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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-25469
iVillage Inc.
-------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3845162
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
500 Seventh Avenue, New York, New York 10018
-------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(212) 600-6000
--------------
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
56,151,130 shares of common stock as of November 12, 2003.
iVillage Inc.
Form 10-Q
For the Quarter ended September 30, 2003
Index
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002.......1
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002................................................................2
Condensed Consolidated Statements of Cash Flows for the three and nine months ended
September 30, 2003 and 2002................................................................3
Notes to Condensed Consolidated Financial Statements.......................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................................................47
Item 4. Controls and Procedures......................................................................47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................49
Item 4. Submission of Matters to a Vote of Security Holders..........................................49
Item 6. Exhibits and Reports on Form 8-K.............................................................50
Signatures....................................................................................................51
Exhibit Index.................................................................................................52
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,
2003 2002
------------- ------------
Assets
Current assets:
Cash and cash equivalents...................................... $ 15,448 $ 21,386
Accounts receivable, less allowance for doubtful accounts of
$1,131 and $1,310, respectively........................... 5,601 5,336
Prepaid rent................................................... 318 --
Other current assets........................................... 5,040 5,960
--------- ---------
Total current assets 26,407 32,682
Restricted cash................................................ -- 8,474
Fixed assets, net.............................................. 7,472 17,157
Goodwill, net.................................................. 22,266 24,617
Intangible assets, net......................................... 12,942 17,367
Prepaid rent, net of current portion........................... 3,392 --
Other assets................................................... 165 289
--------- ---------
Total assets.......................................... $ 72,644 $ 100,586
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.......................... $ 10,329 $ 10,319
Deferred revenue............................................... 4,372 3,514
Deferred rent.................................................. 144 348
Deferred gain on sale of joint venture interest................ 217 --
Current liabilities of discontinued operations, net............ 98 98
--------- ---------
Total current liabilities............................. 15,160 14,279
Deferred rent, net of current portion.......................... 1,519 3,926
--------- ---------
Total liabilities..................................... 16,679 18,205
Minority interest............................................ 288 181
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $.01, 5,000,000
shares authorized; no shares issued
and outstanding as of September 30, 2003
and December 31, 2002, respectively....................... -- --
Common stock - par value $.01, 200,000,000 shares authorized;
56,964,031 and 56,531,785 shares issued at
September 30, 2003 and December 31, 2002, respectively;
55,760,585 and 55,328,339 shares outstanding as of
September 30, 2003 and December 31, 2002, respectively.... 570 565
Additional paid-in capital................................... 550,028 549,203
Accumulated deficit.......................................... (494,178) (466,717)
Treasury stock at cost (1,203,446 shares).................... (502) (502)
Stockholders' notes receivable............................... (241) (262)
Unearned compensation and deferred advertising............... -- (87)
--------- ---------
Total stockholders' equity.......................... 55,677 82,200
--------- ---------
Total liabilities and stockholders' equity.......... $ 72,644 $ 100,586
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
iVillage Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues ......................................................... $ 13,562 $ 14,629 $ 39,358 $ 45,768
Operating expenses:
Editorial, product development and technology ............... 7,551 7,472 22,180 21,455
Sales and marketing ......................................... 4,341 5,346 14,816 16,018
Sales and marketing - NBC/Hearst expenses ................... 135 568 218 3,435
Termination of NBC advertising contract ..................... -- -- -- 4,084
General and administrative .................................. 4,198 3,238 10,295 9,360
Lease restructuring charge and related impairment
of fixed assets.......................................... 5,101 -- 9,126 --
Depreciation and amortization ............................... 1,856 3,153 6,804 9,087
Impairment of goodwill, intangible assets and
fixed assets............................................... -- -- 4,029 --
-------- -------- -------- --------
Total operating expenses ................................ 23,182 19,777 67,468 63,439
-------- -------- -------- --------
Loss from operations ............................................. (9,620) (5,148) (28,110) (17,671)
Interest income, net ............................................. 62 146 192 431
Other income, net ................................................ 139 16 139 16
Gain on sale of joint venture interest ........................... 200 -- 425 --
-------- -------- -------- --------
Net loss before minority interest and cumulative effect of
change in accounting principle .............................. (9,219) (4,986) (27,354) (17,224)
Minority interest ................................................ (47) 18 (107) (63)
-------- -------- -------- --------
Net loss before cumulative effect of change in accounting
principle ................................................... (9,266) (4,968) (27,461) (17,287)
Cumulative effect of change in accounting principle .............. -- -- -- (9,181)
-------- -------- -------- --------
Net loss ......................................................... $ (9,266) $ (4,968) $(27,461) $(26,468)
======== ======== ======== ========
Per share data:
Net loss before cumulative effect of change in accounting
principle per share ......................................... $ (0.17) $ (0.09) $ (0.49) $ (0.32)
Cumulative effect of change in accounting principle per share .... -- -- -- (0.17)
-------- -------- -------- --------
Basic and diluted net loss per share ............................. $ (0.17) $ (0.09) $ (0.49) $ (0.48)
======== ======== ======== ========
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share ........... 55,753 55,535 55,613 54,607
======== ======== ======== ========
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,
--------------------- --------------------
2003 2002 2003 2002
--------- -------- -------- --------
Cash flows from operating activities:
Net loss ........................................................ $ (9,266) $ (4,968) $(27,461) $(26,468)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment of goodwill, intangibles and fixed
assets (including change in accounting principle) .............. -- -- 4,029 9,181
Depreciation and amortization ................................... 1,856 3,153 6,804 9,087
Non-cash print advertising expense .............................. 315 568 398 1,733
Expense recognized in connection with issuance of
warrants and stock options ..................................... 320 175 395 693
Minority interest ............................................... 47 (18) 107 63
Provision for bad debt expense .................................. 20 102 208 145
Deferred rent amortization ...................................... (42) (87) (210) (260)
Lease restructuring charge and related impairment
of fixed assets ................................................ 350 -- 4,375 --
Amortization of gain on sale of joint venture interest .......... (200) -- (425) --
Changes in operating assets and liabilities:
Accounts receivable ............................................. (239) 1,441 (473) 1,348
Prepaid rent .................................................... (3,710) -- (3,710) --
Restricted cash and other assets ................................ 8,592 339 9,120 5,387
Accounts payable and accrued expenses ........................... 712 (1,839) 10 (7,590)
Lease restructuring ............................................. (59) -- (90) --
Deferred revenue ................................................ (392) (101) 858 857
--------- -------- -------- --------
Net cash used in operating activities............................... (1,696) (1,235) (6,065) (5,824)
--------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets ........................................ (209) (448) (899) (804)
Purchase of intangible assets ................................... (150) -- (150) --
Cash paid less cash acquired for acquisition of
Promotions.com, Inc. .......................................... -- (631) (9) (865)
Deferred gain on sale of joint venture interest ................. 75 -- 642 --
--------- -------- -------- --------
Net cash used in investing activities............................... (284) (1,079) (416) (1,669)
--------- -------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options ......................... 455 -- 522 748
Principal payments on stockholders' note receivable.............. 7 -- 21 1,291
--------- -------- -------- --------
Cash provided by financing activities............................... 462 -- 543 2,039
--------- -------- -------- --------
Cash used in discontinued operations................................ -- -- -- (10)
--------- -------- -------- --------
Net decrease in cash for the period ................................ (1,518) (2,314) (5,938) (5,464)
Cash and cash equivalents, beginning of period...................... 16,966 26,681 21,386 29,831
--------- -------- -------- --------
Cash and cash equivalents, end of period ........................... $ 15,448 $ 24,367 $ 15,448 $ 24,367
========= ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Organization and Basis of Presentation
iVillage Inc. ("iVillage"), The Internet for Women(TM), is a women's
media company that operates online and offline properties including
iVillage.com, iVillage Parenting Network, Inc. ("IVPN"), Public Affairs Group,
Inc. ("PAG"), Promotions.com, Inc. ("Promotions.com"), iVillage Consulting, and
Knowledgeweb, Inc. (operator of the Astrology.com Web site) ("Astrology.com").
iVillage.com is a leading women's online destination offering interactive
services, peer support, content and online access to experts. IVPN is a holding
company for Lamaze Publishing Company ("Lamaze Publishing"), an offline
publisher of educational materials for expectant and new parents, and iVillage
Integrated Properties, Inc. ("IVIP"), the operator of The Newborn Channel, a
satellite television network broadcast in approximately 1,100 hospitals
nationwide, and the publisher of Baby Steps magazine. PAG is comprised of three
divisions: Business Women's Network, Diversity Best Practices and Best Practices
in Corporate Communications, each offering extensive databases of pertinent
information to subscribing companies and members. Promotions.com provides
promotions and direct marketing programs that are integrated with customers'
marketing initiatives.
iVillage has sustained net losses and negative cash flows from
operations since its inception and expects to continue to incur additional net
losses in the near future. iVillage's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to achieve profitable
operations and/or raise additional financing through public or private equity
financings, collaborative or other arrangements with corporate sources, through
the launch of new subscription or other revenue-generating initiatives or other
sources of financing to fund operations. Unless the market price of iVillage's
common stock increases dramatically it is unlikely that iVillage will be able to
raise funds through a public offering of its securities, however, management
believes that it could raise funds through a private placement of its
securities. iVillage can make no assurances that it will achieve profitable
operations or that iVillage will be able to obtain adequate financing from other
sources. Due primarily to iVillage's lack of profitability, it is unlikely that
iVillage will be able to obtain bank financing. Management believes that
iVillage's current funds will be sufficient to enable iVillage to meet its
planned expenditures through the next twelve months. If anticipated operating
results are not achieved, management has the intent and believes it has the
ability to delay or reduce expenditures so as not to require additional
financial resources, if those resources were not available on terms acceptable
to iVillage, although there can be no assurances in this regard.
iVillage is subject to the risks and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for Internet
products and services. These risks include the failure to develop and extend
iVillage's brands, the non-acceptance or rejection of iVillage's services by
consumers, vendors, sponsors and/or advertisers and the inability of iVillage to
maintain and increase the levels of traffic on its online services, as well as
other risks and uncertainties. In the event iVillage does not successfully
implement its business plan, certain assets may not be recoverable.
