Back to GetFilings.com
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------
Commission file number: 000-25469
iVILLAGE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3845162
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500-512 Seventh Avenue,
New York, New York 10018 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 600-6000
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
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,
2001 as reported on the Nasdaq National Market, was approximately $15.1
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, 2001, the registrant had outstanding 29,701,364 shares of
Common Stock.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Certain documents incorporated by reference in this Form 10-K are listed in
the Exhibit Index.
===============================================================================
iVILLAGE INC.
FORM 10-K
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Business ................................................ 1
Item 2. Properties .............................................. 18
Item 3. Legal Proceedings ....................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ..... 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..................................... 19
Item 6. Selected Consolidated Financial Data .................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 21
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk .................................................... 42
Item 8. Consolidated Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant....... 43
Item 11. Executive Compensation................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management .............................................. 50
Item 13. Certain Relationships and Related Transactions........... 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ................................................ 54
SIGNATURES ........................................................... 58
Index of Consolidated Financial Statements and Financial
Statement Schedule ............................................... F-1
PART I
Certain statements in this Annual Report on Form 10-K, including certain
statements contained in "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
words or phrases "can be", "expects", "may affect", "may depend", "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. Actual results could differ materially
from those anticipated in such forward-looking statements due to a number of
factors, some of which are beyond iVillage's control, in addition to those
risks discussed below and in iVillage's other public filings, press releases
and statements by iVillage's management, including (i) the volatile and
competitive nature of the 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, (iv) the impact of recent and
future acquisitions and joint ventures on iVillage's business and financial
condition, (v) iVillage's ability to establish and maintain relationships with
advertisers, sponsors and other third party providers and partners, and (vi)
iVillage's ability to successfully consummate, integrate and manage its
proposed acquisition of Women.com Networks, Inc. All such forward-looking
statements are current only as of the date on which such statements were made.
iVillage does not undertake any obligation to publicly update any forward-
looking statement to reflect events or circumstances after the date on which
any such statement is made or to reflect the occurrence of unanticipated
events.
Item 1. Business
OVERVIEW
iVillage is a media company, which operates iVillage.com, Lamaze Publishing
and the Newborn Channel. iVillage.com is a leading women's online destination
providing practical solutions and everyday support for women 18 and over.
Lamaze Publishing produces advertising supported educational materials for
expectant and new parents. The Newborn Channel is a satellite television
network in over 1,000 hospitals nationwide.
iVillage.com is organized into communities across multiple topics of high
importance to women and offers interactive services, peer support, content and
online access to experts and tailored shopping opportunities. The content
areas include Astrology, Babies, Beauty, Books, Computing, Diet & Fitness,
Food, Games, Health, Home & Garden, Lamaze, Money, News & Issues, Parenting,
Pets, Relationships, Shopping and Work. iVillage facilitates use across
content areas by providing the same look and feel within each area and across
the network, resulting in a consistent and strongly branded Web site.
iVillage is recognized as an industry leader in developing innovative
sponsorship and commerce relationships that match the desire of marketers to
reach women with the needs of iVillage.com members for relevant information
and services. Membership to iVillage.com is free and provides features such as
email, personal homepages, instant messaging and other community tools.
iVillage.com's page views have grown to a monthly average of 214 million for
the quarter ended December 31, 2000.
iVILLAGE CONTENT AREAS
iVillage.com is organized around content specific areas that focus on issues
of most importance to women and provide interactive services, peer support and
online access to experts and tailored shopping opportunities.
1
iVillage.com is updated daily to promote content and community, including
highlights. The following table provides a brief description of the features
of each content area as of February 15, 2001:
Area Description
Astrology A site providing users with horoscopes, celebrity profiles, romance charts, monthly guidance and the
ability to purchase astrology reports.
Babies A parenting community center site that caters to women who are trying to conceive, are expecting or are
new parents and includes bulletin boards and weekly chats on both AOL and the Web.
Beauty A site offering users beauty advice, product reviews and access to hair, makeup and skincare experts.
The beauty channel is operated by a joint venture between a subsidiary of Unilever United States, Inc.
("Unilever") and iVillage.
Books 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.
Diet & Fitness A diet and fitness site which includes Body Calculators, Nutrition Experts and Community Challenges to
improve one's fitness level.
Entertainment An area which includes iVillage Radio, celebrity interviews, jokes, and entertainment-related tools and
quizzes.
Food A food site providing information on meal planning, nutrition and recipes which includes Food Experts
and Cooking Basics.
Games A site offering users the ability to participate in a variety of games.
Health One of the leading health sites on the Internet, Health assists users in becoming better health care
decision makers through bulletin boards and weekly chats on AOL and the Web.
Home & Garden A home and garden site offering users information and tools on gardening issues.
Money A financial planning site providing users with information on savings and investment strategies focusing
on key life stages of women.
News & Issues A site offering users information on current news.
Parenting A parenting site providing users with a branded online community where parents share parenting
solutions, talk with experts and find answers and support.
Pets A site 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.
Pregnancy An area for expectant parents providing information on fertility and pregnancy, including Lamaze.com.
Relationships A site offering users information and conversation on love, marriage, sex and family.
Shopping A one-stop online shopping destination offering users easy access to retail Web sites.
Work A site providing women who work from home with tools and resources such as Home Office Basics, a Tax
Guide and a Software Library. The site also provides women with tools and resources relating to
professional development and career-related issues.
iVillage believes that user support is critical in order to attract and
retain users. iVillage provides user support primarily through e-mail-based
correspondence. Help and feedback buttons are prominently displayed throughout
iVillage.com, and iVillage.com's user support staff attempts to respond to all
e-mail queries within 24 hours. In addition, community leaders provide e-mail
support for broad-ranging issues. iVillage does not charge for these services.
2
Sponsorship and Advertising Revenues
iVillage has derived a significant amount of its revenues to date from the
sale of sponsorships and advertisements. For the years ended December 31, 2000
and 1999 sponsorship and advertising revenues represented 92% and 95%,
respectively, of iVillage's revenues.
iVillage's strategy is focused in part on generating a majority of its
advertising revenues from sponsors and merchants who seek a cost-effective
means to reach women online. iVillage is aggressively working to build its
leadership position as the preeminent women's brand to the advertising
community. iVillage's 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 to cater to the specific
goals of advertisers in the areas of impressions, product research, market
research, new product launches, list development, product information,
repositioning, new account openings, lead generation and transactions.
Sponsors also have the opportunity to develop a dialogue with their key
consumer prospects through iVillage's message boards, chats, polls and special
events, which allows sponsors the opportunity to gain insights into their
customers. iVillage's sponsorship arrangements generally have longer terms
than typical banner advertising placements, provide for higher cost per
thousand impressions per advertiser and independence from page-views as the
sole measure of value. In addition, iVillage occasionally develops extensive
content to support the marketing initiatives of advertisers. iVillage's
sponsorship agreements can be exclusive.
iVillage also derives a smaller portion of its sponsorship and advertising
revenues from banner advertisements that are prominently displayed at the top
and bottom of pages throughout iVillage.com. 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, 2000 and 1999, iVillage's five largest
advertisers accounted for approximately 23% and 20%, respectively, of its
total revenues. At December 31, 2000, Ford Motor Media accounted for
approximately 11% of the net accounts receivable, and at December 31, 1999, no
advertiser accounted for more than 10% of the net accounts receivable.
Membership
iVillage believes a large and active membership base is critical to its
success. Some features of iVillage's Web sites are restricted to members.
Membership is free and available to iVillage.com visitors who disclose their
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 its most valuable users. E-mail, instant
messaging, community challenges, message boards and chats are examples of
members-only benefits.
iVillage recognizes the importance of maintaining the confidentiality of
member information and has a privacy policy to protect this information. In
addition, iVillage Health is a founding member of the Health Internet Ethics,
or Hi-Ethics, organization. iVillage's current privacy policy is accessible
through a link from the iVillage.com home page as well as every Web page on
iVillage.com, including the page where a person initially registers for
membership. iVillage's current policy is to never sell or disclose to any
third party any member's personal identifying information such as his or her
name or address, unless the member has provided consent in the form of an
"opt-in" or in certain limited situations as described in iVillage's privacy
policy. For example, in some situations, iVillage does allow a third-party
partner access to database information if it is necessary for the delivery of
a member service, such as e-mail. In these instances, the partner has
generally agreed to be bound by iVillage's current policy. iVillage does share
aggregated member information with third parties, such as average age or
geographic dispersion. iVillage also reserves the right to offer members
products and services. iVillage may use information revealed by members and
information built from user behavior to target advertising, content and e-
mail. For instance, iVillage may, on behalf of an advertiser, send e-mail
offers to all members from a particular region or target advertisements to all
users who frequent a specific area of the site.
3
Lamaze Publishing and the Newborn Channel
Lamaze Publishing is used to solidify iVillage's 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. iVillage also operates the Lamaze.com Web site.
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. Lamaze Parents had an average annual circulation of
approximately 2,400,000 for 2000.
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. Lamaze Baby had an average annual
circulation of approximately 3,000,000 for 2000.
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. Revista Lamaze para Padres had an average
annual circulation of approximately 550,000 for 2000.
