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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number 000-25469
iVillage Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3845162
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
500-512 Seventh Avenue, New York, New York 10018
(Address of Principal Executive Offices) (Zip Code)
(212) 600-6000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 54,584,590 shares of common
stock as of November 13, 2002.
iVillage Inc.
Form 10-Q
For the Quarter ended September 30, 2002
Index
-----
PART I FINANCIAL INFORMATION Page(s)
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and December 31, 2001................. 1
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2002 (Unaudited) and 2001 (Unaudited)........................................................ 2
Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2002
(Unaudited) and 2001 (Unaudited).................................................................................. 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................ 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................................................... 33
Item 4. Controls and Procedures........................................................................ 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................35
Item 2. Changes in Securities and Use of Proceeds.......................................................35
Item 3. Defaults Upon Senior Securities.................................................................35
Item 4. Submission of Matters to a Vote of Security Holders.............................................35
Item 5. Other Information...............................................................................35
Item 6. Exhibits and Reports on Form 8-K................................................................35
Signatures.......................................................................................................36
Certifications...................................................................................................37
Exhibit Index....................................................................................................39
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
iVillage Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
September 30, December 31,
2002 2001
--------- ---------
Assets
Current assets:
Cash and cash equivalents .............................................. $ 24,367 $ 29,831
Accounts receivable, less allowance for doubtful accounts of
$1,407 and $2,286, respectively ...................................... 6,420 6,722
Other current assets ................................................... 7,323 13,668
--------- ---------
Total current assets .......................................... 38,110 50,221
Restricted cash ........................................................ 8,474 8,474
Fixed assets, net ...................................................... 18,627 21,465
Goodwill, net .......................................................... 25,225 31,928
Intangible assets, net ................................................. 18,633 19,975
Other assets ........................................................... 287 324
--------- ---------
Total assets .................................................. $ 109,356 $ 132,387
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses .................................. $ 11,836 $ 16,070
Deferred revenue ....................................................... 3,732 2,734
Deferred rent .......................................................... 348 348
Current liabilities of discontinued operations, net .................... 93 103
--------- ---------
Total current liabilities ..................................... 16,009 19,255
Deferred rent, net of current portion .................................. 4,013 4,273
--------- ---------
Total liabilities ............................................. 20,022 23,528
Minority interest ...................................................... 170 102
Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock - par value $.01, 5,000,000 shares authorized, no shares
issued and outstanding as of September 30, 2002 and December 31,
2001, respectively .................................................. -- --
Common stock - par value $.01, 200,000,000 shares authorized;
56,529,460 and 53,812,285 shares issued at September 30, 2002 and
December 31, 2001, respectively; 55,326,014 and 52,608,839 shares
outstanding as of September 30, 2002 and
December 31, 2001, respectively ..................................... 565 538
Additional paid-in capital ............................................. 549,206 544,006
Accumulated deficit .................................................... (459,249) (432,781)
Treasury stock at cost (1,203,446 shares) .............................. (502) (502)
Stockholders' notes receivable ......................................... (691) (1,982)
Unearned compensation and deferred advertising ......................... (165) (522)
--------- ---------
Total stockholders' equity .................................... 89,164 108,757
--------- ---------
Total liabilities and stockholders' equity .................... $ 109,356 $ 132,387
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
iVillage Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues ........................................ $ 14,629 $ 18,066 $ 45,768 $ 42,088
Operating expenses:
Editorial, product development and
technology ............................... 7,472 8,171 21,455 26,218
Sales and marketing ........................ 5,346 6,417 16,018 23,375
Sales and marketing - NBC/Hearst expenses .. 568 1,591 3,435 4,371
Termination of NBC advertising contract .... -- -- 4,084 --
General and administrative ................. 3,238 3,642 9,360 12,486
Depreciation and amortization .............. 3,153 7,092 9,087 16,531
-------- -------- -------- --------
Total operating expenses ............... 19,777 26,913 63,439 82,981
-------- -------- -------- --------
Loss from operations ............................ (5,148) (8,847) (17,671) (40,893)
Interest income, net ............................ 146 620 431 2,041
Other income(expense), net ...................... 16 (147) 16 (60)
Gain on sale of assets .......................... -- 385 -- 385
Write-down of investments ....................... -- -- -- (104)
Loss from unconsolidated joint venture .......... -- -- -- (127)
-------- -------- -------- --------
Net loss before minority interest and
cumulative effect of change in accounting
principle .................................. (4,986) (7,989) (17,224) (38,758)
Minority interest ............................... 18 (52) (63) 57
-------- -------- -------- --------
Net loss before cumulative effect of change in
accounting principle ....................... (4,968) (8,041) (17,287) (38,701)
Cumulative effect of change in accounting
principle .................................. -- -- (9,181) --
-------- -------- -------- --------
Net loss ........................................ $ (4,968) $ (8,041) $(26,468) $(38,701)
======== ======== ======== ========
Per share data:
Net loss before cumulative effect of change in
accounting principle per share ............. $ (0.09) $ (0.15) $ (0.32) $ (0.99)
Cumulative effect of change in accounting
principle per share ........................ -- -- (0.17) --
-------- -------- -------- --------
Basic and diluted net loss per share ............ $ (0.09) $ (0.15) $ (0.48) $ (0.99)
======== ======== ======== ========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share ................. 55,535 54,530 54,607 39,253
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
iVillage Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Cash flows from operating activities:
Net loss ..................................... $ (4,968) $ (8,041) $(26,468) $(38,701)
Adjustments to reconcile net loss to
net cash used in operating activities:
Impairment of goodwill (change in
accounting principle) ....................... -- -- 9,181 --
Depreciation and amortization ................ 3,153 7,092 9,087 16,531
Non-cash print advertising expense ........... 568 809 1,733 809
Expense recognized in connection
with issuance of warrants and stock
options ..................................... 175 664 693 2,039
Minority interest ............................ (18) 52 63 (57)
Provision for bad debt expense ............... (441) (35) (495) (56)
Deferred rent amortization ................... (87) (90) (260) (271)
Gain on sale of assets ....................... -- (385) -- (385)
Loss from unconsolidated joint
venture ...................................... -- -- -- 127
Write-down of investments .................... -- -- -- 104
Changes in operating assets and liabilities:
Accounts receivable .......................... 1,984 (3,504) 1,988 1,111
Restricted cash and other assets ............. 339 2,203 5,387 3,103
Accounts payable and accrued expenses ........ (1,839) (15,691) (7,590) (21,397)
Deferred revenue ............................. (101) (1,792) 857 (3,588)
-------- -------- -------- --------
Net cash used in operating activities ........... (1,235) (18,718) (5,824) (40,631)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets ..................... (448) (595) (804) (4,693)
Cash paid of $11,063 less cash
acquired of $10,198 for acquisition
of Promotions.com, Inc. ..................... (631) -- (865) --
Cash paid of $3,210 less cash
acquired of $14,198 for purchase of
Women.com ................................... -- -- -- 10,988
Cash paid of $500 less cash acquired
of $232 for the purchase of Public
Affairs Group, Inc. ......................... -- (268) -- (268)
Purchase of 30.1% of Cooperative
Beauty Ventures, L.L.C., net of
cash acquired of $358 ....................... -- -- -- (1,142)
Investment in Cooperative Beauty
Ventures, L.L.C ............................. -- -- -- (300)
-------- -------- -------- --------
Net cash (used in) provided by
investing activities ......................... (1,079) (863) (1,669) 4,585
Cash flows from financing activities:
Proceeds from exercise of stock options....... -- -- 748 --
Principal payments on stockholders'
note receivable ............................. -- 1,291 1,291 3,874
Proceeds from issuance of common
stock, net .................................. -- (158) -- 18,910
Repurchase of common stock ................... -- (129) -- (129)
Repayment of long-term debt .................. -- (449) -- (449)
-------- -------- -------- --------
Cash provided by financing activities ........... -- 555 2,039 22,206
-------- -------- -------- --------
Cash used in discontinued operations ............ -- (182) (10) (704)
Net decrease in cash for the period ............. (2,314) (19,208) (5,464) (14,544)
Cash and cash equivalents, beginning of
period ...................................... 26,681 53,627 29,831 48,963
-------- -------- -------- --------
Cash and cash equivalents, end of period ........ $ 24,367 $ 34,419 $ 24,367 $ 34,419
-------- -------- -------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - The Company
Basis of Presentation
iVillage Inc. ("iVillage" or the "Company") was incorporated in the State of
Delaware on June 8, 1995 and commenced operations on July 1, 1995. iVillage Inc.
is a leading women's media company and the number one source for women's
information online. iVillage includes iVillage.com, Women.com Networks, Inc.
("Women.com"), Public Affairs Group, Inc. ("PAG"), iVillage Parenting Network,
Inc. (operator of Lamaze Publishing and The Newborn Channel), iVillage
Consulting (formerly "iVillage Solutions"), Promotions.com, Inc.
("Promotions.com") and Knowledgeweb, Inc. (operator of Astrology.com).
iVillage.com and Women.com are leading online women's destinations providing
practical solutions and everyday support for women 18 and over. Lamaze
Publishing produces advertising-supported educational materials for expectant
and new parents. The Newborn Channel is a satellite television network in
approximately 1,100 hospitals nationwide. PAG is a comprehensive source of
information and program linkage that serves as an international platform for
diversity and women offering an extensive database of organizations, best
practices and guidance in the areas of workplace diversity, women and corporate
communications to subscribing companies and members. Promotions.com is a
promotions solution company which helps companies achieve their overall
marketing and business objectives.