4
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unaudited Interim Financial Information
The unaudited interim condensed consolidated financial statements of
iVillage as of September 30, 2003 and for the three and nine months ended
September 30, 2003 and 2002, respectively, included herein, have been prepared
in accordance with the instructions for Form 10-Q under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and Article 10 of Regulation S-X
under the Securities Act of 1933, as amended (the "Securities Act"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. These financial statements should be read in conjunction
with iVillage's Annual Report on Form 10-K for the fiscal year ended December
31, 2002.
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments and appropriate inter-company elimination
adjustments, necessary to present fairly the financial position of iVillage at
September 30, 2003, and the results of its operations and its cash flows for the
three and nine months ended September 30, 2003 and 2002, respectively. The
results for the three and nine months ended September 30, 2003 are not
necessarily indicative of the expected results for the full fiscal year or any
future period.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
iVillage and its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
Revenue and Receivables
Two customers, Wal-Mart Stores, Inc. (including its affiliates,
"Wal-Mart") and Hearst Communications, Inc. (including its affiliates,
"Hearst"), a related party, accounted for approximately 12% and 11% of total
revenues for the three months ended September 30, 2003, respectively. One
customer, Hearst, accounted for approximately 12% of total revenues for the nine
months ended September 30, 2003. iVillage's five largest customers accounted for
approximately 32% and 28% of total revenues for the three and nine months ended
September 30, 2003, respectively. Two customers, Procter and Gamble Company
("Procter and Gamble"), and Hearst, accounted for approximately 17% and 11% of
total revenues for the three months ended September 30, 2002, respectively.
Three customers, 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. iVillage's
five largest customers accounted for approximately 41% of total revenues for the
three and nine months ended September 30, 2002, respectively. At September 30,
2003, Hearst accounted for approximately 30% of the net accounts receivable. At
December 31, 2002, Procter and Gamble accounted for approximately 26% of the net
accounts receivable.
5
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Included in sponsorship and advertising revenues are barter
transactions, which totaled approximately $1.1 million and $3.0 million, or 9%
of sponsorship and advertising revenues for the three and nine months ended
September 30, 2003, respectively, and approximately $0.8 million and $2.6
million, or 6% and 7%, for the comparable periods in 2002.
Reclassifications
Certain reclassifications have been made in the prior period condensed
consolidated financial statements to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Significant estimates and assumptions made by iVillage include those
related to the useful lives of fixed assets and intangible assets, the
recoverability of fixed assets, goodwill, intangible assets and deferred tax
assets, the allowance for doubtful accounts and the accrual of certain operating
expenses.
Accrued Expenses
In the ordinary course of business, iVillage utilizes estimates to
determine the accrual of certain operating expenses. These estimates are
reviewed on an ongoing basis to determine the adequacy of these accruals. For
the three and nine months ended September 30, 2003, iVillage reversed
approximately $0.1 million and $0.2 million, respectively, of accruals included
in operating expenses due to a change in estimate on services previously
provided for, and approximately $0.5 million and $1.1 million for the comparable
periods in 2002. These amounts were offset by additional accruals for various
operating expenses.
Net Loss Per Share
Basic net loss per share is computed using the weighted average number
of common shares outstanding during the period. Diluted net loss per share is
computed using the weighted average number of common shares and common stock
equivalents outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive.
Included in the September 30, 2003 and 2002 calculation of weighted
average number of shares of common stock outstanding are 189,478 and 207,724
shares, respectively, which have not been issued. These shares are being held
for former Women.com Networks, Inc. ("Women.com") and Promotions.com
stockholders that have not yet exchanged their respective shares for shares of
iVillage as of the balance sheet date.
Stock options and warrants in the amount of 11,353,254 shares and
13,028,398 shares for the nine months ended September 30, 2003 and 2002,
respectively, were not included in the computation of diluted net loss per share
as they were anti-dilutive as a result of net losses during the period
presented.
6
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Stock-Based Compensation
iVillage applies Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock option issuances, and has adopted
the disclosure-only provisions of Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). No
compensation cost related to grants of stock options was reflected in iVillage's
net loss, as all options granted under the plans had an exercise price at least
equal to the market value of the underlying common stock on the date of grant.
Compensation cost related to the modification of stock option terms is measured
at the quoted market price of iVillage's common stock at the measurement date
and is amortized to expense over the vesting period. If compensation cost for
iVillage's stock options had been determined based on the fair value of the
stock options at the grant date for awards in the three and nine months ended
September 30, 2003 and 2002 consistent with the provisions of SFAS 123,
iVillage's net loss would have been adjusted to the pro forma amounts indicated
below:
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
2003 2002 2003 2002
--------- -------- ---------- ----------
($ in thousands except per share data)
Net loss - as reported ........................... $ (9,266) $ (4,968) $ (27,461) $ (26,468)
Stock-based compensation expense
determined under SFAS 123 ........................ (1,563) (2,624) (6,244) (8,053)
--------- -------- ---------- ----------
Net loss - pro forma.............................. $ (10,829) $ (7,592) $ (33,705) $ (34,521)
========= ======== ========== ==========
Net loss per share - as reported.................. $ (0.17) $ (0.09) $ (0.49) $ (0.48)
========= ======== ========== ==========
Net loss per share - pro forma.................... $ (0.19) $ (0.14) $ (0.61) $ (0.63)
========= ======== ========== ==========
Because options vest over several years and additional option grants
are expected to be made in future years, the aforementioned pro forma results
are not necessarily indicative of the pro forma results for the full fiscal year
or any future period.
The weighted average assumptions used for grants made in 2003 and 2002
are as follows:
Options granted during the Options granted during the
three months ended nine months ended
September 30, September 30,
--------------------------- --------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Risk-free interest rate............. 2.60% 3.71% 2.56% 3.71%
Expected option life................ 4 years 4 years 4 years 4 years
Dividend yield...................... 0.00% 0.00% 0.00% 0.00%
Volatility.......................... 108.00% 108.00% 108.00% 108.00%
7
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB")
reached a consensus on Emerging Issues Task Force ("EITF") Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF No.
00-21"). The guidance in EITF No. 00-21 is effective for revenue arrangements
entered into for fiscal years beginning after June 15, 2003. EITF No. 00-21
addresses certain aspects of the accounting by a company for arrangements under
which it will perform multiple revenue-generating activities. Specifically, EITF
No. 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and if it does, how to
divide the arrangement into separate units of accounting consistent with the
identified earnings processes for revenue recognition purposes. EITF No. 00-21
also addresses how arrangement consideration should be measured and allocated to
the separate units of accounting in the arrangement. iVillage has determined
that EITF No. 00-21 will not have a material impact on its financial position,
cash flows or results of operations.
In January 2003, the FASB issue FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a
company to consolidate a variable interest entity if it is designated as the
primary beneficiary of that entity even if the company does not have a majority
voting interest. A variable interest entity is generally defined as an entity
where its equity is unable to finance its activities or where the owners of the
entity lack the risks and rewards of ownership. The provisions of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. Based on iVillage's review of FIN 46, it does not believe it has any
interests qualifying as variable interest entities and does not anticipate that
the provisions of FIN 46 will have any near term impact on its financial
position, cash flows or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
for certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies when
a derivative contains a financing component, amends the definition of an
underlying to conform it to language used in FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," and amends certain other
existing pronouncements. This Statement is effective for contracts entered into
or modified after September 30, 2003, and for hedging relationships designated
after September 30, 2003. In addition, most provisions of SFAS 149 are to be
applied prospectively. iVillage does not expect the adoption of SFAS 149 to have
a material impact on its financial position, cash flows or results of
operations.
Note 2 - Fixed Assets
In the second quarter of 2003, iVillage abandoned a portion of its New
York leased real estate. In connection with the abandonment, iVillage incurred
an impairment of fixed assets related to the leasehold improvements, net of
accumulated amortization, of approximately $4.9 million and furniture and
fixtures, net of accumulated depreciation, of approximately $0.3 million. In the
third quarter of 2003, iVillage completed its renegotiation of its lease
agreement with the landlord of its New York leased real estate in which iVillage
abandoned fixed assets related to leasehold improvements, net of accumulated
amortization, of approximately $1.4 million and transferred to the landlord
furniture and fixtures, net of accumulated depreciation, of approximately $0.1
million. These amounts are included in the condensed consolidated statements of
operations in the caption, "Lease restructuring charge and related impairment of
fixed assets." (See Note 8 - Lease Restructuring Charge and Related Impairment
of Fixed Assets).