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. This video is distributed yearly to childbirth educators,
typically during the first four months of the year. In 2000,
approximately 13,000 childbirth educators ordered approximately 200,000
copies of this video 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 2000, approximately 5,000 childbirth
educators ordered approximately 50,000 copies of this video from Lamaze
Publishing.
4
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.
iVillage Integrated Properties, Inc. also owns the Newborn Channel, a
satellite television network that instructs mothers in their hospital rooms
following birth in over 1,000 hospitals nationwide and, as of December 31,
2000, reached approximately 2,400,000 new mothers.
Astrology.com
Astrology.com is a leading destination for women seeking daily horoscopes,
astrology content and personalized forecasts online. Through iVillage's
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 iVillage's core demographic of women and a vehicle to drive repeat visits
to iVillage.com through the use of daily horoscopes. Astrology.com accounts
for a substantial portion of iVillage's traffic. iVillage attempts to leverage
the popularity of Astrology.com by using internal promotion and links to
attract Astrology.com users to other areas of iVillage's Web site, resulting
in higher average page views and time spent per visit. Astrology.com has also
created an interactive commerce system that provides instantaneous, digital
astrology reports. The system consists of software which operates the Web site
and is capable of generating customized astrology reports based on input from
users.
Alliances
iVillage pursues strategic relationships to increase its access to online
customers, build brand recognition and expand its online presence.
Historically, iVillage has pursued strategic alliances to reach online and
offline customers. iVillage's principal strategic alliances and relationships
include the following:
Media Arrangement
In November 1998, iVillage 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
February 2001, iVillage further amended its November 1998 agreement with NBC
to provide for an extension of time during which iVillage must purchase its
advertising or promotional spots on the NBC network. The revised terms require
iVillage to purchase approximately $11.6 million of advertising or promotional
spots between January 30, 2001 and December 31, 2002, with $3.0 million of
advertising or promotional spots being telecast during the year 2001 and
approximately $8.6 million during the year 2002.
Sponsorship Arrangements
iVillage has a number of sponsorship arrangements with leading advertisers
and sponsors, including:
o Fuji Photo Film USA - exclusive sponsorship for the photographic film,
disposable camera and digital camera categories throughout iVillage's
network.
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.
o Johnson & Johnson - exclusive sponsor of certain birth control, anti-
fungal and other pharmaceutical products as well as sponsor of skin care
resource centers.
o Kimberly-Clark - exclusive sponsor on certain parenting areas of diapers,
wipes, training pants and similar products.
o Unilever - promotion of various Unilever brands in several consumer
product categories.
5
Distribution Arrangements
iVillage considers branding an important aspect of its distribution
arrangements and seeks distribution relationships where its brand is promoted.
iVillage periodically enters into distribution and content relationships with
major online service companies on the Internet, including:
o AOL Time Warner Inc. - some of iVillage's icons are placed within the AOL
service and iVillage receives guaranteed impressions.
Joint Venture and International License Arrangements
iVillage has entered into the following joint venture and international
license arrangements:
o Cooperative Beauty Ventures, LLC - iVillage and Unilever have formed,
through a joint venture arrangement, an independently managed company,
Cooperative Beauty Ventures, LLC, to provide women with a focused
community, an array of interactive, customized online services, beauty and
personal care products and personalized product recommendations. iVillage
presently owns 80.1% of the venture and Unilever owns the remaining 19.9%.
iVillage, over the twenty-year term of the venture, is obligated to fund
the ongoing business and operations of the venture, subject to a maximum
funding obligation of $7.0 million. Under certain circumstances, Unilever
can exercise a "put" option to require iVillage to purchase Unilever's
remaining ownership interest in the venture for fair market value and
iVillage, under certain circumstances, can exercise a "call" option to
require Unilever to sell its remaining interest in the venture to iVillage
for fair market value. Also, under certain circumstances, Unilever can
exercise a "call" option to purchase a portion of iVillage's membership
interest in the venture for fair market value, up to a limit of 50% of the
ownership of the venture. During the year ended 2000, iVillage recognized
losses from the joint venture of approximately $0.4 million.
o iVillage UK Limited - In July 2000, iVillage through a foreign
subsidiary, entered into a business arrangement with Tesco PLC, a leading
U.K. supermarket chain, to form iVillage UK Limited, a U.K. company.
iVillage, through its foreign subsidiary, holds approximately a 50%
interest in iVillage UK Limited. Through a newly-developed women's
website (located at www.ivillage.co.uk), iVillage UK Limited serves the
women's online market in the United Kingdom and the Republic of Ireland
through a focused community and an array of interactive, customized
online solutions and services. iVillage, through its foreign subsidiary,
will provide marketing, branding, an immaterial amount of cash,
intellectual property and other resources through online and offline
activities in support of iVillage UK Limited and the U.K. and Ireland
websites. Tesco will provide $18 million in cash over the three-year
period following the establishment of the relationship, and online and
offline promotional considerations. The ivillage.co.uk Web site also will
promote Tesco's retail business. Revenues will be derived primarily from
advertising and sponsorship.
o Hindustan Lever Limited - In December 2000, iVillage and Hindustan Lever
Limited (HLL), a Unilever subsidiary, entered into a licensing and
technology agreement to create a Web site targeting women in India.
iVillage, through a foreign subsidiary, is licensing technology, brands
and other intellectual property to HLL as part of the transaction.
Pursuant to the licensing agreement, HLL will pay an initial set-up fee
of $500,000 and iVillage will receive an annual royalty on revenue
generated. The royalty will be on an annual basis and will be the greater
of 7% of revenues or $500,000. The agreement is subject to necessary
regulatory approvals in India. The government of India has approved the
agreement except for the minimum annual royalty payment of $500,000.
iVillage is currently in discussions with HLL regarding this exception.
The Web site in India will operate under HLL's direction. HLL will also
provide all capital investments required in maintaining the Web site
including technology, staffing and marketing support. The site is
expected to launch in the second half of 2001.
Sales, Marketing and Public Relations
Sales
As of December 31, 2000, iVillage had a direct sales organization consisting
of 20 sales professionals and 25 sales operations staff. iVillage's sales
organization consults regularly with advertisers and agencies on design and
6
placement of its Web-based advertising and the production and management of
co-branded bridge sites which provide information about advertisers and/or
their products and services, provides customers with advertising management
analysis and focuses on providing a high level of customer satisfaction. Nine
professionals concentrate primarily on advertising sales for the Newborn
Channel, video products, and print advertising sales. iVillage generally seeks
to hire individuals with significant experience in selling advertising and
pre-existing relationships with advertisers in a variety of media.
Marketing and Public Relations
iVillage employs a variety of methods to promote 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, iVillage has also entered
into several strategic alliances with offline partners. Please see
"Alliances". In addition, iVillage leverages other audience building
strategies, including working closely with search engine submissions, news
group postings and cross-promotion to properly index materials. iVillage's
marketing department consisted of 30 marketing professionals as of December
31, 2000.
iVillage's internal public relations staff oversees a comprehensive public
relations program which iVillage believes is a key component of its marketing
and brand recognition strategy. Organized into two primary components that
promote iVillage and the iVillage.com brand, the program targets a trade/
business and consumer audience, respectively. iVillage has also implemented
national long-lead consumer initiatives, such as radio media tours, regional
broadcast media tours, consumer publicity of its 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 iVillage's publications and the Newborn Channel,
and gain the endorsement of the professional community for these products,
iVillage gives particular attention to marketing efforts targeted to
childbirth educators, maternity nurses and hospitals. A staff of four
marketing professionals contacts hospitals for distribution of the Newborn
Channel and works with the professional community to maintain distribution
levels of iVillage's publications and demonstrate how they can be used as
teaching tools for expectant parents and new mothers. iVillage's
representatives maintain contact with the professional community through trade
shows, professional conferences, consumer publication updates and personal
sales calls.
Operating Infrastructure
iVillage's Internet operating infrastructure has been designed and
implemented to support the delivery of millions of page views a day. Assuming
traffic is evenly distributed in a normal pattern, iVillage believes its
current operating infrastructure can support approximately 13 million page
views per day. If necessary, iVillage can increase its capacity by adding
additional servers or entering into agreements with third parties under which
iVillage would receive credit for page views on third party sites. Web pages
are generated and delivered, in response to end-users requests, by any one of
more than 100 servers. Key attributes of this infrastructure include the
ability to support growth, performance and service availability.
iVillage's servers run on the Sun Solaris, Microsoft NT and Linux operating
systems and use Netscape Enterprise, Apache and Microsoft Corporation's IIS
Web server software.
iVillage maintains all of its production servers at the New Jersey Data
Center of Exodus Communications, Inc. and Verio, Inc. in San Francisco,
California. iVillage's operations are dependent upon these companies' ability
to protect their respective systems against damage from fire, hurricanes,
power loss, telecommunications failure, break-ins and other events.
Exodus provides comprehensive facilities management services, including
human and technical monitoring of all production servers 24 hours per day,
seven days per week. The servers located at Verio are monitored by iVillage's
California operations staff. Exodus and Verio provide the means of
connectivity for iVillage's servers to end-users via the Internet through
multiple connections. Each facility is powered by multiple uninterruptible
power supplies and backup generators.