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to achieve
profitable operations and/or raise additional financing through public or
private equity financings, collaborative or other arrangements with corporate
sources, or other sources of financing to fund operations. Unless the market
price of the Company's common stock increases dramatically, it is unlikely that
the Company will be able to raise funds through a public offering of its common
stock, although management believes that it could raise funds through a private
placement of its common stock. However, there is no assurance that the Company
will achieve profitable operations or that it will be able to raise adequate
financing from other sources. Due primarily to the Company's lack of
profitability, it is unlikely that the Company will be able to obtain bank
financing. Management believes that its current funds will be sufficient to
enable the Company to meet its planned expenditures through the next twelve
months. If anticipated operating results are not achieved, management has the
intent and believes it has the ability to delay or reduce expenditures so as not
to require additional financial resources, if those resources were not available
on terms acceptable to the Company, although there can be no assurances in this
regard.
The Company is subject to the risks and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for Internet
products and services. These risks include the failure to develop and extend the
Company's online service brands, the non-acceptance or rejection of the
Company's services by Web consumers, vendors, sponsors and/or advertisers and
the inability of the Company to maintain and increase the levels of traffic on
its online services, as well as other risks and uncertainties. In the event the
Company does not successfully implement its business plan, certain assets may
not be recoverable.
Unaudited Interim Financial Information
The unaudited interim condensed consolidated financial statements of
the Company as of September 30, 2002 and for the three and nine months ended
September 30, 2002 and 2001, respectively, included herein have been prepared in
accordance with the instructions for Form 10-Q under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Article 10 of Regulation S-X under
the Securities Act of 1933, as amended (the "Securities Act"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. These financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
4
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments and appropriate inter-company elimination
adjustments, necessary to present fairly the financial position of the Company
at September 30, 2002, and the results of its operations and its cash flows for
the three and nine months ended September 30, 2002 and 2001, respectively. The
results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the expected results for the full fiscal year or any
future period.
Restricted Cash
Restricted cash consists of money held for a letter of credit securing
a real estate lease for the Company's New York office space.
Revenue and Receivables
Two advertisers, Procter and Gamble Company ("Procter and Gamble") and
Hearst Communications, Inc. (including its affiliates, "Hearst"), a related
party, accounted for approximately 17% and 11% of total revenues for the three
months ended September 30, 2002, respectively. Three advertisers, Procter and
Gamble, Hearst and Unilever PLC (including its affiliates, "Unilever") accounted
for approximately 13%, 11% and 11% of total revenues for the nine months ended
September 30, 2002, respectively. Our five largest advertisers accounted for
approximately 41% of total revenues for the three and nine months ended
September 30, 2002. Two advertisers, Unilever and Hearst, accounted for
approximately 14% and 11% of our total revenues for the three months ended
September 30, 2001, respectively, and one advertiser, Unilever, accounted for
approximately 14% of total revenues for the nine months ended September 30,
2001. Our five largest advertisers accounted for approximately 35% and 34% of
total revenues for the three and nine months ended September 30, 2001,
respectively. At September 30, 2002, Procter and Gamble accounted for
approximately 40% of the net accounts receivable, and at December 31, 2001,
Hearst and Unilever accounted for approximately 14% and 10% of the net accounts
receivable, respectively.
Included in sponsorship and advertising revenues are barter
transactions, which totaled approximately $0.8 million and $2.6 million, or 6%
and 7%, of sponsorship and advertising revenues for the three and nine months
ended September 30, 2002, respectively, and approximately $0.4 million and $1.8
million, or 3% and 5%, for the comparable periods in 2001.
Net Loss Per Share
Basic net loss per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common shares and common stock
equivalents outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive.
Included in the September 30, 2002 calculation of weighted average
number of shares of common stock outstanding are 207,724 shares which have not
been issued. These shares are being held for former Women.com and Promotions.com
stockholders that have not yet exchanged their respective shares for shares of
the Company as of the balance sheet date.
Stock options and warrants in the amount of 13,028,398 shares and
10,427,996 shares for the nine months ended September 30, 2002 and 2001,
respectively, were not included in the computation of diluted net loss per share
as they were anti-dilutive as a result of net losses during the period
presented.
Accrued Expenses
In the ordinary course of business, the Company utilizes estimates to
determine the accrual of certain operating expenses. These estimates are
reviewed on an ongoing basis to determine the adequacy of these accruals. For
the three and nine months ended September 30, 2002, the Company reversed
approximately $0.5 million and $0.9 million, respectively, of accruals included
in operating expenses due to a change in estimate on services previously
provided. This amount was offset by additional accruals for various operating
expenses.
5
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 145 "Rescission of SFAS Nos. 4,
44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002"
("SFAS 145"). SFAS 145 becomes effective for financial statements issued for
fiscal years beginning after May 15, 2002. Management believes the adoption of
SFAS 145 will not have a material impact on the Company's financial position and
results of operations.
In June 2002, the FASB issued Statement of Financial Accounting
Standard No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). The provisions of SFAS 146 shall be effective for exit
or disposal activities initiated after December 31, 2002. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
The principal difference between SFAS 146 and EITF 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3
was recognized at the date of an entity's commitment to an exit plan. Management
believes the adoption of SFAS 146 will not have a material impact on the
Company's financial position and results of operations.
Note 2 - Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires all business combinations to be accounted for
using the purchase method of accounting and that certain intangible assets
acquired in a business combination shall be recognized as assets apart from
goodwill. SFAS 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS 142 also addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. This statement provides that intangible assets with indefinite lives and
goodwill will not be amortized, but will be tested at least annually for
impairment. Upon completion of the transitional impairment test, the fair value
for one of the Company's reporting units did not exceed the reporting unit's
carry amount and an impairment was recorded of approximately $9.2 million in the
first quarter of 2002.
As a result of the adoption of SFAS 142, the Company discontinued the
amortization of goodwill effective January 1, 2002. Identifiable intangible
assets are amortized under the straight-line method over the period of expected
benefit ranging from two to ten years. The Company recharacterized acquired
workforce of approximately $1.0 million, which is no longer defined as an
acquired intangible asset under SFAS 141, as goodwill.
The following table sets forth the components of goodwill, net as of
September 30, 2002 (in thousands):
Adjustment to
January 1, Impairment purchase September 30,
2002 Acquisition losses accounting 2002
-------- -------- -------- -------- --------
Reporting unit - 1 $ 19,116 $ -- $ -- $ (346) $ 18,770
Reporting unit - 2 10,874 -- (9,181) -- 1,693
Reporting unit - 3 1,938 -- -- (135) 1,803
Reporting unit - 4 -- 2,959 -- -- 2,959
-------- -------- -------- -------- --------
$ 31,928 $ 2,959 $ (9,181) $ (481) $ 25,225
======== ======== ======== ======== ========
6
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Reporting unit - 1 includes the iVillage, Women.com, Astrology.com and
Cooperative Beauty Ventures, L.L.C. entities; Reporting unit - 2 includes the
Lamaze Publishing and The Newborn Channel entities; Reporting unit - 3 includes
PAG; Reporting unit - 4 includes Promotions.com (See Note 5 - Business
Acquisitions).
The following table sets forth the components of the intangible assets
subject to amortization as of September 30, 2002 and December 31, 2001 (in
thousands):
September 30, 2002 December 31, 2001
---------------------------------- ----------------------------------
Gross Gross
Range of carrying Accumulated carrying Accumulated
useful life amount amortization Net amount amortization Net
----------- ------ ------------ --- ------ ------------ ---
Advertiser and member
list and customer
contracts 2-10 years $ 21,150 $(6,882) $ 14,268 $ 19,610 $ (4,288) $ 15,322
Trademarks and domain
names 3 years 3,424 (1,811) 1,613 2,947 (1,042) 1,905
Licensing agreement 10 years 2,900 (902) 1,998 2,900 (685) 2,215
Technology 3 years 890 (136) 754 -- -- --
Non-competition
agreements 1 year 810 (810) -- 810 (405) 405
Content 3 years 600 (600) -- 600 (472) 128
-------- -------- -------- -------- -------- --------
$ 29,774 $(11,141) $ 18,633 $ 26,867 $ (6,892) $ 19,975
======== ======== ======== ======== ======== ========
Amortization expense for the nine months ended September 30, 2002 and
2001 was approximately $4.2 million and $11.2 million, respectively.
Estimated amortization expense for the twelve month period ending
September 30, are as follows (in thousands):
2003............................ $ 5,057
2004............................ 4,372
2005............................ 2,181
2006............................ 1,760
2007............................ 1,760
--------
$ 15,130
========
7
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table provides a reconciliation of net loss for exclusion of
goodwill amortization:
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
------- ------- --------- ----------
Net loss - as reported ........... $(4,968) $(8,041) $ (26,468) $ (38,701)
Addback: Goodwill amortization ... -- 3,842 -- 8,625
Net loss - adjusted .............. $(4,968) $(4,199) $ (26,468) $ (30,076)
Per share data:
Basic and diluted net loss per
share ............................ $ (0.09) $ (0.15) $ (0.48) $ (0.99)
Addback: Goodwill amortization ... -- 0.07 -- 0.22
------- ------- --------- ----------
Adjusted basic and diluted net
loss per share ................... $ (0.09) $ (0.08) $ (0.48) $ (0.77)
======= ======= ========= ==========
Note 3 - Discontinued Operations
Net current liabilities of discontinued operations as of September 30, 2002 were
as follows (in thousands):
Other current assets........................................ $ 6
Accounts payable and accrued expenses....................... (99)
----
Net current liabilities of discontinued operations.......... $(93)
====
Note 4 - Related Party Transactions
National Broadcasting Company, Inc.
