Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-25469
iVillage Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3845162
- -------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
500 Seventh Avenue, New York, New York 10018
- -------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
(212) 600-6000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed since Last Report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
56,084,462 shares of common stock as of August 12, 2003.
iVillage Inc.
Form 10-Q
For the Quarter ended June 30, 2003
Index
-----
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited)
and December 31, 2002 (Unaudited)...........................................1
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2003 (Unaudited) and 2002 (Unaudited).................2
Condensed Consolidated Statements of Cash Flows for the three and six
months ended June 30, 2003 (Unaudited) and 2002 (Unaudited).................3
Notes to Condensed Consolidated Financial Statements (Unaudited)............4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.....................................................46
Item 4. Controls and Procedures.........................................46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................48
Item 2. Changes in Securities and Use of Proceeds.......................48
Item 3. Defaults Upon Senior Securities.................................48
Item 4. Submission of Matters to a Vote of Security Holders.............48
Item 5. Other Information...............................................48
Item 6. Exhibits and Reports on Form 8-K................................49
Signatures.................................................................50
Exhibit Index..............................................................51
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
iVillage Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
June 30, December 31,
2003 2002
------------ ------------
Assets
Current assets:
Cash and cash equivalents ........................................................ $ 16,966 $ 21,386
Accounts receivable, less allowance for doubtful accounts of
$1,214 and $1,310, respectively ............................................. 5,382 5,336
Other current assets ............................................................. 5,470 5,960
--------- ---------
Total current assets ........................................... 27,818 32,682
Restricted cash .................................................................. 8,474 8,474
Fixed assets, net ................................................................ 9,467 17,157
Goodwill, net .................................................................... 22,266 24,617
Intangible assets, net ........................................................... 13,933 17,367
Other assets ..................................................................... 168 289
--------- ---------
Total assets ................................................... $ 82,126 $ 100,586
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............................................ $ 9,617 $ 10,319
Lease restructuring .............................................................. 613 --
Deferred revenue ................................................................. 4,764 3,514
Deferred rent .................................................................... 194 348
Deferred gain on sale of joint venture interest .................................. 342 --
Current liabilities of discontinued operations, net .............................. 98 98
--------- ---------
Total current liabilities ...................................... 15,628 14,279
Deferred rent, net of current portion ............................................ 2,096 3,926
--------- ---------
Total liabilities .............................................. 17,724 18,205
Minority interest ................................................................ 241 181
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $.01, 5,000,000 shares authorized; no shares issued
and outstanding as of June 30, 2003 and December 31, 2002, respectively ..... -- --
Common stock - par value $.01, 200,000,000 shares authorized; 56,607,733 and
56,531,785 shares issued at June 30, 2003 and December 31, 2002, respectively;
55,404,287 and 55,328,339 shares outstanding as of June 30, 2003 and
December 31, 2002, respectively ............................................. 566 565
Additional paid-in capital ....................................................... 549,269 549,203
Accumulated deficit .............................................................. (484,912) (466,717)
Treasury stock at cost (1,203,446 shares) ........................................ (502) (502)
Stockholders' notes receivable ................................................... (248) (262)
Unearned compensation and deferred advertising ................................... (12) (87)
--------- ---------
Total stockholders' equity ..................................... 64,161 82,200
--------- ---------
Total liabilities and stockholders' equity ..................... $ 82,126 $ 100,586
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
iVillage Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues ....................................................... $ 13,204 $ 16,072 $ 25,796 $ 31,139
Operating expenses:
Editorial, product development and technology ............... 7,054 7,302 14,629 13,983
Sales and marketing ......................................... 5,033 5,471 10,475 10,672
Sales and marketing - NBC/Hearst expenses ................... -- 708 83 2,867
Termination of NBC advertising contract ..................... -- -- -- 4,084
General and administrative .................................. 3,065 3,308 6,097 6,122
Lease restructuring charge and related impairment of
fixed assets ............................................ 4,025 -- 4,025 --
Depreciation and amortization ............................... 2,225 2,975 4,948 5,934
Impairment of goodwill, intangible assets and fixed assets .. 4,029 -- 4,029 --
-------- -------- -------- --------
Total operating expenses ..................... 25,431 19,764 44,286 43,662
-------- -------- -------- --------
Loss from operations ........................................... (12,227) (3,692) (18,490) (12,523)
Interest income, net ........................................... 41 122 130 285
Gain on sale of joint venture interest ......................... 200 -- 225 --
-------- -------- -------- --------
Net loss before minority interest and
cumulative effect of change in accounting principle ........... (11,986) (3,570) (18,135) (12,238)
Minority interest .............................................. (73) (34) (60) (81)
-------- -------- -------- --------
Net loss before cumulative effect of
change in accounting principle................................. (12,059) (3,604) (18,195) (12,319)
Cumulative effect of change in accounting principle ............ -- -- -- (9,181)
-------- -------- -------- --------
Net loss ....................................................... $(12,059) $ (3,604) $(18,195) $(21,500)
======== ======== ======== ========
Per share data:
Net loss before cumulative effect of
change in accounting principle per share ...................... $ (0.22) $ (0.07) $ (0.33) $ (0.23)
Cumulative effect of change in
accounting principle per share ................................ -- -- -- (0.17)
-------- -------- -------- --------
Basic and diluted net loss per share ........................... $ (0.22) $ (0.07) $ (0.33) $ (0.40)
======== ======== ======== ========
Weighted average shares of common
stock outstanding used in computing basic
and diluted net loss per share ................................ 55,550 54,860 55,542 54,135
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
iVillage Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- ---------- ---------
Cash flows from operating activities:
Net loss ........................................................... $ (12,059) $ (3,604) $(18,195) $(21,500)
Adjustments to reconcile net loss to net cash used
in operating activities:
Impairment of goodwill, intangibles and fixed assets
(including change in accounting principle) ....................... 4,029 -- 4,029 9,181
Depreciation and amortization ...................................... 2,225 2,975 4,948 5,934
Non-cash print advertising expense ................................. -- 708 83 1,165
Expense recognized in connection with issuance of
warrants and stock options ...................................... 29 69 75 518
Minority interest .................................................. 73 34 60 81
Provision for bad debt expense ..................................... 90 43 188 43
Deferred rent amortization ......................................... (82) (86) (168) (173)
Lease restructuring charge and related impairment of fixed assets .. 4,025 -- 4,025 --
Amortization of gain on sale of joint venture interest ............. (200) -- (225) --
Changes in operating assets and liabilities:
Accounts receivable ................................................ (1,727) (707) (234) (93)
Restricted cash and other assets ................................... 45 (692) 528 5,048
Accounts payable and accrued expenses .............................. 109 (1,888) (702) (5,751)
Lease restructuring ................................................ (31) -- (31) --
Deferred revenue ................................................... 1,593 664 1,250 958
-------- -------- -------- --------
Net cash used in operating activities ................................... (1,881) (2,484) (4,369) (4,589)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets ........................................... (175) (181) (690) (356)
Cash paid less cash acquired for acquisition
of Promotions.com, Inc. .......................................... -- (234) (9) (234)
Deferred gain on sale of joint venture interest .................... 75 -- 567 --
-------- -------- -------- --------
Net cash used in investing activities ................................... (100) (415) (132) (590)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options ............................ 67 665 67 748
Principal payments on stockholders' note receivable ................ 14 -- 14 1,291
-------- -------- -------- --------
Cash provided by investing activities ................................... 81 665 81 2,039
-------- -------- -------- --------
Cash used in discontinued operations .................................... -- -- -- (10)
Net decrease in cash for the period ..................................... (1,900) (2,234) (4,420) (3,150)
Cash and cash equivalents, beginning of period .......................... 18,866 28,915 21,386 29,831
-------- -------- -------- --------
Cash and cash equivalents, end of period ................................ $ 16,966 $ 26,681 $ 16,966 $ 26,681
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1-Organization and Basis of Presentation
iVillage Inc. ("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, 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
approximately 1,100 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' 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 brands, the non-acceptance or rejection of iVillage's services by
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.