All of iVillage's production data, except Astrology.com, are copied to
backup tapes each night and stored at a third party, off-site storage
facility. Astrology.com's production data is backed up on a daily basis to
local
7
storage. iVillage is in the process of developing a comprehensive disaster
recovery plan to respond to system failures. iVillage keeps all of its
production servers behind firewalls for security purposes and does not allow
outside access, at the operating systems level, except via special secure
channels. Strict password management and physical security measures are
followed. Computer emergency response team alerts are read, and, where
appropriate, recommended action is taken to address security risks and
vulnerabilities.
iVillage's Web sites must accommodate a high volume of traffic and deliver
frequently updated information. Components or features of iVillage's Web sites
have in the past suffered outages or experienced slower response times because
of hardware or software downtime. This has not had a material effect on
iVillage's 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. iVillage maintains 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, iVillage expects that competition will continue to
intensify.
iVillage believes 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.
Other companies or sites which are primarily focused on targeting women
online include Oxygen.com and condenet.com, as well as Web sites targeted to
categories such as health. iVillage will likely also face competition in the
future from:
o developers of Web directories;
o search engine providers;
o shareware archives;
o content sites;
o commercial online services;
o 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 iVillage's competitors.
In addition, iVillage could face competition in the future from traditional
media companies, a number of which, including CBS and NBC, have made
significant acquisitions of or investments in Internet companies. Further,
there can be no assurance that iVillage's competitors and potential
competitors will not develop communities that are equal or superior to ours or
that achieve greater market acceptance than iVillage's community.
8
iVillage also competes with traditional forms of media, such as newspapers,
magazines, radio and television, for advertisers and advertising revenues.
iVillage believes that the principal competitive factors in attracting
advertisers are:
o the amount of traffic on iVillage's Web sites;
o brand recognition;
o the demographics of iVillage's members and visitors;
o iVillage's ability to offer targeted audiences; and
o the overall cost-effectiveness of the advertising medium offered by us.
iVillage believes that the number of Internet companies relying on Web-based
advertising revenues may increase in the future. Accordingly, iVillage may
face increased competition, which could in turn have a material adverse effect
on its business, results of operations and financial condition.
Many of iVillage's current and potential competitors, including developers
of Web directories and search engines and traditional media companies, have:
o longer operating histories;
o significantly greater financial, technical and marketing resources;
o greater name recognition; and
o larger existing customer bases.
These competitors are able to undertake more extensive marketing campaigns
for their brands and services, adopt more aggressive advertising pricing
policies and make more attractive offers to potential employees, distribution
partners, commerce companies, advertisers and third-party content providers.
There can be no assurance that Internet content providers and Internet service
providers, including developers of Web directories, search engines, sites that
offer professional editorial content and commercial online services, will not
be perceived by advertisers as having more desirable Web sites for placement
of advertisements. In addition, many of iVillage's current advertising
customers and strategic partners also have established collaborative
relationships with certain of iVillage's competitors or potential competitors,
and other high-traffic Web sites. Accordingly, there can be no assurance that:
o iVillage will be able to grow its membership, traffic levels and
advertiser customer-base at historical levels;
o iVillage will be able to retain its current members, traffic levels or
advertiser customers;
o competitors will not experience greater growth in traffic as a result of
these relationships which could have the effect of making their Web sites
more attractive to advertisers; or
o iVillage's strategic partners will not sever or will elect not to renew
their agreements with us.
Several major publishing companies produce products that are directly
competitive with iVillage's magazines. AOL 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. iVillage competes by emphasizing the
highly targeted nature of its audience, product quality and the fact that its
publications are used as teaching tools by professionals, and the credibility
and trust parents place in the Lamaze brand name.
While iVillage's 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 these
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
9
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 iVillage will be able to compete successfully
against its current or future competitors or that competitive pressures faced
by iVillage will not have a material adverse effect on its business, results
of operations and financial condition.
Intellectual Property, Proprietary Rights and Domain Names
iVillage regards its copyrights, service marks, trademarks, trade names,
trade dress, trade secrets, proprietary technology and similar intellectual
property as critical to its success, and relies on trademark and copyright
law, trade secret protection and confidentiality and/or license agreements
with its employees, customers, independent contractors, partners and others to
protect iVillage's proprietary rights. iVillage pursues the registration of
its trademarks and service marks in the United States, and has applied for and
obtained registration in the United States for certain of iVillage's
trademarks and service marks, including "iVillage". Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which iVillage's products and services are made available
online.
iVillage has licensed in the past, and expects that it may license in the
future, certain of iVillage's proprietary rights, such as trademarks or
copyrighted material, to third parties. While iVillage attempts to ensure that
the quality of its brand is maintained by these licensees, there can be no
assurance that the licensees will not take actions that might materially
adversely affect the value of its proprietary rights or reputation, which
could have a material adverse effect on its business, financial condition and
results of operations. There can be no assurance that the steps taken by
iVillage to protect its proprietary rights will be adequate or that third
parties will not infringe or misappropriate its copyrights, trademarks, trade
dress and similar proprietary rights. In addition, there can be no assurance
that other parties will not assert claims of infringement of intellectual
property or alter proprietary rights against iVillage.
iVillage has been subject to claims and expects to be subject to legal
proceedings and claims from time to time in the ordinary course of its
business, including claims of alleged infringement of patents, trademarks and
other intellectual property rights of third parties by iVillage and its
licensees. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. Further, if
these claims are successful, iVillage may be required to change its
trademarks, alter its content, alter its site format and pay financial
damages. There can be no assurance that these changes of trademarks,
alteration of content or format or payment of financial damages will not
adversely affect its business, results of operations and financial condition.
iVillage may be required to obtain licenses from others to refine, develop,
market and deliver new services. There can be no assurance that iVillage will
be able to obtain any license on commercially reasonable terms or at all or
that rights granted pursuant to any licenses will be valid and enforceable.
Human Resources
As of February 20, 2001, iVillage employed 309 full-time employees, of whom
96 were in sales and marketing, 85 were in editorial and community, 53 were in
administration and customer service, and 75 were in technology, operations and
support. As iVillage continues to grow and introduce more products, iVillage
may need to hire more personnel, particularly in the areas of product
development and sponsorship. None of iVillage's current employees are
represented by a labor union or is the subject of a collective bargaining
agreement. iVillage believes that relations with its employees are good.
Proposed Merger with Women.com
Merger Agreement
On February 5, 2001, iVillage, Stanhope Acquisition Sub, LLC ("merger sub"),
a Delaware limited liability company and wholly-owned subsidiary of iVillage,
and Women.com, Networks, Inc. ("Women.com") entered into an Agreement and Plan
of Merger (the "original merger agreement"). On February 22, 2001, the parties
to the original merger agreement entered into Amendment No. 1 to Agreement and
Plan of Merger (together with
10
the original merger agreement, the "merger agreement") that amends the
original merger agreement. The merger agreement provides for a taxable merger
of merger sub with and into Women.com (the "merger"), with Women.com
continuing as the surviving corporation (the "surviving corporation"). The
certificate of merger filed in Delaware to effect the merger will provide that
a restated certificate of incorporation, as amended and restated, will become
the certificate of incorporation of the surviving corporation. The bylaws of
the surviving corporation will be those of Women.com. The directors and
officers of the merger sub will become the directors and officers of Women.com
after the merger. Following the merger, Women.com will become a wholly-owned
subsidiary of iVillage and Women.com's common stock will be delisted from the
Nasdaq National Market.
At the effective time of the merger, each share of Women.com common stock
issued and outstanding immediately before such time (other than shares held by
Women.com, iVillage or merger sub, which will be canceled and retired, or
shares as to which appraisal rights have been demanded, exercised or perfected
in accordance with Delaware law, which shares will be converted into the right
to receive any amount required by Delaware law) will be converted into 0.322
(the "exchange ratio") of a share of iVillage common stock and the right to
receive cash equal to 1% of the product of the average of the high and low
prices of a share of iVillage common stock on the Nasdaq National Market on
the closing date multiplied by 0.322 (subject to adjustment as described
below).
The exchange ratio will be decreased if Women.com does not have at least
$12,000,000 of working capital and $20,000,000 in cash as of March 31, 2001.
In addition, if the actual cash and working capital of Women.com as of
March 31, 2001 is less than the required amounts of cash and working capital,
then Hearst Communications, Inc., the largest stockholder of Women.com and a
Delaware corporation ("Hearst Communications"), would have the option to
purchase additional shares of iVillage common stock in an amount equal to the
amount of the shortfall up to $2,000,000 divided by $1.875. If the shortfall
is more than $2,000,000 as of March 31, 2001, but less than $4,000,000, then
Hearst Communications must purchase additional shares of iVillage common stock
pursuant to the merger agreement for the amount of the shortfall which exceeds
$2,000,000, and Hearst Communications will have the option to purchase shares
with respect to the additional $2,000,000 shortfall amount. Hearst
Communications will pay $1.875 for each share purchased due to any shortfall.
iVillage may terminate the merger agreement if:
o the shortfall is more than $4,000,000 as of March 31, 2001;
o Women.com's cash on hand immediately prior to the closing of the merger
is not equal to or greater than the difference between the amount of cash
on hand as of March 31, 2001 minus the product of $166,666 multiplied by
the number of days elapsed from March 31, 2001 to the date which is one
day prior to the date of the closing of the merger; or
o working capital immediately prior to such closing is materially less than
the difference between the amount of working capital as at March 31, 2001
minus the reduction in Women.com's cash on hand since March 31, 2001.