On February 22, 2002, the Company amended its agreement with the
National Broadcasting Company, Inc. ("NBC"), pursuant to which NBC released the
Company from its obligation to make the remaining approximately $4.6 million in
cash payments and to place any additional advertising on NBC, in exchange for
the purchase of approximately $1.3 million in telecast spots in February 2002 by
the Company and the forfeiture of its right to the remaining approximately $4.1
million of prepaid advertising. The approximately $4.1 million charge is
included in the caption "Termination of NBC advertising contract" in the
condensed consolidated statement of operations for the nine months ended
September 30, 2002.
AOL Time Warner Inc.
In December 2001, iVillage entered into an advertising agreement with
the America Online, Inc. division of AOL Time Warner Inc. ("AOL") pursuant to
which AOL was obligated to deliver a guaranteed amount of impressions during the
period from December 2001 through January 2002. In consideration of these
services, iVillage paid AOL $0.7 million.
In 2002, iVillage entered into a web pointing agreement with AOL,
pursuant to which AOL provides a link to iVillage's Web site. The agreement
terminated on September 30, 2002, and in consideration of these services,
iVillage paid AOL approximately $0.2 million.
Included in the caption "Sales and marketing" in the condensed
consolidated statements of operations is approximately $0.1 million and $1.3
million of expense from the Company's AOL agreements for the three and nine
months ended September 30, 2002, respectively, and approximately $1.2 million
and $3.5 million for the comparable periods in 2001.
Hearst Communications, Inc.
In January 2002, the Company signed contracts with Hearst to provide
production and certain hosting services for two additional magazine sites, as
well as The Hearst Corporation corporate Web site. The contracts for the
magazine sites had an initial term of six months, and the contract for The
Hearst Corporation corporate Web site has an initial term of one year, with
automatic renewals unless terminated. The minimum amount of production fees for
the initial term of the contracts is approximately $0.3 million.
8
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
In April 2002, the Company and Hearst amended the magazine content
license and hosting agreement to provide that, if a shortfall in production fees
occurs in the first year of the agreement, then Hearst must place additional
advertising in an amount equal to 40% of the production fee shortfall. The
Company's guaranteed advertising royalty to Hearst would be reduced on a pro
rata basis for any production fee shortfall in the first year of the agreement.
As part of the acquisition of Women.com, the Company acquired
approximately $4.9 million of prepaid print advertising in certain Hearst
magazines. These ads are currently scheduled to appear through March 2003. The
Company recognized approximately $0.6 million and $1.7 million of non-cash print
advertising expense for the three and nine months ended September 30, 2002 from
this advertising, respectively. For the three and nine months ended September
30, 2001, non-cash print advertising expense was approximately $0.8 million. As
of September 30, 2002, included in the caption "Other current assets" in the
condensed consolidated balance sheet is approximately $1.4 million of prepaid
Hearst print advertising.
Revenues, net of the royalty payment, from Hearst for the three and
nine months ended September 30, 2002 were approximately $1.5 million and $5.0
million, respectively. For the three and nine months ended September 30, 2001,
revenues from Hearst were approximately $2.0 and $2.1 million, respectively. As
of September 30, 2002, the Company was owed, net of royalty payments,
approximately $25,000 from Hearst.
Note 5 - Business Acquisitions
Promotions.com, Inc.
On April 18, 2002, the Company acquired 82.3% of the outstanding shares
of Promotions.com common stock, a promotion and direct marketing company. On May
24, 2002, the Company acquired the remaining outstanding shares of
Promotions.com common stock through a second-step merger. The aggregate purchase
price paid was approximately $15.2 million, consisting of approximately $11.1
million of cash (inclusive of closing costs) and 1,587,191 shares of the
Company's common stock. This $11.1 million included $9.8 million which
represented the net cash on the balance sheet of Promotions.com. The difference
between the purchase price and the fair value of the acquired net assets of
Promotions.com of approximately $3.0 million has been recorded as goodwill.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows (in
thousands):
Working capital .................. $ 8,103
Fixed assets ..................... 1,196
Customer contracts and member list 1,540
Technology ....................... 890
Trademarks and domain names ...... 477
Goodwill ......................... 2,959
-------
$15,165
=======
9
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The accompanying unaudited pro forma summary presents consolidated
results of operations for the Company as if the acquisition of Promotions.com
had been consummated on January 1, 2001. The pro forma information does not
necessarily reflect the actual results that would have been achieved, nor is it
necessarily indicative of future consolidated results of the Company.
Nine months ended Year ended
September 30, 2002 December 31, 2001
------------------ -----------------
(in thousands, except per share data)
Revenues.................................... $ 47,359 $ 71,255
Net loss from operations.................... $ (19,924) $ (62,910)
Net loss.................................... $ (28,590) $ (58,275)
Net loss per share.......................... $ (0.52) $ (1.31)
Note 6 - Commitments and Contingencies
Leases
The Company leases office space and equipment, under non-cancelable
operating leases expiring at various dates through April 2015. The following is
a schedule of future minimum lease payments under non-cancelable operating
leases as of September 30, 2002:
Year ending September 30: (in thousands)
----------------------------------------------------
2003............................ $ 5,097
2004............................ 4,159
2005............................ 4,114
2006............................ 3,975
2007............................ 3,791
--------
$ 21,136
========
Joint Ventures
The Company is obligated to fund the ongoing business and operations of
Cooperative Beauty Ventures, L.L.C., a joint venture between the Company and
Unilever, but not to exceed $7.0 million. During 2002, the Company has not been
required to fund the operations of the venture, and as of September 30, 2002,
iVillage has contributed, in total, approximately $1.9 million to the venture.
Litigation
In the normal course of business, iVillage is subject to proceedings,
lawsuits and other claims. Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at September 30, 2002 cannot be ascertained. While these matters could
affect the operating results of any one quarter when resolved in future periods
and while there can be no assurance with respect thereto, management believes
that after final disposition, any monetary liability or financial impact to
iVillage from matters described would not be material to the consolidated
financial statements.
Several plaintiffs have filed class action lawsuits against the
Company, several of its present and former executives and directors and its
underwriters in connection with its March 1999 initial public offering. A
similar class action lawsuit was filed against the Company's Women.com
subsidiary, several of its former executives and directors and its underwriters
in connection with Women.com's October 1999 initial public offering. The
complaints generally assert claims under the Securities Act, the Exchange Act
and rules promulgated by the Securities and Exchange Commission (the "SEC"). The
complaints seek class action certification, unspecified damages in an amount to
be determined at trial, and costs associated with the litigation, including
attorneys' fees.
10
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company believes that the lawsuits and claims asserted against
iVillage and Women.com pursuant to these class action complaints are without
merit and intends to vigorously defend against these claims. The Company does
not believe that these class action lawsuits will have a material adverse effect
on the Company's business, financial condition or results of operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements in this Quarterly Report on Form 10-Q, including
certain statements contained in this Item 2 constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. The words or phrases "can be," "expects," "may affect,"
"may depend," "believes," "estimate," "project," and similar words and phrases
are intended to identify such forward-looking statements. Such forward-looking
statements are subject to various known and unknown risks and uncertainties and
we caution you that any forward-looking information provided by or on our behalf
is not a guarantee of future performance. Actual results could differ materially
from those anticipated in such forward-looking statements due to a number of
factors, some of which are beyond our control, in addition to those risks
discussed below and in our other public filings, press releases and statements
by our management, including (i) the volatile and competitive nature of the
media industry, (ii) changes in domestic and foreign economic, political and
market conditions, (iii) the effect of federal, state and foreign regulation on
our business, (iv) the impact of recent and future acquisitions and joint
ventures on our business and financial condition, (v) our ability to establish
and maintain relationships with advertisers, sponsors, and other third party
providers and partners, and (vi) the impact of pending litigation on our
business and financial condition. All such forward-looking statements are
current only as of the date on which such statements were made. We do not
undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement is
made or to reflect the occurrence of unanticipated events.
Overview
iVillage is a leading women's media company and the number one source
for women's information online. iVillage includes iVillage.com, Women.com, PAG,
iVillage Parenting Network, Inc. (operator of Lamaze Publishing and The Newborn
Channel), iVillage Consulting, Promotions.com and Astrology.com. iVillage.com
and Women.com are leading online women's destinations providing practical
solutions and everyday support for women 18 and over. Lamaze Publishing produces
advertising supported educational materials for expectant and new parents. The
Newborn Channel is a satellite television network broadcast in approximately
1,100 hospitals nationwide. PAG is a comprehensive source of information and
program linkage that serves as an international platform for diversity and women
offering an extensive database of organizations, best practices and guidance in
the areas of workplace diversity, women and corporate communications to
subscribing companies and members. Promotions.com is a promotions solution
company which helps companies achieve their overall marketing and business
objectives.
The discussion and analysis below includes the results of operations of
Cooperative Beauty Ventures, L.L.C. since March 1, 2001, Women.com since June
18, 2001, PAG since July 16, 2001 and Promotions.com since April 19, 2002.
Cooperative Beauty Ventures, L.L.C. was accounted for under the equity method of
accounting prior to March 1, 2001.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by iVillage.
Revenue Recognition
To date, iVillage's revenues have been derived primarily from the sale
of sponsorship and advertising contracts. Sponsorship revenues are derived
principally from contracts ranging from one to three years. Sponsorships are
designed to support the customer's broad marketing objectives, including brand
promotion, awareness, product introductions and online research. Sponsorship
agreements typically include the delivery of impressions on iVillage's Web sites
and occasionally the design and development of customized sites that enhance the
promotional objectives of the sponsor. An impression is the viewing of
promotional material on a Web page, which may include banner advertisements,
links, buttons or other text or images. As part of certain sponsorship
agreements, sponsors who also sell products may provide iVillage with a
commission on sales of their products generated through iVillage's Web sites. To
date, these amounts have not been significant.