4
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unaudited Interim Financial Information
The unaudited interim condensed consolidated financial statements of
iVillage as of June 30, 2003 and for the three and six months ended June 30,
2003 and 2002, respectively, included herein have been prepared in accordance
with the instructions for Form 10-Q under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and Article 10 of Regulation S-X under the
Securities Act of 1933, as amended (the "Securities Act"). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
statements. These financial statements should be read in conjunction with
iVillage's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments and appropriate inter-company elimination
adjustments, necessary to present fairly the financial position of iVillage at
June 30, 2003, and the results of its operations and its cash flows for the
three and six months ended June 30, 2003 and 2002, respectively. The results for
the three and six months ended June 30, 2003 are not necessarily indicative of
the expected results for the full fiscal year or any future period.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
iVillage and its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
Restricted Cash
Restricted cash consists of money held for a letter of credit
collateralizing a real estate lease for iVillage's New York office space (See
Note 10 - Subsequent Events).
Revenue and Receivables
One customer, Hearst Communications, Inc. (including its affiliates,
"Hearst"), a related party, accounted for approximately 12% and 13% of total
revenues for the three and six months ended June 30, 2003, respectively. Our
five largest customers accounted for approximately 26% and 27% of total revenues
for the three and six months ended June 30, 2003, respectively. Three customers,
Unilever PLC (including its affiliates, "Unilever"), Procter and Gamble Company
("Procter and Gamble"), and Hearst, accounted for approximately 19%, 11% and 10%
of total revenues for the three months ended June 30, 2002, respectively, and
15%, 11% and 11%, of total revenues for the six months ended June 30, 2002,
respectively. Our five largest customers accounted for approximately 46% and 44%
of total revenues for the three and six months ended June 30, 2002,
respectively. At June 30, 2003, Hearst accounted for approximately 23% of the
net accounts receivable. At December 31, 2002, Procter and Gamble accounted for
approximately 26% of the net accounts receivable.
5
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Included in sponsorship and advertising revenues are barter
transactions, which totaled approximately $1.0 million and $2.0 million, or 9%
of sponsorship and advertising revenues for the three and six months ended June
30, 2003, respectively, and approximately $0.9 million and $1.8 million, or 7%
and 8%, for the comparable periods in 2002.
Reclassifications
Certain reclassifications have been made in the prior period condensed
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.
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 three and six months ended June 30, 2003, the Company reversed no amount and
approximately $0.1 million, respectively, of accruals included in operating
expenses due to a change in estimate on services previously provided for, and
approximately $0.4 million and $0.6 million for the comparable periods in 2002.
These amounts were 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 shares and common stock
equivalents outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive.
Included in the June 30, 2003 and 2002 calculation of weighted average
number of shares of common stock outstanding are 189,404 and 387,309 shares,
respectively, 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.
6
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Stock options and warrants in the amount of 12,157,010 shares and
13,538,450 shares for the six months ended June 30, 2003 and 2002, respectively,
were not included in the computation of diluted net loss per share as they were
anti-dilutive as a result of net losses during the period presented.
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 Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). No
compensation cost related to grants of stock options was reflected in iVillage's
net loss, as all options granted under the plans had an exercise price at least
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. If compensation cost for
iVillage's stock options had been determined based on the fair value of the
stock options at the grant date for awards in the three and six months ended
June 30, 2003 and 2002 consistent with the provisions of SFAS 123, iVillage's
net loss would have been adjusted to the pro forma amounts indicated below:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ---------
($ in thousands except per share data)
Net loss- as reported............................................. $ (12,059) $ (3,604) $ (18,195) $ (21,500)
Stock-based compensation expense determined under SFAS 123 ....... (1,287) (2,628) (4,680) (5,428)
--------- --------- --------- ---------
Net loss - pro forma.............................................. $ (13,346) $ (6,232) $ (22,875) $ (26,928)
========= ========= ========= =========
Net loss per share - as reported.................................. $ (0.22) $ (0.07) $ (0.33) $ (0.40)
========= ========= ========= =========
Net loss per share - pro forma.................................... $ (0.24) $ (0.11) $ (0.41) $ (0.50)
========= ========= ========= =========
Because options vest over several years and additional option grants
are expected to be made in future years, the aformentioned pro forma results are
not necessarily indicative of the pro forma results for the full fiscal year or
any future period.
The weighted average assumptions used for grants made in 2003 and 2002
are as follows:
Options granted during the
six months ended June 30,
-------------------------
2003 2002
---------- ----------
Risk-free interest rate..................... 2.31% 3.71%
Expected option life........................ 4 years 4 years
Dividend yield.............................. 0.00% 0.00%
Volatility.................................. 108.00% 108.00%
7
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB")
reached a consensus on Emerging Issues Task Force ("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 has determined
that EITF No. 00-21 will not have a material impact on its financial position,
cash flows or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), for certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149: clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative,
clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform it to language used in FASB
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and amends
certain other existing pronouncements. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. In addition, most provisions of SFAS 149 are to
be applied prospectively. The Company does not expect the adoption of SFAS 149
to have a material impact on its financial position, cash flows or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 changes the accounting for certain financial instruments
that under previous guidance issuers could account for as equity. It requires
that those instruments be classified as liabilities in balance sheets. The
guidance in SFAS 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective on July
1, 2003. The Company does not anticipate that the adoption of SFAS 150 will have
a material impact on its financial position, cash flows or results of
operations.
