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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-25469
iVILLAGE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3845162
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
212 FIFTH AVENUE, NEW YORK, NEW YORK 10010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 206-3100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
March 15, 2000 as reported on the Nasdaq National Market, was approximately
$593.3 million. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 15, 2000, the registrant had outstanding 29,635,027 shares of
Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 17, 2000 are incorporated by reference
in Part III of this Form 10-K. Other documents incorporated by reference in this
Form 10-K are listed in the Exhibit Index.
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iVILLAGE INC.
FORM 10-K
TABLE OF CONTENTS
PAGE NO.
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PART I.................................................................................................. 1
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 15
Item 3. Legal Proceedings............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................................... 16
PART II................................................................................................. 17
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 17
Item 6. Selected Consolidated Financial Data.......................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 35
Item 8. Consolidated Financial Statements and Supplementary Data...................................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 35
PART III................................................................................................ 36
Item 10. Directors and Executive Officers of the Registrant........................................... 36
Item 11. Executive Compensation....................................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 37
Item 13. Certain Relationships and Related Transactions............................................... 37
PART IV................................................................................................. 38
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 38
SIGNATURES.............................................................................................. 42
Index of Financial Statements and Financial Statement Schedule........................................ F-1
PART I
Certain statements in this Annual Report on Form 10-K, including certain
statements contained in "Item 1. Business" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words or
phrases "can be", "expects", "may affect", "may depend", "believes", "estimate",
"project", and similar words and phrases are intended to identify such
forward-looking statements. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and iVillage cautions you that
any forward-looking information provided by or on behalf of iVillage is not a
guarantee of future performance. iVillage's actual results could differ
materially from those anticipated by such forward-looking statements due to a
number of factors, some of which are beyond iVillage's control, in addition to
those risks discussed below and in iVillage's other public filings, press
releases and statements by iVillage's management, including (i) the volatile and
competitive nature of the Internet industry, (ii) changes in domestic and
foreign economic and market conditions, (iii) the effect of federal, state and
foreign regulation on iVillage's business, and (iv) the impact of recent and
future acquisitions on iVillage's business and financial condition. All such
forward-looking statements are current only as of the date on which such
statements were made. iVillage does not undertake any obligation to publicly
update any forward-looking statement to reflect events or circumstances after
the date on which any such statement is made or to reflect the occurrence of
unanticipated events.
ITEM 1. BUSINESS
OVERVIEW
iVillage Inc., The Women's Network, is the leading online destination
targeted at women and one of the most demographically focused communities on the
Internet. iVillage.com is an easy-to-use, comprehensive network of Web sites
tailored to the interests and needs of women aged 25 through 54. As an online
media company, we provide advertisers and merchants with targeted access to
women using the Internet. Our page views have grown to a monthly average of 137
million for the quarter ended December 31, 1999.
Our network of sites consists of 17 content specific channels and several
shopping areas. The channels cover the topics of deepest interest to women, such
as family, health, work, money, food, computers, relationships, shopping,
travel, pets and astrology. We facilitate network use across channels by
providing common features, positioning and functionality within each channel and
across the network, resulting in a consistent and strongly branded environment.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ONLINE COMMERCE
The Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct business
electronically, and providing advertisers and businesses with an attractive
means of marketing and selling their products and services. International Data
Corporation estimates the number of users accessing the Web will increase from
approximately 142 million at the end of 1998 to approximately 502 million by the
end of 2003. According to International Data Corporation, the amount of commerce
conducted over the Web will top $1 trillion by 2003. Forrester Research, a
research firm that analyzes the future of technological change and its impact,
estimates that the amount spent on online advertising in the United States is
expected to increase from approximately $2.8 billion in 1999 to approximately
$22.2 billion by 2004. The Internet enables features and functions that are
unavailable in traditional media, permitting online retailers to interact
effectively with customers and advertisers to target specific demographic groups
by capturing valuable data on customer tastes, preferences and shopping and
buying patterns.
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WOMEN'S INCREASING USE OF THE INTERNET AND THEIR IMPORTANCE IN THE ECONOMY
Women represent an attractive demographic group for advertisers and
businesses. According to Jupiter Communications, a new media research firm that
specializes in online research and analysis, 48% of the Internet audience was
female as of January 1999. This trend is important to advertisers because women
are estimated to have disproportionate control or influence over consumer
spending in the United States. For example, according to a November 1997
Advertising Age article, women controlled or influenced 80% of all purchase
decisions, 80% of new vehicle purchases, 66% of home computers, 46% of men's
wear and 70% of appliance choices. We believe that women are increasing their
use of the Internet for commercial purposes. Although women are underrepresented
in the online spending category, accounting for only 30% of online sales in
1998, according to Jupiter Communications, this gap is expected to narrow over
the next several years and grow to approximately 48% by 2002.
Spending on advertising targeted to women is generally considered to
represent the largest single category of advertising in the United States. Also,
we believe that women online spend fewer hours watching television or reading
print media than they did prior to using the Internet in comparison to their
male counterparts. Thus, as women move online, advertisers will likely follow
suit.
THE iVILLAGE SOLUTION
iVillage.com is the leading online destination targeted at women and one of
the most demographically focused communities on the Internet. We focus on the
needs of women online and have created an environment that solves everyday
problems quickly in those areas of life most important to women, including
family, parenting, work, money and health. The user's experience on iVillage.com
centers on solving these problems in one destination through targeted community,
access to experts, useful interactive tools and commerce opportunities.
We believe our success to date can be attributed to the following factors:
FOCUS ON HIGHLY TARGETED DEMOGRAPHIC GROUP
iVillage.com is primarily tailored to the interests and needs of women
online between the ages of 25 and 54. We believe that these women want:
o powerful, quick and easily accessible problem-solving content;
o emotional support, a sense of identification and access to sympathetic
listeners; and
o a consistent navigation and programming experience.
We believe that our network creates the experience women are seeking and
distinguishes iVillage.com from the major Internet portals, other women's
networks and other online services. iVillage.com offers a series of integrated
tools, community resources, experts and information databases to help women
solve their everyday problems quickly and effectively. For example, a woman who
learns that she has a disease can quickly:
o access other members who have lived through this experience and can
provide both guidance and emotional relief;
o access a medical database to research the topic;
o ask a health expert questions regarding the topic; and
o select and purchase books on the topic.
iVillage.com provides a place where women can find support from like-minded
women and the comfort of knowing that other women have shared similar
experiences and have come through them successfully. iVillage.com also offers
daily polls, message boards and chats that provide women with an immediate sense
of belonging and connection.
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POSITIVE ENVIRONMENT FOR ADVERTISING AND COMMERCE
We believe that iVillage.com appeals to advertisers and consumers because
it combines the following attributes:
o a large, growing user base with a highly attractive demographic profile;
o a high degree of member involvement within the network, through polls,
message boards, chats and personalized interactive services, allowing our
advertisers to reach women when they are actively seeking communication
and focused on a goal;
o an interactive sponsorship model that provides advertising and commerce
opportunities throughout iVillage.com; and
o a single consistent brand.
In addition, we currently estimate that our Lamaze Publishing Company, Inc.
subsidiary reaches more than 75% of all women giving birth in the United States
through its magazines, videos and Newborn Channel, its satellite television
network which broadcasts in over 900 hospitals in the United States.
We believe that the cost per thousand impressions, or CPMs, generated by
our advertising and sponsorship contracts are significantly above the industry
average. iVillage.com also offers a scalable business platform from which we can
generate multiple revenue streams, including:
o banner advertising;
o sponsorship;
o production;
o e-commerce;
o content licensing and syndication;
o satellite television through the Newborn Channel;
o print media;
o direct marketing;
o video production; and
o sampling.
BUSINESS STRATEGY
Our objective is to be the premier online destination targeted at women. We
have pursued acquisitions which, among other things, give us new vehicles to
reach and capture our target audience, provide new solutions for advertisers and
add to our ability to grow our overall business. Key elements of our strategy
are as follows:
BUILD STRONG BRAND RECOGNITION
We believe that building brand recognition of iVillage.com is critical to
attracting and expanding our global Internet user base. Our market leadership
position has been driven by partnership and distribution agreements with other
leading Internet-based companies. We also use barter transactions as a component
of our online marketing efforts. We expect barter transactions to continue to be
a part of our business strategy. We believe aggressive brand-building will
become increasingly important to sustain our leadership position and have begun
to allocate some of our branding expenditures toward offline branding on
television and radio, through direct media spending and through strategic
alliances with traditional media partners. On August 2, 1999, we announced a $40
million marketing campaign, $28.5 million of which was incremental to our
existing plan, intended to establish iVillage.com as the brand leader and
strengthen our competitive position. The marketing campaign, consisting
primarily of broadcast advertisements, started in the third quarter of 1999 and
will run through 2000. We believe that we can build offline brand awareness and
attract traffic by leveraging the reach of
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traditional media partners. For example, in November 1998, we entered into a
contract with the National Broadcasting Company, Inc. ("NBC") pursuant to which
NBC will promote iVillage.com during prime time programs as well as through its
Web sites.
We also plan to build brand recognition and develop new commerce
opportunities through the marketing and packaging of our content. For example,
we licensed portions of our online content to PlanetRx.com. In addition, we
currently run a syndicated column with Copley News Services based upon our
content and have published three books under the Parent Soup brand and are
contemplating publishing additional books on a variety of topics in order to
reach offline audiences.
Lamaze Publishing also presents attractive opportunities for advertisers to
have access to the majority of U.S. parents and prospective parents through one
single source.