Advertising revenues are derived principally from long-term and
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.
12
In recent quarters, iVillage has experienced a shift from the larger,
higher-rate, long-term sponsorship agreements that were prevalent a few years
ago to smaller, lower-rate, short-term advertising agreements. The increase in
these short-term agreements has made it more difficult for iVillage to
accurately project future quarterly revenues.
Included in sponsorship and advertising revenues are revenues from
advertising placements in Lamaze Publishing's publications, videos and Web site,
and satellite broadcasts on The Newborn Channel. In addition, revenues are
generated through a sampling and coupon program, which offers advertisers the
ability to distribute samples, coupons and promotional literature to new and
expectant parents.
Sponsorship and advertising revenues also include revenues from
Promotions.com, Inc., which generates revenues through the Web sites
Webstakes.com, a Web site dedicated to Internet sweepstakes and promotions, and
Promotions.com, a full service integrated promotions services group.
Webstakes.com revenues are derived principally from service contracts
whereby the Company recognizes revenues based on either a "cost-per-click" or a
"cost-per-action" pricing model. The contracts typically include cancellation
clauses ranging from 30 to 60 days. Revenue is recognized ratably over the
period during which the Company provides promotions services, provided that no
significant obligations remain and collection of the resulting receivable is
reasonably assured. With a cost-per-click pricing model, the Company generally
guarantees a minimum number of advertising impressions, and/or times that the
Company's visitors are delivered to its customer's Web site. To the extent that
these minimum guarantees are not met, the Company defers recognition of the
corresponding revenues until the guaranteed levels are achieved. Revenue is
recognized differently in a cost-per-action pricing model, which requires the
Company to not only deliver the aforementioned, but also a specific user action
such as purchasing a product or registering as a member of the customer's Web
site in order for the Company to earn revenue. The Company recognizes revenue
related to the cost-per-action pricing model when the specific action has been
performed on its customer's Web site and the collection of the corresponding
receivable is reasonably assured.
Promotions.com revenues are derived principally from contracts in which
the Company typically provides custom turnkey services for the creation,
administration and implementation of a promotion on a customer's Web site. The
Company's revenue recognition policy related to Promotions.com services is also
to recognize revenues ratably over the period during which the Company provides
promotions services, provided that no significant obligations remain and
collection of the resulting receivable is reasonably assured.
Sponsorship and advertising revenues also include barter revenues,
which generally represent exchanges by iVillage of advertising space on its Web
sites for reciprocal advertising space on or traffic from other Web sites.
Revenues and expenses from these barter transactions are recorded based upon the
fair value of the advertisements delivered. Fair value of advertisements
delivered is based upon iVillage's recent practice of receiving cash from
similar advertisers. Barter revenues are recognized when the advertisements are
displayed on iVillage.com and its affiliated properties. Barter expenses are
generally recognized when iVillage's advertisements are displayed on the
reciprocal Web sites or properties, which is typically in the same period as
when advertisements are displayed on iVillage.com and its affiliated properties,
and are included as part of sales and marketing expenses. Revenues from barter
transactions were approximately $2.6 million and $1.8 million for the nine
months ended September 30, 2002 and 2001, respectively.
iVillage Consulting is a business unit within iVillage that provides
production and back-end provisioning for customers in need of these services.
iVillage recognizes revenues from production services based upon actual hours
worked at iVillage's negotiated hourly rates and/or fixed fees stipulated in
contracts.
13
PAG is a comprehensive source of information and program linkage that
serves as an international platform for diversity and women offering an
extensive database of organizations, best practices and guidance in the areas of
workplace diversity, women and corporate communications to subscribing companies
and members. Revenues from PAG are generated primarily through
subscription-based programs that convey current best practices for women and
diversity issues in the workplace and the hosting of an annual two-day event
focusing on women and diversity. iVillage recognizes revenue from subscriptions
ratably over the term of the contract.
Revenues from the e-commerce portion of Astrology.com consist of the
sale of astrological charts and other related products to visitors to the
Astrology.com Web site. iVillage recognizes revenues from Astrology.com product
sales, net of any discounts, when products are shipped to customers and the
collection of the receivable is reasonably assured.
iVillage has and expects to continue to receive revenues from new
initiatives involving subscription-based properties, the sale of iVillage
branded products and services and the sale of research. During the third quarter
of 2002, the Company began selling various iVillage branded consumer products
labeled iVillageSolutions through its Web site. Through an agreement with a
third party, iVillage receives a revenue share on each sale and bears no
fulfillment risks. Subsequent to September 30, 2002, iVillage launched
iVillageAccess, the Company's Internet Service Provider offering ("ISP"). The
ISP is provided through an agreement with a third party, and iVillage receives a
revenue share on each consumer. While iVillage believes that one or more of
these new initiatives will develop into a recurring source of revenues, iVillage
can make no assurance that it will be successful in any of these endeavors.
iVillage received fees from licensing portions of its content in
connection with its agreement with PlanetRx.com, Inc. These fees were recognized
on a straight-line basis over the life of the contract, which ended in the first
quarter of 2002.
Goodwill
Goodwill is not subject to amortization and is tested for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset may be impaired. The impairment test consists of a comparison of the
fair value of goodwill with its carrying amount. If the carrying amount of
goodwill exceeds its fair value, an impairment loss shall be recognized in an
amount equal to that excess. After an impairment loss is recognized, the
adjusted carrying amount of goodwill is its new accounting basis.
Intangible Assets
iVillage assesses the recoverability of its intangible assets by
determining whether the unamortized balance over its remaining life can be
recovered through forecasted cash flows. If undiscounted forecasted cash flows
indicate that the unamortized amounts will not be recovered, an adjustment is
made to reduce the net amounts to an amount consistent with forecasted future
cash flows discounted at a rate commensurate with the risk associated when
estimating future discounted cash flows. Future cash flows are based on trends
of historical performance and management's estimate of future performance,
giving consideration to existing and anticipated competitive and economic
conditions.
Results of Operations
Revenues
Revenues were approximately $14.6 million and $45.8 million for the
three and nine months ended September 30, 2002, respectively, which represents a
decrease of approximately 19% and an increase of approximately 9%, respectively,
when compared with the corresponding periods' revenues of approximately $18.1
million and $42.1 million in 2001. The increase in revenues for the nine months
ended September 30, 2002, as compared to 2001, was primarily due to the
acquisitions of PAG and Promotions.com resulting in identifiable incremental
revenues of approximately $1.7 million and $1.6 million, respectively, as well
as revenues from new initiatives involving online subscription-based properties
and research resulting in revenues of approximately $0.6 million and $1.1
million, respectively, offset by lower licensing revenue of approximately $1.7
million. Sponsorship and advertising revenues were approximately $11.8 million
and $35.1 million for the three and nine months ended September 30, 2002,
respectively, compared to approximately $13.8 million and $34.8 million for the
corresponding periods in 2001. Sponsorship and advertising revenues accounted
for approximately 81% and 77% of total revenues for the three and nine months
ended September 30, 2002, respectively, compared to 77% and 83% of total
revenues for the corresponding periods in 2001. Revenues from Lamaze Publishing
and The Newborn Channel accounted for approximately 31% and 27% of sponsorship
and advertising revenues for the three and nine months ended September 30, 2002,
respectively, compared to approximately 21% and 26% for the corresponding
periods in 2001. Revenues from Promotions.com accounted for approximately 7% and
5% of sponsorship and advertising revenues for the three and nine months ended
September 30, 2002, respectively. Promotions.com was acquired in the second
quarter of 2002, and consequently there are no comparative numbers for the
corresponding periods in 2001.
14
Included in sponsorship and advertising revenues are barter
transactions, which accounted for approximately 6% and 7% of sponsorship and
advertising revenues for the three and nine months ended September 30, 2002,
respectively, and approximately 3% and 5% of sponsorship and advertising
revenues for the corresponding periods in 2001.
Included in revenues are production fees received from work performed,
primarily for Hearst, by the iVillage Consulting unit, which accounted for
approximately 6% and 8% of total revenues for the three and nine months ended
September 30, 2002, respectively, and approximately 8% and 4% of total revenues
for the corresponding periods in 2001.
Included in revenues are subscription-based fees and sponsorship
revenues derived from the services provided by PAG which accounted for
approximately 7% and 6% of total revenues for the three and nine months ended
September 30, 2002, respectively, and approximately 5% and 2% of total revenues
for the corresponding periods in 2001.
Included in revenues are fees received from licensing portions of
iVillage's content, and fees from chart sales through Astrology.com, which
collectively accounted for approximately 5% and 6% of total revenues for the
three and nine months ended September 30, 2002, respectively, compared to 10%
and 11% of total revenues for the corresponding periods in 2001.
Included in revenues are fees from new initiatives involving online
subscription-based properties and the sale of research which accounted for
approximately 1% and 4% of total revenues for the three and nine months ended
September 30, 2002, respectively. These new initiatives were commenced in the
later part of 2001, and consequently there are no comparative numbers for the
corresponding periods in 2001.