8
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the second quarter of 2003, iVillage restructured the business
operations of Promotions.com (See Note 3 - Goodwill) resulting in an impairment
of computer equipment, net of accumulated depreciation, of approximately $0.8
million. This amount is included in the condensed consolidated statements of
operations in the caption, "Impairment of goodwill, intangible assets and fixed
assets."
Note 3 - Goodwill
Effective January 1, 2002, iVillage adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the recognition and
measurement of goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 also addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination whether acquired
individually or with a group of other assets. This statement provides that
intangible assets with indefinite lives and goodwill will not be amortized, but
will be tested at least annually for impairment, or if circumstances change that
will more likely than not reduce the fair value of the reporting unit below its
carrying amount. Upon completion of the transitional impairment test, the fair
value for Reporting unit - 2 did not exceed the reporting unit's carrying value
and an impairment was recorded of approximately $9.2 million in the first
quarter of 2002. In the second quarter of 2003, iVillage restructured the
business operations of Reporting unit - 4 by outsourcing most of the operations
of the Promotions.com business unit and by changing the Webstakes.com business
model, and as a result, the fair value of Reporting unit - 4 did not exceed the
reporting unit's carrying value and an impairment was recorded of approximately
$2.6 million. This amount is included in the condensed consolidated statements
of operations in the caption, "Impairment of goodwill, intangible assets and
fixed assets."
The following table sets forth the components of goodwill, net as of
September 30, 2003 and December 31, 2002 (in thousands):
Adjustment to Impairment
December 31, 2002 Acquisition purchase accounting losses September 30, 2003
----------------- ------------ ------------------- ---------- ------------------
Reporting unit - 1 $ 18,770 $ -- $ -- $ -- $ 18,770
Reporting unit - 2 1,693 -- -- -- 1,693
Reporting unit - 3 1,803 -- -- -- 1,803
Reporting unit - 4 2,351 -- 295 (2,646) --
-------- ---- -------- -------- --------
$ 24,617 $ -- $ 295 $ (2,646) $ 22,266
======== ==== ======== ======== ========
Reporting unit - 1 includes the iVillage, Women.com, Astrology.com and
Cooperative Beauty Ventures, L.L.C. entities; Reporting unit - 2 includes IVPN,
Lamaze Publishing and IVIP; Reporting unit - 3 includes PAG; Reporting unit - 4
includes Promotions.com consisting of the Promotions.com and Webstakes.com
business units.
9
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4 - Intangible Assets
Effective January 1, 2002, iVillage adopted SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
addresses financial accounting and reporting for the disposal of long-lived
assets. The objectives of SFAS 144 are to address significant issues relating to
the implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of" ("SFAS 121") and to develop
a single accounting model, based on the framework established in SFAS 121, for
the long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired. SFAS 144 retains the fundamental provisions of SFAS 121
regarding the recognition and measurement of the impairment of long-lived assets
to be held and used. iVillage reviews for the impairment of long-lived assets
and certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
general, iVillage will recognize an impairment when the sum of undiscounted
future cash flows is less than the carrying amount of such assets. The
measurement for such impairment loss is based on the fair value of the asset,
typically based upon the future cash flows discounted at a rate commensurate
with the risk involved. During the second quarter of 2003, iVillage restructured
the business operations of Reporting unit - 4 (See Note 3 - Goodwill), and as a
result, the fair value was less than the carrying amount of certain intangible
assets and an impairment was recorded of approximately $0.7 million. This amount
is included in the condensed consolidated statements of operations in the
caption, "Impairment of goodwill, intangible assets and fixed assets."
In July 2003, iVillage acquired the Web site, trademarks, key contracts
and other related assets of gURL.com for an immaterial amount of cash.
Identifiable intangible assets are amortized under the straight-line
method over the period of expected benefit ranging from two to ten years. The
following table sets forth the components of the intangible assets subject to
amortization as of September 30, 2003 and December 31, 2002 (in thousands):
September 30, 2003 December 31, 2002
------------------------------------------------------------------- ---------------------------------
Range
of Gross Adjustment Gross
useful carrying to purchase Impairment Accumulated carrying Accumulated
life amount Acquisition accounting losses amortization Net amount amortization Net
------ -------- ----------- ----------- ---------- ------------ ------ -------- ------------ ----------
Advertiser and
member list and
customer 2-10
contracts years $ 21,150 $ 150 $ -- $ (718) $(10,447) $10,135 $21,150 $ (7,803) $ 13,347
Trademarks and
domain names 3 years 3,424 -- (197) -- (2,585) 642 3,424 (2,009) 1,415
Licensing
agreement 10 years 2,900 -- -- -- (1,192) 1,708 2,900 (975) 1,925
Technology 3 years 890 -- -- -- (433) 457 890 (210) 680
Non competition
agreements 1 year 810 -- -- -- (810) -- 81 (810) --
Content 3 years 600 -- -- -- (600) -- 600 (600) --
-------- ------ ------ ------ -------- ------- ------- -------- --------
$ 29,774 $ 150 $ (197) $ (718) $(16,067) $12,942 $29,774 $(12,407) $ 17,367
======== ====== ====== ====== ======== ======= ======= ======== ========
10
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Amortization expense for the three and nine months ended September 30,
2003 was approximately $1.1 million and $3.7 million, respectively. For the
three and nine months ended September 30, 2002, amortization expense was
approximately $1.5 million and $4.2 million, respectively.
Estimated amortization expense for the twelve months ending September
30 are as follows (in thousands):
2004............................ $ 3,997
2005............................ 2,059
2006............................ 1,802
2007............................ 1,760
2008............................ 1,760
-------
$11,378
=======
Note 5 - Deferred Gain on Sale of Joint Venture Interest
In March 2003, iVillage and Tesco.com Limited, a division of Tesco PLC
("Tesco"), restructured the terms of their joint venture so that Tesco purchased
iVillage's entire ownership interest in iVillage UK. iVillage and Tesco also
entered into a twenty-year agreement, subject to earlier termination upon the
occurrence of certain events, whereby iVillage will license to iVillage UK
certain of its content and intellectual property, including trademarks and
copyrights, for use in the United Kingdom ("U.K.") and Ireland in exchange for
the greater of a minimum monthly license fee or a percentage of iVillage UK's
gross revenues. As part of the agreement, the entity continues to operate under
the iVillage UK domain name and provides users with the same content and
offerings.
All monies received by iVillage under the license agreement will be
classified as other income and will be included in the condensed consolidated
statements of operations as a gain on sale of joint venture interest. iVillage
will receive a minimum of $0.8 million in year one of the license agreement,
which will be earned monthly as services are provided. As of September 30, 2003,
iVillage has received approximately $0.6 million.
Note 6 - Discontinued Operations
Net current liabilities of discontinued operations as of September 30,
2003 were as follows (in thousands):
Accounts payable and accrued expenses....................... $(98)
====
Net current liabilities of discontinued operations.......... $(98)
====
11
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 7 - Related Party Transactions
Hearst Communications, Inc.
As part of the acquisition of Women.com, iVillage acquired
approximately $4.9 million of prepaid print advertising in certain Hearst
magazines. During the third quarter of 2003, iVillage recognized approximately
$0.1 million of non-cash print advertising expense, and included in the caption
"Other income, net" in the condensed consolidated statements of operations,
iVillage wrote off approximately $0.2 million for expired prepaid print
advertising credits. For the nine months ended September 30, 2003, iVillage
recognized approximately $0.4 million of non-cash print advertising expense and
expired credits from this advertising. For the three and nine months ended
September 30, 2002, iVillage recognized approximately $0.6 million and $1.7
million of non-cash print advertising expense. As of September 30, 2003,
included in the caption "Other current assets" in the condensed consolidated
balance sheet is $20,860 of prepaid Hearst print advertising.
Revenues, net of royalty payments, from Hearst for the three and nine
months ended September 30, 2003 were approximately $1.5 million and $4.8
million, respectively. For the three and nine months ended September 30, 2002,
revenues, net of royalty payments, from Hearst were approximately $1.5 million
and $5.0 million, respectively.
Time Warner Inc.
In the second and third quarters of 2003, iVillage signed contracts
with the America Online ("AOL") division of Time Warner Inc. to promote various
AOL products. Revenues from Time Warner Inc. for the three and nine months ended
September 30, 2003 were approximately $0.3 million, respectively. No revenues
were recognized from Time Warner Inc. for the comparable periods in 2002.
Note 8 - Lease Restructuring Charge and Related Impairment of Fixed Assets
In the second quarter of 2003, iVillage abandoned a significant portion
of its New York leased real estate. As a result, iVillage incurred a lease
restructuring charge of approximately $0.6 million. In addition, iVillage wrote
off fixed assets of approximately $5.2 million that were impaired with the
abandonment of the leased space (See Note 2- Fixed Assets) and reduced the
liability for deferred rent, associated with the abandoned leased space, by
approximately $1.8 million.