Note 2 - Fixed Assets
In the second quarter of 2003, the Company abandoned a portion of its
New York leased real estate. In connection with the abandonment, the Company
incurred an impairment of fixed assets related to the leasehold improvements,
net of accumulated amortization, of approximately $4.9 million and furniture and
fixtures, net of accumulated depreciation, of approximately $0.3 million. These
amounts are included in the condensed consolidated statements of operations in
the caption, "Lease restructuring charge and related impairment of fixed
assets" (See Note 8 - Lease Restructuring Charge and Related Impairment of
Fixed Assets).
8
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the second quarter of 2003, the Company restructured the
business operations of Promotions.com (See Note 3 - Goodwill) resulting in an
impairment of computer equipment, net of accumulated depreciation, of
approximately $0.8 million. This amount is included in the condensed
consolidated statements of operations in the caption, "Impairment of goodwill,
intangible assets and fixed assets".
Note 3 - Goodwill
Effective January 1, 2002, iVillage adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). 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, or if circumstances change that
will more likely than not reduce the fair value of the reporting unit below its
carrying amount. Upon completion of the transitional impairment test, the fair
value for Reporting unit - 2 did not exceed the reporting unit's carrying value
and an impairment was recorded of approximately $9.2 million in the first
quarter of 2002. In the second quarter of 2003, the Company restructured the
business operations of Reporting unit - 4 by outsourcing most of the operations
of the Promotions.com business unit and by changing the Webstakes.com business
model, and as a result, the fair value of Reporting unit - 4 did not exceed the
reporting unit's carrying value and an impairment was recorded of approximately
$2.6 million. This amount is included in the condensed consolidated statements
of operations in the caption, "Impairment of goodwill, intangible assets and
fixed assets".
The following table sets forth the components of goodwill, net as of
June 30, 2003 and December 31, 2002 (in thousands):
Adjustment to
December 31, purchase Impairment June 30,
2002 Acquisition accounting losses 2003
----------- ----------- ------------ ------------ ---------
Reporting unit - 1......... $ 18,770 $ -- $ -- $ -- $ 18,770
Reporting unit - 2......... 1,693 -- -- -- 1,693
Reporting unit - 3......... 1,803 -- -- -- 1,803
Reporting unit - 4......... 2,351 -- 295 (2,646) --
--------- --------- ---------- --------- ---------
$ 24,617 $ -- $ 295 $ (2,646) $ 22,266
========= ========= ========== ========= =========
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 consisting of the Promotions.com
and Webstakes.com business units.
9
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4- Intangible Assets
Effective January 1, 2002, the Company adopted 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 the 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,
typically based upon the future cash flows discounted at a rate commensurate
with the risk involved. During the second quarter of 2003, the Company
restructured the business operations of Reporting unit - 4 (See Note 3 -
Goodwill), and as a result, the fair value was less than the carrying amount of
certain intangible assets and an impairment was recorded of approximately $0.7
million. This amount is included in the condensed consolidated statements of
operations in the caption, "Impairment of goodwill, intangible assets and fixed
assets".
Identifiable intangible assets are amortized under the straight-line
method over the period of expected benefit ranging from two to ten years. The
following table sets forth the components of the intangible assets subject to
amortization as of June 30, 2003 and December 31, 2002 (in thousands):
June 30, 2003 December 31, 2002
-------------------------------------------------------- ----------------------------
Range of Gross Adjustment Gross
useful carrying to purchase Impairment Accumulated carrying Accumulated
life amount accounting losses amortization Net amount amortization Net
--------- -------- ----------- --------- ------------ ----- -------- ------------ -----
Advertiser and member list and
customer contracts............. 2-10 years $ 21,150 $ -- $ (718) $(9,644) $10,788 $ 21,150 $ (7,803) $13,347
Trademarks and domain names..... 3 years 3,424 (197) -- (2,393) 834 3,424 (2,009) 1,415
Licensing agreement............. 10 years 2,900 -- -- (1,120) 1,780 2,900 (975) 1,925
Technology...................... 3 years 890 -- -- (359) 531 890 (210) 680
Non-competition agreements...... 1 year 810 -- -- (810) -- 810 (810) --
Content......................... 3 years 600 -- -- (600) -- 600 (600) --
-------- -------- -------- -------- ------- -------- -------- -------
$ 29,774 $ (197) $ (718) $(14,926) $13,933 $ 29,774 $(12,407) $17,367
======== ======== ======== ======== ======= ======== ======== =======
10
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Amortization expense for the six months ended June 30, 2003 and 2002
was approximately $2.5 million and $2.7 million, respectively.
Estimated amortization expense for the twelve months ending June 30 are
as follows (in thousands):
2004................................ $ 4,524
2005................................ 2,124
2006................................ 1,760
2007................................ 1,760
2008................................ 1,760
--------
$ 11,928
========
Note 5 - Deferred Gain on Sale of Joint Venture Interest
In March 2003, iVillage and Tesco.com Limited, a division of Tesco PLC
("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 twenty-year agreement, subject to earlier termination upon the
occurrence of certain events, whereby iVillage licenses to iVillage UK certain
of its content and intellectual property, including trademarks and copyrights,
for use in the United Kingdom ("U.K.") and Ireland in exchange for the greater
of a minimum monthly license fee or a percentage of iVillage UK's gross
revenues. As part of the agreement, the entity continues to operate under the
iVillage UK domain name and provides users with the same content and offerings.
All monies received by iVillage under the license agreement will be
classified as other income and will be included in the condensed consolidated
statements of operations as a gain on sale of joint venture interest. iVillage
will receive a minimum of $0.8 million in year one of the license agreement,
which will be earned monthly as services are provided. As of June 30, 2003,
iVillage has received $0.5 million.
Note 6 - Discontinued Operations
Net current liabilities of discontinued operations as of June 30, 2003
were as follows (in thousands):
Accounts payable and accrued expenses................. $ (98)
==========
Net current liabilities of discontinued operations.... $ (98)
==========
Note 7 - Related Party Transactions
As part of the acquisition of Women.com, iVillage acquired
approximately $4.9 million of prepaid print advertising in certain Hearst
magazines. These ads appeared through July 2003. iVillage recognized no amount
and approximately $0.1 million of non-cash print advertising expense from this
advertising for the three and six months ended June 30, 2003, respectively, and
$0.7 million and $1.2 million for the comparable periods in 2002. As of June 30,
2003, included in the caption "Other current assets" in the condensed
consolidated balance sheet is approximately $0.3 million of prepaid Hearst print
advertising.