For the three and nine months ended September 30, 2002, revenues from
iVillage's five largest advertisers accounted for approximately 41% of total
revenues. Two advertisers, Procter and Gamble and Hearst accounted for
approximately 17% and 11% of total revenues for the three months ended September
30, 2002, respectively. Three advertisers, Procter and Gamble, Hearst and
Unilever accounted for approximately 13%, 11% and 11% of total revenues for the
nine months ended September 30, 2002, respectively. One advertiser, Unilever,
accounted for approximately 14% of total revenues for the three and nine months
ended September 30, 2001, respectively, and Hearst accounted for approximately
11% of total revenues for the three months ended September 30, 2001. iVillage's
five largest advertisers accounted for approximately 35% and 34% of total
revenues for the three and nine months ended September 30, 2001, respectively.
At September 30, 2002, Procter and Gamble accounted for approximately 40% of the
net accounts receivable, and at December 31, 2001, Hearst and Unilever accounted
for approximately 14% and 10% of the net accounts receivable, respectively.
Operating Expenses
Editorial, Product Development and Technology.
Editorial, product development and technology expenses consist
primarily of payroll and related expenses for the editorial, technology, Web
site design and production staffs, severance costs for terminated employees, the
cost of communications, related expenditures necessary to support iVillage's Web
sites, software development, technology and support operations, and an
allocation of facility expenses, which is based on the number of personnel.
Editorial, product development and technology expenses for the three and nine
months ended September 30, 2002 were approximately $7.5 million, and $21.5
million, or 51% and 47% of total revenues, respectively. Editorial, product
development and technology expenses were approximately $8.2 million and $26.2
million, or 45% and 62% of total revenues, respectively, for the corresponding
periods in 2001. The decrease between the comparable nine month periods was
primarily attributable to a decrease of salaries, severance and related benefits
of approximately $3.1 million, renegotiation of expenditures which provide
support, content and serving of impressions to iVillage's Web sites of
approximately $0.7 million, and lower facility costs resulting in a decreased
facilities allocation of approximately $0.9 million. These reductions were
offset slightly by incremental costs associated with the acquisition of
Promotions.com of approximately $0.6 million. Editorial, product development and
technology expenses decreased as a percentage of total revenues for the nine
months ended September 30, 2002, as compared to the same period in 2001, as a
result of the benefits recognized from cost reduction initiatives implemented
throughout 2001 and into 2002, coupled with an increase in revenues.
15
Sales and Marketing.
Sales and marketing expenses consist primarily of costs related to
distribution agreements, payroll and expenses for sales and marketing personnel,
severance costs for terminated employees, commissions, advertising and other
marketing-related expenses, and an allocation of facility expenses, which is
based on the number of personnel. Sales and marketing expenses for the three and
nine month periods ended September 30, 2002 were approximately $5.9 million and
$23.5 million, or 40% and 51% of total revenues, respectively. Sales and
marketing expenses were approximately $8.0 million and $27.7 million, or 44% and
66% of total revenues, respectively, for the comparable periods in 2001. The
decrease in sales and marketing expenses for the nine month period ended
September 30, 2002, as compared to 2001, was primarily attributable to the
benefits of cost reduction initiatives implemented throughout 2001 and into 2002
which resulted in an approximately $6.1 million decrease in advertising
expenses, a decrease in payroll, severance, commission and related benefits of
approximately $3.2 million, and lower facility costs resulting in a decreased
facilities allocation of approximately $0.6 million partially offset by the
negotiated advertising spend and termination of an advertising agreement with
NBC resulting in charges of approximately $1.3 million and $4.1 million,
respectively, as well as incremental sales and marketing expenses related to the
PAG and Promotions.com acquisitions of approximately $0.5 million and $1.0
million, respectively. Sales and marketing expenses decreased as a percentage of
total revenues for the nine months ended September 30, 2002, as compared to the
same period in 2001, as a result of the benefits recognized from cost reduction
initiatives implemented throughout 2001 and into 2002, coupled with an increase
in revenues.
Included in sales and marketing expenses are barter transactions, which
amounted to approximately 13% and 10% of sales and marketing costs during the
three and nine months ended September 30, 2002, respectively, compared to 5% and
6% of sales and marketing expenses for the comparable periods in 2001.
General and Administrative.
General and administrative expenses consist primarily of payroll,
related expenses and benefits for the executive management, finance, allocated
facility expenses, human resources and legal employees, severance costs for
terminated employees, general corporate overhead, and other professional fees.
General and administrative expenses for the three and nine months ended
September 30, 2002 were approximately $3.2 million and $9.4 million, or 22% and
20% of total revenues, respectively. For the comparable periods in 2001, general
and administrative expenses were approximately $3.6 million and $12.5 million,
or 20% and 30% of total revenues, respectively. The decrease in general and
administrative expenses for the comparable nine month period was primarily due
to a decrease in salaries, severance and related benefits of approximately $2.0
million, a payment to the former Chief Executive Officer of approximately $1.3
million in 2001, and a decrease in professional fees and facilities allocation
of approximately $0.2 million each, partially offset by the acquisitions of PAG
and Promotions.com resulting in incremental costs of approximately $0.6 million
and $0.4 million, respectively, as well as higher insurance costs of
approximately $0.5 million. General and administrative expenses decreased as a
percentage of total revenues for the nine months ended September 30, 2002,
compared to the comparable period in 2001, as a result of the benefits
recognized from cost reduction initiatives implemented throughout 2001 and into
2002, coupled with an increase in revenues.
16
In the ordinary course of business, iVillage utilizes estimates to
determine the accrual of certain operating expenses. These estimates are
reviewed on an ongoing basis to determine the adequacy of these accruals. For
the three and nine months ended September 30, 2002, iVillage reversed
approximately $0.5 million and $0.9 million, respectively, of accruals included
in operating expenses due to a change in estimate on services previously
provided. This amount was offset by additional accruals for various operating
expenses.
Depreciation and Amortization.
Depreciation and amortization expenses for the three and nine months
ended September 30, 2002 were approximately $3.2 million and $9.1 million, or
22% and 20% of total revenues, respectively. For the comparable periods in 2001,
depreciation and amortization expenses were approximately $7.1 million and $16.5
million, or 39% of total revenues. The dollar decrease of approximately $8.6
million in depreciation and amortization for the comparable nine month period
was primarily due to the adoption of the provisions of SFAS 142.
Interest Income, Net
Interest income, net includes primarily interest income from iVillage's
cash balances. Interest income, net for the three and nine months ended
September 30, 2002 was approximately $0.1 million and $0.4 million, or 1% of
total revenues, respectively. For the same periods in 2001, interest income, net
was approximately $0.6 million and $2.0 million, or 3% and 5% of total revenues,
respectively. The decrease between 2002 and 2001 was due to lower average net
cash and cash equivalents balances and lower interest rates in 2002 as compared
to 2001.
Net Loss
iVillage recorded a net loss of approximately $5.0 million and $26.5
million, or $0.09 and $0.48 per share, respectively, for the three and nine
month periods ended September 30, 2002. For the same periods in 2001, iVillage
recorded a net loss of approximately $8.0 million and $38.7 million, or $0.15
and $0.99 per share, respectively. The decrease in net loss for the nine months
ended September 30, 2002 compared to the same period in 2001 was primarily due
to the increase in revenues of approximately $3.7 million and a decrease in
operating expenses of approximately $19.5 million, partially offset by the
adoption of SFAS 142 which resulted in a change of accounting principle charge
of approximately $9.2 million in the first quarter of 2002 relating to the
impairment of goodwill.
Liquidity and Capital Resources
Financial Reporting Release No. 61 requires all companies to include a
discussion to address, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. iVillage
currently does not maintain any off-balance sheet arrangements.
As of September 30, 2002, iVillage had approximately $24.4 million in
cash and cash equivalents and approximately $8.5 million of restricted cash.
Cash equivalents consist primarily of money market accounts. The restricted cash
consists of money held for a letter of credit collateralizing a real estate
lease for iVillage's New York office space. iVillage maintains its cash and cash
equivalents in highly rated financial institutions.
iVillage has sustained net losses and negative cash flows from
operations since its inception. iVillage's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to achieve
profitable operations and/or raise additional financing through public or
private equity financings, collaborative or other arrangements with corporate
sources, or other sources of financing to fund operations. Unless the market
price of the Company's common stock increases dramatically, it is unlikely that
the Company will be able to raise funds through a public offering of its common
stock, although management believes that it may be possible to raise funds
through a private placement of its common stock. However, iVillage can make no
assurance that it will achieve profitable operations or that it will be able to
raise adequate financing from other sources. Due primarily to the Company's lack
of profitability, it is unlikely that the Company will be able to obtain bank
financing. Management believes that iVillage's current funds will be sufficient
to enable iVillage to meet its planned expenditures through the next twelve
months. If anticipated operating results are not achieved, management has the
intent and believes it has the ability to delay or reduce expenditures so as not
to require additional financial resources, if those resources were not available
on terms acceptable to iVillage, although there can be no assurances in this
regard.
17
iVillage has and expects to continue to reduce its costs. In the past,
the Company has achieved cost reductions through increased managerial
efficiencies and several expense reduction initiatives targeted at certain
expenses, including without limitation, reduced advertising, targeted staff
reductions and reduced company employee benefit plan costs, as well as other
initiatives. During the ninth months ended September 30, 2002, iVillage has paid
approximately $0.6 million for severance and related costs for staff reduction
and acquisition related layoffs. On November 13, 2002, iVillage announced
further staff reductions of approximately 30 employees, or approximately 10% of
iVillage's workforce, and management estimates that this staff reduction will
result in an approximately $0.6 million restructuring charge, of which a
substantial portion will be recorded in the fourth quarter of 2002.