The merger agreement does not specify the manner in which the parties would
determine whether or not such working capital amount is "materially less" than
the difference between the amount of working capital at March 31, 2001 and the
reduction in Women.com's cash since March 31, 2001.
Certificates for fractional shares of iVillage common stock will not be
issued in the merger. Women.com's stockholders who would otherwise receive
fractional shares will, instead, be entitled to receive a cash payment equal
to the value of these fractional share interests, determined by multiplying
(i) the per share closing price of iVillage common stock on the closing date
by (ii) the fraction of the share of iVillage common stock to which the holder
would otherwise have been entitled.
At the effective time of the merger, each outstanding stock option granted
or issued under Women.com's stock option plans in effect on the date of the
merger agreement will be converted into a stock option to acquire iVillage
common stock, with appropriate adjustments to reflect the exchange ratio.
Pursuant to the merger agreement, Women.com and its directors, officers,
employees and representatives are prohibited from negotiating with, soliciting
offers from, or providing information to any third party with respect to any
"acquisition proposal" (generally, any proposal or offer to acquire 20% or
more of the assets of
11
Women.com and its subsidiaries or 20% or more of the voting power of the
shares of Women.com or any merger or other business combination). However, if
within 60 days of the date of the original merger agreement (i.e., February 5,
2001) (or, if earlier than the end of such 60-day period, no later than the
date of the stockholders' meeting held to vote on the merger), Women.com's
Board of Directors, in exercise of its fiduciary duties, reasonably determines
in good faith that the Board is required to do so to comply with its fiduciary
duties to Women.com's stockholders under applicable law, the Board may, in
response to a "superior proposal" that did not result in a breach of the
foregoing prohibition, furnish information to, and engage in negotiations
with, the proponent of such superior proposal. The merger agreement generally
defines a superior proposal as an acquisition proposal relating to
substantially all the assets of Women.com or 80% of the shares of Women.com
which is on terms which the Board determines in good faith (x) to be more
favorable from a financial point of view to the stockholders of Women.com than
the merger, (y) is reasonably capable of being completed and (z) for which
financing, to the extent required, is then committed or can be obtained.
In accordance with the merger agreement, the Board of Directors of Women.com
has unanimously adopted resolutions approving, and recommending that
Women.com's stockholders approve and adopt, the merger agreement and the
merger. The merger agreement generally prohibits the Board from withdrawing or
modifying, in either case in a manner adverse to iVillage, its approval or
recommendation of the merger or the merger agreement. If, within 60 days of
the date of the original merger agreement (or, if earlier than the end of such
60-day period, no later than the date of the stockholders' meeting held to
vote on the merger), the Board, in the exercise of its fiduciary duties,
reasonably determines in good faith that the Board is required to do so to
comply with its fiduciary duties to Women.com's stockholders under applicable
law, in response to a "superior proposal" that did not result in a breach of
the prohibitions described in the preceding paragraph and after providing
iVillage with at least 72 hours advance notice of its decision to take such
action, the Board may modify or propose publicly to modify, in a manner
adverse to iVillage, its approval or recommendation of the merger or the
merger agreement.
If iVillage terminates the merger agreement because Women.com withdraws or
modifies its recommendation for approval of the merger or approves or
recommends an acquisition proposal (provided that it may recommend a superior
proposal, as indicated in the previous paragraph), Women.com is obligated to
pay iVillage a termination fee of $1,000,000 (the "termination fee").
If iVillage terminates the merger agreement because Women.com's stockholders
do not approve the merger, Women.com is obligated to pay iVillage the
termination fee; if Women.com terminates the merger agreement because
iVillage's stockholders do not approve the merger, iVillage is obligated to
pay Women.com the termination fee.
In connection with the merger agreement, iVillage entered into agreements
with four of its stockholders, America Online, Inc., National Broadcasting
Company, Inc., GE Investments Subsidiary, Inc. and Rho Management Trust I,
pursuant to which these iVillage stockholders have agreed to vote all shares
of iVillage common stock beneficially owned by them in favor of the merger at
the meeting of iVillage stockholders to be held to vote on the merger. As of
February 5, 2001, these stockholders beneficially owned (after taking into
account exercisable warrants) an aggregate of approximately 21.2% of the
outstanding iVillage common stock.
Also in connection with the merger agreement, iVillage and Hearst
Communications have entered into a Stockholder Voting Agreement, dated as of
February 5, 2001 (the "voting agreement"), and an Amended and Restated
Securities Purchase Agreement, dated as of February 22, 2001 (the "securities
purchase agreement").
Voting Agreement
The voting agreement obligates Hearst Communications to vote its shares in
favor of the approval and adoption of the merger agreement and each of the
other transactions contemplated in the merger agreement, including the merger
and against:
o any action or agreement that would result in a breach by Women.com
under the merger agreement;
o any extraordinary corporate transaction involving Women.com, such as a
merger, consolidation or other business combination;
12
o a sale, lease or transfer of a material amount of assets of Women.com
or a reorganization, recapitalization, dissolution or liquidation of
Women.com;
o any change in the board of directors of Women.com;
o any amendment of the certificate of incorporation of Women.com; or
o any other action which is intended, or could reasonably be expected, to
impede, interfere with, delay, postpone, discourage or materially and
adversely affect the contemplated benefits to iVillage of the merger
and the other transactions contemplated by the merger agreement.
Hearst Communications has also agreed that it will not, directly or
indirectly:
o solicit, initiate or encourage (including by way of furnishing
information) or otherwise take any action to facilitate, a competing
acquisition proposal relating to Women.com; or
o participate in any discussions or negotiations regarding any proposal
that constitutes, or that may lead to, a competing acquisition
proposal.
Hearst Communications has also agreed not to authorize or permit any of its
officers, directors, employees, agents or representatives to engage in these
activities and to keep iVillage informed of the status and details of any
requests, competing acquisition proposals or inquiries.
Securities Purchase Agreement
Pursuant to the securities purchase agreement, Hearst Communications has
agreed to purchase up to 9,324,000 shares of iVillage common stock and a
warrant (with an exercise price of $0.01 per share) to purchase up to
2,100,000 shares of iVillage common stock for an aggregate purchase price of
up to $20,000,000. Pursuant to the securities purchase agreement, iVillage has
agreed to conduct a registered rights offering (the "rights offering") whereby
all stockholders of Women.com will be given the right to purchase their pro-
rata portion (based upon their ownership of the outstanding shares of
Women.com) of the shares of iVillage common stock and warrant covered by the
securities purchase agreement. Hearst Communications has agreed to reimburse
iVillage for expenses related to the rights offering that exceed $100,000. The
term "rights offering" does not include any additional shares of iVillage
common stock purchased by Hearst Communications as a result of Women.com
failing to meet the cash and working capital requirements specified by the
merger agreement or the exercise of appraisal rights by Women.com's
stockholders (as described below).
The number of shares of iVillage common stock to be purchased by Hearst
Communications under the securities purchase agreement, as well as the number
of shares of iVillage common stock underlying the warrant, will be reduced on
a one-for-one basis by the number of shares and warrant shares purchased by
Women.com's stockholders (other than Hearst Communications) in the rights
offering. Also, the aggregate purchase price payable by Hearst Communications
will be reduced by the amount received by iVillage from Women.com's
stockholders (other than Hearst Communications) in the rights offering.
If appraisal rights are demanded, exercised or perfected by any of
Women.com's stockholders pursuant to Section 262 of Delaware corporate law,
and the shares of Women.com associated with such appraisal rights exceed 2.0%
of the shares of Women.com outstanding as of the record date of Women.com's
special stockholders' meeting called for the purpose of approving the merger,
Hearst Communications will, if requested by iVillage, purchase from iVillage,
at a $1.875 per share purchase price, a number of shares of iVillage common
stock equal to the number of shares of Women.com in excess of such 2% amount
multiplied by the exchange ratio, rounded down to the nearest whole share.
The closing of the transactions contemplated by the securities purchase
agreement will occur concurrently with the closing of the merger and after the
satisfaction or waiver of the conditions thereto.
Stockholder Agreement
Upon Hearst Communications' purchase of iVillage common stock pursuant to
the securities purchase agreement, iVillage and Hearst Communications will
enter into a stockholder agreement that sets forth certain obligations,
restrictions and limitations relating to the securities purchased by Hearst
Communications pursuant
13
to the merger agreement and the securities purchase agreement. The stockholder
agreement applies to all voting securities of iVillage owned by Hearst
Communications on the date of the agreement and all voting securities of
iVillage subsequently acquired by Hearst Communications.
Restrictions on Securities Ownership. The stockholder agreement places a
cap on the number of iVillage voting securities that Hearst Communications and
its affiliates may own. This cap may be exceeded only with (i) the unanimous
written consent of iVillage's board of directors or (ii) the approval of all
of the non-Hearst Communications board designees present at a meeting of
iVillage's board of directors at which a quorum is present. Under the
stockholder agreement, Hearst Communications and its affiliates will be
prohibited from owning voting securities of iVillage in excess of a specified
percentage of the total number of iVillage voting securities outstanding at
any time.
