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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number 0-26055
WOMEN.COM NETWORKS, INC.
(Exact name or registrant as specified in its charter)
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<S> <C>
DELAWARE 13-4059516
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1820 GATEWAY DRIVE, SAN MATEO, CALIFORNIA 94404-2471
(Address of principal executive office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (650) 378-6500
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 [ ]
The number of shares outstanding of the registrant's common stock as of October
31, 2000 was 46,971,257.
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WOMEN.COM NETWORKS, INC.
FORM 10-Q
September 30, 2000
INDEX
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PAGE
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Part I. Financial Information
Item 1. Financial Statements
(a) Consolidated Balance Sheets As of September 30, 2000 and December 31, 1999...................... 3
(b) Consolidated Statements of Operations For the Three Months Ended September 30, 2000
and September 30, 1999 and for the Nine Months Ended September 30, 2000 and September 30, 1999... 4
(c) Consolidated Statements of Cash Flow For the Nine Months Ended September 30, 2000
and September 30, 1999.......................................................................... 5
(d) Notes to Consolidated Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 19
Part II. Other Information
Item 1. Legal Proceedings.................................................................................... 20
Item 2. Changes in Securities and Use of Proceeds............................................................ 20
Item 3. Defaults Upon Senior Securities...................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 20
Item 5. Other Information.................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................................... 21
Signature......................................................................................................... 22
</TABLE>
2
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Part I. Financial Information
Item 1. Financial Statements
WOMEN.COM NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
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Assets
Current assets:
Cash and cash equivalents ..................................... $ 42,290 $ 87,242
Accounts receivable, less allowance for doubtful accounts
Of $1,874 and $353, respectively ........................... 7,881 15,131
Accounts receivable, related party ............................ 1,508 1,197
Prepaid and other current assets .............................. 4,578 4,082
--------- ---------
Total current assets ........................................... 56,257 107,652
Property and equipment, net .................................... 14,873 9,069
Intangible assets, net ......................................... 47,019 53,651
Other assets ................................................... 1,816 2,167
--------- ---------
Total assets ................................................... $ 119,965 $ 172,539
========= =========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable .............................................. $ 4,782 $ 6,492
Other current liabilities ..................................... 5,602 2,765
Deferred revenue .............................................. 2,878 5,208
--------- ---------
Total current liabilities ...................................... 13,262 14,465
========= =========
Stockholders' equity:
Common stock, $.001 par value: authorized 195,000
shares at September 30, 2000 ...............................
Issued or outstanding; 46,916 shares at September 30, 2000 and
45,704 shares at December 31, 1999 ......................... 47 45
Additional paid-in capital .................................... 252,725 244,154
Notes receivable from stockholders ............................ (44) (44)
Unearned compensation ......................................... (1,008) (3,059)
Accumulated deficit ........................................... (145,017) (83,022)
--------- ---------
Total stockholders' equity ..................................... 106,703 158,074
--------- ---------
Total liabilities and stockholders' equity ..................... $ 119,965 $ 172,539
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
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WOMEN.COM NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
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Revenues ................................... $ 7,918 $ 6,440 $ 32,971 $ 14,952
Revenues, related party .................... 927 796 2,514 1,715
-------- -------- -------- --------
Total revenues ............................. 8,845 7,236 35,485 16,667
-------- -------- -------- --------
Costs and operating expenses
Cost of revenues ......................... 1,259 270 3,283 534
Production, product and technology ....... 9,549 6,077 26,997 14,757
Sales and marketing ...................... 12,578 9,323 34,812 26,622
General and administrative ............... 4,762 2,236 9,619 5,780
Stock-based compensation (cancellations)
expense, net ........................... (66) 852 (105) 2,392
Amortization of acquired intangibles ..... 7,680 5,870 21,979 14,817
-------- -------- -------- --------
Total operating expenses ............... 35,762 24,628 96,585 64,902
-------- -------- -------- --------
Loss from operations ....................... (26,917) (17,392) (61,100) (48,235)
Loss on investment ......................... (3,800) -- (3,800) --
Other income, net .......................... 815 358 2,906 838
Interest expense ........................... -- (17) -- (43)
-------- -------- -------- --------
Net loss ................................... (29,902) (17,051) (61,994) (47,440)
Dividend accretion on mandatorily
redeemable convertible preferred stock ... -- (50) -- (295)
-------- -------- -------- --------
Net loss attributable to common stockholders $(29,902) $(17,101) $(61,994) $(47,735)
======== ======== ======== ========
Basic and diluted net loss per share
attributable to common stockholders ...... $ (0.64) $ (0.56) $ (1.33) $ (2.23)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share ....................... 46,831 30,453 46,549 21,365
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
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WOMEN.COM NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands) (Unaudited)
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<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
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Cash flow from operating activities:
Net loss ............................................................... $(61,994) $(47,440)
Adjustments to reconcile net loss to net cash used in operating
activities, net of the effects of acquisitions
Depreciation and amortization of tangible assets ................... 3,278 1,050
Amortization of intangibles ........................................ 21,979 14,817
Provision for doubtful accounts .................................... 1,521 361
Stock-based compensation (cancellations) expense , net ............. (105) 2,392
Loss on investment ................................................. 3,800 --
Issuance of restricted stock in exchange for services .............. -- 231
Increase in accounts receivable .................................... 5,729 (2,869)
Increase in accounts receivable - related party .................... (311) (1,111)
Increase in prepaids and other current assets ...................... (496) (2,414)
Decrease in other assets ........................................... 551 2,867
(Decrease) increase in accounts payable ............................ (1,710) 3,146
Increase in other current liabilities .............................. 3,842 411
(Decrease) increase in deferred revenue ............................ (2,330) 744
-------- --------
Net cash used in operating activities ............................ (26,246) (27,815)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment .................................. (9,083) (3,339)
Acquisition of Internethoroscope.com ................................... -- (237)
Investment in Medical Self Care, Inc. .................................. (4,000) --
Acquisition of EZSharing.com, Inc. ..................................... (2,000) --
Cash paid in conjunction with acquisition of World Gaming
Corporation ......................................................... (282) --
Acquisition of ParentTime.com LLC ...................................... (3,857) --
Cash received from HomeArts acquisition ................................ -- 12,907
-------- --------
Net cash (used in) provided by investing activities .............. (19,222) 9,331
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, preferred stock and
warrants and convertible units net of issuance costs ................ -- 46,749
Proceeds from exercise of common stock warrants ........................ -- 3
Proceeds from exercise of stock options ................................ 516 364
Principal payments under term loan ..................................... -- (348)
Principal payments under capital lease obligations ..................... -- (15)
-------- --------
Net cash provided by financing activities ........................ 516 46,753
-------- --------
Net (decrease) increase in cash and cash equivalents ..................... (44,952) 28,269
Cash and cash equivalents at beginning of period ......................... 87,242 12,235
-------- --------
Cash and equivalents at end of period .................................... $ 42,290 $ 40,504
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Revenue and advertising expense from barter transactions .............. $ 66 $ 220
Supplemental disclosure of noncash financing information:
Accretion of preferred stock ........................................... $ -- $ 295
Unearned compensation (cancellations) expense related to
stock option grants .................................................. $ (2,157) $ 4,634
Liabilities assumed in connection with acquisition of HomeArts:
Fair value of assets acquired ...................................... $ 76,265
Cash received ...................................................... 12,907
Common stock issued ................................................ (85,000)
--------
Liabilities assumed ................................................ $ 4,172
========
Common stock issued in conjunction with acquisition of EZSharing.com, Inc. $ 9,208
Common stock issued in conjunction with ESPP ............................. $ 1,005
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
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WOMEN.COM NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting only of normal recurring items)
necessary for their fair presentation in conformity with generally accepted
accounting principles. Preparing financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a full
year. The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and financial statements and notes thereto included in the Women.com
Networks, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1999.