Net cash used in operating activities decreased to approximately $1.2
million for the three months ended September 30, 2002, from $18.7 million for
the comparable period in 2001. Net cash used in operating activities decreased
to approximately $5.8 million for the nine months ended September 30, 2002, from
approximately $40.6 million for the same period in 2001. The overall decrease in
net cash used in operating activities for the nine months ended September 30,
2002 compared to the comparable period in 2001 was primarily from a decrease in
net loss, less adjustments, of approximately $13.4 million, a smaller decrease
in accounts payable and accrued expenses in 2002 of approximately $13.8 million,
primarily from liabilities paid in the third quarter of 2001 resulting from the
Women.com acquisition, a larger decrease in restricted cash and other assets in
2002 of approximately $2.3 million primarily due to the one-time charge for the
termination of the NBC agreement, and an increase in deferred revenue of
approximately $0.9 million in 2002 as compared to a decrease of approximately
$3.6 million in 2001. The decrease in net loss was primarily due to an increase
in revenues of approximately $3.7 million and a decrease in operating expenses
of approximately $19.5 million, partially offset by the adoption of SFAS 142
which resulted in a change of accounting principle charge of approximately $9.2
million in the first quarter of 2002.
Cash used in investing activities was approximately $1.1 million and
$1.7 million for the three and nine months ended September 30, 2002,
respectively. This compares to cash used in investing activities of
approximately $0.9 million and net cash provided by investing activities of $4.6
million, respectively, for the three and nine months ended September 30, 2001.
The overall increase in net cash used in investing activities for the nine
months ended September 30, 2002 compared to the comparable period in 2001 was
primarily due to the acquisition of Women.com in the second quarter of 2001
resulting in net cash acquired of approximately $11.0 million. This amount was
partially offset by lower fixed asset purchases in 2002 of $3.9 million and the
purchase of an additional 30.1% interest in Cooperative Beauty Ventures, L.L.C.
of approximately $1.1 million in the first quarter of 2001.
There was no cash provided by financing activities for the three months
ended September 30, 2002 and cash provided by financing activities was
approximately $2.0 million for the nine months ended September 30, 2002,
compared to approximately $0.6 million and $22.2 million for the three and nine
months ended September 30, 2001, respectively. The overall decrease in cash
provided by financing activities for the nine months ended September 30, 2002
compared to the comparable period in 2001 was primarily attributable to the
purchase of shares of common stock and warrants by Hearst and other former
Women.com stockholders in the second quarter of 2001 resulting in net proceeds
of approximately $18.9 million.
In March 2001, iVillage purchased an additional 30.1% of Cooperative
Beauty Ventures, L.L.C. from Unilever for $1.5 million, thereby increasing its
ownership to 80.1%. The agreement revised iVillage's funding obligation and
provides that iVillage will fund the ongoing business and operations of this
venture, not to exceed $7.0 million, and terminates Unilever's funding
obligation. During 2002, the Company has not been required to fund the
operations of the venture and, as of September 30, 2002, iVillage has
contributed, in total, approximately $1.9 million to the venture. As a result of
the purchase transaction described above, iVillage gained operational control of
the venture and the venture was consolidated within iVillage's financial
statements beginning in March 2001.
18
Unilever can exercise a "put" option to require iVillage to purchase
Unilever's remaining ownership interest in the venture for fair market value at
any time after September 30, 2002. At any time on or after September 30, 2002,
iVillage can exercise a "call" option to require Unilever to sell its remaining
interest in the venture to iVillage for fair market value; provided, however,
that Unilever can exercise a "call" option superior to iVillage's "call" option
to purchase a portion of iVillage's interest in the venture for fair market
value, up to a limit of 50% of the venture's ownership. These "put" and "call"
options must be paid in cash. If iVillage was required to purchase Unilever's
remaining ownership interest in the venture pursuant to the exercise of one of
these options, iVillage does not believe the amount of cash payable would be
material and expects that it would fund this obligation with its working
capital. In addition, at any time on or after September 30, 2002, Unilever can
exercise a "call" option to purchase a portion of iVillage's membership interest
in the venture for fair market value, up to a limit of 50% of the venture's
ownership.
iVillage's February 2000 advertising agreement with Unilever, as
amended, provides for a Unilever advertising purchase commitment of $14.5
million. Through September 30, 2002, iVillage has earned approximately $12.9
million under the advertising agreement with the remaining approximately $1.6
million to be earned between the period October 1, 2002 through June 30, 2003.
Pursuant to an amended and restated magazine content license and
hosting agreement with Hearst, Hearst has committed to purchase from iVillage
between $15.0 million and $21.0 million of production and advertising services
over a three-year period beginning in June 2001. This agreement also provides
for revenue sharing between Hearst and iVillage with respect to advertising
revenues obtained by iVillage from the Hearst magazine Web sites and iVillage's
other Web sites containing substantial Hearst content. This revenue-sharing
arrangement requires that iVillage pay Hearst a royalty payment, based on net
advertising revenues, of at least $3.9 million during the three-year term of the
agreement. This amount would be reduced on a pro rata basis if Hearst fails to
expend a minimum of $5.0 million in production fees in any year of the
agreement. In addition, if a shortfall in production fees occurs in the any year
of the agreement, then Hearst must place additional advertising in an amount
equal to 40% of the production fee shortfall.
Women.Com has been party to a multi-year advertising agreement with
Procter and Gamble since July 2000. During the third quarter of 2002, this
agreement was amended to eliminate the provision for an early termination fee
and to lower the minimum guaranteed fee to Women.com to approximately $9.6
million. Women.com had earned approximately $8.3 million under this advertising
agreement through September 30, 2002, and approximately $1.3 million of the
advertising purchase commitment remains from October 1, 2002 through June 30,
2003.
In December 2001, concurrent with the termination of Women.com's
agreement with AOL, iVillage entered into an advertising agreement with AOL
pursuant to which AOL delivered a guaranteed number of impressions during the
period from December 2001 through January 2002. In consideration of these
services, iVillage paid AOL $0.7 million. In 2002, iVillage entered into a web
pointing agreement with AOL, pursuant to which AOL provided a link to iVillage's
Web site. The agreement terminated on September 30, 2002, and in consideration
of these services, iVillage paid AOL approximately $0.2 million.
On February 22, 2002, iVillage amended its advertising and promotional
agreement with NBC, pursuant to which NBC released iVillage from its obligation
to make the remaining approximately $4.6 million in cash payments and to place
any additional advertising on NBC, in exchange for the purchase of approximately
$1.3 million in telecast spots in February 2002 by iVillage and the forfeiture
of iVillage's right to the remaining approximately $4.1 million of prepaid
advertising.
In March 2002, iVillage entered into a one-year financial advisory
agreement with Allen & Company Incorporated ("Allen & Company") pursuant to
which Allen & Company has agreed to act as iVillage's financial advisor with
respect to various matters from time to time. iVillage paid Allen & Company an
initial non-refundable fee of $505,000 in April 2002, which fee shall be
credited towards any additional fees payable to Allen & Company for services
rendered pursuant to this agreement.
19
On April 18, 2002, the Company acquired 82.3% of the outstanding shares
of Promotions.com common stock. On May 24, 2002, the Company acquired the
remaining outstanding shares of Promotions.com common stock through a
second-step merger. The aggregate purchase price paid was approximately $15.2
million, consisting of approximately $11.1 million of cash (inclusive of closing
costs) and 1,587,191 shares of the Company's common stock.
iVillage leases office space and equipment under non-cancelable
operating leases expiring at various dates through April 2015. The following is
a schedule of future minimum lease payments under noncancelable operating leases
as of September 30, 2002 for the next five years:
Year ending September 30: (in thousands)
2003.......................................... $ 5,097
2004.......................................... 4,159
2005.......................................... 4,114
2006.......................................... 3,975
2007.......................................... 3,791
---------
$ 21,136
=========
iVillage currently maintains a receivable from the landlord of its New
York headquarters for the remaining approximately $0.8 million for reimbursement
of certain construction expenses. iVillage anticipates collection of this
receivable within the next year.
iVillage's capital requirements depend on numerous factors, including:
o market acceptance of its services;
o the amount of resources iVillage devotes to investments in the
iVillage network, including entering into joint ventures with
and/or the acquisition of other entities;
o the resources iVillage devotes to marketing; and
o the resources iVillage devotes to selling its services and
brand promotions.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002". SFAS
145 becomes effective for financial statements issued for fiscal years beginning
after May 15, 2002. Management believes the adoption of SFAS 145 will not have a
material impact on the Company's financial position and results of operations.
In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities". The provisions of SFAS 146 shall be effective
for exit or disposal activities initiated after December 31, 2002. SFAS 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS 146 and EITF 94-3 relates to its requirements
for recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized
at the date of an entity's commitment to an exit plan. Management believes the
adoption of SFAS 146 will not have a material impact on the Company's financial
position and results of operations.
