components of the net deferred tax asset as of December 31, 2002
and 2001 consists of the following:
2002 2001
---------- ---------
(In thousands)
Operating loss carryforward................... $ 98,262 $ 83,556
Depreciation and amortization................. 4,485 956
Bad debt allowance and reserves............... 598 1,003
Unearned compensation......................... 1,074 4,348
Other......................................... 685 79
---------- --------
Net deferred tax asset.................... 105,104 89,942
Less, valuation allowance..................... (105,104) (89,942)
---------- --------
Deferred tax asset........................ $ -- $ --
========== ========
The difference between iVillage's U.S. federal statutory rate of 35%,
as well as its state and local rate, net of a federal benefit, of 10%, when
compared to the effective rate is principally comprised of the valuation
allowance.
As of December 31, 2002, iVillage has a net operating loss carryforward
for federal income tax purposes of approximately $239.7 million, which begin to
expire in 2010. Substantial changes in iVillage's ownership have occurred which
may result in annual limitations on the amount of carryforwards which can be
realized in future periods. The net deferred tax asset has been fully reserved
due to the uncertainty of iVillage's ability to realize this asset in the
future. To the extent that deferred tax assets created as a result of iVillage
acquisitions reverse in future periods, the benefit of the reversal will be
recorded as goodwill.
iVillage is subject to various state and local taxes. State and
local tax expense was approximately $0.2 million, $0.5 million and $0.3 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
F-35
iVILLAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 12 - Subsequent Events
On March 17, 2003, iVillage and Tesco restructured the terms of its
joint venture so that Tesco purchased iVillage's entire ownership interest in
iVillage UK. iVillage and Tesco also entered into a 20-year agreement, subject
to earlier termination upon the occurrence of certain events, whereby iVillage
will license to iVillage UK certain of its content and intellectual property,
including trademarks and copyrights, for use in the U.K. and Ireland in exchange
for the greater of a minimum monthly license fee or a percentage of iVillage
UK's gross revenues.
Note 13 -Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2002 and 2001:
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
(in thousands, except per share data)
2002
Revenue............................................ $ 15,067 $ 16,072 $ 14,629 $ 13,655
============= ============= ============= =============
Net loss before cumulative effect of change in
accounting principle.......................... $ (8,715) $ (3,604) $ (4,968) $ (7,468)
============= ============= ============= =============
Cumulative effect of change in accounting principle $ (9,181) $ -- $ -- $ --
============= ============= ============= =============
Net loss........................................... $ (17,896) $ (3,604) $ (4,968) $ ( 7,468)
============= ============= ============= =============
Basic and diluted net loss per share before
cumulative effect of change in accounting
principle..................................... $ (0.16) $ (0.07) $ (0.09) $ 0.13)
============= ============= ============= =============
Basic and diluted net loss per share from
cumulative effect of change in accounting
principle..................................... $ (0.18) $ -- $ -- $ --
============= ============= ============= =============
Basic and diluted net loss per share............... $ (0.34) $ (0.07) $ (0.09) $ (0.13)
============= ============= ============= =============
2001
Revenue............................................ $ 12,573 $ 11,449 $ 18,066 $ 17,953
============= ============= ============== =============
Net loss before cumulative effect of change in
accounting principle.......................... $ (12,175) $ (18,485) $ (8,041) $ (9,764)
============= ============= ============= =============
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ --
============= ============= ============= =============
Net loss........................................... $ (12,175) $ (18,485) $ (8,041) $ (9,764)
============= ============= ============= =============
Basic and diluted net loss per share before
cumulative effect of change in accounting
principle..................................... $ (0.41) $ (0.56) $ (0.15) $ (0.18)
============= ============= ============= =============
Basic and diluted net loss per share from
cumulative effect of change in accounting
principle..................................... $ -- $ -- $ -- $ --
============= ============= ============= =============
Basic and diluted net loss per share............... $ (0.41) $ (0.56) $ (0.15) $ (0.18)
============= ============= ============= =============
F-36
Schedule I
iVILLAGE INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Charged
Beginning Costs and to Other Balance at End
of Period Expenses Accounts Deductions of Period
--------- -------- -------- ---------- ---------
(in thousands)
For the year ended December 31, 2000:
Provision for doubtful accounts....... $ 700 $ 277 $ 73(1) $ 43(2) $ 1,007
========== ========== ============ ============ ==========
For the year ended December 31, 2001:
Provision for doubtful accounts....... $ 1,007 $ -- $ 1,630(3) $ 351(2) $ 2,286
========== ========== ============ ============ ==========
For the year ended December 31, 2002:
Provision for doubtful accounts....... $ 2,286 $ 552 $ (443)(3) $ 1,085(2) $ 1,310
========== ========== ============ ============ ==========
(1) Doubtful accounts written off against revenue.
(2) Doubtful accounts written off, net of cash received.
(3) Increase (decrease) in allowance for doubtful accounts in connection with
valuation of receivables from the acquisitions of Women.com and
Promotions.com.
All other schedules have been omitted because they are not applicable
or not required or because the information is included elsewhere in the
consolidated financial statements or the notes thereto.
S-1
EXHIBIT INDEX
Exhibit
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).
4.1 Form of Registrant's common stock certificate (incorporated by
reference from Exhibit 4.1 to Registration Statement File No.
333-68749).
10.1 Form of Indemnification Agreement between the Registrant and its
directors and officers (incorporated by reference from Exhibit
10.1 to Registration Statement File No. 333-68749).