This specified percentage, which will not be calculated until the closing of
the merger, will be determined by calculating (x) the total number of
outstanding iVillage voting securities owned by Hearst Communications or its
affiliates on the closing date of the merger and the total number of
outstanding convertible securities, options, warrants or other rights
exercisable for or convertible into voting securities, with or without the
passage of time or the satisfaction of specified conditions, owned by Hearst
Communications or its affiliates on the closing date of the merger; and (y)
dividing the number calculated in the manner described above by the sum of the
total number of iVillage voting securities outstanding on the closing date of
the merger and the number of shares of iVillage voting securities represented
by warrants for iVillage common stock held by Hearst Communications or its
affiliates on the closing date of the merger. Assuming that: (1) no Women.com
stockholders participate in the rights offering; (2) Hearst Communications is
not required to, and does not elect to, purchase additional iVillage common
stock pursuant to the merger agreement; (3) there are 54,233,431 shares of
iVillage common stock outstanding after the merger; and (4) Women.com
stockholders holding in excess of 2% of the number of shares of Women.com
outstanding as of the record date for the Women.com special stockholders'
meeting do not exercise appraisal rights in connection with the merger, the
cap would equal 32.6% and Hearst Communications and its affiliates would be
prohibited from owning iVillage voting securities or securities convertible
into or exercisable for iVillage voting securities in excess of 32.6% of the
total number of outstanding iVillage voting securities.
Restrictions on Stockholder Activities. The stockholder agreement provides
that unless Hearst Communications obtains (i) the unanimous written consent of
iVillage's board of directors or (ii) the approval of all of the non-Hearst
Communications board designees present at a meeting of iVillage board of
directors at which a quorum is present, Hearst Communications may not, as it
relates to iVillage, initiate or engage in proxy solicitations, solicit
stockholders or induce others to do so, initiate stockholder proposals or
tender offers, call stockholders' meetings, act by written consent or place
any voting securities in a voting trust or other voting agreement.
Quorum Obligations. The stockholder agreement requires Hearst
Communications and each of its affiliates to be present in person or
represented by proxy at all iVillage stockholder meetings so that their
iVillage common stock may be counted for the purpose of determining a quorum.
Voting Obligations. The stockholder agreement does not restrict Hearst
Communications' or its affiliates' ability to vote their iVillage common stock
to the extent that the aggregate amount of such shares does not exceed 25% of
the outstanding iVillage voting securities as of the date of the calculation.
However, any voting securities held by Hearst Communications or its affiliates
in excess of 25% of the outstanding voting securities must be voted by Hearst
Communications and its affiliates in the manner recommended to iVillage
stockholders by (i) the unanimous written consent of iVillage's board of
directors or (ii) the non-Hearst Communications board designees present at a
meeting of iVillage's board of directors at which a quorum is present. This
25% threshold will be increased to the extent Hearst Communications is
required to purchase additional shares of iVillage common stock pursuant to
the securities purchase agreement.
Board Representation. Effective upon the closing of the merger, the
stockholder agreement requires iVillage to have a Board of Directors
consisting of ten members (subject to increase under certain circumstances as
described below). The stockholder agreement also requires iVillage to appoint
three representatives of Hearst Communications to separate classes of
iVillage's board of directors. iVillage must appoint one of these board
members to the nominating committee and one to the compensation committee of
its board. In addition, the
14
stockholder agreement requires iVillage to appoint five independent directors
to its board. An independent director is defined as any person who is not and
has not been for the past three years affiliated with Hearst Communications or
its affiliates or an employee of iVillage or any of its subsidiaries.
So long as Hearst Communications or its affiliates holds at least 10% of the
outstanding voting securities of iVillage, Hearst Communications may recommend
and iVillage's nominating committee must recommend to iVillage's board of
directors that number of nominees of Hearst Communications or its affiliates
as follows: (1) so long as Hearst Communications holds at least 80% of its
initial equity investment, Hearst Communications may designate three nominees;
(2) so long as Hearst Communications holds at least 66%, but less than 80%, of
its initial equity investment, Hearst Communications may designate two
nominees; and (3) so long as Hearst Communications holds at least 10% of the
voting securities of iVillage, but less than 66% of its initial equity
investment, Hearst Communications may designate one nominee.
If the number of voting securities later held by Hearst Communications
decreases below the stated thresholds, any excess directors must immediately
resign. If the number of voting securities later held by Hearst Communications
falls below 10% of its initial equity investment, all Hearst Communications
designated board members must immediately resign and all quorum and voting
obligations cease. However, if the number of voting securities held by Hearst
Communications subsequently returns to 10% or more of its initial equity
investment, all rights and obligations under the stockholder agreement revive
for the duration of the term of the stockholder agreement.
The stockholder agreement also provides that if iVillage issues voting
securities in a single transaction or a series of related transactions and the
number of iVillage voting securities outstanding immediately after such
transaction or series of related transactions: (x) is greater than 20% but
less than 40%, then, at the request of iVillage, Hearst Communications and its
affiliates must cooperate with iVillage and take all action reasonably
necessary to increase the size of iVillage's board of directors to 11 and to
fill the vacancy resulting therefrom with an independent director; or (y) is
equal to or greater than 40%, then, at the request of iVillage, Hearst
Communications and its affiliates must cooperate with iVillage and take all
action reasonably necessary to increase the size of iVillage's board of
directors to 12 and to fill the vacancies resulting therefrom with two
independent directors.
In either case, the independent directors appointed as a result of the
increased board size must be approved by either (i) the unanimous written
consent of iVillage's board of directors or (ii) all members of iVillage's
board of directors at any properly noticed board meeting at which a quorum is
present, including all of the non-Hearst Communications board designees
present at the meeting.
Transfer Restrictions. Except for certain permitted transfers, for so long
as Hearst Communications and its affiliates own voting securities representing
at least 10% of iVillage's outstanding voting securities, Hearst
Communications may not transfer any voting securities of iVillage without (1)
the approval of all of the non-Hearst Communications directors present at a
meeting of the board of directors of iVillage at which a quorum is present or
(2) the unanimous written consent of iVillage's board of directors.
The following transfers will be permitted without the approval of the non-
Hearst Communications directors or the unanimous written consent of iVillage's
board of directors:
o a pledge of voting securities pursuant to a bona fide loan transaction
that creates a mere security interest;
o a repurchase of voting securities by iVillage;
o a bona fide gift of voting securities;
o a sale or transfer of voting securities to a third party that does not
result in the third party holding more than 10% of iVillage's voting
securities;
o a sale or transfer of voting securities pursuant to a tender offer or
exchange approved by iVillage's board of directors;
o a sale or transfer of voting securities in connection with a merger or
consolidation approved by iVillage's board of directors; and
15
o a sale or transfer in connection with the sale of all or substantially
all of iVillage's assets approved by iVillage's board of directors.
In addition, without obtaining approval from the non-Hearst Communications
members of iVillage's board of directors, Hearst Communications may transfer
voting securities to its affiliates provided that the affiliates agree to be
bound by the terms of the stockholder agreement.
Term. The stockholder agreement expires five years after its effectiveness,
unless earlier terminated by the mutual written consent of iVillage and Hearst
Communications. Upon any early termination, any Hearst Communications
designees serving on iVillage's board of directors must resign immediately.
Magazine Content License Agreement
Pursuant to the merger, iVillage will assume an amended and restated
magazine content license and hosting agreement, which was originally entered
into between Women.com and Hearst Communications. Under this agreement, and an
amendment number two to the agreement which iVillage and Hearst Communications
intend to execute upon the closing of the merger, iVillage will provide
production and hosting services for certain web sites affiliated with selected
Hearst magazines, including Good Housekeeping, Redbook, Cosmopolitan and
Country Living. These sites will be part of the iVillage network. The magazine
sites will be on URL's owned by Hearst Communications.
Under the agreement, as amended, iVillage agrees to provide Hearst
Communications web site production and hosting services, including the
creation of original site content which will be owned by Hearst
Communications. In consideration for these services, Hearst Communications
agrees to:
o pay iVillage at least $5.0 million per year for production services
during the three-year term of the agreement, for a total of at least
$15.0 million;
o place at least $2.0 million of Hearst Communications advertising per
year (total of $6 million) on the network, which amount may be
increased in the second and third years of the agreement if Hearst
Communications fails to pay iVillage the required fees for production
services as described above. If such a shortfall in production fees
occurs in the second and third years of the agreement, Hearst
Communications must place additional advertising in an amount equal to
40% of the production fee shortfall; and
o grant to iVillage a right of first offer on any new internet-based
development projects initiated by Hearst Communications that are
appropriate for inclusion on the network.
iVillage will not be required to pay any monies under its agreement to
provide Hearst Communications website production, content and hosting
services. Any such services will be provided to Hearst Communications by
iVillage's internal production and technology staff in exchange for the
payments described in the agreement.
There are no material expenses to iVillage associated with the magazine
content license and hosting agreement, other than the advertising revenue
share, which is estimated to cost iVillage approximately $3.9 million over the
term of the agreement, though it could be less if Hearst Communications fails
to expend its full production commitment to iVillage, and could be more if
iVillage sells a significant amount of additional advertising on those
portions of the iVillage network that are subject to the advertising revenue
share. iVillage currently believes that all other costs associated with the
agreement can be absorbed into the combined company's technical and advertising
sales and servicing infrastructure, without any additional material expense
being incurred by iVillage.