20
Risk Factors That May Affect Results of Operations and Financial Condition
iVillage may face difficulties encountered in the new and rapidly evolving
markets in which it operates.
iVillage faces many of the risks and difficulties frequently
encountered in new and rapidly evolving markets, including the Internet
advertising and consumer products and services markets. These risks and
difficulties include iVillage's ability to:
o attract a larger audience to the iVillage network of Web
sites;
o increase awareness of the iVillage brand and iVillage-branded
products and services;
o strengthen user loyalty;
o offer compelling content and desirable consumer products and
services;
o maintain current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of
industries;
o respond effectively to competitive pressures;
o continue to develop and upgrade iVillage's technology; and
o attract, retain and motivate qualified personnel.
iVillage has not achieved profitability and has recent and anticipated
continuing losses. iVillage has not achieved profitability and iVillage expects
to continue to incur operating losses for the foreseeable future. iVillage
incurred net losses attributable to common stockholders of approximately $26.5
million for the nine months ended September 30, 2002, $48.5 million for the year
ended December 31, 2001, and $191.4 million for the year ended December 31,
2000. As of September 30, 2002, iVillage's accumulated deficit was approximately
$459.3 million.
iVillage cannot make any assurances that it will achieve sufficient
revenues for profitability. Even if iVillage does achieve profitability,
iVillage cannot make any assurances that it will be able to sustain or increase
profitability on a quarterly or annual basis. If revenues grow slower than
iVillage anticipates, or if operating expenses exceed iVillage's expectations or
cannot be adjusted accordingly, its business, financial condition and results of
operations will be materially adversely affected. Because iVillage's strategy
includes acquisitions of, and joint ventures with, other businesses, acquisition
and joint venture expenses and any cash used to make these acquisitions and
joint ventures will reduce its available cash.
iVillage has a small number of customers and the loss of a number of these
customers could adversely affect its business, financial condition and results
of operations.
iVillage depends on a limited number of customers for a significant
portion of its revenues. For the three and nine months ended September 30, 2002,
revenues from iVillage's five largest advertisers accounted for approximately
41% of total revenues, respectively. Two advertisers, Procter and Gamble and
Hearst accounted for approximately 17% and 11% of total revenues for the three
months ended September 30, 2002, respectively. Three advertisers, Procter and
Gamble, Hearst and Unilever accounted for approximately 13%, 11% and 11% of
total revenues for the nine months ended September 30, 2002, respectively. One
advertiser, Unilever, accounted for approximately 14% of total revenues for the
three and nine months ended September 30, 2001, respectively, and Hearst
accounted for approximately 11% of total revenues for the three months ended
September 30, 2001. iVillage's five largest advertisers accounted for
approximately 35% and 34% of total revenues for the three and nine months ended
September 30, 2001, respectively. At September 30, 2002, Procter and Gamble
accounted for approximately 40% of the net accounts receivable, and at December
31, 2001, Hearst and Unilever accounted for approximately 14% and 10% of the net
accounts receivable, respectively. iVillage anticipates that its results of
operations in any given period will continue to depend to a significant extent
on revenues from a small number of customers. In addition, iVillage's largest
customers have in the past varied over time, and iVillage anticipates that they
will continue to do so in the future. Consequently, the loss of even a small
number of iVillage's largest customers at any one time may adversely affect
iVillage's business, financial condition and results of operations, unless
iVillage is able to enter into a sufficient number of new comparable contracts.
21
iVillage common stock may be delisted and, if it is delisted, trading in
iVillage common stock would decrease substantially and the market price of
iVillage common stock may decline further.
iVillage received a letter from The NASDAQ Stock Market, Inc., dated
September 17, 2002, stating that iVillage had failed to maintain a minimum per
share bid price of $1.00 over the last 30 consecutive trading days, which is
required for continued listing on The NASDAQ National Market. iVillage will have
until December 16, 2002 to regain compliance with this continued listing
requirement. If at any time before December 16, 2002, the closing bid price of
iVillage's common stock is at least $1.00 for a minimum of ten consecutive days,
NASDAQ will determine if iVillage then complies with NASDAQ's continued listing
requirements. If iVillage is unable to demonstrate compliance with the continued
listing requirements on or before December 16, 2002, NASDAQ will provide
iVillage with written notification that its securities will be delisted.
iVillage may appeal The NASDAQ staff's decision to a NASDAQ Listing
Qualifications Panel or apply to transfer its securities to The NASDAQ SmallCap
Market. iVillage currently intends to apply for a transfer to The NASDAQ
SmallCap Market if it appears that iVillage will be unable to regain compliance
with the continued listing requirements of The NASDAQ National Market. There
can be no guarantee that iVillage's transfer application will be approved
by NASDAQ.
If iVillage common stock is delisted from trading, the market price of
iVillage common stock may decline further, possibly to zero, and it may have a
material adverse effect on the ability of iVillage's stockholders to sell their
shares. The delisting of iVillage's common stock would also make it more
difficult for iVillage to raise additional financing.
iVillage's quarterly revenues and operating results are not indicative of future
performance, are difficult to forecast and have been and are likely to continue
to fluctuate.
iVillage does not believe that period-to-period comparisons of its
operating results are necessarily meaningful nor should they be relied upon as
reliable indicators of future performance, thus making it difficult to forecast
quarterly revenues and results of operations. In addition, iVillage's operating
results are likely to fluctuate significantly from quarter to quarter as a
result of several factors, many of which are outside iVillage's control, and any
of which could materially harm iVillage's business. These factors include:
o fluctuations in the demand for advertising or electronic
commerce;
o bankruptcies or other payment defaults of companies that are a
source of advertising revenues;
o volatility in the media market and the high number of
companies decreasing their marketing budgets;
o changes in the level of traffic on its network; and
o fluctuations in marketing expenses and technology
infrastructure costs.
iVillage's revenues for the foreseeable future will remain primarily
dependent on user traffic levels and advertising activity on its Web sites.
Future revenues are difficult to forecast. iVillage may be unable to adjust
spending quickly enough to offset any unexpected reduction in revenues in a
particular quarter, which may materially and adversely affect its business,
financial condition and results of operations.
In one or more future quarters, iVillage's results of operations may
fall below the expectations of securities analysts and investors. If iVillage's
results of operations fall below expectations, the trading price of its common
stock would likely be materially adversely affected. In addition, if the
revenues of iVillage in any particular quarter are lower than anticipated,
iVillage may be unable to reduce spending in that quarter. If iVillage has a
shortfall in revenues in relation to its expenses, then iVillage's business,
financial condition and results of operations would be materially adversely
affected.
iVillage may need to raise additional capital and its prospects for obtaining
additional financing are uncertain.
iVillage currently anticipates that its existing cash and cash
equivalents will be sufficient to meet its anticipated capital expenditures and
working capital requirements for at least the next twelve months. However, the
amount of cash and cash equivalents that iVillage will need in the future cannot
be accurately predicted and depends on many factors, including the amount of
revenues received and expenses incurred in connection with the operation of its
business. Accordingly, iVillage may need to raise additional funds in the future
to fund its operations. iVillage can make no assurances that additional
financing will be available to iVillage on acceptable terms, or at all. In
particular, unless the market price of iVillage's common stock increases
dramatically, it is unlikely that iVillage will be able to raise funds through a
public offering of its common stock. Due to iVillage's lack of profitability, it
is also unlikely that iVillage would be able to obtain any bank financing. If
anticipated operating results are not achieved, management of iVillage has the
intent and believes it has the ability to delay or reduce expenditures so as not
to require additional financial resources if those resources were not available
on terms acceptable to iVillage, although iVillage can make no assurances in
this regard.
22
The downturn in the economy has raised uncertainties concerning iVillage's
business prospects.
The national economy has recently experienced a slowdown. As a result,
many of iVillage's customers have experienced difficulty in maintaining their
current operations and implementing their business plans. Many of these
customers have reduced their spending on iVillage's products and services,
and/or may not be able to discharge their current payables and other obligations
to iVillage. The non-payment or late payment of amounts due to iVillage from a
significant customer, or the non-payment or late payment by multiple customers
which, in the aggregate, are substantial would materially adversely affect
iVillage's business, financial condition and results of operations.
As of September 30, 2002, Hearst owned approximately 29.5% of the outstanding
shares of iVillage common stock and had three representatives on the iVillage
Board of Directors; therefore, Hearst is able to significantly influence
iVillage's corporate direction and policies.
As of September 30, 2002, Hearst owned approximately 29.5% of the
outstanding shares of iVillage's common stock, assuming that all of the shares
of Women.Com Networks, Inc. held by former Women.Com stockholders and all of the
shares of Promotions.com, Inc. held by former Promotions.com stockholders had
been exchanged for shares of iVillage common stock, in which case there would
have been 55,533,738 shares of iVillage common stock outstanding. In addition,
Hearst holds a warrant entitling it to purchase 2,065,695 shares of iVillage's
common stock.
Pursuant to an amended and restated stockholder agreement entered into
between Hearst and iVillage on June 20, 2001, iVillage appointed three
representatives of Hearst to its board of directors, with one Hearst designee
appointed to each class of director. The amended and restated stockholder
agreement provides that the number of Hearst representatives is subject to
reduction if Hearst's ownership of iVillage common stock falls below certain
threshold levels. There is also a Hearst representative on each of iVillage's
nominating and compensation committees.
Hearst's board representation and stock ownership allows Hearst to
significantly influence iVillage's corporate direction and policies, including
any mergers, acquisitions, consolidations, strategic relationships or sales of
assets. This board representation and stock ownership may also discourage or
prevent transactions involving an actual or potential change of control,
including transactions in which iVillage stockholders would otherwise receive a
premium for their shares. In addition, the interests of Hearst, which owns or
has significant investments in other businesses, including cable television
networks, newspapers, magazines and electronic media, may from time to time be
competitive with, or otherwise diverge from, iVillage's interests, particularly
with respect to new business opportunities and future acquisitions.
Although Hearst is required to vote all shares that it holds in excess
of 25% (subject to adjustment) of iVillage's outstanding voting securities in
accordance with the recommendation of iVillage's Board of Directors, Hearst may
effectively control certain stockholder actions, including approving changes to
iVillage's Certificate of Incorporation or Bylaws and adopting or changing
equity incentive plans. Hearst's effective control over stockholder actions may
also determine the outcome of any merger, consolidation, sale of all or
substantially all of iVillage's assets or other form of change of control that
iVillage might consider.