In July 2003, iVillage entered into a lease amendment with the landlord
of its New York headquarters that became effective on August 15, 2003. The lease
amendment provides for a reduction in leased space, as well as a reduction in
rent per square foot. In connection with the lease amendment, iVillage
surrendered the approximately $8.5 million classified as restricted cash to the
landlord, resulting in a lease restructuring charge of approximately $4.7
million and prepaid rent of $3.7 million, which will be amortized over the
remaining life of the lease. In addition, iVillage wrote off fixed assets of
approximately $1.5 million that were transferred to the landlord (See Note 2 -
Fixed Assets), reduced the liability for deferred rent, associated with the
reduction in leased space, by approximately $0.6 million and reversed the
remaining lease restructuring liability of approximately $0.6 million.
These amounts are included in the condensed consolidated statements of
operations in the caption, "Lease restructuring charge and related impairment of
fixed assets".
12
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 9 - Commitments and Contingencies
Leases
iVillage leases office space and equipment, under non-cancelable
operating leases expiring at various dates through April 2015. The following is
a schedule of future minimum lease payments under non-cancelable operating
leases as of September 30, 2003:
Twelve months ending September 30: (in thousands)
--------------------------------------------------------------
2004..................................... $ 2,127
2005..................................... 2,076
2006..................................... 1,783
2007..................................... 1,553
2008..................................... 1,470
-------
$ 9,009
=======
Joint Ventures
Pursuant to an agreement with Unilever, iVillage was obligated to fund
the ongoing business and operations of Cooperative Beauty Ventures, L.L.C., a
joint venture between iVillage and Unilever, up to a maximum of $7.0 million. As
of September 30, 2003, iVillage had not been required to fund the operations of
the venture during 2002 and 2003 and has contributed, in total, approximately
$1.9 million to the venture. Subsequent to the balance sheet date, iVillage
purchased Unilever's ownership interest in the venture and the entity became
wholly-owned by iVillage (See Note 10 - Subsequent Events).
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, 2003 cannot be ascertained. While these matters could
affect the operating results of any one quarter when resolved in future periods
and while there can be no assurance with respect thereto, management believes,
with the advice of outside legal counsel, that after final disposition, any
monetary liability or financial impact to iVillage from matters described would
not be material to the condensed consolidated financial statements.
Several plaintiffs have filed class action lawsuits in federal court
against iVillage, several of its present and former executives and its
underwriters in connection with its March 1999 initial public offering. A
similar class action lawsuit was filed against Women.com, several of its former
executives and its underwriters in connection with Women.com's October 1999
initial public offering. The complaints generally assert claims under the
Securities Act, the Exchange Act and rules promulgated by the Securities and
Exchange Commission ("SEC"). The complaints seek class action certification,
unspecified damages in an amount to be determined at trial, and costs associated
with the litigation, including attorneys' fees.
13
iVillage Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
In February 2003, the defendants' motion to dismiss certain of the
plaintiffs' claims was granted in part, but, for the most part, denied.
In June 2003, a proposed settlement of this litigation was structured
between the plaintiffs, the issuer defendants, the issuer officers and directors
named as defendants, and the issuers' insurance companies. The proposed
settlement generally provides that the issuer defendants and related individual
defendants will be released from the litigation without any liability other than
certain expenses incurred to date in connection with the litigation, the issuer
defendants' insurers will guarantee $1.0 billion in recoveries by plaintiff
class members, the issuer defendants will assign certain claims against the
underwriter defendants to the plaintiff class members, and the issuer defendants
will have the opportunity to recover certain litigation-related expenses if the
plaintiffs recover more than $5.0 billion from the underwriter defendants. The
respective boards of directors of iVillage and Women.com each approved the
proposed settlement in July 2003. The proposed settlement is now subject to
approval by the other involved parties as well as to the final approval of the
court. There can be no assurance that this proposed settlement will be approved
and implemented in its current form, or at all.
In June 2001, Euregio.net commenced an action in Belgium against
Women.com claiming damages in excess of 1 million Euros in connection with
certain alleged copyright infringements. Despite Women.com's arguments
challenging the jurisdiction of the Belgian court, the alleged infringements and
the amount of damages, in January 2003 a Belgian court issued a judgment against
Women.com in the amount of approximately 850,000 Euros (approximately $990,250
based on the Euro exchange rate as of September 30, 2003). Women.com has been
advised by outside legal counsel that Euregio.net would have to commence legal
proceedings in the United States to enforce this judgment. Women.com has
appealed this judgment in the Belgian courts and will also oppose any effort by
the plaintiffs to enforce this judgment in the United States court system.
iVillage, with the advice of outside legal counsel, believes that the
lawsuits and claims asserted against iVillage and Women.com pursuant to these
complaints are without merit and intends to vigorously defend against these
claims. iVillage does not believe that any of these legal proceedings will have
a material adverse effect on iVillage's business, financial condition, results
of operations and liquidity.
Note 10 - Subsequent Events
In October 2003, iVillage purchased the remaining 19.9% ownership
interest of Cooperative Beauty Ventures, L.L.C. from Unilever for approximately
$0.7 million, resulting in such entity becoming wholly-owned by iVillage. The
aggregate purchase price consisted of approximately $0.2 million in cash and
200,000 shares of iVillage's common stock.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain statements in this Quarterly Report on Form 10-Q, including
certain statements contained in this Item 2 constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. The words or phrases "can be," "expects," "may affect,"
"may depend," "believes," "estimate," "project," and similar words and phrases
are intended to identify such forward-looking statements. Such forward-looking
statements are subject to various known and unknown risks and uncertainties and
we caution you that any forward-looking information provided by or on behalf of
iVillage is not a guarantee of future performance. Actual results could differ
materially from those anticipated in such forward-looking statements due to a
number of factors, some of which are beyond iVillage's control, in addition to
those risks discussed below and in iVillage's other public filings, press
releases and statements by iVillage's management, including (i) the volatile and
competitive nature of the media industry, (ii) changes in domestic and foreign
economic, political and market conditions, (iii) the effect of federal, state
and foreign regulation on iVillage's business, (iv) the impact of recent and
future acquisitions and joint ventures on iVillage's business and financial
condition, (v) iVillage's ability to establish and maintain relationships with
advertisers, sponsors, and other third party providers and partners, and (vi)
the impact of pending litigation on iVillage's business and financial condition.
All such forward-looking statements are current only as of the date on which
such statements were made. 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, The Internet for Women(TM), is a women's media company that
operates online and offline properties including iVillage.com, IVPN, PAG,
Promotions.com, iVillage Consulting, and Astrology.com. iVillage.com is a
leading women's online destination offering interactive services, peer support,
content and online access to experts. IVPN is a holding company for Lamaze
Publishing, an offline publisher of educational materials for expectant and new
parents, and IVIP, the operator of The Newborn Channel, a satellite television
network broadcast in approximately 1,100 hospitals nationwide, and the publisher
of Baby Steps magazine. PAG is comprised of three divisions: Business Women's
Network, Diversity Best Practices and Best Practices in Corporate
Communications, each offering extensive databases of pertinent information to
subscribing companies and members. Promotions.com provides promotions and direct
marketing programs that are integrated with customers' marketing initiatives.
The discussion and analysis below includes the results of operations of
Promotions.com since April 19, 2002.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by iVillage.
15
Revenue Recognition
To date, iVillage's revenues have been derived primarily from the sale
of sponsorship and advertising contracts. Sponsorship revenues are derived
principally from contracts ranging from one to three years. Sponsorships are
designed to support the customer's broad marketing objectives, including brand
promotion, awareness, product introductions and online research. Sponsorship
agreements typically include the delivery of impressions on iVillage's Web sites
and the design and development of customized sites that enhance the promotional
objectives of the sponsor. An impression is the viewing of promotional material
on a Web page, which may include banner advertisements, links, buttons or other
text or images. As part of certain sponsorship agreements, sponsors who also
sell products may provide iVillage with a commission on sales of their products
generated through iVillage's Web sites.
Advertising revenues are derived principally from short-term
advertising contracts in which iVillage typically guarantees a minimum number of
impressions or pages to be delivered to users over a specified period of time
for a fixed fee. Sponsorship and advertising revenues are recognized ratably in
the period in which the advertisement is displayed, provided that iVillage has
no continuing obligations and the collection of the receivable is reasonably
assured, at the lesser of the ratio of impressions delivered over total
guaranteed impressions or the straight-line basis over the term of the contract.
To the extent that minimum guaranteed impressions are not met, iVillage defers
recognition of the corresponding revenues until the guaranteed impressions are
achieved.
Advertising revenues also include revenues from targeted advertising
appearing on an iVillage Web site that is based upon relevant content or a world
wide web search query result. These revenues are earned on a cost per thousand
impressions and/or a percentage of net advertising revenue.
For contracts with multiple elements (e.g., deliverable and
undeliverable products, advertising and production revenue), iVillage allocates
revenue to each element based on evidence of its fair value. Evidence of fair
value is the price of a deliverable when it is regularly sold on a stand-alone
basis. iVillage recognizes revenue allocated to each element when the criteria
for revenue set forth above are met.
Included in sponsorship and advertising revenues are revenues from
advertising placements in IVPN's publications, videos and Web site, and
broadcasts of The Newborn Channel and The Newborn Channel-Spanish (currently
offered as an audio overlay to The Newborn Channel). In addition, sponsorship
and advertising revenues from IVPN include promotional programs that offer
advertisers the ability to distribute samples, coupons and promotional
literature to new and expectant parents, as well as custom publications and
mailings created and distributed on behalf of advertisers.