AGGRESSIVELY GROW MEMBERSHIP
We intend to grow our membership base and increase member usage through
member promotions, interactive services, community building and relationships
with national women's organizations. We also plan to offer additional
member-only services and to transition selected sections of our programming to
member-only areas.
ENHANCE AND EXPAND THE NETWORK
We intend to expand the network by developing additional channels and
expanding the content of our existing channels. In addition, we intend to
develop these additional channels with sponsors and media partners in order to
maintain low development costs while creating high utility for users. Our
acquisitions of OnLine Psychological Services, Inc. ("OnLine Psych"), Lamaze
Publishing and Family Point Inc. in 1999 allow us to expand our network through
a strong brand, expert content, and audio and video content which increases our
online content to women.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
We plan to continue to bolster our traffic, market share and revenues
through strategic acquisitions that offer opportunities to increase market share
in our content categories, offer high traffic or are sites categorized by high
retention statistics. In 1999, we made a number of strategic acquisitions to
further this goal. These include:
o OnLine Psych, one of the largest online health communities focused on
mental health;
o Lamaze Publishing, a multimedia provider of education information to
expectant and new mothers; and
o Family Point, a leading online meeting place for families, friends and
groups with similar interests.
We also intend to form alliances with larger companies to leverage their
brands, while incorporating content that is consistent with the network. We may
also expand our revenue opportunities through alliances with other retailers,
online service and content providers, commerce providers and advertisers. On
February 15, 2000, we announced a venture with Unilever plc where both parties
formed an independently managed company to provide women with an unbiased,
comprehensive website for their total beauty needs. The company will offer
content, beauty-related services and commerce solutions not limited to any
specific brands or manufacturers. Unilever and iVillage plan to provide an
aggregate $200 million in cash, intellectual property, marketing and other
resources. Unilever will provide capital as well as sponsorship and promotional
initiatives. iVillage will provide its Beauty channel, capital, intellectual
property, services and promotion.
INCREASE SPONSOR AND ADVERTISING REVENUES
We view our relationships with our sponsors and advertisers as critical to
our success. We have been a pioneer in developing innovative sponsorship
advertising relationships with leading brand marketers which go beyond
traditional banner advertising to support broad marketing objectives, including
brand promotion, awareness, product introductions, online research and the
integration of advertising with editorial content. We plan to continue to seek
additional sponsorship arrangements, which have longer-term contracts and higher
dollar values than typical banner deals as well as independence from page views
as the sole measurement basis. In
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addition, we intend to continue to attract banner advertising, which is sold
primarily through agencies. Through our acquisition of Lamaze Publishing, we
also offer advertising opportunities in addition to our network over multiple
platforms such as satellite television, video and print. We have recently
increased the size of our sales force to concentrate on increasing our
advertising and sponsorship relationships with leading brand marketers.
GENERATE E-COMMERCE REVENUES
We intend to identify new commerce, revenue and acquisition opportunities
that enhance iVillage.com by offering transaction services in categories that:
o have a high degree of relevance to iVillage.com members;
o are appropriate for the Internet; and
o fit with or complement a current iVillage.com content site.
We also generate e-commerce revenues through agreements with leading
merchants interested in targeting iVillage.com members. These merchants receive
exposure through banner advertising, special content and promotional offers in
exchange for which we generally collect a fixed fee and a share of revenue from
sales to iVillage.com users. In addition to enhancing user retention, these
retailing opportunities can be used to identify valuable purchasing trends that
can be used in future advertising and commerce.
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THE IVILLAGE NETWORK
Our network is organized around 17 content specific channels and several
shopping areas. iVillage.com is a single point of entry to our network of sites
and is updated daily to promote content and community, including channel
highlights. The following table provides a brief description of the features of
each channel and our shopping central area as of March 15, 2000:
CHANNEL DESCRIPTION
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allHealth..................... One of the leading health sites on the Internet, allHealth assists users in
becoming better health care decision makers through approximately 239 bulletin
boards and approximately 331 weekly chats on America Online, Inc. ("AOL") and the
Web. The site also includes OnLine Psych which hosts the largest online bulletin
board system on mental health issues and a database of mental health treatment
providers.
astrology.com................. A site providing users with horoscopes, celebrity profiles, romance charts,
monthly guidance and the ability to purchase astrology reports.
Beauty........................ A site offering users beauty advice, product reviews and access to hair, makeup
and skincare experts. On February 15, 2000, we announced that the beauty channel
would be contributed to a new venture between Unilever and iVillage.
Book club..................... A book and reading site for readers interested in a wide range of books that
allows users to discuss featured books and offers Monthly Book Picks, Question of
the Week, Reading Groups and iVillage.com Bestsellers.
Click! computing.............. A site offering users information on computers, including experts, tools, message
boards and chats.
Diet & fitness................ A diet and fitness site which includes Body Calculators, Nutrition Experts and
Community Challenges to improve one's fitness level.
election 2000................. A site offering users information on candidates, Town Hall Tuesdays which are
interactive auditorium chats with various candidates, and helpful voting
information.
food.......................... A food site providing information on meal planning, nutrition and recipes which
includes Food Experts and Cooking Basics.
garden........................ A home and garden site offering users information and tools on gardening issues.
moneylife..................... A financial planning site providing users with information on savings and
investment strategies focusing on key life stages of women.
parent soup................... A parenting site providing users with a branded online community where parents
share parenting solutions, talk with experts and find answers and support.
parentsplace.................. A parenting community center site that caters to women who are trying to
conceive, are expecting or are new parents and includes, on AOL and the Web,
approximately 950 bulletin boards and approximately 134 weekly chats.
pets.......................... A site designed in partnership with Ralston Purina that provides information on
caring for your pet, selecting a breed and features an automated adoption and
veterinarian-finder tool sponsored by the American Humane Association and
American Animal Hospital Association.
relationships................. A site offering users information and conversation on love, marriage, sex and
family.
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CHANNEL DESCRIPTION
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travel........................ A travel site that offers tools for planning a vacation, articles on
travel-related issues, a link to a travel reservation center and a currency
converter.
work from home................ A site providing women who work from home with tools and resources such as Home
Office Basics, a Tax Guide and a Software Library.
working diva.................. A career planning site that provides women with tools and resources relating to
professional development and career-related issues.
shopping central.............. A one-stop online shopping destination offering users easy access to retail Web
sites such as Nordstrom.com, PlanetRx.com, Sparks.com, Family Wonder, iBaby,
PlusBoutique.com and iMaternity.
We believe that user support is critical in order to attract and retain
users. We provide user support primarily through e-mail-based correspondence.
Help and feedback buttons are prominently displayed throughout iVillage.com, and
our user support staff attempts to respond to all e-mail queries within 24
hours. In addition, community leaders provide e-mail support for broad-ranging
issues. We do not charge for these services.
SPONSORSHIP AND ADVERTISING REVENUES
We have derived a significant amount of our revenues to date from the sale
of sponsorships and advertisements. For the years ended December 31, 1999, 1998
and 1997, sponsorship and advertising revenues represented 79%, 83% and 93%,
respectively, of our revenues.
Our strategy is focused in part on generating a majority of our advertising
revenues from sponsors and merchants who seek a cost-effective means to reach
women online. We are aggressively working to build our leadership position as
the preeminent women's brand to the advertising community. Our sponsorship
arrangements typically differ from traditional banner advertising in that they
are designed to achieve broad marketing objectives such as brand promotion,
awareness, product introductions and online research. Sponsorships allow
iVillage.com to cater to the specific goals of advertisers in the areas of
impressions, product research, market research, new product launches, list
development, product information, repositioning, new account openings, lead
generation and transactions. Sponsors also have the opportunity to talk
one-on-one with members on the network's message boards, chats, polls and
special events, which allows sponsors the opportunity to gain insights into
their customers. Our sponsorship arrangements generally have longer terms than
typical banner advertising placements, provide for higher CPMs per advertiser
and independence from page-views as the sole measure of value. In addition, we
occasionally develop extensive content to support the marketing initiatives of
advertisers. Our sponsorship agreements can be exclusive and generally are for a
period of one to three years.
We also derive a smaller portion of our sponsorship and advertising
revenues from banner advertisements that are prominently displayed at the top of
pages throughout the iVillage.com network. From each banner advertisement,
viewers can hyperlink directly to the advertiser's own Web site, thus providing
the advertiser the opportunity to directly interact with an interested customer.
During the years ended December 31, 1999, 1998 and 1997, our five largest
advertisers accounted for approximately 16%, 17%, and 26% respectively, of our
total revenues; however, no advertiser accounted for more than 10% of total
revenues. The following is a select list of our advertisers:
AT&T
Charles Schwab & Co.
CNA
First USA
Fuji Photo Film USA
Ford Motor
Glaxo Wellcome
Johnson & Johnson
Kimberly-Clark
Nordstrom.com
PlanetRx.com
PNC Bank
Procter & Gamble
Ralston Purina
Visa
Wal-Mart
Warner Lambert
Westpoint Stevens
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MEMBERSHIP
We believe a large and active membership base is critical to our success.
Some features of our Web sites are restricted to members. Membership is free and
available to iVillage.com visitors who disclose their names, e-mail addresses,
zip codes, ages and gender and choose a member name and password to be used
throughout member-only areas. Members form iVillage.com's core audience and are
our most valuable users. In 1999, we launched an aggressive member-acquisition
campaign, which included the creation of free services and support for members.