Women.com has incurred operating losses since inception and has an accumulated
deficit. The Company expects operating losses to continue during 2001 as the
network expands and investment in infrastructure continues. As a result, the
Company will need to seek additional sources of capital. There can be no
assurance that Women.com will be able to obtain such funding, if necessary, on
acceptable terms or at all.
Failure to raise additional capital or reduce certain discretionary spending
would have a material adverse effect on the Company's ability to continue as a
going concern and to achieve its intended business objectives.
These consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances have been eliminated.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS No. 133, as amended, is effective for all fiscal quarters for fiscal years
beginning after June 15, 2000. Women.com believes that the impact of SFAS No.
133 will not have any significant impact since Women.com does not currently have
any derivative instruments nor plans to acquire derivative instruments in the
future.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the Commission. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Women.com believes that the
impact of SAB 101 will not have a material effect on its financial position or
results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25". This Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation was adopted by the company July 1, 2000,
subject to certain conclusions in this Interpretation which cover specific
events that occur after either December 15, 1998, or January 12, 2000. The
adoption of FIN 44 has not had a material affect on the financial statements.
Net loss per share
Basic net loss per share is computed by dividing the net loss attributable to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and common stock equivalent shares outstanding during the period. Common
equivalent shares, composed of common shares issuable upon the exercise of stock
options and warrants and upon conversion of mandatorily redeemable convertible
preferred stock, are included in the diluted net loss per share to the extent
such shares are dilutive.
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The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated (in thousands, except per share amounts):
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THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPT 30, 2000 SEPT 30, 1999 SEPT 30, 2000 SEPT 30, 1999
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Numerator:
Net loss............................................. $ (29,902) $ (17,051) $ (61,994) $ (47,440)
Accretion of mandatorily redeemable convertible
preferred stock to redemption value................ -- (50) -- (295)
--------- --------- --------- ---------
Net loss attributable to common stockholders......... $ (29,902) $ (17,101) $ (61,994) $ (47,735)
========= ========= ========= =========
Denominator:
Shares used in computing basic
and dilutive net loss per share.................. 46,831 30,453 46,549 21,365
========= ========= ========= =========
Basic and diluted net loss per share
attributable to common stockholders.............. $ (0.64) $ (0.56) $ (1.33) $ (2.23)
========= ========= ========= =========
Antidilutive securities including options, warrants,
preferred stock and convertible units not included
in net loss per share calculation................... 9,207 6,804 9,207 6,804
========= ========= ========= =========
</TABLE>
Comprehensive income
To date, Women.com has not had any transactions that are required to be reported
as comprehensive income, in accordance with the provisions of SFAS No. 130
"Reporting Comprehensive Income".
Investment
Women.com acquired 1,142,857 shares of Series H preferred stock of Medical Self
Care, Inc. for approximately $4.0 million in cash on February 2, 2000. This
investment has been accounted for using the cost method of accounting.
Management believes this asset has been impaired and the financial statements
reflect a $3.8 million loss on investment for the three and nine months ended
September 30, 2000.
Acquisition
On February 14, 2000, Women.com acquired EZSharing.com, Inc. for consideration
of $2.0 million in cash and 715,213 shares of common stock. The common stock was
valued at approximately $9.2 million dollars in accordance with Accounting
Principles Board Opinion No. 16 ("APB 16"). This acquisition has been accounted
for using the purchase method of accounting. The total purchase price of $11.2
million has been allocated to the intangible asset acquired and is being
amortized over its estimated useful economic life of 3 years.
The following unaudited pro forma financial information reflects the results of
operations for the nine months ended September 30, 2000 and 1999 as if the
acquisition of EZSharing.com, Inc. had occurred on January 1, 2000 and 1999,
respectively, and after giving effect to purchase accounting adjustments. These
unaudited pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what operating results would have been had
the acquisition actually taken place on January 1, 2000 or 1999, and may not be
indicative of future operating results (in thousands, except per share amounts):
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NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT 30, 2000 SEPT 30, 1999
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Net revenues.................................................. $ 35,485 $ 16,667
Loss from operations.......................................... (61,567) (51,043)
Net loss attributable to common stockholders.................. (62,462) (50,543)
Basic and diluted net loss per share.......................... $ (1.34) $ (2.29)
</TABLE>
On June 22, 2000, Women.com announced UK.women.com, a joint venture with
National Magazine Company, a subsidiary of Hearst Corporation, in the United
Kingdom. Women.com is contributing its Internet expertise to the joint venture.