11
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Revenues, net of royalty payments, from Hearst for the three and six
months ended June 30, 2003 were approximately $1.6 million and $3.2 million,
respectively. For the three and six months ended June 30, 2002, revenues, net of
royalty payments, from Hearst were approximately $1.6 million and $3.5 million,
respectively.
Note 8 - Lease Restructuring Charge and Related Impairment of Fixed Assets
In the second quarter of 2003, the Company abandoned a significant
portion of its New York leased real estate. As a result, the Company incurred a
lease restructuring charge of approximately $0.6 million. In addition the
Company wrote off fixed assets of approximately $5.2 million that were impaired
with the abandonment of the leased space (See Note 2- Fixed Assets) and reduced
the liability for deferred rent, associated with the abandoned leased space, by
approximately $1.8 million. These amounts are included in the condensed
consolidated statements of operations in the caption "Lease restructuring charge
and related impairment of fixed assets" (See Note 10 - Subsequent Events).
Note 9 - Commitments and Contingencies
Leases
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 non-cancelable operating
leases as of June 30, 2003:
Twelve months ending
June 30: (in thousands)
-----------------------------------------------
2004.............................. $ 4,476
2005.............................. 4,362
2006.............................. 4,058
2007.............................. 3,854
2008.............................. 3,729
--------
$ 20,479
========
In July 2003, the Company entered into a lease amendment with the
landlord of its New York headquarters that will become effective upon
satisfaction of certain conditions (See Note 10 - Subsequent Events). The lease
amendment provides for a reduction in leased space, as well as a reduction in
rent per square foot. When effective, the future minimum lease payments under
non-cancelable operating leases for the next five years will be approximately
$9.6 million.
12
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Joint Ventures
iVillage is obligated to fund the ongoing business and operations of
Cooperative Beauty Ventures, L.L.C., a joint venture between iVillage and
Unilever, but not to exceed $7.0 million. iVillage has not been required to fund
the operations of the venture during 2002 and 2003 and, as of June 30, 2003, has
contributed, in total, approximately $1.9 million to the venture.
Litigation
In the normal course of business, iVillage is subject to proceedings,
lawsuits and other claims. Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at June 30, 2003 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 condensed consolidated financial statements.
Several plaintiffs have filed class action lawsuits in federal court
against iVillage, several of its present and former executives and its
underwriters in connection with its March 1999 initial public offering. A
similar class action lawsuit was filed against Women.com, several of its former
executives and its underwriters in connection with Women.com's October 1999
initial public offering. The complaints generally assert claims under the
Securities Act, the Exchange Act and rules promulgated by the Securities and
Exchange Commission ("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.
In June 2003, a proposed settlement of this litigation was structured
between the plaintiffs, the issuer defendants, the issuer officers and directors
named as defendants, and the issuers' insurance companies. The proposed
settlement generally provides, among other things, that the issuer defendants
and related individual defendants will be released from the litigation without
any liability other than certain expenses incurred to date in connection with
the litigation, the issuer defendants' insurers will guarantee $1.0 billion in
recoveries by plaintiff class members, the issuer defendants will assign certain
claims against the underwriter defendants to the plaintiff class members, and
the issuer defendants will have the opportunity to recover certain
litigation-related expenses if the plaintiffs recover more than $5.0 billion
from the underwriter defendants.
The respective boards of directors of iVillage and Women.com each
approved the proposed settlement in July 2003. The proposed settlement is now
subject to approval by the other involved parties as well as to the final
approval of the court. There can be no assurance that this proposed settlement
will be approved and implemented in its current form, or at all.
13
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, in January 2003 a Belgian court issued a judgment against
Women.com in the amount of approximately 850,000 Euros (approximately $977,670
based on the Euro exchange rate as of June 30, 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 iVillage and Women.com 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 iVillage's business, financial condition, results
of operations and liquidity.
Note 10 - Subsequent Events
In July 2003, iVillage entered into a lease amendment with the landlord
of its New York headquarters that will become effective upon satisfaction of
certain conditions. When the lease amendment becomes effective, iVillage will
surrender the approximately $8.5 million classified as restricted cash to the
landlord. iVillage currently expects to incur a charge of approximately $5.0
million to $5.5 million, depending on the effective date of the lease amendment,
in the third quarter of 2003 in connection with this transaction.
On July 25, 2003, iVillage acquired the Web site, trademarks, key
contracts and other related assets of gURL.com for an immaterial amount of cash.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain statements in this Quarterly Report on Form 10-Q, including
certain statements contained in this Item 2 constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. The words or phrases "can be," "expects," "may affect,"
"may depend," "believes," "estimate," "project," and similar words and phrases
are intended to identify such forward-looking statements. Such forward-looking
statements are subject to various known and unknown risks and uncertainties and
we caution you that any forward-looking information provided by or on 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 our control, in addition to those
risks discussed below and in our other public filings, press releases and
statements by our management, including (i) the volatile and competitive nature
of the media industry, (ii) changes in domestic and foreign economic, political
and market conditions, (iii) the effect of federal, state and foreign regulation
on our business, (iv) the impact of recent and future acquisitions and joint
ventures on our business and financial condition, (v) our ability to establish
and maintain relationships with advertisers, sponsors, and other third party
providers and partners, and (vi) the impact of pending litigation on our
business and financial condition. All such forward-looking statements are
current only as of the date on which such statements were made. We do not
undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement is
made or to reflect the occurrence of unanticipated events.
Overview
iVillage is a 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 approximately 1,100 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
Promotions.com since April 19, 2002.
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. The following is a brief discussion of the more
significant accounting policies and methods used by iVillage.
15
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.
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
broadcasts of The Newborn Channel and The Newborn Channel-Spanish (currently
offered as an audio overlay to The Newborn Channel). In addition, sponsorship
and advertising revenues from IVPN include promotional programs that offer
advertisers the ability to distribute samples, coupons and promotional
literature to new and expectant parents, as well as custom publications and
mailings created and distributed on behalf of advertisers.
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. With a cost-per-click pricing model,
Webstakes.com generally earns revenues by delivering its visitors 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 visitor, but
also a specific user action such as purchasing a product or registering for more
information or 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.
16
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. Promotions.com's revenue
recognition policy related to its services is to recognize revenues ratably over
the period of the promotion, 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 and/or
other advertising mediums. 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 $1.0 million and $2.0 million for the three and six months ended
June 30, 2003, respectively, and approximately $0.9 million and $1.8 million,
for the comparable periods in 2002.
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.
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 or e-mailed to customers,
the collection of the receivable is reasonably assured and no further obligation
remains.