E-mail, instant messaging, community challenges, message boards and chats
are examples of members-only benefits. In addition, within the allHealth
channel, the personal health report is restricted to members and, within the
Parent Soup channel, the pregnancy calendar is restricted to members.
We recognize the importance of maintaining the confidentiality of member
information and have a privacy policy to protect such information. Our current
privacy policy is accessible through a link from the iVillage.com home page as
well as nearly every Web page on iVillage.com, including the page where a person
initially registers for membership. Our current policy is to never sell to any
third party any member's personal identifying information such as his or her
name or address, unless the member has provided written consent or in certain
limited situations. For example, in some situations, we do allow a third-party
partner access to database information if it is necessary for the delivery of a
member service, such as e-mail. In these instances, the partner has agreed to be
bound by our current policy. We do share aggregated member information with
third parties, such as average age or geographic dispersion. We also reserve the
right to offer members products and services. We may use information revealed by
members and information built from user behavior to target advertising, content
and e-mail. For instance, we may, on behalf of an advertiser, send e-mail offers
to all members from a particular region or target advertisements to all users
who frequent a specific area of the site.
LAMAZE PUBLISHING
Lamaze Publishing is used to solidify our leading position in the parenting
category. Lamaze Publishing produces advertising-supported educational materials
for expectant and new parents and is the exclusive licensee of the LAMAZE mark
for use in connection with consumer publications and other communications, which
include print, audio, visual and other consumer oriented media, that are
commercial in nature. Lamaze Publishing is also the exclusive marketing agent
for Lamaze International, Inc., the owner of the LAMAZE family of marks.
Lamaze is a method of childbirth preparation based on the Lamaze philosophy
of birth. The Lamaze philosophy of birth states that birth is "normal, natural
and healthy," and "childbirth education empowers women to make informed choices
in healthcare, to assume responsibility for their health and trust their inner
wisdom".
Lamaze International was founded by interested parents, childbirth
educators and healthcare providers in 1960 to promulgate these ideas. Lamaze
Publishing was established as a for-profit company in 1990 to provide childbirth
and infant care educational materials.
During a pregnancy and immediately after the birth of a child, new parents
spend substantial amounts of time with childbirth educators and maternity nurses
seeking information on healthcare issues, the birth process and infant care.
These busy healthcare professionals typically have neither the time nor the
resources to create the consumer publications or communications that would
assist this process and allow parents to absorb this material at home.
The Lamaze Publishing business strategy is to provide these consumer
publications or communications to childbirth educators and maternity nurses free
of charge, and offset the expense incurred by selling print advertising and
commercial messages to advertisers who target the young family market.
Lamaze Publishing publications, used and distributed to parents by
childbirth educators and maternity nurses nationwide, include:
o Lamaze Parents, a prenatal publication used in childbirth education.
Topics include prenatal nutrition, the role of the childbirth partner,
and the physical and emotional challenges of pregnancy. Childbirth
educators distribute Lamaze Parents to expectant parents on the first
night of class. This publication
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reaches an estimated 90% of all first-time expectant parents in the U.S.
Lamaze Parents had an average annual circulation of approximately
2,400,000 for 1999.
o Lamaze Baby, a parenting guide for mothers from the time a child is born
through twelve months of life written entirely by healthcare
professionals. Lamaze Baby is delivered by maternity nurses to new
mothers at the hospital bedside shortly after childbirth. The magazine
covers topics that hospital nurses review with new mothers prior to
discharge serving as a helpful and time saving tool for nurses in
educating mothers about infant care. This publication reaches an
estimated 75% of all new U.S. parents. Lamaze Baby had an average annual
circulation of approximately 3,000,000 for 1999.
o Revista Lamaze para Padres, a Spanish language prenatal magazine which
reaches more expectant Hispanic mothers than any other title. Childbirth
educators distribute Revista Lamaze para Padres to expectant parents on
the first night of class. This publication reaches an estimated 85% of
Hispanic woman giving birth in the U.S. Revista Lamaze para Padres had an
average annual circulation of approximately 600,000 for 1999.
o "Lamaze You and Your Baby", a 90 minute video textbook providing
expectant parents with important instruction on infant care. Childbirth
educators distribute to expectant parents the video, which is later
returned. The video is distributed yearly to childbirth educators,
typically during the first four months of the year. In 1999,
approximately 7,800 childbirth educators had ordered approximately
200,000 videos from Lamaze Publishing.
o "Lo Mejor para Su Bebe", a 60 minute Spanish-language video textbook that
provides expectant parents with important instruction on infant care.
This video is modeled after "Lamaze You and Your Baby". The video is
distributed yearly to childbirth educators, typically during the first
four months of the year. In 1999, approximately 4,200 childbirth
educators ordered approximately 60,000 videos from Lamaze Publishing.
o Lamaze Special Delivery, a program offering advertisers the ability to
distribute coupons, samples and promotional literature to expectant and
new parents. Information to be distributed is polybagged with Lamaze
Parents, Lamaze Baby and Revista Lamaze para Padres.
Lamaze Publishing also owns the Newborn Channel, a satellite television
network that instructs mothers in their hospital rooms following birth in over
900 hospitals nationwide and, as of December 31, 1999, reached approximately
2,200,000 new mothers.
E-COMMERCE
OVERVIEW
We generate commerce revenues by selling products or services that have a
high degree of relevance to our members and fit within a content area or provide
an opportunity for future content development.
iBABY, iMATERNITY AND PLUSBOUTIQUE
iBaby offers more than 5,000 products from over 400 manufacturers
representing an extensive assortment of products for children under three years
of age. The site's comprehensive selection, combined with easy site navigation
and time-saving features such as a baby registry, superior product search and a
gift-finder service, makes iBaby convenient for new and expectant parents.
iBaby targets parents through newsletters, message boards, content
integration and banner ads. iBaby has distribution agreements with online
services such as AOL and Yahoo!. iBaby has also initiated a substantial print
advertising campaign in various magazines to increase sales and build brand
awareness.
Online orders are taken 24 hours a day, seven days per week and products
are shipped generally within 48 hours of placement of most orders. We recently
started handling merchandising, inventory management and order fulfillment for
iBaby.
9
During 1999, iBaby launched two additional commerce channels, iMaternity
and PlusBoutique. iMaternity sells iMaternity brand clothing and products.
PlusBoutique sells clothing and products for plus-sized women. All product
orders and fulfillment are currently handled by Dan Howard, Inc. All orders for
iMaternity and PlusBoutique are taken through its channel on iVillage.com, and
iBaby collects the payment for product sales. Lamaze-licensed products are also
offered through iBaby and iMaternity.
ASTROLOGY.COM
Astrology.com is a leading destination for women seeking daily horoscopes,
astrology content and personalized forecasts online. Through our network of
sites organized by topics of interest to women such as family, love, money and
career, Astrology.com provides a timely, personalized experience for the user,
stimulates commerce sales of monthly and annual forecasts by subject and creates
an advertising environment that is appealing to advertisers due to targeting
possibilities within the site and through e-mail communication.
Astrology.com brings iVillage a content and commerce site that is appealing
to our core demographic of women, represents one of the best customer
acquisition tools as demonstrated by strong performance in online media, and a
vehicle to drive repeat visits to iVillage through the use of daily horoscopes.
Astrology.com has also created an interactive commerce system that provides
instantaneous, digital astrology reports. The system consists of software which
operates the Web site and is capable of generating customized astrology reports
based on input from users.
ALLIANCES
We pursue strategic relationships to increase our access to online
customers, build brand recognition and expand our online presence. Historically,
we have pursued strategic alliances to reach online customers. We have begun to
shift our focus to building offline brand recognition and to increasing our
access to offline customers. Our principal strategic alliances and relationships
include the following:
MEDIA ARRANGEMENT
In November 1998, we entered into an advertising and promotional agreement
with NBC pursuant to which NBC promotes iVillage.com on television, primarily
during prime-time programs, as well as through its Web sites. In March 1999, we
amended our November 1998 agreement with NBC to provide for the purchase by us,
for cash, of $13.5 million of advertising and promotional spots during 1999 and
$8.5 million per year during 2000 and 2001.
SPONSORSHIP ARRANGEMENTS
We have a number of sponsorship arrangements with leading advertisers and
sponsors, including:
o Charles Schwab & Co.--exclusive sponsorship of all brokerage and mutual
fund categories on all of our money, financial or investing related
sites.
o CNA--the first insurer to provide iVillage.com visitors with highly
integrated online tools and information regarding life insurance products
and services. CNA sponsored a co-branded life insurance center, offering
iVillage.com visitors information and quotes for an array of life
insurance products.
o Ford Motor Media--promotion of the sale of Ford automotive products
across our Web sites.
o Fuji Photo Film USA--exclusive sponsorship for the photographic film,
disposable camera and digital camera categories throughout our network.
o General Electric--introduction and promotion of General Electric's
Advantium oven directly to its targeted audience.
o Glaxo Wellcome--exclusive sponsorship for resource centers for smoking
cessation, migraine, and asthma that include interactive assessment
tools, disease-specific newsletters, and enhanced community support.
10
o PNC Bank--exclusive sponsor of certain banking products and services.
o Ralston Purina--creation of a pet channel and provider of content,
experts, customer service and distribution for the pet channel.
o Warner Lambert--promoting and marketing a range of products.
DISTRIBUTION ARRANGEMENTS
We consider branding an important aspect of our distribution arrangements
and seek distribution relationships where our brand is promoted. We have also
entered into distribution and content relationships with a number of major
online service companies on the Internet, including:
o Snap.com--we have the exclusive right to program the content on the front
pages of the Health Center, with health-related content from iVillage.com
and Snap's Family Center with content from Parent Soup.
o AOL--some of our icons are placed within the AOL service and we receive
guaranteed impressions.
o Yahoo!--We provide branded content for Yahoo!'s Web site in the areas of
programming, diet and fitness, and astrology.