As of September 30, 2000, no contributions had been made to the joint venture by
Women.com.
During June and July 2000, Women.com acquired certain of the assets of
ParentTime LLC from Proctor & Gamble Productions Inc., and simultaneously
entered into a $15 million web advertising agreement with Proctor & Gamble.
Women.com paid Proctor & Gamble $3.857 million in cash for the assets, which
included the ParentTime.com trademark, web site and various software tools, as
well as the rights to certain advertising contracts. Under the terms of the web
advertising agreement, Women.com will develop certain unique marketing programs
for Proctor & Gamble over three years.
The acquisition will be accounted for using the purchase method of accounting
and the Company is in the process of allocating the amount paid to the tangible
and intangible assets acquired.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with Women.com's
financial statements and the notes thereto.
This Quarterly Report on Form 10-Q (the "Report") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements regarding Women.com's expectations, beliefs, intentions,
or future strategies that are signified by the words "expects", "anticipates",
"intends", "believes", or similar language. All forward-looking statements
included in this document are based on information available to Women.com on the
date hereof, and Women.com assumes no obligation to update any such
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. In evaluating Women.com's business,
investors should carefully consider the information set forth below under the
caption "Risk Factors" in addition to the other information set forth herein.
Women.com cautions investors that its business and financial performance are
subject to substantial risks and uncertainties.
Overview
Women.com is a leading Internet network dedicated to women, featuring
award-winning original content, personalized services, community and online
shopping. Women.com's network contains more than 100,000 pages of content
organized into 19 topical channels, and offers content from 11 of the world's
leading women's magazines, including Cosmopolitan, Good Housekeeping, Prevention
and Redbook.
Women.com Networks was formed in October 1992 and introduced its current
Internet site, located at www.women.com, in 1995. In January 1999, Women.com
Networks and Hearst HomeArts, Inc., a subsidiary of The Hearst Corporation,
contributed their businesses to Women.com Networks LLC, which was jointly owned
by Women.com and HomeArts. In August 1999, Women.com and HomeArts merged and the
business previously conducted by Women.com Networks LLC was continued by
Women.com. The creation of Women.com Networks LLC was accounted for as an
acquisition using the purchase method of accounting. The operations of HomeArts
have been included in Women.com's operations since the formation of Women.com
Networks LLC on January 29, 1999.
Women.com has incurred significant net losses and negative cash flows from
operations since its inception. As of September 30, 2000, Women.com had an
accumulated deficit of $145 million. Women.com believes it will incur
significant operating losses and negative cash flows from operations for at
least the next several years.
Substantially all of Women.com's revenues to date have been generated from
advertising and sponsorships. Advertising and sponsorship revenues represented
71% of total revenues for the three months ended September 30, 2000 and 79% for
the three months ended September 30, 1999.
Advertising revenues consist primarily of sales of banner advertisements and
sponsorships. Advertising contracts are generally short-term, although several
long-term contracts and sponsorship agreements have been signed. Women.com
typically guarantees a minimum number of impressions or page views to be
delivered to users over a specified period of time for a fixed fee. Advertising
revenues are generally recognized ratably over the period in which the
advertising is displayed. To the extent that minimum guaranteed page deliveries
are not met, Women.com defers recognition of the corresponding revenues until
the guaranteed page deliveries are achieved.
Sponsorship revenues are derived from contracts that generally range from six to
24 months in length. Sponsorship agreements typically include the delivery of
impressions, market research, preferred status within relevant content areas and
the design and development of sites branded by both Women.com and the sponsor
intended to enhance the promotional objective of the sponsor.
Women.com recognizes sponsorship revenues as earned, which is generally ratably
over the contract period. To the extent that committed obligations under
sponsorship agreements are not met, revenue recognition is deferred until the
obligations are met.
Advertising revenues have historically included barter revenues, which represent
the exchange of advertising space on Women.com's network for reciprocal
advertising space on third party Web sites as well as other advertising and
promotional vehicles. Revenues from barter transactions are recorded at fair
value, as determined by the company's own historical practice of receiving cash
for similar advertising from buyers unrelated to the counterpart of the barter
transaction. A period of six months prior to the date of the barter transaction
is used to determine whether a historical practice of receiving cash exists.
This treatment applies EITF 99-17 "Accounting
8
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for Advertising Barter Transactions" applicable to transactions after January
20, 2000. Revenues from barter transactions which occurred prior to January 20,
2000 are recorded as advertising revenues at the lower of estimated fair value
of the advertisements received or delivered and are recognized upon publication
of the advertisements on Women.com's network. Barter expenses are an equal and
offsetting charge and are recorded at the lower of estimated fair value of the
advertisements received or delivered and are recognized when Women.com's
advertisements run on the reciprocal media property, which is typically in the
same period in which the advertisements run on Women.com's network.
Production revenues are derived from contracts in which Women.com designs and
develops web sites for third parties for use on the Women.com network or their
own sites. Women.com recognizes production revenues as earned, which is
generally as services are performed over the contract period. To the extent that
committed obligations under production agreements are not met, revenue
recognition is deferred until the obligations are met.
E-commerce revenues consist of commissions from the sale of magazine
subscriptions, sales of services on Astronet and, to a lesser extent, payments
from affiliate sales programs. Women.com records a portion of the revenue from
each magazine subscription sold on the network magazine sites. Astronet
e-commerce revenues from services offered on its network include personalized
horoscope reports and readings. Affiliate program e-commerce revenues are
recognized upon notification from the affiliate. Although Women.com briefly
offered products for sale as part of the shopping channel, Women.com is not
currently engaged in direct retail.
Results of Operations
Revenues
Total revenues were $8.8 million for the three months ended September 30, 2000,
a 122% increase compared to the same period in 1999. The increase in revenues
was primarily due to higher production revenues during the three months ended
September 30, 2000. Production revenues were $1.8 million for the three months
ended September 30, 2000, a 73% increase over the corresponding period in 1999.
Advertising and sponsorship revenues also increased by 8% over the same three
month period in 1999.