Sponsorship and advertising revenues also include revenues from
Promotions.com which generates revenues through Webstakes.com, a Web site
dedicated to Internet sweepstakes and promotions, and Promotions.com, a full
service integrated promotions services group.
16
Webstakes.com revenues are derived principally from service contracts
whereby Webstakes.com recognizes revenues based on either a "cost-per-click" or
a "cost-per-action" pricing model. With a cost-per-click pricing model,
Webstakes.com generally earns revenues by delivering its visitors to its
customer's Web site. Webstakes.com recognizes revenue related to its
cost-per-click pricing model when a visitor has been delivered to the customer's
Web site and the collection of the corresponding receivable is reasonably
assured. Revenue is recognized differently in a cost-per-action pricing model,
which requires Webstakes.com to not only deliver the aforementioned visitor, but
also a specific user action such as purchasing a product or registering for more
information or as a member of the customer's Web site in order for Webstakes.com
to earn revenue. Webstakes.com recognizes revenue related to the cost-per-action
pricing model when the specific action has been performed on its customer's Web
site and the collection of the corresponding receivable is reasonably assured.
Promotions.com revenues are derived principally from contracts in which
Promotions.com typically provides custom turnkey services for the creation,
administration and implementation of a promotion. Promotions.com's revenue
recognition policy related to its services is to recognize revenues ratably over
the period of the promotion, provided that no significant obligations remain in
a contract and collection of the resulting receivable is reasonably assured.
Sponsorship and advertising revenues also include barter revenues,
which generally represent exchanges by iVillage of advertising space on its Web
sites for reciprocal advertising space on or traffic from other Web sites and/or
other advertising mediums. Revenues and expenses from these barter transactions
are recorded based upon the fair value of the advertisements delivered. Fair
value of advertisements delivered is based upon iVillage's recent practice of
receiving cash from similar advertisers. Barter revenues are recognized when the
advertisements are displayed on iVillage's Web sites. Barter expenses are
generally recognized when iVillage's advertisements are displayed on the
reciprocal Web sites or properties, which typically is the same period as when
advertisements are displayed on iVillage's Web sites, and are included as part
of sales and marketing expenses. Revenues from barter transactions were
approximately $1.1 million and $3.0 million for the three and nine months ended
September 30, 2003, respectively, and approximately $0.8 million and $2.6
million, for the comparable periods in 2002.
iVillage Consulting is a business unit within iVillage that provides
production and back-end provisioning for customers in need of these services.
iVillage recognizes revenues from production services based upon actual hours
worked at its negotiated hourly rates and/or fixed fees stipulated in contracts.
PAG is a comprehensive source of information and program linkage that
serves as an international platform for diversity and women offering to
subscribing companies and members an extensive database of women's
organizations, best practices and guidance in the areas of workplace diversity,
women and corporate communications. Revenues from PAG are generated primarily
through subscription-based programs that convey current best practices for women
and diversity issues in the workplace and the hosting of an annual two-day event
that focuses on women and diversity. iVillage recognizes revenue from PAG
subscriptions ratably over the term of the subscription agreement and revenues
associated with events are recognized when the events are held.
17
Revenues from the e-commerce portion of Astrology.com consist of the
sale of astrological charts and other related products to visitors to the
Astrology.com Web site. iVillage recognizes revenues from Astrology.com product
sales, net of any discounts, when products are shipped or e-mailed to customers,
the collection of the receivable is reasonably assured and no further obligation
remains.
iVillage received fees from licensing portions of its content in
connection with its agreement with PlanetRx.com, Inc. These fees were recognized
on a straight-line basis over the life of the contract, which ended in the first
quarter of 2002.
iVillage has received revenues from new initiatives involving
subscription-based properties, the sale of iVillage-branded products and
services, the sale of third-party products and services and the sale of
research. During 2002, iVillage began selling iVillageSolutions-branded consumer
products through the iVillage Market located on iVillage.com. During 2003,
iVillage has released seven iVillageSolutions-branded books, through an
agreement with a publisher. iVillage receives a revenue share or royalty on each
of the above products when purchased. iVillage recognizes revenues from these
new initiatives when products are shipped and/or provided to the customer, the
collection of the receivable is reasonably assured and no further obligation
remains. Additionally, in the first quarter of 2003, IVPN began to charge
hospitals a carriage fee for The Newborn Channel. IVPN recognizes revenues from
these carriage fees ratably over the term of the agreement provided the
collection of the receivable is reasonably assured. While iVillage believes that
one or more of these new initiatives will develop into a recurring source of
revenues, iVillage can make no assurance that it will be successful in any of
these endeavors.
Goodwill
Goodwill is not subject to amortization and is tested for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset may be impaired. The impairment test consists of a comparison of the
fair value of goodwill with its carrying amount. If the carrying amount of
goodwill exceeds its fair value, an impairment loss is recognized in an amount
equal to that excess. Fair value is typically based upon the future cash flows
discounted at a rate commensurate with the risk involved. After an impairment
loss is recognized, the adjusted carrying amount of goodwill is its new
accounting basis.
Intangible Assets
iVillage reviews for impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In general,
iVillage will recognize an impairment when the fair value is less than the
carrying amount of such assets. The measurement for such impairment loss is
based on the fair value of the asset, typically based upon the future cash flows
discounted at a rate commensurate with the risk involved.
18
Fixed Assets
Depreciation of equipment, furniture and fixtures, and computer
software is provided for by the straight-line method over their estimated useful
lives ranging from three to five years. Amortization of leasehold improvements
is provided for over the lesser of the term of the related lease or the
estimated useful life of the improvement. The cost of additions, and
expenditures which extend the useful lives of existing assets, are capitalized,
and repairs and maintenance costs are charged to operations as incurred.
iVillage continually evaluates whether current events or circumstances warrant
adjustments to the carrying value or estimated useful lives of fixed assets in
accordance with the provisions of SFAS 144.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Significant estimates and assumptions made by iVillage include those
related to the useful lives of fixed assets and intangible assets, the
recoverability of fixed assets, goodwill, intangible assets and deferred tax
assets, the allowance for doubtful accounts and the accrual of certain operating
expenses.
Results of Operations
Revenues
Revenues were approximately $13.6 million and $39.4 million for the
three and nine months ended September 30, 2003, respectively, which represents a
decline of 7% and 14% when compared with approximately $14.6 million and $45.8
million of revenues for the three and nine months ended September 30, 2002,
respectively. The decline in revenues for the three months ended September 30,
2003, as compared to 2002, was primarily due to a decrease in sponsorship and
advertising revenues of approximately $0.6 million, principally due to the
expiration of some long term contracts. The decline in revenues for the nine
months ended September 30, 2003, as compared to the same period in 2002, was
primarily due to a decrease in production fees billed by iVillage Consulting of
approximately $0.7 million, a decrease of revenues from research initiatives of
approximately $1.1 million, a decrease in licensing fees of approximately $0.5
million and a decrease in sponsorship and advertising revenues (excluding
Promotions.com) of approximately $4.7 million primarily resulting from the
expiration of some long term contracts. This decrease was partially offset by
the acquisition of Promotions.com resulting in identifiable incremental revenues
of approximately $1.0 million. Sponsorship and advertising revenues were
approximately $11.3 million and $31.8 million for the three and nine months
ended September 30, 2003, respectively, compared to approximately $11.9 million
and $35.4 million for the corresponding periods in 2002. Sponsorship and
advertising revenues accounted for approximately 83% and 81% of total revenues
for the three and nine months ended September 30, 2003, respectively, compared
to approximately 81% and 77% of total revenues for the corresponding periods in
2002. Revenues from IVPN accounted for approximately 44% and 39% of sponsorship
and advertising revenues for the three and nine months ended September 30, 2003,
respectively, compared to approximately 31% and 27% for the corresponding
periods in 2002. The increase in 2003 is primarily from larger custom
publications created in 2003, as compared to the custom publications created in
2002, on behalf of an advertiser, and increased revenues from IVPN's magazines
and promotional programs coupled with an overall decline in sponsorship and
advertising revenues. Revenues from Promotions.com accounted for approximately
7% and 8% of sponsorship revenues for the three and nine months ended September
30, 2003, respectively, compared to approximately 7% and 4% for the
corresponding periods in 2002.
19
In recent years, iVillage has experienced a shift from the larger,
higher-rate, long-term sponsorship agreements that were prevalent a few years
ago to smaller, lower-rate, short-term advertising agreements. This trend has
made it more difficult for iVillage to both achieve period-to-period revenue
growth and accurately project future quarterly revenues.
Included in sponsorship and advertising revenues are barter
transactions, which accounted for approximately 9% of sponsorship and
advertising revenues for each of the three and nine months ended September 30,
2003, respectively, and approximately 6% and 7% of sponsorship and advertising
revenues for the corresponding periods in 2002.
Included in revenues are production fees received from work performed
(primarily for Hearst, a related party) by iVillage Consulting, which accounted
for approximately 5% and 6% of total revenues for the three and nine months
ended September 30, 2003, respectively, compared to approximately 6% and 7% for
the corresponding periods in 2002.