SALES, MARKETING AND PUBLIC RELATIONS
SALES
As of December 31, 1999, we had a direct sales organization, consisting of
15 sales professionals with an average of over 15 years of experience, and 48
sales operations staff. Our sales organization consults regularly with
advertisers and agencies on design and placement of its Web-based advertising
and the production and management of bridge sites, provides customers with
advertising management analysis and focuses on providing a high level of
customer satisfaction. Nine professionals concentrate primarily on advertising
sales for the Newborn Channel, video products, and print advertising sales. We
generally seek to hire individuals with significant experience in selling
advertising and pre-existing relationships with advertisers in a variety of
media.
MARKETING AND PUBLIC RELATIONS
We employ a variety of methods to promote the iVillage.com brand and to
attract traffic and new members, including advertising on other Internet sites,
targeted publications, radio stations, national television, cross promotional
arrangements to secure advertising and other promotional considerations. To
extend the iVillage.com brand, we have also entered into several strategic
alliances with offline partners. Please see "--Alliances". In addition, we
leverage other audience building strategies, including working closely with
search engine submissions, news group postings and cross-promotion with affinity
sites to properly index materials. Our marketing department consisted of 51
marketing professionals as of December 31, 1999.
Our internal public relations staff oversees a comprehensive public
relations program which we believe is a key component of our marketing and brand
recognition strategy. Organized into two primary components that promote
iVillage and the iVillage.com brand, the program targets a trade/business and
consumer audience, respectively. We have also implemented national long-lead
consumer initiatives, such as radio media tours, regional broadcast media tours,
consumer publicity of our Parent Soup book series and other related activities,
and multiple daily media advisories sent to consumer outlets throughout the
United States.
To maximize distribution of our publications and the Newborn Channel, and
gain the endorsement of the professional community for these products, we give
particular attention to marketing efforts targeted to childbirth educators,
maternity nurses and hospitals. A staff of three marketing professionals
contacts hospitals for distribution of the Newborn Channel and works with the
professional community to maintain distribution levels of our publications and
demonstrate how they can be used as teaching tools for expectant parents and new
mothers. Our representatives maintain contact with the professional community
through trade shows, professional conferences, consumer publication updates and
personal sales calls.
11
OPERATING INFRASTRUCTURE
Our Internet operating infrastructure has been designed and implemented to
support the delivery of millions of page views a day. Web pages are generated
and delivered, in response to end-users requests, by any one of more than 45
servers. Key attributes of this infrastructure include the ability to support
growth, performance and service availability.
Our servers run on the Sun Solaris, Microsoft NT and Linux operating
systems and use Netscape Enterprise, Apache and Microsoft Corporation's IIS Web
server software.
We maintain all of our production servers at the New Jersey Data Center of
Exodus Communications, Inc., Verio, Inc. in San Francisco, California and the
San Diego Data Center of AT&T CERFnet. Our operations are dependent upon these
companies' ability to protect their respective systems against damage from fire,
hurricanes, power loss, telecommunications failure, break-ins and other events.
Exodus, Verio and AT&T CERFnet provide comprehensive facilities management
services, including human and technical monitoring of all production servers 24
hours per day, seven days per week. Each of these companies provides the means
of connectivity for our servers to end-users via the Internet through multiple
connections. Each facility is powered by multiple uninterruptible power
supplies.
All of our production data, except Astrology.com, are copied to backup
tapes each night and stored at a third party, off-site storage facility.
Astrology.com's production data is backed up on a daily basis to local storage.
We are in the process of developing a comprehensive disaster recovery plan to
respond to system failures. We keep all of our production servers behind
firewalls for security purposes and do not allow outside access, at the
operating systems level, except via special secure channels. Strict password
management and physical security measures are followed. Computer emergency
response team alerts are read, and, where appropriate, recommended action is
taken to address security risks and vulnerabilities. From time to time, we use
the services of third party computer security experts and penetration tests have
been performed to help improve security.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. Components or features of our Web sites have in
the past suffered outages or experienced slower response times because of
equipment or software downtime. This has not had a material effect on our
business.
Broadcasting of the Newborn Channel to hospitals originates from a laser
disc system operated by Group W Network Services, from Group W's facility in
Stamford, Connecticut. The system provides an uplink signal to a satellite
operated by PanAmSat. The signal is received through a satellite dish at each
hospital and distributed to patients' rooms. Group W handles installation and
service of all hospital receiving equipment. We maintain business interruption
insurance in the event programming is interrupted over the designated satellite.
COMPETITION
The market for members, visitors and Internet advertising is new and
rapidly evolving, and competition for members, visitors and advertisers is
intense and is expected to increase significantly in the future. With no
substantial barriers to entry, we expect that competition will continue to
intensify.
We believe that the primary competitive factors in creating community on
the Internet are:
o functionality;
o brand recognition;
o member affinity and loyalty;
o demographic focus;
o variety of value-added services;
o ease-of-use;
o quality of service; and
o reliability and critical mass.
12
Other companies or sites which are primarily focused on targeting women
online include Women.com Networks, Oxygen.com and condenet.com, as well as Web
sites targeted to categories such as health. We also compete with e-commerce
companies targeting children less than three years of age such as eToys, Inc.
and its wholly-owned subsidiary, BabyCenter, Inc. We will likely also face
competition in the future from:
o developers of Web directories;
o search engine providers;
o content sites;
o commercial online services;
o sites maintained by Internet service providers; and
o other entities that attempt to or establish communities on the Internet
by developing their own or purchasing one of our competitors.
In addition, we could face competition in the future from traditional media
companies, a number of which, including Disney, CBS and NBC, have recently made
significant acquisitions of or investments in Internet companies. Further, there
can be no assurance that our competitors and potential competitors will not
develop communities that are equal or superior to ours or that achieve greater
market acceptance than our community.
We also compete with traditional forms of media, such as newspapers,
magazines, radio and television, for advertisers and advertising revenues. We
believe that the principal competitive factors in attracting advertisers are:
o the amount of traffic on our Web sites;
o brand recognition;
o the demographics of our members and visitors;
o our ability to offer targeted audiences; and
o the overall cost-effectiveness of the advertising medium offered by us.
We believe that the number of Internet companies relying on Web-based
advertising revenues will increase greatly in the future. Accordingly, we will
likely face increased competition, which could in turn have a material adverse
effect on our business, results of operations and financial condition.
Many of our current and potential competitors, including developers of Web
directories and search engines and traditional media companies, have:
o longer operating histories;
o significantly greater financial, technical and marketing resources;
o greater name recognition; and
o larger existing customer bases.
These competitors are able to undertake more extensive marketing campaigns
for their brands and services, adopt more aggressive advertising pricing
policies and make more attractive offers to potential employees, distribution
partners, commerce companies, advertisers and third-party content providers.
There can be no assurance that Internet content providers and Internet service
providers, including developers of Web directories, search engines, sites that
offer professional editorial content and commercial online services, will not be
perceived by advertisers as having more desirable Web sites for placement of
advertisements. In addition, many of our current advertising customers and
strategic partners also have established collaborative relationships with
certain of our competitors or potential competitors, and other high-traffic Web
sites. Accordingly, there can be no assurance that:
o we will be able to grow our membership, traffic levels and advertiser
customer-base at historical levels;
o we will be able to retain our current members, traffic levels or
advertiser customers;
13
o competitors will not experience greater growth in traffic as a result of
these relationships which could have the effect of making their Web sites
more attractive to advertisers; or
o our strategic partners will not sever or will elect not to renew their
agreements with us.
Several major publishing companies produce products that are directly
competitive with our magazines. Time Warner, Gruner and Jahr and Primedia all
publish various pre- and post-natal publications. Disney Publishing and
Children's Television Workshop also publish general parenting magazines. All of
these publishers have substantially greater marketing, research and financial
resources than us. We compete by emphasizing the highly targeted nature of our
audience, product quality and the fact that our publications are used as
teaching tools by professionals, and the credibility and trust parents place in
the Lamaze brand name.
While our Lamaze Publishing instructional videos and the Newborn Channel
currently have no direct competitors, advertisers in this marketplace are heavy
users of daytime network television and cable television networks targeted to
young parents. The broadcasting companies that provide such opportunities have
invested substantial amounts in programming, sales and marketing and are much
better-known to advertisers than Lamaze Publishing and the Newborn Channel. To
compete, Lamaze Publishing and the Newborn Channel must convince them that
advertising recall and effectiveness obtained in an educational or hospital
setting is superior to that of traditional broadcasting.
There can be no assurance that we will be able to compete successfully
against our current or future competitors or that competitive pressures faced by
us will not have a material adverse effect on our business, results of
operations and financial condition.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND DOMAIN NAMES
We regard our copyrights, service marks, trademarks, trade names, trade
dress, trade secrets, proprietary technology and similar intellectual property
as critical to our success, and rely on trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers, independent contractors, partners and others to protect
our proprietary rights. We pursue the registration of our trademarks and service
marks in the United States, and have applied for and obtained registration in
the United States for certain of our trademarks and service marks, including
"iVillage". Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our products and
services are made available online.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material,
to third parties. While we attempt to ensure that the quality of our brand is
maintained by these licensees, there can be no assurance that the licensees will
not take actions that might materially adversely affect the value of our
proprietary rights or reputation, which could have a material adverse effect on
our business, financial condition and results of operations. There can be no
assurance that the steps taken by us to protect our proprietary rights will be
adequate or that third parties will not infringe or misappropriate our
copyrights, trademarks, trade dress and similar proprietary rights. In addition,
there can be no assurance that other parties will not assert claims of
infringement of intellectual property or alter proprietary rights against us.