There was no barter revenue for the three months ended September 30, 2000.
Barter revenue represented less than 1% of total revenues for the three months
ended September 30, 1999.
Total revenues were $35.5 million for the nine months ended September 30, 2000,
a 113% increase over the same period in 1999. Advertising and sponsorship
revenues were $29.0 million for the nine months ended September 30, 2000, a 223%
increase over the nine months ended September 30, 1999. Production revenues for
the nine months ending September 30, 2000 increased 152% over the same period in
1999.
Barter revenue represented 0.2% of total revenues for the nine months ended
September 30, 2000 and 1.3% of total revenues for the nine months ended
September 30, 1999.
Operating Expenses
The principal elements of Women.com's operating expenses consist of cost of
revenues, production, product and technology expenses, sales and marketing
expenses and general and administrative expenses.
Cost of revenues
Cost of revenues include payments for revenue sharing and gaming prizes. Cost of
revenues increased to $1.3 million for the three months ended September 30, 2000
from $0.3 million for the same period in 1999. $0.4 million of this increase was
due to obligations to fulfill gaming prizes as a result of the acquisition of
World Gaming Corporation in December 1999. Revenue sharing payments also
increased during the three months ended September 30, 2000 due to increased
traffic on the Hearst magazine sites.
Cost of revenues increased to $3.3 million for the nine months ended September
30, 2000 from $534,000 for the same period in 1999. $1.2 million of this
increase was due to gaming prizes, and the remainder due to increased traffic on
the Hearst magazine sites and the launch of eharlequin.com in February 2000.
Production, product and technology expenses
9
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Production, product and technology expenses consist primarily of personnel
related costs for technical operations, editorial and design activities and
content acquisition costs. Production, product and technology expenses increased
to $9.5 million for the three months ended September 30, 2000 from $6.1 million
in the same period in 1999. This increase was primarily due to increased
expenses of approximately $1.5 million related to the hiring of additional
personnel, as well as increased content acquisition costs and other production
costs associated with growth in Women.com's business.
Production, product and technology expenses increased to $27.0 million for the
nine months ended September 30, 2000 from $14.8 million for the same period in
1999. This increase was primarily due to increased expenses of approximately
$6.0 million related to the hiring of additional personnel, $1.5 million in
increased content acquisition costs and other production costs associated with
the growth in Women.com's business.
Sales and marketing expenses
Sales and marketing expenses consist primarily of personnel costs and
advertising, distribution and public relations expenses. Sales and marketing
expenses were $12.6 million for the three months ended September 30, 2000, an
increase of 35% over the same period in the prior year. This increase was
primarily due to increased expenses of approximately $2.4 million related to
distribution and affiliate programs.
Sales and marketing expenses increased to $34.8 million for the nine months
ended September 30, 2000 compared to $26.6 million for the same period in 1999.
This increase was primarily attributable to approximately $2.7 million in
increased costs related to the hiring of additional personnel and $4.2 million
in distribution and affiliate programs.
General and administrative expenses
General and administrative expenses consist primarily of personnel costs,
occupancy costs, depreciation expenses, bad debt allowance and legal and
accounting fees. General and administrative expenses were $4.8 million for the
three months ended September 30, 2000, an increase of 113% over the same period
in the prior year. This increase was primarily attributable to a $2.2 million
increase in bad debt charge.
General and administrative expenses increased to $9.6 million for the nine
months ended September 30, 2000 from $5.8 million for the same period in 1999.
This increase was primarily attributable to a $2.2 million increase in bad debt
charge and a $1.5 million increase in rent related to additional headcount.
Stock-based compensation
Stock-based compensation consists of charges related to the difference between
employee stock option grant prices and deemed fair market values on the date of
grant amortized over the vesting period of the options. Women.com's stock-based
compensation was a credit of $66,000 for the three months ended September 30,
2000 compared with a charge of $852,000 for the same period in 1999. This
decrease was due to the reversal of amortized stock-based compensation expense
in relation to cancellations of unvested stock options previously granted.
Stock-based compensation was a credit of $105,000 for the nine months ended
September 30, 2000 compared with a charge of $2.4 million for the same period
during 1999. This decrease was due to the reversal of amortized stock-based
compensation expense in relation to cancellations of unvested stock options
previously granted.
Amortization of acquired intangibles
Amortization of acquired intangibles consists of the amortization of goodwill
and intangible assets acquired. Women.com reported $7.7 million in amortization
of acquired intangibles for the three months ended September 30, 2000 compared
to $5.9 million for the same period in 1999. The amortization expense for the
three months ended September 30, 2000 includes goodwill amortization related to
the acquisitions of World Gaming Corporation in December 1999, EZSharing.com,
Inc. in February 2000 and various intangible assets of ParentTime LLC in June
and July 2000.
Amortization of acquired intangibles increased to $22.0 million for the nine
months ended September 30, 2000 compared to $14.8 million for the same period
during 1999. This increase is attributable to goodwill amortization related to
the acquisitions of World Gaming Corporation in December 1999, EZSharing.com,
Inc. in February 2000 and various intangible assets of ParentTime LLC in July
2000.
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Other income
Other income consists of interest income and other miscellaneous income. Other
income was $815,000 for the three months ended September 30, 2000 compared with
$358,000 for the same period in 1999. The increase is primarily due to higher
cash balances as a result of both private and public sales of equity securities.
Other income increased to $2.9 million for the nine months ended September 30,
2000 compared to $838,000 for the same period during 1999. The increase is
primarily due to higher cash balances as a result of both private and public
sales of equity securities.
Income taxes
No provision for federal and state income taxes has been recorded as Women.com
incurred net losses through September 30, 2000. Women.com has taken a valuation
allowance on the full amount of the net operating loss carryforwards since it is
likely the benefit will not be realized in the future.
Women.com elected to be taxed as a partnership for the period beginning on
January 29, 1999, the date of formation of Women.com Networks LLC and ending on
the date of the merger of Women.com Networks and HomeArts in August 1999.
Federal and state tax effects of Women.com losses during this period were
recorded by the members of the LLC on their respective income tax returns.