17
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 2002, iVillage began selling iVillageSolutions-branded consumer
products through the iVillage Market located on iVillage.com and launched
iVillageAccess, iVillage's Internet service provider ("ISP") offering. In the
first half of 2003, iVillage released seven iVillageSolutions-branded books,
through an agreement with a publisher, and expects to release others throughout
2003. iVillage receives a revenue share or royalty on each of the above products
when 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.
Additionally, in the first quarter of 2003, IVPN began to charge hospitals a
carriage fee for The Newborn Channel. IVPN recognizes revenues from these
carriage fees ratably over the term of the agreement provided the collection of
the receivable is reasonably assured. 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. Fair value is typically based upon the future cash flows
discounted at a rate commensurate with the risk involved. After an impairment
loss is recognized, the adjusted carrying amount of goodwill is its new
accounting basis.
Intangible Assets
iVillage 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,
iVillage will recognize an impairment when the fair value is less than the
carrying amount of such assets. The measurement for such impairment loss is
based on the fair value of the asset, typically based upon the future cash flows
discounted at a rate commensurate with the risk involved.
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 repair 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.
18
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.
Results of Operations
Revenues
Revenues were approximately $13.2 million and $25.8 million for the
three and six months ended June 30, 2003, respectively, which represents a
decline of 18% and 17% when compared with revenues of approximately $16.1
million and $31.1 million for the three and six months ended June 30, 2002,
respectively. The decline in revenues for the six months ended June 30, 2003, as
compared to 2002, was primarily due to a decrease in production fees billed by
iVillage Consulting of approximately $0.9 million, a decrease of revenues from
research initiatives of approximately $1.1 million, a decrease in licensing fees
of approximately $0.5 million and a decrease in sponsorship and advertising
revenues (excluding Promotions.com) of approximately $3.8 million primarily from
the expiration of some long-term contracts, partially offset by the acquisition
of Promotions.com resulting in identifiable incremental revenues of
approximately $1.0 million. Sponsorship and advertising revenues were
approximately $10.3 million and $20.5 million for the three and six months ended
June 30, 2003, respectively, compared to $13.1 million and $23.3 million for the
corresponding periods in 2002. Sponsorship and advertising revenues accounted
for approximately 78% and 80% of total revenues for the three and six months
ended June 30, 2003, respectively, compared to approximately 82% and 75% of
total revenues for the corresponding periods in 2002. Revenues from IVPN
accounted for approximately 30% and 36% of sponsorship and advertising revenues
for the three and six months ended June 30, 2003, respectively, compared to
approximately 22% and 25% for the corresponding periods in 2002. The percentage
increase in 2003 is primarily from a larger IVPN custom publication created in
the first quarter of 2003, as compared to a custom publication created in the
first quarter of 2002, on behalf of an advertiser, combined with the decline in
sponsorship and advertising revenues. Revenues from Promotions.com accounted for
approximately 9% of sponsorship revenues for each of the three and six months
ended June 30, 2003, respectively, compared to approximately 6% and 3% for the
corresponding periods in 2002.
19
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 9% of sponsorship and
advertising revenues for each of the three and six months ended June 30, 2003,
respectively, and approximately 7% and 8% of sponsorship and advertising
revenues for the corresponding periods in 2002.
Included in revenues are production fees received from work performed
(primarily for Hearst, a related party) by iVillage Consulting, which accounted
for approximately 6% and 7% of total revenues for the three and six months ended
June 30, 2003, respectively, compared to approximately 7% and 8% for the
corresponding periods in 2002.
Included in revenues are subscription-based fees derived from the
services provided by PAG, which accounted for approximately 9% and 7% of total
revenues for the three and six months ended June 30, 2003, respectively,
compared to approximately 5% for each of the corresponding periods in 2002.
Included in revenues are fees received from licensing portions of
iVillage's content, and fees from chart sales through Astrology.com, which
accounted for approximately 5% of total revenues for each of the three and six
months ended June 30, 2003, compared to approximately 5% and 7% for the
corresponding periods in 2002.
Included in revenues are fees from new initiatives involving online
subscription-based properties, the sale of iVillage-branded products and
services, the sale of third-party products, the sale of research and The Newborn
Channel's carriage fee, which in the aggregate accounted for approximately 1% of
total revenues for each of the three and six months ended June 30, 2003,
compared to approximately 2% and 5% for the comparable periods in 2002.
For the three and six months ended June 30, 2003, revenues from
iVillage's five largest customers accounted for approximately 26% and 27% of
total revenues, respectively. One customer, Hearst, accounted for approximately
12% and 13% of total revenues for the three and six months ended June 30, 2003,
respectively. Three customers, Unilever, Procter and Gamble, and Hearst,
accounted for approximately 19%, 11% and 10% of total revenues for the three
months ended June 30, 2002, respectively, and 15%, 11% and 11%, of total
revenues for the six months ended June 30, 2002, respectively. Our five largest
customers accounted for approximately 46% and 44% of total revenues for the
three and six months ended June 30, 2002, respectively.
20
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 Unilever and Procter and Gamble expired 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 three and six
months ended June 30, 2003 were approximately $7.1 million and $14.6 million, or
53% and 57% of total revenues, respectively. Editorial, product development and
technology expenses were approximately $7.3 million and $14.0 million, or 45% of
total revenues for the corresponding periods in 2002. The increase between the
comparable six month periods was primarily attributable to higher costs involved
with a larger custom publication created in the first quarter of 2003, as
compared to a custom publication created in the first quarter of 2002, by IVPN
on behalf of an advertiser of approximately $0.3 million, increased circulation
and production costs associated with IVPN's magazines, videos and promotional
programs of approximately $0.5 million, as well as the acquisition of
Promotions.com resulting in incremental expenses of approximately $0.4 million,
partially offset by a decrease in salaries, severance and related expenses of
approximately $0.7 million. Editorial, product development and technology
expenses increased as a percentage of total revenues for the six months ended
June 30, 2003, when compared to the same period in 2002, as a result of the
increase in expenses coupled with a decline in revenues.
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 three and
six months ended June 30, 2003 were approximately $5.0 million and $10.6
million, or 38% and 41% of total revenues, respectively. Sales and marketing
expenses were approximately $6.2 million and $17.6 million, or 38% and 57% of
total revenues, respectively, for the comparable periods in 2002. The decrease
in sales and marketing expenses for the six month period ended June 30, 2003 as
compared to 2002 was primarily attributable to the negotiated advertising spend
and termination of an advertising agreement with National Broadcasting Company,
Inc. ("NBC") in the first quarter of 2002 resulting in charges of approximately
$1.3 million and $4.1 million, respectively, and in 2003 a decrease in online
media expenses and Hearst print expenses of approximately $1.1 million each,
partially offset by incremental sales and marketing expenses related to the
Promotions.com acquisition of approximately $1.1 million. Sales and marketing
expenses decreased as a percentage of total revenues for the six months ended
June 30, 2003, as compared to the same period in 2002, due to a larger
percentage decrease in sales and marketing expenses, as compared to the decline
in revenues.