We have been subject to claims and expect to be subject to legal
proceedings and claims from time to time in the ordinary course of our business,
including claims of alleged infringement of patents, trademarks and other
intellectual property rights of third parties by us and our licensees. These
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources. Further, if these claims are successful, we
may be required to change our trademarks, alter our content, alter our site
format and pay financial damages. There can be no assurance that these changes
of trademarks, alteration of content or format or payment of financial damages
will not adversely affect our business, results of operations and financial
condition.
We filed a service mark application for the mark "PARENTSPLACE.COM". On
July 22, 1998, Jewish Family and Children's Services filed a Notice of
Opposition in the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office. On January 22, 1999, we filed an Answer to the Notice of
Opposition, denying that there was any likelihood of confusion between our mark,
"PARENTSPLACE.COM", and the mark used by
14
Children's Services. Children's Services has proposed a resolution of this
dispute that would allow us to continue using the mark "PARENTSPLACE.COM".
Although we are currently engaged in settlement negotiations with Children's
Services, there can be no assurance that a resolution can be achieved or that
Children's Services will not be successful in the Opposition proceeding, thus
preventing us from securing a federal registration to the mark
"PARENTSPLACE.COM". Further, there can be no assurance that Children's Services
will not assert a claim to trademark rights against us in the future with
respect to the use of "PARENTSPLACE.COM" or "PARENTSPLACE", either as currently
used or as developed in the future. We are not able at this time to evaluate the
likelihood of an unfavorable outcome in the event such claims are asserted, or
to estimate the amount or range of potential loss.
We may be required to obtain licenses from others to refine, develop,
market and deliver new services. There can be no assurance that we will be able
to obtain any license on commercially reasonable terms or at all or that rights
granted pursuant to any licenses will be valid and enforceable.
HUMAN RESOURCES
As of March 10, 2000, we employed 414 full-time employees, of whom 111 were
in sales and marketing, 88 were in editorial and community, 89 were in
administration and customer service, and 126 were in technology, operations and
support. As we continue to grow and introduce more products, we expect to hire
more personnel, particularly in the areas of product development and
sponsorship. None of our current employees are represented by a labor union or
is the subject of a collective bargaining agreement. We believe that relations
with our employees are good.
ITEM 2. PROPERTIES
We are headquartered in New York, New York, where we currently occupy an
aggregate of approximately 43,650 square feet of space. We lease space in two
buildings located across the street from each other. We lease one floor at 170
Fifth Avenue, which is approximately 3,650 square feet. The lease expires on May
31, 2000. We lease two floors at 149 Fifth Avenue, which are each approximately
10,000 square feet. The lease expires on June 30, 2001. We have a third lease at
212 Fifth Avenue for approximately 20,000 square feet of space. The lease
expires on June 30, 2000. In March 2000, we entered into a fifteen-year lease
for approximately 105,000 square feet at 500-512 Seventh Avenue in which we plan
to consolidate our New York City operations upon expiration of our existing
leases.
We also lease a sales office which is located at 645 North Michigan Avenue,
Chicago, Illinois. The lease is on a month-to-month basis.
iBaby is currently leasing approximately 74,000 rentable square feet at a
facility located at 6910 Carroll Road in San Diego, California for use as
general office, administrative, storage, warehousing and distribution. The lease
is for a term of 24 months with the right to extend the lease term for an
additional 5 years.
Lamaze Publishing subleases approximately 10,300 square feet of space at
9 Old Kings Highway, Darien, Connecticut. The sublease expires on June 30, 2001.
Astrology.com leases approximately 7,400 square feet of space in San
Francisco, California. The lease expires in November 2002.
15
ITEM 3. LEGAL PROCEEDINGS
On January 8, 1999, a complaint was filed in the Chancery Court for
Williamson County, Tennessee by a former employee against us and three of our
officers. The complaint was subsequently amended to withdraw all claims against
two of those officers. The complaint alleged breach of an alleged employment
agreement and fraudulent inducement to accept a job in New York and to move from
Tennessee to New Jersey. In addition to unspecified damages, the complaint
sought an award of options to purchase 100,000 shares of common stock.
On January 29, 1999, the case was removed from the Chancery Court to the
U.S. District Court for the Middle District of Tennessee. On March 12, 1999, the
U.S. District Court for the Middle District of Tennessee issued a ruling
transferring the case to the U.S. District Court for the Southern District of
New York. In addition, on August 11, 1999, the plaintiff filed a complaint with
the Equal Employment Opportunity Commission alleging gender discrimination in
connection with his termination of employment. Further, on January 14, 2000, two
complaints were filed against us by two former employees. The complaints, among
other things, alleged breach of an alleged employment agreement and fraud in
connection with an alleged promise of stock options. The complaints sought an
unspecified amount of actual and punitive damages.
Each of these matters was settled in March 2000 for a combination of cash
and stock options that in the aggregate will not have a material adverse effect
on our business, financial condition or results of operations.
We are not currently subject to any other material legal proceedings other
than as set forth in "Item 1. Business--Intellectual Property, Proprietary
Rights and Domain Names". We may from time to time become a party to various
legal proceedings arising in the ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 1999 Annual Meeting of Stockholders was held on December 15, 1999. In
the election of directors, the three director nominees were elected with the
following votes:
NUMBER OF VOTES
-----------------------
NOMINEE FOR WITHHELD
- -------------------------------------------------------------------- ---------- --------
Alan Colner......................................................... 22,220,861 51,819
Lennert J. Leader................................................... 22,220,992 51,688
Michael Levy........................................................ 22,220,220 52,460
The stockholders voted in favor of adoption of our Amended and Restated
1999 Employee Stock Option Plan and the ratification of the appointment of
PricewaterhouseCoopers LLP as our independent auditors for the fiscal year
ended December 31, 1999 as follows:
NUMBER OF VOTES
--------------------------------------------------
FOR AGAINST ABSTAIN NON-VOTE
---------- --------- ------- ---------
Approval of Adoption of Amended and Restated 1999 Employee
Stock Option Plan.......................................... 16,123,787 2,104,505 21,328 4,023,060
Ratification of Appointment of Auditors...................... 22,243,033 15,685 13,962 --
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market since
March 19, 1999 and trades under the symbol "IVIL". Prior to that time, there was
no public market for our common stock. The following table sets forth, for the
periods indicated, the high and low closing prices per share of the common stock
as reported on the Nasdaq National Market.
1999 HIGH LOW
- ----------------------------------- ------- ------
First Quarter (from March 19, 1999).......................................................... $104.63 $70.75
Second Quarter............................................................................... $113.75 $33.38
Third Quarter................................................................................ $ 62.75 $28.06
Fourth Quarter............................................................................... $ 34.50 $20.25
On March 15, 2000, the closing sales price of our common stock was $26.00
per share. There were 397 holders of record as of March 15, 2000.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends in the foreseeable
future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes to those
statements and other financial information included elsewhere in this Form 10-K.
iVillage acquired ParentsPlace.com, Inc. in December 1996, Health
ResponseAbility Systems, Inc. in May 1997, the majority interest and remaining
minority interest in iBaby in April 1998 and March 1999, respectively,
Astrology.Net in February 1999, OnLine Psych in June 1999, and Lamaze Publishing
and Family Point in August 1999. The financial data reflect the results of
operations of these subsidiaries since their dates of acquisition. For the year
ended December 31, 1998, a portion of the net loss for iBaby, Inc. attributable
to minority stockholders is included as a reduction to net loss.
JULY 1, 1995
(INCEPTION)
YEAR ENDED DECEMBER 31, TO
-------------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995
--------- -------- -------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 44,561 $ 15,012 $ 6,019 $ 732 $ --
Cost of revenues.................................... 21,768 12,403 5,530 3,468 508
--------- -------- -------- ------- --------
Gross margin........................................ 22,793 2,609 489 (2,736) (508)
--------- -------- -------- ------- --------
OPERATING EXPENSES:
Product development and technology.................. 6,081 2,118 2,076 1,053 121
Sales and marketing................................. 66,845 28,523 8,771 2,709 329
General and administrative.......................... 17,879 10,612 7,841 3,104 656
Depreciation and amortization....................... 29,312 5,683 2,886 109 17
--------- -------- -------- ------- --------
Total operating expenses.......................... 120,117 46,936 21,574 6,975 1,123
--------- -------- -------- ------- --------
Loss from operations................................ (97,324) (44,327) (21,085) (9,711) (1,631)
Interest income (expense), net...................... 4,085 591 (216) 28 (7)
Other income (expense), net......................... 238 -- -- -- --
Loss on sale of Web site(1)......................... -- (504) -- -- --
Minority interest................................... -- 586 -- -- --
--------- -------- -------- ------- --------
Net loss............................................ (93,001) (43,654) (21,301) (9,683) (1,638)
Preferred stock deemed dividend..................... (23,612) -- -- -- --
--------- -------- -------- ------- --------
Net loss attributable to common stockholders........ $(116,613) $(43,654) $(21,301) $(9,683) $ (1,638)
--------- -------- -------- ------- --------
--------- -------- -------- ------- --------
Basic and diluted net loss per share.............. $ (5.58) $ (21.11) $ (13.65) $ (8.90) $ (1.51)
--------- -------- -------- ------- --------
--------- -------- -------- ------- --------
17
JULY 1, 1995
(INCEPTION)
YEAR ENDED DECEMBER 31, TO
-------------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995
--------- -------- -------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per
share............................................. 20,901 2,068 1,561 1,087 1,083
--------- -------- -------- ------- --------
--------- -------- -------- ------- --------
Pro forma basic and diluted net loss
per share(2)...................................... $ (4.85)
---------
---------
Shares of common stock used in computing pro forma
basic and diluted net loss per share(2)........... 24,060
---------
---------
- ------------------
(1) Please see note 5 to iVillage's consolidated financial statements.