Financial operations
Accounts receivable, net of the allowance for doubtful accounts decreased by
42% to $9.4 million as of September 30, 2000. This decrease is attributable to
the company's focus on collections during 2000 as well as a significantly
larger allowance for doubtful accounts as of September 30, 2000.
Net property and equipment increased by $5.8 million for the nine months ended
September 30, 2000. This increase is attributable to the company's significant
investments in technology infrastructure as well as leasehold improvements
related to new office space in New York.
Current liabilities decreased by 8% to $13.3 million as of September 30, 2000.
The decrease is attributable to a decrease in deferred revenues related to
advance billings.
Liquidity and capital resources
Until its initial public offering in October 1999, which raised net proceeds of
approximately $38.6 million including the exercise of the underwriter's
over-allotment option, Women.com financed its operations primarily through the
private placement of its convertible preferred stock.
We believe that our existing cash and cash equivalents may not be sufficient to
meet our operating and capital requirements at our currently anticipated level
of operations beyond the end of the second quarter of 2001. While we may take
appropriate actions to change our proposed operations in order to stretch our
current cash positions beyond the end of the second quarter of 2001, additional
capital will be necessary in order to fund our operations at currently
anticipated levels beyond the second quarter of 2001. There can be no assurance
that we will be able to obtain additional funds, on acceptable terms or at all.
If we cannot raise additional capital on acceptable terms, we will not be able
to continue our present level of operations and will have to scale back our
business and may not be able to further take advantage of future opportunities
or respond to competitive pressures, any of which could have a material adverse
effect on our business and results of operations.
We expect our operating losses to continue as we expand our network and we will
continue to invest in our infrastructure by making capital expenditures. As a
result, we expect to record losses during 2001.
We may attempt to finance our future capital needs through some combination of
commercial bank borrowings, leasing, vendor financing and the sale of
additional equity or debt securities. Our capital requirements will vary based
upon the timing and success of implementation of our business plan and as a
result of competitive and technological developments, or if:
- demand for our services or our cash flow from operations varies from
projections;
- our development plans or projections change or prove to be inaccurate;
- we make any acquisitions; or
- we accelerate deployment of our network or otherwise alter the schedule or
targets of our business plan implementation.
Net cash used in operating activities decreased to $26.2 million for the nine
months ended September 30, 2000 from $27.8 million for the nine months ended
September 30, 1999. This decrease was primarily due to increased amortization of
intangibles during the nine months ended September 30, 2000 and to the
impairment of Women.com's investment in Medical Selfcare Inc. of $3.8 million.
Net cash used in investing activities increased to $19.2 million for the nine
months ended September 30, 2000 compared to net cash generated from investing
activities for the same period during 1999 of $9.3 million. The increased
investing spending was attributable to increased purchases of property and
equipment, an investment in Medical Self Care, Inc., the acquisition of
EZSharing.com and the acquisition of various intangible assets of ParentTime
LLC. Net cash provided by investing activities during the nine months ended
September 30, 1999 was primarily related to the combination with HomeArts and
Astronet.
Net cash provided by financing activities decreased to $516,000 for the nine
months ended September 30, 2000 compared to $46.8 million for the nine months
ended September 30, 1999. During the nine months ended September 30, 1999
Women.com received proceeds from the issuance of common stock, preferred stock,
preferred stock warrants and convertible units net of issuance costs totaling
$46.7 million.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS No. 133, as amended, is effective for all fiscal quarters for fiscal years
beginning after June 15, 2000. Women.com believes that the impact of SFAS No.
133 will not have a significant impact since Women.com does not currently have
any derivative instruments nor plans to acquire derivative instruments in the
future.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 or SAB 101, Revenue Recognition in Financial Statements, which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the Commission. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides
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guidance for disclosures related to revenue recognition policies. Women.com
believes that the impact of SAB 101 will not have a material effect on its
financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25". This Interpretation clarifies (a) the definition of employees for purposes
of applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation was adopted by the company July 1, 2000,
subject to certain conclusions in this Interpretation cover which specific
events that occur after either December 15, 1998, or January 12, 2000. The
adoption of FIN 44 has not had a material effect on the financial statements.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
You should carefully consider the risks described below in evaluating our
business. The risks described below are not the only ones we face. Additional
risks not presently known to us or that we currently deem immaterial may also
impair our business operations in the future.
Our business, financial condition or results of operations could be materially
adversely affected by any of these risks. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your
investment.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED
AND OUR BUSINESS MODEL IS UNPROVEN
Our historical financial information is of limited value in projecting our
future operating results because of our limited operating history as a combined
organization with the HomeArts and Astronet businesses and the emerging nature
of our market. We first recognized a small amount of subscription revenues in
January 1994 and advertising revenues in March 1996 and our revenues have become
significant only recently. It is difficult to evaluate our business and our
prospects because our revenue and income potential is unproven and our business
model is still emerging.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE ANTICIPATE INCREASED LOSSES IN THE
FUTURE
We have had operating losses since we were formed. We expect to incur
significant operating losses and negative cash flows for at least the next
several years. We may never achieve profitability. If we fail to achieve
profitability or sustain or increase profitability if we achieve it, our
financial condition would be materially harmed. As of September 30, 2000, we had
an accumulated deficit of $145 million. Successfully achieving our growth and
profitability plan depends on, among other things, our ability to significantly
increase our revenues and meet the other challenges set forth in the following
risk factors.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE TO US.
We believe that our existing cash and cash equivalents may not be sufficient to
meet our operating and capital requirements at our currently anticipated level
of operations beyond the end of the second quarter of 2001. While we may take
appropriate actions to change our proposed operations in order to stretch our
current cash positions beyond the second quarter of 2001, additional capital
will be necessary in order to fund our operations at currently anticipated
levels beyond the second quarter of 2001. There can be no assurance that we will
be able to obtain additional funds, on acceptable terms or at all. If we cannot
raise additional capital on acceptable terms, we will not be able to continue
our present level of operations and will have to scale back our business and may
not be able to further take advantage of future opportunities or respond to
competitive pressures, any of which could have a material adverse effect on our
business and results of operations.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY WHICH MAKES OUR FUTURE
OPERATING RESULTS DIFFICULT TO EVALUATE AND MAY ADVERSELY AFFECT OUR STOCK PRICE
Our operating results have fluctuated and are likely to continue to fluctuate
significantly from quarter to quarter as a result of several factors, many of
which are outside our control, and any of which could materially harm our
business. These factors include:
- fluctuations in the demand for internet advertising or electronic
commerce
- changes in the level of traffic on our network
- fluctuations in marketing expenses and technology infrastructure costs
If our revenues in a particular quarter are lower than we anticipate, we may be
unable to reduce spending in that quarter. As a result, any shortfall in
revenues would likely adversely affect our quarterly operating results.