The agreement also provides for revenue sharing between iVillage and Hearst
Communications with respect to advertising revenues obtained by iVillage from
the Hearst magazine websites and other iVillage websites containing
substantial Hearst content. This revenue sharing arrangement requires that
iVillage pay Hearst Communications a royalty payment based on net advertising
revenues of at least $3.9 million during the three-year term of the agreement.
This amount is reducible pro rata if Hearst Communications fails to expend the
$5.0 million in production fees in the second and third years of the
agreement.
Exclusivity. Pursuant to the agreement, iVillage agrees that it will not,
without the prior written consent of Hearst Communications:
16
o enter into any agreement to include in iVillage's network of websites
any sites for magazines that compete with the Hearst magazines listed
in the agreement;
o display on the magazine websites any advertising or other promotional
materials from magazines that compete with the Hearst magazines listed
in the agreement; or
o display on an iVillage webpage the brands, logos, trademarks or
proprietary content of both Hearst Communications and a Hearst
Communications competitor.
Under the agreement, Hearst Communications agrees that it will not enter
into, with an iVillage competitor, any internet distribution agreements that
relate to Hearst content covered by the agreement nor will it grant any entity
the right to display on the internet content that has appeared on the magazine
websites in substantially the same form and format as it appeared on the
magazine website (other than materials posted on the website verbatim to the
way they were initially published by Hearst Communications). However, Hearst
Communications is permitted to license the content or trademarks of its
magazines to any internet site or portal that is not deemed to be an iVillage
competitor, subject only to the restrictions in the foregoing sentence, and to
use the Hearst content in international editions of its magazine on the
internet. The agreement defines an iVillage competitor to include any internet
site, channel, area or online content aggregation service that provides
content primarily for women, is targeted primarily at women, is used primarily
by women and is primarily targeted to any country or region in the world where
iVillage is targeted.
Warranties. In the agreement Hearst Communications warrants that it will
not provide any content to iVillage or publish any content that, and iVillage
warrants that it will not post to the magazine websites any content that:
o infringes on any third party's proprietary rights or rights to
publicity or privacy;
o violates any law, statute, ordinance or regulation;
o is defamatory, trade libelous, unlawfully threatening or harassing;
o is obscene or pornographic;
o violates any laws regarding unfair competition, antidiscrimination or
false advertising; or
o to the best of the party's knowledge, contains any viruses or other
damaging computer problems.
Term. The term of the magazine content license and hosting agreement will
be three years from the effective date of the amendment. However, the
agreement may be terminated by either party immediately upon written notice if
the other party:
o becomes the subject of any proceeding relating to insolvency,
receivership or liquidation;
o files or has filed against it a petition in bankruptcy that is not
discharged within 30 days;
o makes an assignment for the benefit of its creditors; or
o admits in writing its inability to pay debts as they become due.
In addition, either party has the right to terminate the magazine content
license and hosting agreement in the event of a "change of control" of the
other party. A "change of control" is defined in the magazine content license
and hosting agreement to mean (i) a sale of all or substantially all of the
assets of iVillage; (ii) a merger or consolidation of iVillage with or into
another corporation or entity with the effect that, immediately after such
merger or consolidation, none of the existing holders of iVillage voting stock
immediately before such merger or consolidation holds, and the existing
holders of iVillage voting stock immediately before such merger or
consolidation do not hold, in the aggregate, at least 50% of the combined
voting power of the then voting stock of the surviving corporation of such
merger or the corporation or other entity resulting from such consolidation,
(iii) the acquisition of 20% or more of the voting stock of iVillage by an
entity other than Hearst Communications, (iv) the adoption by iVillage of a
plan of complete or partial liquidation or (v) certain bankruptcy events.
17
Item 2. Properties
iVillage is headquartered in New York, New York. In March 2000, iVillage
entered into a fifteen-year lease for approximately 105,000 square feet at
500-512 Seventh Avenue in which iVillage has consolidated its New York City
operations.
iVillage also leases two floors at 149 Fifth Avenue, which are each for
approximately 10,000 square feet. The lease expires on June 30, 2001 and
iVillage is exploring the possibility of subleasing this space.
iVillage also leases a sales office that is located at 645 North Michigan
Avenue, Chicago, Illinois. The lease is on a month-to-month basis.
iVillage's subsidiary, IVN, Inc., formerly known as iBaby, Inc., 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 which expires in
November 2001. iVillage is exploring the possibility of subleasing this space.
Lamaze Publishing subleases approximately 10,300 square feet of space at 9
Old Kings Highway, Darien, Connecticut. The sublease expires on June 30, 2005.
Astrology.com leases approximately 7,400 square feet of space in San
Francisco, California. The lease expires in November 2002.
Item 3. Legal Proceedings
On May 24, 2000, a complaint was filed in the Supreme Court of the State of
New York in New York County by Insignia/ESG, Inc. f/k/a Insignia/Edward S.
Gordon, Inc., a real estate broker, against iVillage. The complaint alleges a
breach of the provisions of a written agreement between Insignia and iVillage
related to iVillage's failure to pay Insignia a broker's commission in
connection with its lease of office space at 500-512 Seventh Avenue in New
York City. In addition to unspecified damages, the complaint seeks an award of
$2.0 million plus interest thereon. On July 10, 2000, iVillage filed an answer
and counterclaim to Insignia's complaint alleging intentional, malicious,
wrongful and tortious interference by Insignia with iVillage's prospective
contractual relationship with the owner of another New York office building.
In addition to unspecified damages, iVillage's counterclaim seeks an award of
$7.0 million in compensatory damages and $1.0 million in punitive damages as
well as interest thereon from Insignia.
iVillage believes that the lawsuit and claims asserted against it by
Insignia are without merit and intends to vigorously defend against these
claims.
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 to iVillage's service mark application for the mark
"PARENTSPLACE.COM". On January 22, 1999, iVillage filed an Answer to the
Notice of Opposition, denying that there was any likelihood of confusion
between iVillage's mark and the mark used by Jewish Family and Children's
Services. In September 2000, iVillage and Jewish Family and Children's
Services entered into a settlement agreement permitting each party to use its
respective mark in a manner that does not infringe on the other party's
primary use of its mark. The parties also plan to move for dismissal of the
Trademark Trial and Appeal Board proceedings.
iVillage is not currently subject to any other material legal proceedings.
iVillage may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been listed and 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.
High Low
---- ---
2000
----
First Quarter .............................................. $ 26.11 $13.56
Second Quarter ............................................. 13.63 6.22
Third Quarter .............................................. 8.94 3.06
Fourth Quarter ............................................. 3.63 0.66
1999
----
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, 2001, the closing sales price of our common stock was $0.75 per
share. There were 400 holders of record as of March 15, 2001.
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.
19
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 iVillage's 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, Astrology.Net in February
1999, OnLine Psychological Services, Inc. in June 1999, and Lamaze Publishing
and Family Point Inc. in August 1999. The financial data reflect the results
of operations of these subsidiaries since their dates of acquisition. In April
1998 and March 1999, iVillage acquired the majority interest and remaining
minority interest in iBaby, Inc. In June 2000, iVillage decided to discontinue
the operations of iBaby, Inc. and, as such, all discussion and analysis below
represents solely the continuing operations of iVillage.
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- -------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues................................................................ $ 76,352 $ 36,576 $ 12,451 $ 6,019 $ 732
--------- --------- -------- -------- -------
Operating Expenses:
Editorial, product development and technology........................... 35,327 20,652 11,742 7,606 4,521
Sales and marketing..................................................... 54,098 63,526 28,177 8,771 2,709
General and administrative.............................................. 22,634 13,164 9,546 7,841 3,104
Depreciation and amortization........................................... 37,681 25,720 5,500 2,886 109
Impairment of goodwill.................................................. 98,056 -- -- -- --
--------- --------- -------- -------- -------
Total operating expenses............................................... 247,796 123,062 54,965 27,104 10,443
--------- --------- -------- -------- -------
Loss from operations.................................................... (171,444) (86,486) (42,514) (21,085) (9,711)
Interest income (expense), net.......................................... 5,261 4,085 571 (216) 28
Other income, net....................................................... 595 271 -- -- --
Loss on sale of Web site (1)............................................ -- -- (504) -- --
Minority interest....................................................... -- -- 587 -- --
Write-down of note receivable and investments........................... (13,496) -- -- -- --
Loss from affiliate..................................................... (422) -- -- -- --
--------- --------- -------- -------- -------
Net loss from continuing operations..................................... (179,506) (82,130) (41,860) (21,301) (9,683)
Preferred stock deemed dividend......................................... -- (23,612) -- -- --
--------- --------- -------- -------- -------
Net loss attributable to common stockholders
from continuing operations............................................. $(179,506) $(105,742) $(41,860) $(21,301) $(9,683)
========= ========= ======== ======== =======
Basic and diluted net loss per share from
continuing operations.................................................. $ (6.05) $ (5.06) $ (20.24) $ (13.65) $ (8.91)
========= ========= ======== ======== =======
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share............................................. 29,683 20,901 2,068 1,561 1,087
========= ========= ======== ======== =======
- ---------------
(1) Please see note 6 to iVillage's consolidated financial statements.