21
Included in sales and marketing expenses are barter transactions, which
amounted to approximately 21% of total sales and marketing costs during each of
the three and six months ended June 30, 2003, compared to 14% and 9% of total
sales and marketing costs for the comparable periods in 2002. Barter
transactions increased as a percentage of sales and marketing expenses for the
six months ended June 30, 2003, as compared to the same period in 2002, due to
the decrease in sales and marketing expenses coupled with an increase in barter
expense.
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, general corporate overhead, a
lease restructuring charge and related impairment of fixed assets, and other
professional fees. General and administrative expenses for the three and six
months ended June 30, 2003 were $7.1 million and $10.1 million, or 54% and 39%
of total revenues, respectively. For the comparable period in 2002, general and
administrative expenses were $3.3 million and $6.1 million, or 21% and 20% of
total revenues, respectively. The increase in general and administrative
expenses for the comparable six month periods was primarily due to the lease
restructuring charge and related impairment of fixed assets of approximately
$4.0 million and higher insurance costs of approximately $0.3 million, partially
offset by a decrease in salaries and related benefits of approximately $0.1
million. General and administrative expenses increased as a percentage of total
revenues for the six months ended June 30, 2003, compared to the corresponding
period in 2002, as a result of the increase in expenses coupled with a decline
in revenues.
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 three and six months ended June 30, 2003, iVillage reversed no amount and
approximately $0.1 million of accruals included in operating expenses due to a
change in estimate on services previously provided, respectively, compared to
approximately $0.4 million and $0.6 million for the corresponding periods in
2002. These amounts were partially offset by additional accruals for various
operating expenses.
Depreciation and Amortization.
Depreciation and amortization expenses for the three and six months
ended June 30, 2003 were approximately $2.2 million and $4.9 million, or 17% and
19% of total revenues, respectively. For the comparable periods in 2002,
depreciation and amortization expenses were $3.0 million and $5.9 million, or
19% of total revenues, respectively. The dollar decrease in depreciation and
amortization for the comparable six month periods was primarily due to several
intangible assets being fully amortized in 2002 and the impairments of
intangible assets and fixed assets reducing the cost basis on which depreciation
and amortization is calculated, partially offset by amortization expense on
intangible assets acquired with the Promotions.com acquisition in April 2002.
22
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 three and six months ended June 30, 2003 was approximately
$40,000 and $0.1 million, or less than 1% and 1% of total revenues,
respectively. For the comparable periods in 2002, interest income, net was
approximately $0.1 million and $0.3 million, or 1% of total revenues,
respectively. The decrease between 2003 and 2002 was primarily due to the
repayment of the NBC loan in the first quarter of 2002.
Net Loss
iVillage recorded a net loss of approximately $12.1 million and $18.2
million, or $0.22 per share and $0.33 per share, for the three and six months
ended June 30, 2003, respectively. For the comparable periods in 2002, iVillage
recorded a net loss of approximately $3.6 million and $21.5 million, or $0.07
per share and $0.40 per share, respectively. The decrease in net loss for the
six months ended June 30, 2003 compared to the same period in 2002 was primarily
due to the following 2002 events: the adoption of SFAS 142 which resulted in a
change in accounting principle charge of approximately $9.2 million and the
negotiated advertising spend and termination of an advertising agreement with
NBC of approximately $1.3 million and $4.1 million, respectively, offset by the
following 2003 events: lower revenues of approximately $5.3 million, a lease
restructuring charge and related impairment of fixed assets due to the
abandonment of leased real estate of approximately $4.0 million, and the
restructuring of the Promotions.com business resulting in the impairment of
goodwill, intangible assets and fixed assets of approximately $4.0 million.
Recent Events
In July 2003, iVillage entered into a lease amendment with the landlord
of its New York headquarters that will become effective upon satisfaction of
certain conditions. When the lease amendment becomes effective, iVillage will
surrender the approximately $8.5 million classified as restricted cash to the
landlord. iVillage currently expects to incur a charge of approximately $5.0
million to $5.5 million, depending on the effective date of the lease amendment,
in the third quarter of 2003 in connection with this transaction.
On July 25, 2003, iVillage acquired the Web site, trademarks, key
contracts and other related assets of gURL.com for an immaterial amount of cash.
23
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 June 30, 2003, iVillage had approximately $17.0 million in cash
and cash equivalents and approximately $8.5 million of restricted cash (See
Recent Events). 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.
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 February 2003, iVillage announced a further expense reduction
initiative with the goal of reducing annualized costs by up to $10.0 million. To
date, iVillage has recognized and/or achieved approximately $8.0 million of
annualized savings pursuant to this initiative, primarily through the
renegotiation of our New York real estate lease and contracts with third-party
vendors, as well as employee staff reductions and other miscellaneous
reductions. As iVillage regularly evaluates its cost structure in an effort to
improve operational efficiencies, iVillage will continue to seek to identify
potential expense reductions that will have a positive effect on iVillage's
business, financial condition and results of operations.
Based on current internal projections, iVillage no longer expects to be
able to maintain a cash balance at December 31, 2003 comparable to its cash
balance at December 31, 2002, primarily due to previously incurred or
anticipated cash expenditures relating to the renegotiation of our New York real
estate lease, certain investments in our infrastructure, research initiatives,
and other restructuring costs. Despite the short-term negative impact of these
expenditures on iVillage's cash balance, iVillage believes that these costs
improve the Company's long-term liquidity outlook by contributing to revenue
growth opportunities and significantly reducing annualized operating expenses.
24
Net cash used in operating activities decreased to approximately $1.9
million for the three months ended June 30, 2003, from $2.5 million for the
comparable period in 2002. Net cash used in operating activities decreased to
approximately $4.4 million for the six months ended June 30, 2003, from
approximately $4.6 million for the corresponding period in 2002. The decrease in
net cash used in operating activities for the six months ended June 30, 2003,
compared to the comparable period in 2002, was primarily due to a smaller
decrease in accounts payable and accrued expenses in 2003 of approximately $5.0
million, offset by a smaller utilization of restricted cash and other assets in
2003 of approximately $4.5 million, as compared to 2002, primarily due to the
charge for the negotiated advertising spend and termination of the NBC agreement
in 2002.