Specifically, in order to attract and retain a larger user base, we plan to
significantly increase our expenditures on sales and marketing, content
development, technology and infrastructure. Many of these expenditures are
planned or committed in advance and in anticipation of future revenues.
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Due to the factors noted above and the other risks discussed in this section,
quarter-to-quarter comparisons of our results of operations may not accurately
predict future performance. It is possible that in some future quarters our
results of operations may be below the expectations of public market analysts or
investors. If this occurs, the price of our common stock may decline.
IF WE ARE UNABLE TO GENERATE ADDITIONAL ADVERTISING REVENUES, WHICH ACCOUNT FOR
SUBSTANTIALLY ALL OF OUR REVENUES, OUR BUSINESS WOULD BE MATERIALLY HARMED
We derive substantially all of our revenues from the sale of advertisements on
our network. If we fail to sell or deliver advertising, our revenues will be
significantly reduced. Market acceptance of Internet-based advertising is
uncertain and depends largely on advertisers' determinations that the Internet
is an effective medium for advertising. Most of our customers have limited
experience with the Internet as an advertising medium. Our ability to generate
significant advertising revenues depends upon several other factors, including:
- the development of a large, demographically attractive base of users
on our network
- our ability to continue to develop and update effective advertising
delivery and measurement systems
- our ability to maintain and increase our advertising rates given the
growing number of outlets for advertisers on the Internet
IF WE LOSE ADVERTISING CUSTOMERS TO OUR COMPETITION OR REDUCE ADVERTISING RATES
TO REMAIN COMPETITIVE, OUR REVENUES WILL DECLINE SUBSTANTIALLY AND OUR BUSINESS
WILL BE MATERIALLY HARMED
Many Internet content and service providers compete with us for advertisers,
e-commerce partners and Internet users, and there are few barriers to entry. We
expect this competition to increase. Many of our current and potential
competitors in the Internet market have significantly greater financial,
editorial, technical and marketing resources, longer operating histories,
greater name recognition and more established relationships with advertisers and
advertising agencies. These competitors may be able to undertake more extensive
marketing campaigns, adopt aggressive pricing policies and devote substantially
more resources to developing Internet content and services than we can.
THE HEARST CORPORATION CONTROLS ACTIONS REQUIRING BOARD AND STOCKHOLDER APPROVAL
WHICH WEAKENS THE EFFECT OF OTHER STOCKHOLDERS' VOTES
Hearst representatives currently fill 4 of the 8 seats on our board of
directors. In addition, Hearst beneficially owns approximately 46% of our
outstanding common stock. On June 30, 2000, Hearst publicly disclosed that it
purchased 238,500 shares of our common stock in April and May of 2000, and that
it is considering acquiring up to an additional 761,500 shares of our common
stock. Given Hearst's share ownership, Hearst is able to elect additional
directors. Any action taken by our board requires the approval of at least five
directors. As a result, at least one Hearst representative must approve all
actions taken by our board, which could significantly influence our corporate
direction and policies, including any mergers, acquisitions, consolidations,
strategic relationships or sales of assets. Hearst's board representation and
stock ownership may discourage or prevent transactions involving an actual or
potential change of control, including transactions in which stockholders would
otherwise receive a premium for their shares. In addition, the interests of
Hearst, which owns or has significant investments in other businesses, including
cable television networks, newspapers, magazines and electronic media, may from
time to time be competitive with, or otherwise diverge from, our interests,
particularly with respect to new business opportunities and future acquisitions.
In addition to the ability to elect additional directors, Hearst has effective
control over all other stockholder actions, including approving changes to our
restated certificate of incorporation or amended and restated bylaws and
adopting or changing equity incentive plans. Hearst's control over stockholder
actions will also determine the outcome of any merger, consolidation, sale of
all or substantially all of our assets or other form of change of control that
we might consider. In addition, Hearst is not subject to any restrictions on
acquiring additional shares of our common stock following this offering, and,
therefore, may increase its share ownership percentage by purchasing additional
shares of common stock in the public market.
HEARST'S LARGE OWNERSHIP PERCENTAGE MAY LIMIT THE TRADING VOLUME OF OUR COMMON
STOCK AND INCREASE THE VOLATILITY OF OUR STOCK PRICE
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Because Hearst controls such a significant percentage of our common stock,
trading in our common stock may be limited unless Hearst elects to sell some or
all of its shares. If Hearst elects to purchase additional shares in the future,
the market for our common stock will be even more limited. As a result of the
limited public float of our common stock, relatively small purchases or sales of
our stock may have a disproportionate effect on our market price. In addition,
if Hearst elects to sell some or all of its shares, the effect on our market
price could be negative.
WE RELY ON HEARST FOR CONTENT AND CROSS-PROMOTION AND LOSS OF THIS RELATIONSHIP
WOULD HARM OUR BUSINESS
Information supplied by or developed from the Hearst magazines to which we have
online rights accounts for a significant portion of our network's content. If
our relationship with Hearst ends, we may not be able to enter into alternative
arrangements with third parties or to internally develop content and services to
replace the benefits we receive from our relationship with Hearst.
Our relationship with Hearst is governed by a magazine content license and
hosting agreement. While this agreement will continue to provide us with
benefits during its initial six-year term, we may not enjoy benefits from our
relationship with Hearst beyond the term of this agreement, including the
benefits we derive from Hearst's reputation, online content and
cross-promotional activities.
We depend on Hearst to effectively market and promote its 10 magazine sites. If
Hearst fails to do so, our brand identity could be negatively affected and our
business, financial condition and operating results would be materially harmed.