10.2 1995 Amended and Restated Employee Stock Option Plan of the
Registrant (incorporated by reference from Exhibit 10.2 to
Registration Statement File No. 333-68749).
10.3 1997 Amended and Restated Acquisition Stock Option Plan of the
Registrant (incorporated by reference from Exhibit 10.3 to
Registration Statement File No. 333-68749).
10.4 Amended and Restated 1999 Employee Stock Option Plan of the
Registrant (incorporated by reference from Exhibit 99.1 to
Registration Statement File No. 333-31988).
10.5 1999 Director Option Plan of the Registrant (incorporated by
reference from Exhibit 10.5 to Registration Statement File No.
333-85437).
10.6 1999 Employee Stock Purchase Plan of the Registrant
(incorporated by reference from Exhibit 10.6 to Registration
Statement File No. 333-85437).
10.7 1999 Acquisition Stock Option Plan of the Registrant
(incorporated by reference from Exhibit 10.7 to Registration
Statement File No. 333-85437).
10.8 Amended and Restated 1999 Non-Qualified Stock Option Plan,
as amended by Amendment Number 2 (incorporated by reference from
Exhibit 10.8 to Registration Statement File No. 333-84532).
10.9 Amended 2001 Non-Qualified Stock Option Plan of the Registrant
(incorporated by reference from Exhibit 10.1 to the Registrant's
Form 10-Q Quarterly Report for the period ended June 30, 2002,
File No. 000-25469).
10.10 Form of Non-Competition, Non-Disclosure and Assignment of
Inventions Agreement dated September 9, 1995, and Amendment
dated May 6, 1996, between the Registrant and Nancy Evans
(incorporated by reference from Exhibit 10.18 to Registration
Statement File No. 333-68749).
Exhibit
Number Description
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10.11 Lease, dated March 14, 2000, between 500-512 Seventh Avenue
Limited Partnership and the Registrant (incorporated by
reference from Exhibit 10.1 to the Registrant's Form 10-Q
Quarterly Report for the period ended March 31, 2000, File No.
000-25469).
10.12 First Amendment to Lease, dated as of June 7, 2000, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.3 to the Registrant's
Form 10-Q Quarterly Report for the period ended September 30,
2000, File No. 000-25469).
10.13 Second Amendment to Lease, dated January 10, 2001, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.28 to Registration
Statement File No. 333-56150).
10.14 Third Amendment to Lease, dated October 17, 2001, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.2 to the Registrant's
Form 10-Q Quarterly Report for the period ended September 30,
2001, File No. 000-25469).
10.15 Fourth Amendment to Lease, dated December 3, 2001, between the
Registrant and 500-512 Seventh Avenue Limited Partnership
(incorporated by reference from Exhibit 10.22 to Registration
Statement File No. 333-84532).
10.16 Letter Agreement, dated December 23, 2002, between the
Registrant and 500-512 Seventh Avenue Limited Partnership.
10.17 License Agreement, dated as of September 8, 2000, among Lamaze
International, Inc., Lamaze Publishing Company and the
Registrant (incorporated by reference from Exhibit 10.2 to the
Registrant's Form 10-Q Quarterly Report for the period ended
September 30, 2000, File No. 000-25469).
10.18 Amendment to License Agreement, dated as of January 1, 2003,
among Lamaze International, Inc., Lamaze Publishing Company and
the Registrant.
10.19 Employment Agreement, dated November 29, 2000, between Douglas
W. McCormick and the Registrant (incorporated by reference from
Exhibit 10.31 to Registration Statement File No. 333-56150).
10.20 Amended and Restated Securities Purchase Agreement, dated as of
February 22, 2001, between the Registrant and Hearst
Communications, Inc. (incorporated by reference from Exhibit
10.32 to Registration Statement File No. 333-56150).
10.21 Amended and Restated Stockholder Agreement, dated as of June 20,
2001, between the Registrant and Hearst Communications, Inc.
(incorporated by reference from Exhibit 10.26 to Registration
Statement File No. 333-84532).
Exhibit
Number Description
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10.22 Amended and Restated Magazine Content License and Hosting
Agreement, dated January 29, 2001, between Hearst
Communications, Inc. and Women.com Networks, Inc. (incorporated
by reference from Exhibit 10.27 to Registration Statement File
No. 333-84532).
10.23 Form of Amendment Number Two to Amended and Restated Magazine
Content License and Hosting Agreement (incorporated by reference
from Exhibit 10.35 to Registration Statement File No.
333-56150).
10.24 Amendment Number Three to Amended and Restated Magazine Content
License and Hosting Agreement, dated as of April 5, 2002,
between the Registrant and Hearst Communications, Inc.
(incorporated by reference from Exhibit 10.34 to Registration
Statement File No. 333-84532).
10.25 Promissory Note, dated June 5, 1998, in the amount of $500,000
between Candice Carpenter and the Registrant (incorporated by
reference from Exhibit 10.23 to Registration Statement File No.
333-68749).
10.26 Amendment No. 1 to Promissory Note, dated as of April 1, 2001,
between Candice Carpenter and the Registrant (incorporated by
reference from Exhibit 10.22.1 to Registrant's Form 10-K Annual
Report for the period ended December 31, 2000, File No.
000-25469).
10.27 Amendment No. 2 to Promissory Note, dated as of December 19,
2002, between the Registrant and Candice Carpenter.
10.28 Form of Severance Agreement between the Registrant and certain
executive officers of the Registrant.
21 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350.
99.2 Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350.