Year Ended December 31,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- ------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents ....................... $ 48,963 $106,010 $30,825 $ 4,335 $2,102
Working capital ................................. 40,252 90,752 19,919 1,114 1,006
Total assets ................................... 132,459 312,748 45,721 16,236 4,997
Long-term liabilities ........................... 4,818 -- -- 139 --
Stockholders' equity ............................ 101,366 283,850 32,022 10,522 3,259
20
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
iVillage is a media company that operates iVillage.com, Lamaze Publishing
and the Newborn Channel. iVillage.com is a leading women's online destination
providing practical solutions and everyday support for women 18 and over.
Lamaze Publishing produces advertising supported educational materials for
expectant and new parents. The Newborn Channel is a satellite television
network in over 1,000 hospitals nationwide.
In June 2000, iVillage decided to discontinue the operations of its iBaby,
Inc. subsidiary. As such, all discussion and analysis below represents solely
the continuing operations of iVillage.
To date iVillage's revenues have been derived primarily from the sale of
sponsorship and advertising contracts. Sponsorship revenues are derived
principally from contracts ranging from one to three years. Sponsorships are
designed to support broad marketing objectives, including brand promotion,
awareness, product introductions and online research. Sponsorship agreements
typically include the delivery of impressions on iVillage's Web sites and
occasionally the design and development of customized sites that enhance the
promotional objectives of the sponsor. An impression is the viewing of
promotional material on a Web page, which may include banner advertisements,
links, buttons, or other text or images. As part of certain sponsorship
agreements, sponsors who also sell products may provide iVillage with a
commission on sales of their products generated through iVillage's Web site.
To date, these amounts have not been significant.
Advertising revenues are derived principally from short-term advertising
contracts in which iVillage typically guarantees a minimum number of
impressions or pages to be delivered to users over a specified period of time
for a fixed fee. Sponsorship and advertising revenues are recognized ratably
in the period in which the advertisement is displayed, provided that iVillage
has no continuing obligations and the collection of the receivable is
reasonably assured, at the lesser of the ratio of impressions delivered over
total guaranteed impressions or the straight-line basis over the term of the
contract. To the extent that minimum guaranteed impressions are not met,
iVillage defers recognition of the corresponding revenues until the guaranteed
impressions are achieved.
Included in sponsorship and advertising revenues are revenues from
advertising placements in Lamaze Publishing's publications, videos and website
and satellite broadcasts on the Newborn Channel. In addition, revenues are
generated through a sampling and coupon program which offers advertisers the
ability to distribute samples, coupons and promotional literature to new and
expectant mothers.
Sponsorship and advertising revenues also include barter revenues, which
represent exchanges by iVillage of advertising space on iVillage's Web sites
for reciprocal advertising space or traffic on other Web sites. Revenues and
expenses from these barter transactions are recorded based upon the fair value
of the advertisements delivered. Fair value of advertisements delivered is
based upon iVillage's recent historical practice of receiving cash from
similar advertisers. Barter revenues are recognized when the advertisements
are displayed on iVillage.com and its affiliated properties. Barter expenses
are recognized at the value of advertisements received when iVillage's
advertisements are displayed on the reciprocal Web sites or properties, which
is typically in the same period as when advertisements are displayed on
iVillage.com and its affiliated properties, and are included as part of sales
and marketing expenses. Revenues from barter transactions were approximately
$3.6 million, $3.3 million and $3.0 million for the years ended December 31,
2000, 1999 and 1998, respectively. iVillage anticipates that barter revenues
will continue to increase in the future and will remain constant or increase
slightly as a percentage of total revenues depending on iVillage's future
revenue growth.
Revenues from the e-commerce portion of Astrology.com consist of the sale of
astrological charts and other related products to visitors to the
Astrology.com Web site. iVillage recognizes revenues from Astrology.com
product sales, net of any discounts, when products are shipped to customers
and the collection of the receivable is reasonably assured.
21
iVillage received fees from the licensing of portions of its content in
connection with the PlanetRx.com relationship. These fees are recognized on a
straight-line basis over the life of the contract.
iVillage has and will continue to reduce its costs through several expense
reduction initiatives targeted at certain expenses, including, without
limitation, reduced advertising, targeted staff reductions primarily through
attrition, reduced company employee benefit plan costs, as well as other
initiatives. iVillage management expects to be able to significantly reduce
expenditures of the combined company through elimination of overlapping
personnel, facilities, marketing expenses, technology, and legal, accounting
and regulatory fees. iVillage also believes that it generally can leverage its
current operating infrastructure to meet its future operational needs.
Results of Operations
The following table sets forth iVillage's results of operations expressed as
a percentage of total revenues:
Year Ended December
31,
-------------------
2000 1999 1998
---- ---- ----
Revenues ....................................................................... 100% 100% 100%
Operating expenses:
Editorial, product development and technology ................................. 46 56 94
Sales and marketing ........................................................... 71 174 226
General and administrative .................................................... 30 36 77
Depreciation and amortization ................................................. 49 70 44
Impairment of goodwill ........................................................ 128 -- --
---- ---- ----
Total operating expenses ................................................... 324 336 441
---- ---- ----
Loss from operations ........................................................... (225) (236) (341)
==== ==== ====
Net loss from continuing operations ............................................ (235)% (225)% (336)%
==== ==== ====
Comparison of Years Ended December 31, 2000 and December 31, 1999
Revenues
Revenues were $76.4 million for the year ended December 31, 2000, which
represents an increase of 109% when compared with 1999. The increase in
revenues was primarily due to iVillage's ability to generate significantly
higher sponsorship and advertising revenues during 2000 and the benefit of
receiving revenues from Lamaze Publishing and the Newborn Channel for the
entire 2000 period. Sponsorship, advertising and other revenues were $69.9
million for the year ended December 31, 2000, compared to $35.0 million for
1999. The increase in sponsorship, advertising and other revenues was
primarily due to an increase in the number of impressions sold, an increase in
the number of sponsors advertising on iVillage's Web sites during 2000, and
from operating Lamaze Publishing and the Newborn Channel for the entire 2000
period. Sponsorship, advertising and other revenues accounted for
approximately 92% and 95% of total revenues for the years ended December 31,
2000 and 1999, respectively. Revenues from Lamaze Publishing and the Newborn
Channel accounted for approximately 20% and 10% of sponsorship, advertising
and other revenues for the years ended December 31, 2000 and 1999,
respectively.
Although no one advertiser accounted for greater than 10% of iVillage's
total revenues for the year ended December 31, 2000, iVillage's five largest
advertisers accounted for 23% of total revenues. The five largest advertisers
accounted for 20% of total revenues for the year ended December 31, 1999.
Included in sponsorship and advertising revenues are barter transactions,
which accounted for approximately 5% of sponsorship and advertising revenues
for the year ended December 31, 2000, compared to 10% for 1999.
Included in total revenues are fees received from the licensing of portions
of iVillage's content and fees from chart sales through Astrology.com, which
accounted for approximately 8% of total revenues for the year ended December
31, 2000, compared to 5% for 1999.
22
Operating Expenses
Editorial, Product Development and Technology. Editorial, product
development and technology expenses consist primarily of payroll and related
expenses for the editorial, technology, Web site design and production staffs,
the cost of communications, related expenditures necessary to support
iVillage's Web sites, software development, technology and support operations,
and an allocation of facility expenses, which is based on the number of
personnel. Editorial, product development and technology expenses for the year
ended December 31, 2000 were approximately $35.3 million, or 46% of total
revenues. Editorial, product development and technology expenses were
approximately $20.7 million, or 56% of total revenues, for 1999. The increase
was primarily attributable to additional personnel costs related to creating
and testing new concepts and tools used throughout iVillage's network of Web
sites of $5.0 million and the acquisition of Lamaze Publishing in August 1999
which resulted in an incremental cost of $6.9 million in 2000. Editorial,
product development and technology expenses decreased as a percentage of total
revenues as a result of the growth in revenues for the year ended December 31,
2000 compared to 1999.
Sales and Marketing. Sales and marketing expenses consist primarily of
costs related to distribution agreements, payroll and related expenses for
sales and marketing personnel, commissions, advertising and other marketing-
related expenses, and an allocation of facility expenses, which is based on
the number of personnel. Sales and marketing expenses for the year ended
December 31, 2000 were approximately $54.1 million, or 71% of total revenues.
Sales and marketing expenses were approximately $63.5 million, or 174% of
total revenues, for 1999. The dollar decrease in sales and marketing expenses
in 2000 was primarily attributable to the launch of a national advertising
campaign in the third quarter of 1999 which was substantially completed by
early 2000, coupled with cost reduction initiatives instituted in the second
quarter of 2000 and continued throughout the year, which resulted in a $21.3
million decrease in advertising expenses, offset primarily by an increase in
personnel costs of $4.1 million, incremental costs from the acquisition of
Lamaze Publishing of $2.4 million, allocation of costs associated with
iVillage's office space of $1.7 million and an increase in consultant costs
for corporate communications and sales marketing research of $1.0 million.