Included in revenues are subscription-based and event fees derived from
the services provided by PAG, which accounted for approximately 4% and 6% of
total revenues for the three and nine months ended September 30, 2003,
respectively, compared to approximately 7% and 6% for the corresponding periods
in 2002.
Included in revenues are fees from chart sales through Astrology.com,
fees received from licensing portions of iVillage's content, and fees from new
initiatives involving online subscription-based properties, the sale of
iVillage-branded products and services, the sale of third-party products, the
sale of research and The Newborn Channel's carriage fee, which in the aggregate
accounted for approximately 8% and 7% of total revenues for the three and nine
months ended September 30, 2003, compared to approximately 6% and 10% for the
corresponding periods in 2002.
For the three and nine months ended September 30, 2003, revenues from
iVillage's five largest customers accounted for approximately 32% and 28% of
total revenues, respectively. Two customers, Wal-Mart and Hearst, accounted for
approximately 12% and 11% of total revenues for the three months ended September
30, 2003, respectively. One customer, Hearst, accounted for approximately 12% of
total revenues for the nine months ended September 30, 2003. Two customers,
Procter and Gamble and Hearst accounted for approximately 17% and 11% of total
revenues for the three months ended September 30, 2002, respectively. Three
customers, Hearst, Procter and Gamble, and Unilever accounted for approximately
13%, 11% and 11% of total revenues for the nine months ended September 30, 2002,
respectively. iVillage's five largest customers accounted for approximately 41%
of total revenues for the three and nine months ended September 30, 2002,
respectively.
20
iVillage anticipates that its results of operations in any given period
will continue to depend to a significant extent on revenues from a small number
of customers. iVillage's contract with Procter & Gamble expired in June 2003,
iVillage's contract with Hearst expires in June 2004, and iVillage's contract
with Unilever, signed in October 2003, expires in December 2004. iVillage can
make no assurances as to whether these expiring contracts will be renewed, or if
so renewed, that they will be on similar terms as the expiring agreements.
Because iVillage's largest customers have varied over time in the past, iVillage
anticipates that they will continue to do so in the future. Consequently, the
loss of even a small number of iVillage's largest customers at any one time may
adversely affect iVillage's business, financial condition and results of
operations, unless iVillage is able to enter into a sufficient number of new
comparable contracts.
Operating Expenses
Editorial, Product Development and Technology
Editorial, product development and technology expenses consist
primarily of payroll and related expenses for the editorial, technology, Web
site design and production staffs, severance costs for terminated employees, the
cost of communications, related expenditures necessary to support iVillage's Web
sites, software development, technology and support operations, and an
allocation of facility expenses, which is based on the number of personnel.
Editorial, product development and technology expenses for the three and nine
months ended September 30, 2003 were approximately $7.6 million and $22.2
million, or 56% of total revenues, respectively. Editorial, product development
and technology expenses were approximately $7.5 million and $21.5 million, or
51% and 47% of total revenues, respectively, for the corresponding periods in
2002. The increase between the comparable nine month periods was primarily
attributable to the increased revenues from IVPN. Associated with these revenues
were higher costs involved with larger custom publications created in 2003, as
compared to the custom publications created in 2002, by IVPN on behalf of an
advertiser of approximately $0.8 million and increased circulation and
production costs associated with IVPN's magazines, videos and promotional
programs of approximately $0.6 million. Additionally, the acquisition of
Promotions.com resulted in incremental expenses of approximately $0.5 million.
These amounts were partially offset by a decrease in salaries, severance and
related expenses of approximately $1.4 million. Editorial, product development
and technology expenses increased as a percentage of total revenues for the nine
months ended September 30, 2003, when compared to the same period in 2002, as a
result of the increase in expenses coupled with a decline in revenues.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses for sales and marketing personnel, severance costs for terminated
employees, commissions, advertising and other marketing-related expenses,
distribution agreements which expired in 2002 and an allocation of facility
expenses, which is based on the number of personnel. Sales and marketing
expenses for the three and nine months ended September 30, 2003 were
approximately $4.5 million and $15.0 million, or 33% and 38% of total revenues,
respectively. Sales and marketing expenses were approximately $5.9 million and
$23.5 million, or 40% and 51% of total revenues, respectively, for the
comparable periods in 2002. The decrease in sales and marketing expenses for the
nine month period ended September 30, 2003 as compared to 2002 was primarily
attributable to the negotiated advertising spend and termination of an
advertising agreement with National Broadcasting Company, Inc. ("NBC") in the
first quarter of 2002 resulting in charges of approximately $1.3 million and
$4.1 million, respectively, and in 2003 a decrease in online media expenses,
Hearst print expenses and salaries, commissions, severance and related expenses
of approximately $0.7 million, $1.5 million and $0.8 million, respectively,
partially offset by incremental sales and marketing expenses related to the
Promotions.com acquisition of approximately $0.9 million. Sales and marketing
expenses decreased as a percentage of total revenues for the nine months ended
September 30, 2003, as compared to the same period in 2002, due to a larger
percentage decrease in sales and marketing expenses, as compared to the decline
in revenues.
21
Included in sales and marketing expenses are barter transactions, which
amounted to approximately 23% and 21% of total sales and marketing costs during
the three and nine months ended September 30, 2003, compared to 13% and 10% of
total sales and marketing costs for the comparable periods in 2002. Barter
transactions increased as a percentage of sales and marketing expenses for the
nine months ended September 30, 2003, as compared to the same period in 2002,
due to the decrease in sales and marketing expenses coupled with an increase in
barter expense.
General and Administrative
General and administrative expenses consist primarily of payroll,
severance and related expenses for the executive management, finance, allocated
facilities, human resources and legal employees, general corporate overhead,
lease restructuring charges and related impairment of fixed assets and other
professional fees. General and administrative expenses for the three and nine
months ended September 30, 2003 were approximately $9.3 million and $19.4
million, or 69% and 49% of total revenues, respectively. For the comparable
period in 2002, general and administrative expenses were approximately $3.2
million and $9.4 million, or 22% and 20% of total revenues, respectively. The
increase in general and administrative expenses for the comparable three and
nine month periods was primarily due to the lease restructuring charges and
related impairment of fixed assets of approximately $5.1 million and $9.1
million, respectively, and an increase in payroll, severance and related
expenses of approximately $1.0 million and $0.9 million, respectively. General
and administrative expenses increased as a percentage of total revenues for the
nine months ended September 30, 2003, compared to the corresponding period in
2002, as a result of the increase in expenses coupled with a decline in
revenues.
In the ordinary course of business, iVillage utilizes estimates to
determine the accrual of certain operating expenses. These estimates are
reviewed on an ongoing basis to determine the adequacy of these accruals. For
the three and nine months ended September 30, 2003, iVillage reversed
approximately $0.1 million and $0.2 million, respectively, of accruals included
in operating expenses due to a change in estimate on services previously
provided for, and approximately $0.5 million and $1.1 million for the comparable
periods in 2002. These amounts were offset by additional accruals for various
operating expenses.
22
Depreciation and Amortization
Depreciation and amortization expenses for the three and nine months
ended September 30, 2003 were approximately $1.9 million and $6.8 million, or
14% and 17% of total revenues, respectively. For the comparable periods in 2002,
depreciation and amortization expenses were approximately $3.2 million and $9.1
million, or 22% and 20% of total revenues, respectively. The dollar decrease in
depreciation and amortization for the comparable three and nine month periods
was primarily due to several intangible assets being fully amortized in 2002 and
the impairments of intangible assets and fixed assets in the second and third
quarters of 2003, reducing the cost basis on which depreciation and amortization
is calculated, partially offset by amortization expense on intangible assets
acquired with the Promotions.com acquisition in April 2002.
Interest Income, Net
Interest income, net includes primarily interest income from iVillage's
cash balances and interest earned on stockholders' notes receivable. Interest
income, net for the three and nine months ended September 30, 2003 was
approximately $0.1 and $0.2 million, or less than 1% of total revenues,
respectively. For the comparable periods in 2002, interest income, net was $0.1
million and $0.4 million, or 1% of total revenues, respectively. The decrease
between 2003 and 2002 was primarily due to the repayment of the NBC loan in the
first quarter of 2002 and lower cash balances in 2003.
Net Loss
iVillage recorded a net loss of approximately $9.3 million and $27.5
million, or $0.17 per share and $0.49 per share, for the three and nine months
ended September 30, 2003, respectively. For the comparable periods in 2002,
iVillage recorded a net loss of approximately $5.0 million and $26.5 million, or
$0.09 per share and $0.48 per share, respectively. The increase in net loss for
the nine months ended September 30, 2003 compared to the same period in 2002 was
primarily due to the following 2003 events: lower revenues of approximately $6.4
million, lease restructuring charges and related impairment of fixed assets due
to the abandonment and renegotiation of leased real estate of approximately $9.1
million and the restructuring of the Promotions.com business resulting in the
impairment of goodwill, intangible assets and fixed assets of approximately $4.0
million, offset by the following 2002 events: the adoption of SFAS 142 which
resulted in a change in accounting principle charge of approximately $9.2
million and the negotiated advertising spend and termination of an advertising
agreement with NBC of approximately $1.3 million and $4.1 million, respectively
and by the following 2003 events: lower online media and Hearst print expenses
of $2.2 million and lower depreciation and amortization of $2.3 million.