Net cash used in investing activities was approximately $0.1 million
for each of the three and six months ended June 30, 2003. This compares to cash
used in investing activities of approximately $0.4 million and $0.6 million for
the three and six months ended June 30, 2002, respectively. The overall decrease
in cash used in investing activities for the six months ended June 30, 2003
compared to the comparable period in 2002 resulted from cash received in
connection with the revised license agreement with Tesco of approximately $0.6
million in 2003 and cash paid for the acquisition of Promotions.com in 2002 of
$0.2 million, offset by higher fixed asset purchases in 2003 of approximately
$0.3 million.
Cash provided by financing activities was approximately $0.1 million
for each of the three and six months ended June 30, 2003. This compares to cash
provided by financing activities of $0.7 million and $2.0 million for the three
and six months ended June 30, 2002, respectively. The overall decrease in cash
provided by financing activities for the six months ended June 30, 2003 compared
to the comparable period in 2002 was primarily due to a decrease in principal
payments received for stockholders' notes receivable of approximately $1.3
million in 2003 coupled with a decrease in proceeds from the exercise of stock
options of approximately $0.7 million.
In March 2001, iVillage purchased an additional 30.1% of Cooperative
Beauty Ventures, L.L.C. from Unilever for $1.5 million, thereby increasing its
ownership to 80.1%. The agreement revised iVillage's funding obligation and
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. iVillage has not been required to fund the operations of the venture
during 2002 and 2003 and, as of June 30, 2003, 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.
25
iVillage's February 2000 advertising agreement with Unilever, as
amended, provided for a Unilever advertising purchase commitment of $14.5
million. Although this agreement expired in June 2003 with iVillage only having
earned approximately $14.2 million, iVillage expects the remaining approximately
$0.3 million to be earned by the end of 2003.
Pursuant to an amended and restated magazine content license and
hosting agreement with Hearst, Hearst 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 was party to a multi-year advertising agreement with Procter
and Gamble from July 2000 through June 2003. 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 fully earned the guaranteed fee under this advertising
agreement as of June 30, 2003.
In January 2003, iVillage received a notice of determination from the
City of New York Department of Finance regarding outstanding commercial rent
taxes and applicable interest and penalties. iVillage paid approximately $0.5
million in the second quarter 2003 and believes that it has fully paid and
satisfied this obligation.
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 twenty-year agreement, subject to
earlier termination upon the occurrence of certain events, whereby iVillage
licenses 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. iVillage will receive a minimum of $0.8 million in year one
of the license agreement, which will be earned monthly as services are provided.
As of June 30, 2003, iVillage has received $0.5 million.
26
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 non-cancelable operating
leases as of June 30, 2003 for the next five years:
Year ending June 30: (in thousands)
-------------------- --------------
2004......................... $ 4,476
2005......................... 4,362
2006......................... 4,058
2007......................... 3,854
2008......................... 3,729
--------
$ 20,479
========
In January 2003, iVillage received from the landlord of its New York
headquarters $0.3 million for reimbursement of certain construction expenses.
This landlord still owes iVillage approximately $0.5 million for reimbursement
of certain other construction expenses. iVillage maintains $8.5 million of
restricted cash that is held for a letter of credit collateralizing this lease.
In July 2003, iVillage entered into a lease amendment with the landlord
of its New York headquarters that will become effective upon satisfaction of
certain conditions (See Recent Events). When the lease amendment becomes
effective, iVillage will surrender the approximately $8.5 million classified as
restricted cash to the landlord and the landlord will pay iVillage the remaining
$0.5 million construction reimbursement payment described above. When effective,
the future minimum lease payments under non-cancelable operating leases for the
next five years will be approximately $9.6 million. Additionally, upon
effectiveness, this lease amendment will reduce iVillage's total leased space
and rent per square foot, resulting in anticipated cash savings from lower rent
payments, real estate taxes and facilities costs in excess of $17.0 million over
the remaining term of the lease.
In May 2003, Promotions.com received from its former New York landlord
approximately $0.4 million for reimbursement of certain construction expenses.
In the normal course of business, iVillage enters into contracts that
contain a variety of representations, warranties and minimum spend guarantees
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;
27
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 November 2002, the FASB reached a consensus on EITF No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables". 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. iVillage has determined that EITF No. 00-21
will not have a material impact on our financial position, cash flows or results
of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies when
a derivative contains a financing component, amends the definition of an
underlying to conform it to language used in FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," and amends certain other
existing pronouncements. This Statement is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. The Company does not expect the adoption of SFAS 149 to have a
material impact on its financial position, cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
150 changes the accounting for certain financial instruments that under previous
guidance issuers could account for as equity. It requires that those instruments
be classified as liabilities in balance sheets. The guidance in SFAS 150 is
generally effective for all financial instruments entered into or modified after
May 31, 2003, and otherwise is effective on July 1, 2003. The Company does not
anticipate that the adoption of SFAS 150 will have a material impact on its
financial position, cash flows or results of operations.
28
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 affect 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-Q and with
iVillage's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
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
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 $18.2 million for the six months ended June 30,
2003, $33.9 million for the year ended December 31, 2002, and $48.5 million for
the year ended December 31, 2001. As of June 30, 2003, iVillage's accumulated
deficit was approximately $484.9 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 decline or 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.
29
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.
For the three and six months ended June 30, 2003, revenues from
iVillage's five largest customers accounted for approximately 26% and 27% of
total revenues, respectively. One customer, Hearst, accounted for approximately
12% and 13% of total revenues for the three and six months ended June 30, 2003,
respectively. Three customers, Unilever, Procter and Gamble, and Hearst,
accounted for approximately 19%, 11% and 10% of total revenues for the three
months ended June 30, 2002, respectively, and 15%, 11% and 11%, of total
revenues for the six months ended June 30, 2002, respectively. Our five largest
customers accounted for approximately 46% and 44% of total revenues for the
three and six months ended June 30, 2002, respectively. At June 30, 2003, Hearst
accounted for approximately 23% of the net accounts receivable. At December 31,
2002, Procter and Gamble accounted for approximately 26% of the net accounts
receivable.
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 Unilever and Procter and
Gamble expired 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 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.
iVillage's quarterly revenues and operating results are not indicative of future
performance, are difficult to forecast and have been and are likely to continue
to fluctuate.
iVillage does not believe that period-to-period comparisons of its
operating results are necessarily meaningful nor should they be relied upon as
reliable indicators of future performance, thus making it difficult to forecast
quarterly 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;
30
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.
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.
31
Hearst is able to significantly influence iVillage's corporate direction and
policies.
As of June 30, 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 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;
32
o consumers returning to traditional or alternative sources for
information, shopping and services;
o privacy concerns, including those related to the ability of
Web sites to gather information about users without their
knowledge or consent; and
o 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.
33
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.