(2) Please see note 2 to iVillage's consolidated financial statements.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 106,010 $ 30,825 $ 4,335 $ 2,102 $ 162
Working capital (deficit)............................... 90,752 19,919 1,114 1,006 (715)
Total assets............................................ 312,748 45,721 16,236 4,997 275
Long-term liabilities................................... -- -- 139 -- --
Stockholders' equity (deficit).......................... 283,850 32,022 10,522 3,259 (629)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and notes to those statements and the other
financial information appearing elsewhere in this Form 10-K. In addition to
historical information, the following discussion and other parts of this Form
10-K contain forward-looking information that involves risks and uncertainties.
OVERVIEW
The iVillage network, iVillage.com, provides an easy-to-use, comprehensive
online network of sites tailored to the interests and needs of women using the
Internet. iVillage.com consists of 17 content specific channels organized by
subject matter and several shopping areas. The channels cover leading topics of
interest to women online, such as family, health, work, money, food, computers,
relationships, shopping, travel, pets and astrology. We facilitate channel usage
by providing common features and functionality within each channel, including
experts, chats, message boards and services.
To date, our revenues have been derived primarily from the sale of
sponsorship and advertising contracts. Sponsorship and advertising revenues
constituted 79% and 83% of total revenues for the years ended December 31, 1999
and 1998, respectively.
Sponsorship revenues are derived principally from contracts ranging from
one to three years. Sponsorships are designed to support broad marketing
objectives, including brand promotion, awareness, product introductions and
online research. Sponsorship agreements typically include the delivery of
impressions on our Web sites and occasionally the design and development of
customized sites that enhance the promotional objectives of the sponsor. An
impression is the viewing of promotional material on a Web page, which may
include banner advertisements, links, buttons or other text or images.
Sponsorship revenues are recognized ratably in the period in which the
advertisement is displayed, provided that none of our significant obligations
remain 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. Accordingly, to the extent
that
18
minimum guaranteed impressions are not met, we defer recognition of the
corresponding revenues until the guaranteed impressions are met.
As part of our sponsorship deals, certain sponsors who also sell products
provide us with a commission on sales of their products generated through our
Web site. To date, these amounts have been immaterial.
Advertising revenues are derived principally from short-term advertising
contracts in which we typically guarantee a minimum number of impressions or
pages to be delivered to users over a specified period of time for a fixed fee.
Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant iVillage obligations
remain and the collection of the receivable is probable, 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, we defer recognition of the corresponding revenues
until the guaranteed impressions are achieved. Advertising rates, measured on a
cost per thousand impressions basis, or CPMs, are dependent on whether the
impressions are for general rotation throughout our Web sites or for targeted
audiences and properties within specific areas of iVillage.com.
Sponsorship and advertising revenues also include barter revenues, which
represent exchanges by us of advertising space on our Web sites for reciprocal
advertising space or traffic on other Web sites. Revenues from these barter
transactions are recorded as advertising revenues at the estimated fair value of
the advertisements delivered, unless the fair value of the goods and services
received is more objectively determinable, and are recognized when the
advertisements are run on iVillage.com and its affiliated properties. Barter
expenses are recognized at the value of advertisements received when our
advertisements are run on the reciprocal Web sites or properties, which is
typically in the same period as when the advertisements are run on iVillage.com.
Barter expenses are included as part of sales and marketing expenses. We do not
receive cash for the advertisements delivered, nor do we pay for the
advertisements received. Typically, these barter transactions have no impact on
our cash flows and results of operations. Barter transactions enable us to
continue to build strong brand recognition as part of our overall business
strategy without expending cash resources. Revenues from barter transactions
represented approximately 7% and 20% of total revenues for the years ended
December 31, 1999 and 1998, respectively. We anticipate that barter revenues
will continue to increase in the future although they will decrease as a
percentage of total revenues.
With the acquisition of Lamaze Publishing, we generate additional revenues
through advertising placements in its publications, videos, Newborn Channel
satellite broadcasts and e-commerce opportunities. In addition, revenues are
expected to be generated through a sampling and coupon program which offers
advertisers the ability to distribute samples, coupons and promotional
literature to new and expectant mothers.
Commerce revenues are derived principally from sales through iBaby,
iMaternity, PlusBoutique, and Astrology.com where we are the direct retailer.
Commerce revenues received from iBaby consist of the sale of baby-related
products, including strollers, high chairs, bedding, toys and accessories. iBaby
takes all orders for iBaby products, collects the payment and ships the items to
the customer. The inventory and services agreement between iBaby and Kid's
Warehouse, iVillage's former joint venture partner in iBaby, has terminated and
iBaby has become responsible for all merchandising, inventory management and
order fulfillment functions. In order to fulfill these functions, we recently
signed a two year lease for approximately 40,000 square feet of warehouse space
for iBaby at a facility located in San Diego, California. Additionally, we
exercised an option to lease an additional 34,307 square feet of warehouse
space. Our failure to assume effectively and in a timely manner the
merchandising, inventory management and order fulfillment functions has and
could result in the disruption of the operations of iBaby, including shipment
delays.
Commerce revenues received from iMaternity consist of the sale of maternity
clothing and products through its Web site. Additionally, the commerce revenues
received from PlusBoutique consist of the sale of clothing and products for
plus-sized women through its web site. All orders for iMaternity and
PlusBoutique products are taken through its channel on the iBaby Web site, and
iBaby collects the payment for product sales. The fulfillment of all product
orders for iMaternity and PlusBoutique are handled by Dan Howard, Inc. Revenues
from Astrology.com consist of the sale of astrological charts and other related
products to visitors to the Astrology.com Web site. We recognize revenues from
iBaby, iMaternity, PlusBoutique and Astrology.com product sales, net of any
discounts, when products are shipped to customers and the collection of the
receivable is reasonably assured.
19
Recently, we received fees from the licensing of portions of our content in
connection with the PlanetRx.com relationship. Such fees are recognized on a
straight-line basis over the life of the contract.
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total revenues:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
Revenues............................................................................... 100% 100% 100%
---- ---- ----
Cost of revenues....................................................................... 49 83 92
---- ---- ----
Gross margin........................................................................... 51 17 8
---- ---- ----
Operating expenses:
Product development and technology................................................... 14 14 34
Sales and marketing.................................................................. 150 190 146
General and administrative........................................................... 40 71 130
Depreciation and amortization........................................................ 66 38 48
---- ---- ----
Total operating expenses.......................................................... 270 313 358
---- ---- ----
Loss from operations................................................................... (218) (295) (350)
---- ---- ----
---- ---- ----
Net loss............................................................................... (209)% (291)% (354)%
---- ---- ----
---- ---- ----
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
REVENUES
Revenues were $44.6 million for the year ended December 31, 1999, which
represented an increase of 197%, when compared with 1998. The increase in
revenues was primarily due to our ability to generate significantly higher
sponsorship and advertising revenues during 1999, the acquisition of Lamaze
Publishing, as well as the development of our commerce strategy through our
investments in iBaby and Astrology.com. Sponsorship, advertising and other
revenues were $35.2 million for the year ended December 31, 1999, compared to
$12.5 million for 1998. The increase in sponsorship, advertising and other
revenues was primarily due to an increase in the number of impressions sold and
an increase in the number of sponsors advertising on our Web sites during 1999.
Sponsorship, advertising and other revenues accounted for approximately 79% of
total revenues for the year ended December 31, 1999. Commerce revenues accounted
for $9.4 million, or 21% of total revenues, for the year ended December 31,
1999, compared to $2.6 million, or 17% of total revenues, for 1998. The increase
in commerce revenues was primarily due to the acquisition of Astrology.Net in
February 1999 and the purchase of the remaining interest in iBaby in March 1999,
as well as the launch of the iMaternity and PlusBoutique online stores during
the period.
Although no one advertiser accounted for greater than 10% of total revenues
for the year ended December 31, 1999, our five largest advertisers accounted for
16% of total revenues.
Included in sponsorship and advertising revenues are barter transactions
which accounted for approximately 7% of total revenues for the year ended
December 31, 1999, compared to 20% for 1998.
COST OF REVENUES
The principal elements of cost of advertising, sponsorship and other
revenues for our Internet operations are content costs, payroll and related
expenses for the editorial staff, Web site design and production staff and the
cost of communications and related expenses necessary to support our Web sites.
Cost of commerce revenues consist primarily of the cost of products sold to
customers and outbound and inbound shipping and handling costs. Cost of
advertising, sponsorship and other revenues was $13.9 million, or 40% of
advertising, sponsorship and other revenues, for the year ended December 31,
1999. Cost of advertising, sponsorship and other revenues was $10.2 million, or
82% of advertising, sponsorship and other revenues, for 1998. Cost of
advertising,
20
sponsorship and other revenues, as a percentage of these revenues, decreased
during the year ended December 31, 1999 due to the significant growth in
advertising and sponsorship revenues over the prior period. Cost of commerce
revenues was $7.8 million, or 84% of commerce revenues, for the year ended
December 31, 1999, compared to $2.2 million, or 85% of commerce revenues, for
1998. The cost of commerce revenues as a percentage of total revenues remained
consistent with the prior year, due to a free shipping program initiated by us
during the third quarter of 1999, and certain one time costs associated with the
new warehouse.