We also rely on Hearst to maintain the quality of its magazine content and to
maintain and expand its magazines' readership base. If the quality or
circulation of Hearst's magazines decline, the content of our network would
suffer and our business, financial condition and results of operations would be
materially harmed.
We may not be able to attract enough user traffic or advertisers to our network
to achieve profitability without Hearst's name or promotional capabilities. Even
with Hearst's support, we may never achieve profitability or sustain or increase
profitability if we achieve it.
HEARST'S RIGHT TO LICENSE ITS CONTENT TO OTHER PARTIES AND OUR RESTRICTIONS ON
LICENSING OTHER THIRD-PARTY CONTENT MAY RESTRICT OUR ABILITY TO COMPETE OR
EXPAND OUR NETWORK
Hearst is permitted to license the content or trademarks of the 10 magazines to
any Internet site or portal that is not deemed to be our competitor. A
competitor is defined under the agreement to include any Internet site, channel,
area or online content aggregation service that provides content primarily for
women and is used primarily by women. Any content or trademark license by Hearst
to any third party could dilute the value of the Hearst magazine content to our
network. We agreed with Hearst not to enter into any agreements to produce or
include as part of our network any magazine site or content related to a print
publication other than the Hearst publications and the Prevention and New Woman
magazines without Hearst's approval. Our inability to create new relationships
with print publications could impair our ability to enhance the visibility of
our brand.
IF THE POPULARITY OF ASTRONET DECLINES OR WE ARE UNABLE TO EFFECTIVELY MAINTAIN
ITS DISTRIBUTION, OUR PAGE VIEWS AND NUMBER OF USERS WOULD DECREASE AND OUR
BUSINESS COULD BE MATERIALLY HARMED
We rely on Astronet to generate a significant portion of our page views and
Astronet depends on America Online for traffic. In September 2000, approximately
17% of our page views were generated by Astronet and, during the same period,
approximately 32% of Astronet's traffic was generated by America Online. If the
popularity of our Astronet site declines, or if America Online stops carrying
our Astronet site, our number of visitors and page views would decrease
significantly and our business could be materially harmed.
OUR PROMOTION OF THE WOMEN.COM BRAND MUST BE SUCCESSFUL IN ORDER FOR US TO
ATTRACT USERS AS WELL AS ADVERTISERS AND OTHER STRATEGIC PARTNERS
We believe that establishing and maintaining our brand is critical to our
success and that the importance of brand recognition will increase due to the
growing number of women-oriented Internet sites. Successful promotion and
marketing of our brand will depend on providing interesting and compelling
content, community, commerce and personalized services, and we intend to
increase our marketing and branding expenditures in our effort to increase our
brand awareness. If our brand building strategy is unsuccessful,
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these expenses may never be recovered, we may be unable to increase our future
revenues and our business could be materially harmed.
IF WE ARE UNABLE TO DELIVER ORIGINAL AND COMPELLING INTERNET CONTENT, COMMUNITY,
SHOPPING AND PERSONALIZED SERVICES THAT ATTRACT A SUFFICIENT NUMBER OF USERS TO
OUR NETWORK, OUR BUSINESS WOULD BE MATERIALLY HARMED
Our current network or any additional channels or sites that we may add in the
future may not be attractive to a sufficient number of Internet users. We may
not be able to anticipate, monitor or successfully respond to rapidly changing
consumer tastes and preferences of women so as to attract enough users to our
network. If we are unable to develop Internet content, community, shopping and
personalized services that attract, retain and expand a loyal user base, we will
be unable to generate advertising revenues or commerce revenues and our
business, financial condition and results of operations will be materially
harmed.
IF WE FAIL TO RETAIN EXISTING BRANDING AND CONTENT RELATIONSHIPS OR FAIL TO
ATTRACT NEW ONES, THE AMOUNT AND QUALITY OF CONTENT ON OUR NETWORK MAY DECLINE,
TRAFFIC TO OUR NETWORK MAY DECREASE AND OUR ADVERTISING REVENUES MAY DECREASE
To be successful, we need to maintain our existing relationships and we must
establish similar relationships with new parties who have cross-media and
promotional capabilities. This is critical to our success because we believe
that these relationships will enable us to further enhance our brand awareness
and expand and broaden our reach to a wider variety of users.
With the exception of our Hearst relationship, our existing branding and content
alliances are short-term agreements. When these agreements terminate, we may not
be able to renew them on favorable terms or to obtain similar agreements with
other parties. Additionally, our competitors may enter into agreements with our
existing partners or other parties that are integral to our prospective content
and brand development.
WE MUST ESTABLISH AND MAINTAIN ONLINE DISTRIBUTION CHANNELS TO GENERATE TRAFFIC
TO OUR NETWORK IN ORDER TO BE SUCCESSFUL
We depend on establishing and maintaining online distribution relationships with
high-traffic Internet sites and leading Internet portals to ensure the
visibility of our network and to generate additional traffic. Our business could
be materially harmed if we do not establish and maintain additional
relationships on commercially reasonable terms or if any of our relationships do
not result in increased network traffic and visibility. In September 2000, a
substantial portion of our network's traffic was generated by our distribution
relationships and, in particular, America Online. All of our distribution
relationships are based on short-term agreements. There is intense competition
for online distribution relationships among Internet sites. We may not be able
to enter into new or renewed relationships on commercially reasonable terms or
at all. In addition, our existing online distribution relationships or any
relationships that we enter into in the future may not generate enough
additional traffic to our network or create sufficient brand visibility to
justify the costs we incur for such relationships.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS AND OUR BUSINESS COULD BE MATERIALLY
HARMED IF WE FAIL TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES
We often evaluate acquisition opportunities that could provide us with
additional product or content offerings or additional industry expertise. Any
future acquisition could result in difficulties assimilating acquired operations
and products, diversion of management's attention away from other business
issues and amortization of acquired intangible assets. Specifically, we expect
that future transactions may involve the acquisition of early-stage Internet
content and technology companies. Integration of these companies may result in
problems related to integration of technology and inexperienced management
teams. Our management has had limited experience in assimilating acquired
organizations and products into our operations. We may not successfully
integrate any operations, personnel or products that we may acquire in the
future. If we fail to successfully integrate acquisitions, our business would be
materially harmed.