34
If, despite these factors, iVillage is successful in entering into
additional business combinations, acquisitions and joint ventures, iVillage's
business, financial condition and results of operations could be materially and
adversely affected if iVillage is unable to integrate the operations of the
acquired companies or joint ventures. iVillage's ability to integrate the
operations of the acquired companies or joint ventures will depend, in part, on
iVillage's ability to overcome or address:
o the difficulties of assimilating the operations and personnel
of the acquired companies and the potential disruption of
iVillage's ongoing business as a result of these assimilation
efforts;
o the difficulties of establishing a new joint venture including
the need to attract and retain qualified personnel and the
need to attract customers and advertisers;
o the need to incorporate successfully the acquired or shared
technology or content and rights into iVillage's products and
media properties;
o the difficulties of maintaining uniform standards, controls,
procedures and policies; and
o the potential impairment of relationships with employees and
customers as a result of any integration of new management
personnel or reduction of personnel.
In addition, effecting acquisitions could require use of a significant
amount of iVillage's available cash. Furthermore, iVillage may have to issue
equity or equity-linked securities to pay for future acquisitions, and any of
these issuances could be dilutive to existing and future stockholders.
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, regulatory and/or legal claims if
iVillage's P3P policy does not conform to iVillage's written privacy policy
posted on its Web sites and/or the loss of potential customers. 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.
35
If iVillage fails to attract and retain key personnel, iVillage's business would
be materially adversely affected.
iVillage's future success depends to a significant extent on the
continued services of iVillage's senior management and other key personnel,
particularly Douglas W. McCormick, iVillage's Chairman of the Board and Chief
Executive Officer. The loss of the services of Mr. McCormick would likely harm
iVillage's business. iVillage currently does not maintain "key person" life
insurance for any of iVillage's senior management.
iVillage may be unable to retain its key employees or attract,
assimilate or retain other highly qualified employees in the future. iVillage
has from time to time experienced, and expects to continue to experience,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications as a result of its 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.
36
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.
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:
37
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.
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 America Online, Inc.,
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.
38
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, Meredith Corporation 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.
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 the respective facilities of
Cable and Wireless Internet Services, Inc. ("Cable and Wireless") in New Jersey
and Verio, Inc. ("Verio") 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 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.
39
iVillage may incur liability for the information iVillage publishes or the
products and services iVillage sells.
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 Newborn
Channel, The Newborn Channel-Spanish and The Wellness Channel (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.
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.
40
Although iVillage believes that its content and 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.
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.
41
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.
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.
42
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;
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,
and 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
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.
43
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;
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 digital subscriber lines, or 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.
44
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
iVillageSolutions-branded vitamins, minerals and supplements, 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;
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.
45
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 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
-----------------------------------------------------
iVillage's management maintains disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) which it has designed to
ensure that material information related to iVillage, including its consolidated
subsidiaries, is made known to iVillage's disclosure committee, which consists
of certain members of iVillage's management, on a regular basis.
iVillage's disclosure committee has 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 as of June 30, 2003. 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.
46
iVillage's management, including its Chief Executive Officer and Chief
Financial Officer, does not expect that its disclosure controls or internal
control over financial reporting 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.
(b) Changes in Internal Control over Financial Reporting.
---------------------------------------------------------
There was no change in iVillage's internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the
fiscal quarter ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, iVillage's internal control over
financial reporting.
47
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to "Item 3. Legal Proceedings." in iVillage's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 for a
description of certain class action securities lawsuits pending against iVillage
and Women.com in connection with their respective 1999 initial public offerings.
In June 2003, a proposed settlement of this litigation was structured
between the plaintiffs, the issuer defendants, the issuer officers and directors
named as defendants, and the issuers' insurance companies. The proposed
settlement generally provides, among other things, that the issuer defendants
and related individual defendants will be released from the litigation without
any liability other than certain expenses incurred to date in connection with
the litigation, the issuer defendants' insurers will guarantee $1.0 billion in
recoveries by plaintiff class members, the issuer defendants will assign certain
claims against the underwriter defendants to the plaintiff class members, and
the issuer defendants will have the opportunity to recover certain
litigation-related expenses if the plaintiffs recover more than $5.0 billion
from the underwriter defendants.
The respective boards of directors of iVillage and Women.com each
approved the proposed settlement in July 2003. The proposed settlement is now
subject to approval by the other involved parties as well as to the final
approval of the court. iVillage does not expect this proposed settlement, if
approved, to have a material impact on iVillage's financial condition or results
of operations. There can be no assurance that this proposed settlement will be
approved and implemented in its current form, or at all.
Item 2. Changes in Securities and Use of Proceeds.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
48
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference from Exhibit 3.1 to the
Registrant's Form 10-Q Quarterly Report for the period ended
September 30, 2001, File No. 000-25469).
3.2 By-Laws of the Registrant (incorporated by reference from
Exhibit 3.2 to the Registrant's Form 10-Q Quarterly Report for
the period ended June 30, 2001, File No. 000-25469).
10.1 Employment Agreement, dated as of May 30, 2003, between the
Registrant and Douglas W. McCormick.
10.2 Fifth Amendment to Lease, dated as of June 30, 2003, between
the Registrant and 500-512 Seventh Avenue Limited Partnership.
10.3 Letter Agreement, dated July 22, 2003, between the Registrant
and Nancy Evans.
11 Statement re: computation of earnings per share.
31 Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934.
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
--------------------
A Report on Form 8-K was furnished on May 7, 2003, reporting under Item
7, Item 9 and Item 12, and a Report on Form 8-K was filed on June 10, 2003,
reporting under Item 5 and Item 7.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
iVILLAGE INC.
(Registrant)
Dated: August 14, 2003 By: /s/ Douglas W. McCormick
---------------------------
Douglas W. McCormick
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2003 By: /s/ Scott Levine
--------------------------------
Scott Levine
Chief Financial Officer (Principal
Accounting and Financial Officer)
50
EXHIBIT INDEX
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference from Exhibit 3.1 to the
Registrant's Form 10-Q Quarterly Report for the period ended
September 30, 2001, File No. 000-25469).
3.2 By-Laws of the Registrant (incorporated by reference from
Exhibit 3.2 to the Registrant's Form 10-Q Quarterly Report for
the period ended June 30, 2001, File No. 000-25469).
10.1 Employment Agreement, dated as of May 30, 2003, between the
Registrant and Douglas W. McCormick.
10.2 Fifth Amendment to Lease, dated as of June 30, 2003, between
the Registrant and 500-512 Seventh Avenue Limited Partnership.
10.3 Letter Agreement, dated July 22, 2003, between the Registrant
and Nancy Evans.
11 Statement re: computation of earnings per share.
31 Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934.
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350.
51