23
iVillage's business will be harmed if Internet usage does not continue to grow.
iVillage's market is new and rapidly evolving. iVillage's business
would be adversely affected if Internet usage does not continue to grow,
particularly usage by women. A number of factors may inhibit Internet usage,
including:
o inadequate network infrastructure;
o security concerns;
o inconsistent quality of service;
o lack of availability of cost-effective, high-speed service;
o consumers returning to traditional or alternative sources for
information, shopping and services; and
o privacy concerns, including those related to the ability of
Web sites to gather information about users without their
knowledge or consent.
If Internet usage continues to grow significantly, Internet
infrastructure may not be able to support the demands placed on it by this
growth and its performance and reliability may decline. In addition, Internet
service providers and Web sites have experienced interruptions in their services
as a result of the bankruptcies of Internet service and infrastructure
providers, outages and other delays occurring throughout the Internet network
infrastructure. If these service interruptions frequently occur in the future,
Internet usage, including the usage of iVillage's Web sites, could grow more
slowly or decline.
The market for Internet advertising is still developing. If the Internet fails
to gain further acceptance as a medium for advertising, and iVillage fails to
develop significant alternative sources of revenue, iVillage would have slower
revenue growth than expected and would incur greater than expected losses.
iVillage expects to continue to derive a substantial portion of its
revenues from sponsorships and advertising for the foreseeable future, as demand
and market acceptance for Internet advertising continues to develop.
Accordingly, iVillage's business depends on market acceptance of the Internet as
a medium for advertising. Although iVillage derives a portion of its revenues
from sales and/or licensing of content, products and services, consumer
reluctance to subscribe to or pay for such content, products and services may
limit iVillage's ability to supplement Internet advertising as a substantial
source of revenue in the foreseeable future.
Although there are currently several standards to measure the
effectiveness of Internet advertising, the industry has had difficulty
convincing potential advertisers that Internet advertising is a significant
advertising medium. Advertisers and advertising agencies that have historically
relied on traditional forms of advertising may be reluctant or slow to adopt
online advertising. In addition, advertisers and advertising agencies that use
the Internet as an advertising medium may find online advertising to be less
effective for promoting their products and services than traditional advertising
media, including television, radio and print. Advertisers and advertising
agencies that have invested substantial resources in traditional methods of
advertising may also be reluctant to reallocate their resources to online
advertising. Moreover, software programs that limit or prevent advertising from
being delivered to an Internet user's computer are available. Widespread
adoption of this software could adversely affect the commercial viability of
Internet advertising. The market for online advertising also depends on the
overall growth and acceptance of electronic commerce. If the markets for online
advertising and electronic commerce fail to develop or develop more slowly than
iVillage expects, or if it is unable to adapt to new forms of Internet
advertising, iVillage would have slower than expected revenue growth and would
incur greater than expected losses, and its business and financial condition
would be harmed.
Furthermore, different pricing models are used to sell advertising on
the Internet and it is difficult to predict which, if any, of the models will
emerge as the industry standard. For example, in recent quarters iVillage has
experienced a shift from the larger, higher-rate, long-term sponsorship
agreements that were prevalent a few years ago to smaller, lower-rate,
short-term advertising agreements. This makes it difficult to project iVillage's
future advertising rates and revenues.
iVillage's business would be harmed by a decline in user traffic.
iVillage's business is inherently dependent upon high user traffic
levels. The rates charged to advertisers and sponsors and the number of products
and services sold by iVillage are directly related to the number of visitors to
iVillage's Web sites. User traffic from certain Web sites that are
non-proprietary to iVillage are sometimes included in the reported information
regarding iVillage's network of Web sites. These properties include certain of
the Hearst magazines and other parties who have agreed to have traffic from
their Web sites incorporated within the iVillage Network. There is no guarantee
that the number of visitors to iVillage's Web sites will not decline or that
Hearst or other third parties will continue to permit inclusion of their Web
sites as part of the iVillage network for traffic reporting purposes. Any
decline in user traffic levels could have a material adverse effect on
iVillage's business, financial condition and results of operations.
24
iVillage may not be able to expand its business through acquisitions and joint
ventures and, even if iVillage is successful in this regard, iVillage's
operations may be adversely affected as a result of an acquisition or joint
venture.
iVillage's business strategy includes growth through business
combinations, acquisitions and joint ventures. iVillage's business could be
harmed if it is unable to implement this business strategy. iVillage's ability
to implement this business strategy depends in large part on iVillage's ability
to compete successfully with other entities for acquisition candidates and joint
venture partners. Factors affecting iVillage's ability to compete successfully
in this regard include:
o iVillage's financial condition relative to the financial
condition of its competitors; and
o the attractiveness of iVillage's common stock as potential
consideration for entering into these types of transactions as
compared to the common stock of other entities competing for
these opportunities.
Many of the entities with which iVillage competes for acquisition
candidates and joint venture partners have greater financial resources than
those of iVillage. In addition, iVillage's acquisition program has been
materially adversely affected by the substantial decline in the market price of
iVillage's common stock over the last several years.
If, despite these factors, iVillage is successful in entering into
additional business combinations, acquisitions and joint ventures, iVillage's
business, financial condition and results of operations could be materially and
adversely affected if iVillage is unable to integrate the operations of the
acquired companies or joint ventures. iVillage's ability to integrate the
operations of the acquired companies or joint ventures will depend, in part, on
iVillage's ability to overcome or address:
o the difficulties of assimilating the operations and personnel
of the acquired companies and the potential disruption of
iVillage's ongoing business as a result of these assimilation
efforts;
o the difficulties of establishing a new joint venture,
including the need to attract and retain qualified personnel
and the need to attract customers and advertisers;
o the need to incorporate successfully the acquired or shared
technology or content and rights into iVillage's products and
media properties;
o the difficulties of maintaining uniform standards, controls,
procedures and policies; and
o the potential impairment of relationships with employees and
customers as a result of any integration of new management
personnel or reduction of personnel.
In addition, effecting acquisitions could require use of a significant
amount of iVillage's available cash. Furthermore, iVillage may have to issue
equity or equity-linked securities to pay for future acquisitions, and any of
these issuances could be dilutive to existing and future stockholders. In
addition, acquisitions and investments may have negative effects on iVillage's
reported results of operations due to acquisition-related charges, amortization
of acquired technology and other intangibles, and/or potential liabilities
associated with the acquired businesses or joint ventures. Any of these
acquisition-related risks or costs could harm iVillage's business, financial
condition and results of operations.
iVillage may be unable to respond to the rapid technological change in its
industry.
iVillage's market is characterized by rapidly changing technologies,
frequent new product and service introductions and evolving industry standards.
The recent growth of the Internet and intense competition in iVillage's industry
exacerbates these market characteristics. To achieve its goals, iVillage needs
to effectively integrate the various software programs and tools required to
enhance and improve its product offerings and manage its business. For example,
iVillage's failure to promptly or adequately implement the World Wide Web
Consortium's Platform for Privacy Preferences, or P3P, standards could result in
reduced user traffic to iVillage's Web sites or regulatory and/or legal claims
if iVillage's P3P policy does not conform to iVillage's written privacy policy
posted on its Web sites. iVillage's future success will depend on its ability to
adapt to rapidly changing technologies by continually improving the performance
features and reliability of its services. iVillage may experience difficulties
that could delay or prevent the successful development, introduction or
marketing of new products and services. In addition, iVillage's new enhancements
must meet the requirements of iVillage's current and prospective users and must
achieve significant market acceptance. iVillage also could incur substantial
costs if it needs to modify its services or infrastructure to adapt to these
changes. Due to expense reduction initiatives over the last several years,
iVillage has not upgraded certain aspects of its technology infrastructure.
25
Seasonal and cyclical patterns may adversely affect iVillage's business.
iVillage believes that advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. iVillage believes that similar seasonal and cyclical
patterns have also developed in its market, generally resulting in lower
advertising revenues in the first and third calendar quarters of each year. In
addition, traffic levels on iVillage's Web sites typically fluctuate during the
summer and year-end vacation and holiday periods. These seasonal and cyclical
patterns may adversely affect iVillage's business, financial condition and
results of operations.
iVillage's uncertain sales cycles could adversely affect its business.
The time between the date of initial contact with a potential
advertiser or sponsor and the execution of a contract with the advertiser or
sponsor is often lengthy, typically six weeks for smaller agreements and longer
for larger agreements, and is subject to delays over which iVillage has little
or no control, including:
o advertisers' and sponsors' budgetary constraints;
o advertisers' and sponsors' internal acceptance reviews;
o the success and continued internal support of advertisers' and
sponsors' own development efforts; and
o the possibility of cancellation or delay of projects by
advertisers or sponsors.
During the sales cycle, iVillage may expend funds and management
resources and yet not obtain sponsorship or advertising revenues. Accordingly,
iVillage's results of operations for a particular period may be adversely
affected if sales to advertisers or sponsors forecasted in a particular period
are delayed or do not otherwise occur.
iVillage relies on third parties to adequately measure the demographics of its
user base and delivery of advertisements on iVillage's Web sites. iVillage's
business would be harmed if these third parties fail to provide these services
to iVillage.
It is important to iVillage's advertisers that iVillage accurately
measure the demographics of its user base and the delivery of advertisements on
iVillage's Web sites. iVillage depends on third parties to provide many of these
measurement services. If these third parties are unable or unwilling to provide
these services to iVillage in the future, iVillage would need to perform them or
obtain them from another provider. This could cause iVillage to incur additional
costs or cause interruptions in its business until these services are replaced.
Companies may choose to not advertise on iVillage's Web sites or may pay less
for advertising if they perceive iVillage's demographic measurements are