OPERATING EXPENSES
PRODUCT DEVELOPMENT AND TECHNOLOGY. Product development and technology
expenses consist primarily of salaries, payroll taxes and benefits and related
expenditures for support, technology, software development and operations
personnel. Product development and technology expenses for the year ended
December 31, 1999 were approximately $6.1 million, or 14% of total revenues.
Product development and technology expenses were $2.1 million, or 14% of total
revenues, for 1998. The increase was primarily attributable to additional
personnel costs related to creating and testing new channel concepts and tools
to be used throughout our network of Web sites.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
costs related to distribution agreements, salaries, payroll taxes and benefits
for sales and marketing personnel, commissions, advertising and other
marketing-related expenses and distribution facility expenses related to the
iBaby operations. Distribution facility expenses consist primarily of payroll
and related expenses for personnel engaged in marketing, customer service and
distribution activities as well as equipment and supplies. Sales and marketing
expenses for the year ended December 31, 1999 were approximately $66.8 million,
or 150% of total revenues. Sales and marketing expenses were $28.5 million, or
190% of total revenues, for 1998. The dollar increase in sales and marketing
expenses was primarily attributable to our $28.5 million marketing campaign and
our advertising campaign on the Internet and television in accordance with our
agreement with NBC. Sales and marketing expenses as a percentage of revenues
decreased between 1998 and 1999 as a result of the growth in revenues.
Included in sales and marketing are barter transactions which amounted to
approximately 7% of total revenues during the year ended December 31, 1999,
compared to 20% of total revenues during 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, payroll taxes and benefits and related costs for general
corporate overhead, including executive management, finance, facilities, and
legal and other professional fees. General and administrative expenses for the
year ended December 31, 1999 were $17.9 million, or 40% of total revenues. For
1998, general and administrative expenses were $10.6 million, or 71% of total
revenues. The increase in general and administrative expenses between 1998 and
1999 was primarily due to an increase in salaries and benefits, recruiting costs
and facilities expenses resulting from an increase in the number of personnel
hired to support the growth of our business. General and administrative expenses
decreased as a percentage of total revenues as a result of the growth in
revenues in the year ended December 31, 1999 compared to 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
the year ended December 31, 1999 were $29.3 million, or 66% of total revenues.
For 1998, depreciation and amortization expenses were $5.7 million, or 38% of
total revenues. The dollar increase between 1998 and 1999 was primarily
attributable to increased amortization expense resulting from our acquisitions
of iBaby, Astrology.Net, OnLine Psych, Lamaze Publishing, and Family Point, as
well as depreciation on a greater base of fixed assets owned by us during 1999.
INTEREST INCOME, NET
Interest income, net includes interest income from our cash balances and
interest expenses related to our financing obligations. Interest income, net for
the year ended December 31, 1999 was $4.1 million, or 9% of total revenues. For
1998, interest income, net was $.6 million, or 4% of total revenues. The
increase between 1998 and 1999 was primarily due to higher average net cash and
cash equivalents balances resulting primarily from the cash received from our
initial public offering of common stock in March 1999, and secondary offering of
common stock in October 1999.
21
NET LOSS
We recorded a net loss of $116.6 million, or $5.58 per share, for the year
ended December 31, 1999. The net loss per share for the year ended December 31,
1999 includes a deemed dividend of $23.6 million incurred as a result of the
difference between the purchase price of the series E convertible preferred
stock sold to NBC during the first quarter of 1999, and the fair market value on
the date of issuance. For 1998, we recorded a net loss of $43.7 million.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
REVENUES
Revenues increased 149% to $15.0 million for the year ended December 31,
1998, from $6.0 million for the year ended December 31, 1997. The increase in
revenues was primarily due to our ability to generate significantly higher
sponsorship and advertising revenues, and the development of our commerce
strategy through the investment in iBaby. Sponsorship, advertising and other
revenues increased $6.4 million primarily as a result of a higher number of
impressions sold and additional sponsors advertising on our Web sites. Commerce
revenues accounted for $2.6 million in 1998, with no revenues in 1997. During
1998, we expanded our sales force and the number of impressions available on our
Web sites increased as additional channels were launched and additional content
was produced. Sponsorship and advertising revenues accounted for approximately
83% and 93% of revenues for the years ended December 31, 1998 and 1997,
respectively. Commerce revenues accounted for approximately 17% of revenues for
the year ended December 31, 1998, with no such revenues for the comparable
period in 1997.
Although no one advertiser accounted for greater than 10% of total revenues
for the year ended December 31, 1998, our five largest advertisers accounted for
17% of total revenues for the year. At December 31, 1998, one advertiser
accounted for 11% of net accounts receivable due to a significant invoice billed
close to year-end. Although our five largest sponsorship and advertising
customers accounted for 26% of total revenues for the year ended December 31,
1997, no one advertiser accounted for greater than 10% of total revenues. At
December 31, 1997, one customer accounted for approximately 31% of the net
accounts receivable balance due to a significant invoice billed close to
year-end. A large portion of the invoice was recorded as deferred revenue and
recognized as revenue in 1998, when the services were provided. Included in
sponsorship and advertising revenues are barter transactions which accounted for
approximately 20% and 10% of total revenues for the years ended December 31,
1998 and 1997, respectively. Barter revenues increased as a percentage of
revenues because of the development of barter as a viable vehicle for online
advertising in the industry.
COST OF REVENUES
Cost of advertising, sponsorship and other revenues was $10.2 million and
$5.5 million, or 82% and 92% of advertising, sponsorship and other revenues, for
the years ended December 31, 1998 and 1997, respectively. Cost of advertising,
sponsorship and other revenues, as a percentage of these revenues, decreased
during the year ended December 31, 1998 when compared to the year ended
December 31, 1997 due to the significant growth in advertising and sponsorship
revenues over the prior period. Cost of commerce revenues was $2.2 million, or
85% of commerce revenues, for the year ended December 31, 1998. There were no
cost of commerce revenues for the year ended December 31, 1997. Cost of commerce
revenues, as a percentage of these revenues, increased during the year ended
December 31, 1998 when compared to the year ended December 31, 1997 due to our
joint venture with iBaby in 1998.
OPERATING EXPENSES
PRODUCT DEVELOPMENT AND TECHNOLOGY. Product development and technology
expenses for the years ended December 31, 1998 and 1997, were approximately $2.1
million, or 14% of total revenues, and $2.1 million, or 34% of total revenues,
respectively. The decrease in product development and technology cost, as a
percentage of total revenues, is due to the significant growth in total revenues
for the year ended December 31, 1998 as compared to the year ended December 31,
1997.
22
SALES AND MARKETING. Sales and marketing expenses increased to $28.5
million, or 190% of revenues, for the year ended December 31, 1998, from $8.8
million, or 146% of revenues, for the year ended December 31, 1997. The dollar
increase in sales and marketing expenses was primarily due to expanded
distribution agreements which increased by about $6.3 million, increases in
advertising expenses related to our branding campaign of $5.4 million on the
Internet, television and in print and higher advertising and sales personnel
expenses of about $3.0 million. We invested heavily in distribution arrangements
during the year ended December 31, 1998. These distribution agreements, with
major Web search and retrieval and other online service companies, generally
range from one to two years and include the placement of promotional features or
textual links to our sites. Sales and marketing expenses as a percentage of
revenues increased due to our branding campaign, increased distribution
agreements and additional personnel in our sales department. Included in sales
and marketing expenses are barter transactions, which accounted for
approximately 10% and 7% of sales and marketing expenses for the years ended
December 31, 1998 and 1997, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $10.6 million, or 71% of revenues, for the year ended December 31, 1998, from
$7.8 million, or 130% of revenues, for the year ended December 31, 1997. The
increase in general and administrative expenses was primarily due to an increase
in salaries and benefits, recruiting costs and facilities expenses resulting
from an increase in the number of personnel hired during the year to support the
growth of our business. General and administrative expenses decreased as a
percentage of total revenues because of the growth in revenues relative to the
growth in our general and administrative expenses. This is due to the
development of our infrastructure in 1997 which was necessary for future growth
of revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $5.7 million, or 38% of revenues, for the year ended December 31,
1998 from $2.9 million, or 48% of revenues, for the year ended December 31,
1997. The dollar increase was primarily attributable to increased depreciation
of $1.2 million resulting from purchases of fixed assets of approximately $6.3
million and increased amortization expense of $1.6 million due to the Health
ResponseAbility Systems acquisition in May 1997.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net includes interest income from our cash
balances and interest expense related to our financing obligations, including
non-cash expenses related to the issuance of warrants associated with a bridge
financing in 1997. Interest income (expense), net improved to an income of $0.6
million for the year ended December 31, 1998, from an expense of $0.2 million
for the year ended December 31, 1997. This increase was primarily due to a
higher average net cash and cash equivalents balance from the issuance of
preferred and common stock during 1998.
MINORITY INTEREST
Minority interest represents the portion of the net loss of iBaby
attributable to minority stockholders. On March 25, 1999, we completed our
purchase of all of the outstanding shares of iBaby held by the minority
stockholders of iBaby.