Sales and marketing expenses decreased as a percentage of total revenues as a
result of the growth in revenues for the year ended December 31, 2000 compared
to 1999.
Included in sales and marketing expenses are barter transactions, which
amounted to approximately 7% of total sales and marketing costs during the
year ended December 31, 2000, compared to 5% of total sales and marketing
costs during 1999.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses and related costs for general
corporate overhead, including executive management, finance, allocated
facilities, and legal and other professional fees. General and administrative
expenses for the year ended December 31, 2000 were $22.6 million, or 30% of
total revenues. For 1999, general and administrative expenses were $13.2
million, or 36% of total revenues. The increase in general and administrative
expenses was primarily due to an increase in salaries and benefits of $3.6
million, expenses incurred for international endeavors of $1.2 million,
allocation of costs associated with iVillage's office space of $0.4 million,
and the acquisition of Lamaze Publishing in August 1999, which resulted in an
incremental cost of $1.4 million in 2000. General and administrative expenses
decreased as a percentage of total revenues as a result of the growth in
revenues for the year ended December 31, 2000 compared to 1999.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended December 31, 2000 were approximately $37.7 million, or 49% of
total revenues. For 1999, depreciation and amortization expenses were $25.7
million, or 70% of total revenues. The dollar increase between 1999 and 2000
was primarily attributable to a full year of amortization expense resulting
from iVillage's acquisitions of Astrology.Net, OnLine Psychological Services,
Inc., Lamaze Publishing and Family Point Inc. in 1999. In the third quarter of
2000, iVillage recorded a charge of approximately $98.1 million, or $3.30 per
share, for the impairment of goodwill relating to certain 1999 acquisitions.
The approximately $98.1 million charge consists of the following: OnLine
Psychological Services, Inc. and Code Stone Technologies, Inc. - $17.7
million, Lamaze Publishing - $62.0 million, and Family Point Inc. - $18.4
million. The remaining goodwill from the acquisitions of Astrology.Net and
Lamaze Publishing will be fully amortized in February 2002 and August 2009,
respectively.
23
This non-cash charge represents the difference between the historical book
value of the goodwill and the discounted estimated future cash flows expected
from the related operations. The discounted future cash flows were determined
using the best available estimates. iVillage estimated future cash flows
based upon historical results, current projections and internal earnings
targets, as well as business trends, prospects and market and economic
conditions. The projected future cash flows were then discounted at a rate of
20% corresponding to iVillage's estimated cost of capital. Considerable
management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary from management's estimates. Yearly
amortization of impaired goodwill was approximately $26.6 million.
Interest Income, Net
Interest income, net includes interest income from iVillage's cash balances.
Interest income, net for the year ended December 31, 2000 was $5.3 million, or
7% of total revenues. For 1999, interest income, net was $4.1 million, or 11%
of total revenues. The increase between 1999 and 2000 was due to higher
interest rates in 2000 despite slightly lower average net cash and cash
equivalents balances in 2000 resulting primarily from the cash received from
iVillage's initial public offering of common stock in March 1999, and
secondary offering of common stock in October 1999.
Net Loss
iVillage recorded a net loss of $191.4 million, or $6.45 per share, for the
year ended December 31, 2000. For 1999, iVillage recorded a net loss of $116.6
million, or $5.58 per share. The net loss for the year ended December 31, 2000
includes one-time expenses totaling approximately $118.7 million. These one-
time expenses consisted of a charge for the impairment of goodwill of
approximately $98.1 million in the third quarter of 2000, the write-down of
marketable and non-marketable investments of approximately $8.4 million ($0.3
million in the fourth quarter of 2000 and $8.1 million in the second quarter
of 2000), whose decline was considered other than temporary, the write-down of
a note receivable of approximately $5.1 million in the third quarter of 2000,
and an estimated loss on the sale of iBaby, Inc. assets of $7.1 million. The
net loss 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.
Comparison of Years Ended December 31, 1999 and December 31, 1998
Revenues
Revenues were $36.6 million for the year ended December 31, 1999, which
represented an increase of 194%, when compared with 1998. The increase in
revenues was primarily due to iVillage's ability to generate significantly
higher sponsorship and advertising revenues during 1999 and from the
acquisition of Lamaze Publishing in the third quarter of 1999, and
Astrology.com in the first quarter of 1999. Sponsorship, advertising and other
revenues were $35.0 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 iVillage's Web sites
during 1999. Sponsorship, advertising and other revenues accounted for
approximately 95% and 100% of total revenues for the years ended December 31,
1999 and 1998, respectively.
Although no one advertiser accounted for greater than 10% of total revenues
for the years ended December 31, 1999 and 1998, iVillage's five largest
advertisers accounted for 20% of total revenues in each period.
Included in sponsorship and advertising revenues are barter transactions,
which accounted for approximately 10% of sponsorship and advertising revenues
for the year ended December 31, 1999, compared to 24% for 1998.
Operating Expenses
Editorial, Product Development and Technology. Editorial, product
development and technology expenses consist primarily of payroll and related
expenses for the editorial, technology, Web site design and
24
production staffs, the cost of communications, related expenditures necessary
to support iVillage's Web sites, software development, technology and support
operations, and an allocation of facility expenses, which is based on the
number of personnel. Editorial, product development and technology expenses
for the year ended December 31, 1999 were approximately $20.7 million, or 56%
of total revenues. Editorial, product development and technology expenses were
$11.7 million, or 94% of total revenues, for 1998. The increase was primarily
attributable to additional personnel costs related to creating and testing new
concepts and tools to be used throughout iVillage's network of Web sites of
$2.0 million and incremental costs from iVillage's 1999 acquisitions of $2.7
million.
Sales and Marketing. Sales and marketing expenses consist primarily of
costs related to distribution agreements, payroll and related expenses for
sales and marketing personnel, commissions, advertising and other marketing-
related expenses, and an allocation of facility expenses, which is based on
the number of personnel. Sales and marketing expenses for the year ended
December 31, 1999 were approximately $63.5 million, or 174% of total revenues.
Sales and marketing expenses were $28.2 million, or 226% of total revenues,
for 1998. The dollar increase in sales and marketing expenses was primarily
attributable to iVillage's national advertising campaign on the Internet and
television in accordance with iVillage's 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 5% of sales and marketing costs during the year ended December
31, 1999, compared to 10% of sales and marketing costs during 1998.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses and related costs for general
corporate overhead, including executive management, finance, allocated
facilities, and legal and other professional fees. General and administrative
expenses for the year ended December 31, 1999 were $13.2 million, or 36% of
total revenues. For 1998, general and administrative expenses were $9.5
million, or 77% of total revenues. The increase in general and administrative
expenses between 1998 and 1999 was primarily due to an increase in salaries
and benefits of $1.5 million and facilities expenses of $1.5 million resulting
from an increase in the number of personnel hired to support the growth of
iVillage's 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 $25.7 million, or 70% of total revenues.
For 1998, depreciation and amortization expenses were $5.5 million, or 44% of
total revenues. The dollar increase between 1998 and 1999 was primarily
attributable to increased amortization expense resulting from iVillage's
acquisitions of Astrology.Net, OnLine Psychological Services, Inc., Lamaze
Publishing and Family Point Inc.
Interest Income, Net
Interest income, net includes interest income from iVillage's cash balances
and interest expenses related to iVillage's financing obligations. Interest
income, net for the year ended December 31, 1999 was $4.1 million, or 11% of
total revenues. For 1998, interest income, net was $0.6 million, or 5% 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 iVillage's initial public offering of common stock in March
1999, and secondary offering of common stock in October 1999.
Net Loss
iVillage 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, iVillage recorded a
net loss of $43.7 million.
25
Income Taxes
As of December 31, 2000, iVillage had approximately $196.0 million of net
operating loss carryforwards for federal tax reporting purposes available to
offset future taxable income. iVillage's federal net operating loss
carryforwards expire beginning in 2010. Certain future changes in the share
ownership of iVillage, as defined in the Tax Reform Act of 1986, may restrict
the utilization of carryforwards. A valuation allowance has been recorded for
the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset due to the lack of iVillage's earnings history.
Recent Events
Cooperative Beauty Ventures, LLC. On February 15, 2000, iVillage and
Unilever announced the formation of an independently managed company to
provide women within 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 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. iVillage's funding obligations shall not exceed in the aggregate
$1.5 million in calendar year 2000 and $2.0 million in calendar year 2001,
however any unused funding for calendar year 2000 or 2001 may be carried over
and used in calendar year 2001 or 2002, respectively. As of December 31,
2000, iVillage had not contributed any capital to the joint venture. During
the year ended 2000, iVillage recognized losses from the joint venture of
approximately $0.4 million.
Additionally, in February 2000 iVillage entered into a multi-year
advertising agreement with Unilever for $12.0 million.
In March 2001, iVillage purchased 30.1% of Cooperative Beauty Ventures, LLC
(the "venture") from Unilever for $1.5 million increasing its ownership to
80.1%. The agreement provides that iVillage will fund the ongoing business and
operations of the venture, but not to exceed $7.0 million, and terminates
Unilever's funding obligation. Under certain circumstances, Unilever can
exercise a "put" option to require iVillage to purchase Unilever's remaining
ownership interest for fair value in the venture and iVillage, under certain
circumstances, can exerci