Recent Events
In October 2003, iVillage purchased the remaining 19.9% ownership
interest of Cooperative Beauty Ventures, L.L.C. from Unilever for approximately
$0.7 million, resulting in such entity becoming wholly-owned by iVillage. The
aggregate purchase price consisted of approximately $0.2 million in cash and
200,000 shares of iVillage's common stock.
23
Liquidity and Capital Resources
Financial Reporting Release No. 61, released by the SEC, requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. iVillage currently does not maintain any off-balance sheet
arrangements.
As of September 30, 2003, iVillage had approximately $15.4 million in
cash and cash equivalents. Cash equivalents include money market accounts.
iVillage maintains its cash and cash equivalents in highly rated financial
institutions and at times these balances exceed insurable amounts.
iVillage has sustained net losses and negative cash flows from
operations since its inception and expects to continue to incur additional net
losses in the near future. iVillage's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to achieve profitable
operations and/or raise additional financing through public or private equity
financing, collaborative or other arrangements with corporate sources, through
the launch of new subscription or other revenue-generating initiatives or other
sources of financing to fund operations. Unless the market price of iVillage's
common stock increases dramatically, it is unlikely that iVillage will be able
to raise funds through a public offering of its securities, however, management
does believe that it may be possible to raise funds through a private placement
of its securities. iVillage can make no assurance that it will achieve
profitable operations, or that iVillage will be able to obtain adequate
financing from other sources in the event it becomes necessary. Due primarily to
iVillage's lack of profitability, it is unlikely that iVillage would be able to
obtain bank financing. Management believes that iVillage's current funds will be
sufficient to enable it to meet iVillage's planned expenditures through the next
twelve months. If anticipated operating results are not achieved, management
believes it has the ability to delay or reduce expenditures, so as not to
require additional financial resources if such resources were not available on
terms acceptable to iVillage, although there can be no assurances in this
regard.
In the past, iVillage has achieved cost reductions through increased
managerial efficiencies and several expense reduction initiatives targeted at
certain expenses, including without limitation, reduced advertising, reduced
lease commitments, targeted staff reductions and reduced company employee
benefit plan costs.
In February 2003, iVillage announced an expense reduction initiative
with the goal of reducing annualized costs by up to $10.0 million. To date,
iVillage has recognized and/or achieved approximately $8.5 million of these
savings, primarily through the renegotiation of iVillage's New York real estate
lease and contracts with third-party vendors, as well as employee staff
reductions.
24
Based on current internal projections, iVillage no longer expects to be
able to maintain a cash balance at December 31, 2003 comparable to its cash
balance at December 31, 2002, primarily due to previously incurred or
anticipated cash expenditures relating to the renegotiation of iVillage's New
York real estate lease, certain investments in iVillage's infrastructure,
research initiatives, and other restructuring costs. Despite the short-term
negative impact of these expenditures on iVillage's cash balance, iVillage
believes that these costs improve iVillage's long-term liquidity outlook by
contributing to revenue growth opportunities and significantly reducing
annualized operating expenses.
Additionally, IVPN currently broadcasts The Newborn Channel and The
Newborn Channel-Spanish to most participating hospitals via satellite. This
satellite is scheduled to go offline at the end of 2004. IVPN is currently
exploring the conversion of participating hospitals from the satellite
television network broadcast to an in-hospital digital delivery system. iVillage
anticipates that the subscription fees to be received from the hospitals will
cover the cost of the new equipment required by the conversion.
Net cash used in operating activities increased to approximately $1.7
million for the three months ended September 30, 2003, from approximately $1.2
million for the comparable period in 2002. Net cash used in operating activities
increased to approximately $6.1 million for the nine months ended September 30,
2003, from approximately $5.8 million for the corresponding period in 2002. The
increase in net cash used in operating activities for the nine months ended
September 30, 2003, compared to the comparable period in 2002, was primarily due
to an increase in net loss less adjustments, an increase in prepaid rent and a
lower inflow of cash from accounts receivable of approximately $6.0 million,
$3.7 million and $1.8 million, respectively. These amounts were offset by a
larger decrease in accounts payable and accrued expenses in 2002 of
approximately $7.6 million and a larger utilization of restricted cash and other
assets in 2003 of approximately $3.7 million, primarily due to the surrender of
restricted cash to the landlord in consideration of iVillage's lease
renegotiation.
Net cash used in investing activities was approximately $0.3 million
and $0.4 million for the three and nine months ended September 30, 2003,
respectively. This compares to net cash used in investing activities of
approximately $1.1 million and $1.7 million for the three and nine months ended
September 30, 2002, respectively. The overall decrease in net cash used in
investing activities for the nine months ended September 30, 2003 compared to
the comparable period in 2002 resulted from cash received in connection with the
revised license agreement with Tesco of approximately $0.6 million in 2003 and
cash paid for the acquisition of Promotions.com in 2002 of $0.9 million, offset
by higher fixed asset and intangible asset purchases in 2003 of approximately
$0.1 million and $0.2 million, respectively.
Cash provided by financing activities was approximately $0.5 million
for the three and nine months ended September 30, 2003, respectively. This
compares to cash provided by financing activities of no amount and $2.0 million
for the three and nine months ended September 30, 2002, respectively. The
overall decrease in cash provided by financing activities for the nine months
ended September 30, 2003 compared to the comparable period in 2002 was primarily
due to a decrease in principal payments received for stockholders' notes
receivable of approximately $1.3 million in 2003 coupled with a decrease in
proceeds from the exercise of stock options of approximately $0.2 million.
25
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 with Unilever revised iVillage's funding
obligation and provided that iVillage will fund the ongoing business and
operations of this venture, not to exceed $7.0 million, and terminated
Unilever's funding obligation. As of September 30, 2003, iVillage had not been
required to fund the operations of the venture during 2003 and had contributed,
in total, approximately $1.9 million to the venture.
Pursuant to the March 2001 agreement, Unilever could exercise a "put"
option to require iVillage to purchase Unilever's remaining ownership interest
in the venture for fair market value at any time. iVillage could also 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 could also
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.
In October 2003, iVillage exercised its call option and purchased
Unilever's remaining 19.9% ownership interest in Cooperative Beauty Ventures,
L.L.C. in exchange for approximately $0.2 million of cash and 200,000 shares of
common stock in iVillage Inc.
iVillage's February 2000 advertising agreement with Unilever, as
amended, provided for a Unilever advertising purchase commitment of $14.5
million. This agreement expired in June 2003. In October 2003, iVillage and
Unilever entered into a new agreement that terminates the February 2000
advertising agreement and provides for Unilever's purchase of an additional $0.1
million in advertising and receipt of the remaining advertising not received
under the previous agreement. The new agreement expires in December 2004.
Pursuant to an amended and restated magazine content license and
hosting agreement with Hearst, Hearst committed to purchase from iVillage
between approximately $16.4 million and $18.2 million of production and
advertising services over a three-year period beginning in June 2001. This
agreement also provides for revenue sharing between Hearst and iVillage with
respect to advertising revenues obtained by iVillage from the Hearst magazine
Web sites and iVillage's other Web sites containing substantial Hearst content.
This revenue-sharing arrangement requires that iVillage pay Hearst a royalty
payment, based on net advertising revenues, of at least approximately $2.6
million during the three-year term of the agreement. This amount would be
reduced on a pro rata basis if Hearst fails to expend its stated annual minimum
in production fees in any year of the agreement. In addition, if a shortfall in
production fees occurs in any year of the agreement, then Hearst must place
additional advertising in an amount equal to 40% of the production fee
shortfall.
Women.com was party to a multi-year advertising agreement with Procter
and Gamble from July 2000 through June 2003. During the third quarter of 2002,
this agreement was amended to eliminate the provision for an early termination
fee and to lower the minimum guaranteed fee to Women.com to approximately $9.6
million. Women.com has fully earned the guaranteed fee under this advertising
agreement as of September 30, 2003.
26
In January 2003, iVillage received a notice of determination from the
City of New York Department of Finance regarding outstanding commercial rent
taxes and applicable interest and penalties. iVillage paid approximately $0.5
million in the second quarter 2003 and believes that it has fully paid and
satisfied this obligation.
In March 2003, iVillage and Tesco restructured the terms of their joint
venture so that Tesco purchased iVillage's entire ownership interest in iVillage
UK. iVillage and Tesco also entered into a twenty-year agreement, subject to
earlier termination upon the occurrence of certain events, whereby iVillage will
license to iVillage UK certain of its content and intellectual property,
including trademarks and copyrights, for use in the U.K. and Ireland in exchange
for the greater of a minimum monthly license fee or a percentage of iVillage
UK's gross revenues. iVillage will receive a minimum of $0.8 million in year one
of the license agreement, which will be earned monthly as services are provided.
As of September 30, 2003, iVillage has received $0.6 million.
In July 2003, iVillage acquired the Web site, trademarks, key contracts
and other related assets of gURL.com for an immaterial amount of cash.
iVillage leases office space and equipment under non-cancelable
operating leases expiring at various dates through April 2015. The following is
a schedule of future minimum lease payments under non-cancelable operating
leases as of September 30, 2003 for the next five years:
Twelve months ending September 30: (in thousands)
---------------------------------- --------------
2004................................ $ 2,127
2005................................ 2,076
2006................................ 1,783
2007................................ 1,553
2008................................ 1,470
-------
$ 9,009
=======
In January 2003, iVillage received from the landlord of its New York
headquarters $0.3 million for reimbursement of certain construction expenses.