INCOME TAXES
As of December 31, 1999, we had approximately $136 million of net operating
loss carryforwards for federal tax reporting purposes available to offset future
taxable income. Our federal net operating loss carryforwards expire beginning in
2010. Certain future changes in the share ownership of iVillage, as defined in
the Tax Reform Act of 1986, may restrict the utilization of carryforwards. A
valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties regarding the realization of the asset due to the lack
of our earnings history.
23
RECENT EVENTS
UNILEVER. On February 15, 2000, iVillage and Unilever announced the
formation of an independently managed company to provide women with a highly
focused community, an array of interactive, customized online services, beauty
and personal care products and personalized product recommendations. Unilever
and iVillage plan to provide an aggregate $200 million in cash, intellectual
property, marketing and other resources. Unilever will provide capital as well
as sponsorship and promotional initiatives. iVillage will provide its Beauty
channel, capital, intellectual property, services and promotion.
LIQUIDITY AND CAPITAL RESOURCES
Until our initial public offering in March 1999, which raised net proceeds
of $91.4 million, we financed our operations primarily through the private
placement of our convertible preferred stock. As of December 31, 1999, we had
approximately $106.0 million in cash and cash equivalents. On November 3, 1999,
we consummated a secondary offering of 2,700,000 shares of common stock and
received net proceeds of $70.8 million.
Net cash used in operating activities increased to $57.5 million for the
year ended December 31, 1999 from $32.3 million for the year ended December 31,
1998. The increase in net cash used in operating activities resulted primarily
from increased net losses and other assets, offset by an increase in deferred
revenue and depreciation and amortization expenses. The increased net loss was
primarily due to the continued investment in establishing the iVillage brand on
the Internet through further investment in content and technology and the
commencement of our $28.5 million marketing campaign. Net cash used in operating
activities amounted to $15.3 million for the year ended December 31, 1997. The
increase in net cash used from 1997 to 1998 resulted primarily from increasing
net losses, offset by the timing of payable settlements and increased
depreciation and amortization expense.
Net cash used in investing activities was $34.2 million in the year ended
December 31, 1999. This compares to net cash used in investing activities of
$5.8 million and $6.9 million for the years ended December 31, 1998 and 1997,
respectively. The increase in net cash used in investing activities from 1998 to
1999 resulted primarily from the acquisitions of iBaby and Astrology.Net in the
first quarter of 1999, the acquisitions of OnLine Psychological Services, Inc
and Code Stone Technologies, Inc. during the second quarter of 1999, and the
acquisitions of Lamaze Publishing and Family Point Inc. in August 1999. Net cash
used in investing activities decreased from 1997 to 1998, primarily from
increased purchases of property and equipment and the $2.6 million cash portion
of the acquisition of our health channel in 1997.
Net cash provided by financing activities amounted to $166.9 million for
the year ended December 31, 1999, compared to $64.5 million for the year ended
December 31, 1998. The increase was primarily due to the receipt of $91.4
million of net proceeds from our initial public offering in March 1999, and
$70.8 million of net proceeds from our secondary public offering consummated in
November 1999. Net cash provided by financing activities was $24.4 million for
1997. The increase from 1997 to 1998 was primarily due to $65.3 million of net
cash proceeds from the sale of shares of our series E convertible preferred
stock, series D convertible preferred stock, and common stock as compared to the
$24.8 million of net cash proceeds from the sale of shares of our series C
convertible preferred stock in 1997, inclusive of convertible notes.
On August 2, 1999, we announced a $40 million marketing campaign, $28.5
million of which was incremental to our existing plan, which commenced in the
third quarter of 1999 and will run through 2000. In addition, on September 3,
1999, we paid $7.5 million to PlanetRx.com for 37,103 shares of series D
preferred stock of PlanetRx.com. However, we separately received $7.5 million
from PlanetRx.com in a content license agreement and have entered into a $15.0
million sponsorship agreement with them. We recently signed a two year lease for
approximately 40,000 square feet of warehouse space for iBaby at a facility
located in San Diego, California. Additionally, we exercised an option to lease
an additional 34,307 square feet of warehouse space.
As of September 28, 1999, we entered into a financial advisory agreement
with Allen & Company Incorporated pursuant to which Allen & Company will act as
our financial advisor with respect to various matters from time to time. We paid
Allen & Company $300,000 upon execution of the agreement. In February 2000, we
executed an amendment to the agreement which extended its term to September 28,
2000 and set forth additional fees payable to Allen & Company upon their
provision of certain services to us.
24
Our capital requirements depend on numerous factors, including:
o market acceptance of our services;
o the amount of resources we devote to investments in the iVillage.com
network, including acquisition of other entities;
o the resources we devote to marketing; and
o the resources we devote to selling our services and brand promotions.
We have experienced a substantial increase in our expenditures since our
inception. The increase in expenditures is consistent with the growth in our
operations and staffing. We anticipate we will continue to evaluate possible
investments in businesses, products and technologies, and continue to expand our
sales and marketing programs and conduct more aggressive brand promotions, any
of which could reduce our liquidity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133 is
effective for our fiscal quarters beginning fiscal year 2001. The adoption of
SFAS No. 133 is not expected to have an impact on our results of operations,
financial position or cash flows upon the adoption of this standard.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is not a rule or interpretation of the SEC; however, it represents
interpretations and practices followed by the Division of Corporation Finance
and the Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws. We do not believe that the
interpretations outlined in SAB 101 will have an impact on our revenue
recognition policies.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with Year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
State of Readiness
During 1999, we engaged in an assessment of the Year 2000 readiness of our
operating, financial and administrative systems, including the hardware and
software that support our systems. Our assessment plan consisted of:
o quality assurance testing of our internally developed proprietary
software;
o contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of our services to our users;
o contacting vendors of third-party systems;
o assessing repair and replacement requirements;
o implementing repair or replacement;
o implementation; and
o if deemed necessary or appropriate, creating contingency plans in the
event of Year 2000 failures.
25
Our Year 2000 task force conducted an inventory of and developed testing
procedures for all software and other systems that we believed might be affected
by Year 2000 issues. Since third parties developed and currently support many of
the systems that we use, a significant part of this effort was to ensure that
these third-party systems are Year 2000 compliant. We confirmed this compliance
through a combination of the representation by these third parties of their
products' Year 2000 compliance, as well as specific testing of these systems.
Costs
As of December 31, 1999, we had spent approximately $250,000 on Year 2000
compliance issues. Most of our expenses related to the operating costs
associated with time spent by employees and consultants in the evaluation
process and Year 2000 compliance matters generally.
Risks
To date we are not aware of any Year 2000 compliance problems relating to
our systems that would have had a material adverse effect on our business,
results of operations and financial condition, without taking into account our
efforts to avoid or fix such problems. There can be no assurance that we will
not discover Year 2000 compliance problems in our systems that will require
substantial revision. In addition, there can be no assurance that third-party
software, hardware or services incorporated into our material systems will not
need to be revised or replaced, all of which could be time-consuming and
expensive. Our failure to fix or replace our internally developed proprietary
software or third-party software, hardware or services on a timely basis could
result in lost revenues, increased operating costs, the loss of customers and
other business interruptions, any of which could have a material adverse effect
on our business, results of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in our internally
developed proprietary software could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
We are heavily dependent on a significant number of third-party vendors to
provide both network services and equipment. A significant Year 2000-related
disruption of the network, services or equipment that third-party vendors
provide to us could cause our members and visitors to consider seeking alternate
providers or cause an unmanageable burden on its technical support, which in
turn could materially and adversely affect our business, financial condition and
results of operations.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by these
entities to be Year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent us from delivering our services to our customers,
decrease the use of the Internet or prevent users from accessing our Web sites,
any of which could have a material adverse effect on our business, results of
operations and financial condition.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES ENCOUNTERED IN NEW
AND RAPIDLY EVOLVING MARKETS
We have a limited operating history and face many of the risks and
difficulties frequently encountered in new and rapidly evolving markets,
including the Internet advertising market. These risks include our ability to:
o attract a larger audience to our online network;
o increase awareness of our brand;
o strengthen user loyalty;
o offer compelling content;
o maintain our current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of industries;
26
o respond effectively to competitive pressures;
o continue to develop and upgrade our technology; and
o attract, retain and motivate qualified personnel.
WE LACK SIGNIFICANT REVENUES AND HAVE RECENT AND ANTICIPATED CONTINUING LOSSES
We have not achieved profitability and expect to continue to incur
operating losses for the foreseeable future. We incurred net losses of $93.0
million for the year ended December 31, 1999, $43.7 million for the year ended
December 31, 1998 and $21.3 million for the year ended December 31, 1997. As of
December 31, 1999 and December 31, 1998, our accumulated deficit was $192.9
million and $76.3 million, respectively. We expect to continue to incur
significant operating and capital expenditures and, as a result, we will need to
generate significant revenues to achieve and maintain profitability.
Although our revenues have grown in recent quarters, we cannot guarantee
that we will achieve sufficient revenues for profitability. Even if we do
achieve profitability, we cannot guarantee that we can sustain or increase
profitability on a quarterly or annual basis in the future. If revenues grow
slower than we anticipate, or if operating expenses exceed our expectations or
cannot be adjusted accordingly, our business, results of operations and
financial condition will be materially and adversely affected. Because our
strategy includes acquisitions of other businesses, acquisition expenses and any
cash used to make these acquisitions will reduce our available cash.
WE USE BARTER TRANSACTIONS WHICH DO NOT GENERATE CASH REVENUE
Revenues fro