In July 2003, iVillage entered into a lease amendment with the landlord
of its New York headquarters that became effective on August 15, 2003. The lease
amendment provides for a reduction in leased space, as well as a reduction in
rent per square foot, resulting in anticipated cash savings in excess of $17.0
million over the remaining term of the lease. In connection with the lease
amendment, iVillage surrendered the approximately $8.5 million classified as
restricted cash to the landlord, and the landlord paid iVillage $0.5 million for
certain other construction expenses that remained due from the landlord.
In May 2003, Promotions.com received from its former New York landlord
approximately $0.4 million for reimbursement of certain construction expenses.
27
In the normal course of business, iVillage enters into contracts that
contain a variety of representations, warranties and minimum spend guarantees
and which provide general indemnifications. iVillage's maximum exposure under
these arrangements is unknown. However, based on experience, iVillage expects
the risk of loss to be remote.
iVillage's capital requirements depend on numerous factors,
including:
o market acceptance of iVillage's services;
o the amount of resources iVillage devotes to investments in its
business, including entering into joint ventures with and/or
the acquisition of other entities;
o the resources iVillage devotes to marketing;
o the resources iVillage devotes to building the infrastructure
necessary to enable iVillage to sell subscription-based
products and services; and
o the resources iVillage devotes to selling iVillage's products
and services.
Recent Accounting Pronouncements
In November 2002, the FASB reached a consensus on EITF No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables". The guidance
in EITF No. 00-21 is effective for revenue arrangements entered into for fiscal
years beginning after June 15, 2003. EITF No. 00-21 addresses certain aspects of
the accounting by a company for arrangements under which it will perform
multiple revenue-generating activities. Specifically, EITF No. 00-21 addresses
how to determine whether an arrangement involving multiple deliverables contains
more than one earnings process and if it does, how to divide the arrangement
into separate units of accounting consistent with the identified earnings
processes for revenue recognition purposes. EITF No. 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate units
of accounting in the arrangement. iVillage has determined that EITF No. 00-21
will not have a material impact on its financial position, cash flows or results
of operations.
In January 2003, the FASB issue FIN 46. FIN 46 requires a company to
consolidate a variable interest entity if it is designated as the primary
beneficiary of that entity even if the company does not have a majority voting
interest. A variable interest entity is generally defined as an entity where its
equity is unable to finance its activities or where the owners of the entity
lack the risks and rewards of ownership. The provisions of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. Based on iVillage's review of FIN 46, it does not believe it has any
interests qualifying as variable interest entities and does not anticipate that
the provisions of FIN 46 will have any near term impact on its financial
position, cash flows or results of operations.
28
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies when
a derivative contains a financing component, amends the definition of an
underlying to conform it to language used in FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," and amends certain other
existing pronouncements. This Statement is effective for contracts entered into
or modified after September 30, 2003, and for hedging relationships designated
after September 30, 2003. In addition, most provisions of SFAS 149 are to be
applied prospectively. iVillage does not expect the adoption of SFAS 149 to have
a material impact on its financial position, cash flows or results of
operations.
Risk Factors That May Affect Results of Operations and Financial Condition
The risks and uncertainties described below are not the only ones faced
by iVillage. Additional risks and uncertainties not presently known to iVillage
or that are currently deemed immaterial may also affect iVillage's business,
financial condition and results of operations. These risks should be read in
conjunction with the other information set forth in this Form 10-Q and with
iVillage's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
iVillage may face difficulties encountered in the new and rapidly evolving
markets in which it operates.
iVillage faces many of the risks and difficulties frequently
encountered in new and rapidly evolving markets, including the Internet
advertising and consumer products and services markets. These risks and
difficulties include iVillage's ability to:
o attract a larger audience to the iVillage network of Web
sites;
o increase awareness of the iVillage brand and iVillage-branded
products and services;
o strengthen user loyalty;
o offer compelling content and desirable consumer products and
services;
o maintain current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of
industries;
o respond effectively to competitive pressures;
o continue to develop and upgrade iVillage's technology; and
o attract, retain and motivate qualified personnel.
29
iVillage has not achieved profitability and has recent and anticipated
continuing losses.
iVillage has not achieved profitability and iVillage expects to
continue to incur operating losses for the foreseeable future. iVillage incurred
net losses of approximately $27.5 million for the nine months ended September
30, 2003, $33.9 million for the year ended December 31, 2002, and $48.5 million
for the year ended December 31, 2001. As of September 30, 2003, iVillage's
accumulated deficit was approximately $494.2 million.
iVillage cannot make any assurances that it will achieve sufficient
revenues for profitability. Even if iVillage does achieve profitability,
iVillage cannot make any assurances that it will be able to sustain or increase
profitability on a quarterly or annual basis. If revenues decline or grow slower
than iVillage anticipates, or if operating expenses exceed iVillage's
expectations or cannot be adjusted accordingly, its business, financial
condition and results of operations will be materially adversely affected.
Because iVillage's strategy includes acquisitions of, and joint ventures with,
other businesses, acquisition and joint venture expenses and any cash used to
make these acquisitions and joint ventures will reduce its available cash.
iVillage has a small number of major customers and the loss of a number of these
customers could adversely affect its business, financial condition and results
of operations.
For the three and nine months ended September 30, 2003, revenues from
iVillage's five largest customers accounted for approximately 32% and 28% of
total revenues, respectively. Two customers, Wal-Mart and Hearst accounted for
approximately 12% and 11% of total revenues for the three months ended September
30, 2003, respectively. One customer, Hearst, accounted for approximately 12% of
total revenues for the nine months ended September 30, 2003. Two customers,
Procter and Gamble and Hearst accounted for approximately 17% and 11% of total
revenues for the three months ended September 30, 2002, respectively. Three
customers, Hearst, Procter and Gamble, and Unilever accounted for approximately
13%, 11% and 11% of total revenues for the nine months ended September 30, 2002,
respectively. iVillage's five largest customers accounted for approximately 41%
of total revenues for the three and nine months ended September 30, 2002,
respectively. At September 30, 2003, Hearst accounted for approximately 30% of
the net accounts receivable. At December 31, 2002, Procter and Gamble accounted
for approximately 26% of the net accounts receivable.
iVillage anticipates that its results of operations in any given period
will continue to depend to a significant extent on revenues from a small number
of customers. iVillage's contract with Procter & Gamble expired in June 2003,
iVillage's contract with Hearst expires in June 2004, and iVillage's contract
with Unilever, signed in October 2003, expires in December 2004. iVillage can
make no assurances as to whether these expiring contracts will be renewed, or if
so renewed, that they will be on similar terms as the expiring agreements.
Because iVillage's largest customers have varied over time in the past, iVillage
anticipates that they will continue to do so in the future. Consequently, the
loss of even a small number of iVillage's largest customers at any one time may
adversely affect iVillage's business, financial condition and results of
operations, unless iVillage is able to enter into a sufficient number of new
comparable contracts.
30
iVillage's quarterly revenues and operating results are not indicative of future
performance, are difficult to forecast and have been and are likely to continue
to fluctuate.
iVillage does not believe that period-to-period comparisons of its
operating results are necessarily meaningful nor should they be relied upon as
reliable indicators of future performance, thus making it difficult to forecast
quarterly and annual revenues and results of operations. In addition, iVillage's
operating results are likely to fluctuate significantly from fiscal quarter to
quarter, and year to year, as a result of several factors, many of which are
outside iVillage's control, and any of which could materially harm iVillage's
business. These factors include:
o fluctuations in the demand for advertising or electronic
commerce;
o the unpredictability of iVillage's success in its new revenue
and cost reduction initiatives;
o bankruptcies or other payment defaults of companies that are a
source of revenues;
o volatility in the media market and the high number of
companies decreasing their marketing budgets;
o changes in the level of traffic on its network of Web sites;
and
o fluctuations in marketing expenses and technology
infrastructure costs.
iVillage's revenues for the foreseeable future will remain primarily
dependent on user traffic levels and advertising activity on its Web sites.
Future revenues are difficult to forecast. iVillage may be unable to adjust
spending quickly enough to offset any unexpected reduction in revenues in a
particular fiscal quarter or year, which may materially and adversely affect its
business, financial condition and results of operations.
In one or more future fiscal quarters or years, iVillage's results of
operations may fall below the expectations of securities analysts and investors.
If iVillage's results of operations fall below expectations, the trading price
of its common stock would likely be materially adversely affected. In addition,
if the revenues of iVillage in any particular fiscal period are lower than
anticipated, iVillage may be unable to reduce spending in that fiscal period. If
iVillage has a shortfall in revenues in relation to its expenses, then
iVillage's business, financial condition and results of operations would be
materially adversely affected.
31
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.
Hearst is able to significantly influence iVillage's corporate direction and
policies.
As of September 30, 2003, Hearst owned approximately 28.8% of the
outstanding shares of iVillage's common stock. In addition, Hearst holds a
warrant entitling it to purchase 2,065,695 shares of iVillage's common stock.
Pursuant to an a