GROWTH IN OUR OPERATION HAS AND WILL CONTINUE TO STRAIN OUR RESOURCES AND OUR
FAILURE TO MANAGE GROWTH EFFECTIVELY COULD HARM OUR BUSINESS
We have recently experienced significant growth and are planning to further
expand our business and operations. If we are unable to successfully manage this
growth our business could be materially harmed. We have had a significant
increase in our number of
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employees during the last year. This growth places a significant strain on our
management and other resources. As part of this growth, we expect to implement
new operational and financial systems, procedures and controls. Any problems in
implementing these systems or controls could harm our operations.
OUR SYSTEMS MAY FAIL OR BE INTERRUPTED AND THEREBY LIMIT OUR USER TRAFFIC AND
POTENTIALLY HARM OUR BUSINESS
If our network fails for any reason, even for only a short period of time, our
business and reputation would be materially harmed. We rely on third parties for
proper functioning of our computer infrastructure and delivery of our product.
Our systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, break-ins, earthquake and similar events. In
May and June 1999, user access to our pregnancy channel was disrupted as a
result of a system failure. Although this disruption has been remedied, we may
encounter unforeseen difficulties in maintaining full access to this or other
channels on our network, and, therefore, there may be additional delays. This
failure and any additional failures may adversely affect our user traffic
results in our current or any future quarters, which could adversely affect our
revenues and operating results and harm our reputation with users, advertisers
and commerce partners.
A key element of our strategy is to generate a high volume of traffic to our
network. Accordingly, the satisfactory performance, reliability and availability
of our network and our computer infrastructure is critical to our reputation and
our ability to attract and retain users, advertisers, e-commerce partners and
members. We cannot accurately project the rate or timing of any increases in
traffic to our network and, therefore, the integration and timing of any
upgrades or enhancements required to facilitate any significant traffic increase
to our network are uncertain.
We also depend on the receipt of timely feeds and computer downloads from our
content providers, and any failure or delay in the transmission or receipt of
such feeds or downloads from our content providers, the public network or
otherwise, could disrupt our operations. We also use third party software to
manage and deliver advertisements by contract and to provide our advertisers
with performance data. The failure of these systems to function properly could
discourage advertisers from placing advertisements on our network or e-commerce
partners from selling their products on our network. Failure of these systems
could cause us to incur additional costs or cause interruptions in our business
during the time spent replacing these systems. Our network infrastructure may
not perform properly and may not provide advertisers or e-commerce partners with
accurate data. The failure to expand and upgrade our network or any system error
or failure could materially harm our business, reputation, financial condition
or results of operations.
IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL BE
MATERIALLY HARMED
Our market is new and rapidly evolving. Our business would be significantly
harmed if Internet usage does not continue to grow. Internet usage may not grow
for a number of reasons such as:
- security concerns
- inconsistent quality of service
- inadequate network infrastructure
- consumers returning to traditional or alternative sources for
information, shopping and services
- lack of cost-effective, high-speed connectivity
- the failure of the Internet as a viable commercial marketplace
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON CONTINUED GROWTH IN INTERNET COMMERCE
The market for the purchase of products and services over the Internet is new
and emerging. Our future revenues and profits will depend in part upon the
widespread acceptance and the use of the Internet and other online services as a
medium for commerce by consumers and merchants. If acceptance and growth of the
Internet does not occur, our business and financial performance will materially
suffer. A sufficiently broad base of consumers may not adopt, or continue to
use, the Internet as a medium for commerce.
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Demand for and market acceptance of recently introduced products and services
over the Internet are subject to a high level of uncertainty, and there are few
proven products and services.
In addition, the ability to securely transmit confidential information is a
significant criterion for successful e-commerce. Any well-publicized compromise
of security could deter people from using the Internet or from using the
Internet for transactions that involve transmitting confidential information,
such as credit card numbers. Because many of our advertisers seek to advertise
on our network to encourage people to use the Internet to purchase goods or
services, the failure of the Internet as a medium for commerce would seriously
harm our business, financial condition or results of operations.
WE CANNOT PREDICT TO WHAT EXTENT WE MAY BE HELD LIABLE FOR OUR SERVICES AND USER
GENERATED CONTENT AND IF WE ARE SUBJECT TO SUBSTANTIAL LIABILITY OUR BUSINESS
MAY BE MATERIALLY HARMED
We host a wide variety of information, community, communications and commerce
services that enable our users to exchange information, conduct business and
engage in various online activities. Claims could be made against us for
negligence, defamation, libel, copyright or trademark infringement, personal
injury or other legal claims based on the nature and content of information that
may be posted online by our users. The laws relating to the liability of
providers of these online services for the activities of their users are
currently unsettled. In addition, we could be exposed to liability with respect
to the selection of listings that may be accessible through our
Women.com-branded products and properties, or through content and materials that
may be posted by users on message boards or in clubs, chat rooms or other
interactive community-building services. It is also possible that if any
information provided through our services, such as financial information,
contains errors, third parties could make claims against us for losses incurred
in reliance on such information. We offer Internet-based e-mail services, which
expose us to potential risks, such as liabilities or claims resulting from
unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use of
e-mail, or interruptions or delays in e-mail service. Investigating and
defending such claims is expensive, even to the extent these claims do not
result in liability. Although we carry general liability insurance, this
insurance may not be available to cover a particular claim or may be
insufficient.
In addition, we could be exposed to liability arising from the activities of
users of our content or services or with respect to the unauthorized duplication
or insertion of illegal or inappropriate material accessed directly or
indirectly through our services. Several private lawsuits seeking to impose such
liability upon content providers, online services companies and Internet access
providers are currently pending. In addition, legislation currently imposes
liability for, and in some cases prohibits, the transmission over the Internet
of some types of information. This legislation or any similar future regulation
could expose us to significant liabilities associated with our content or
services. Our activities could be or become subject to various forms of
taxation, including but not limited to sales and use taxes, the imposition of
which could materially harm our business, financial condition or results of
operations.
The imposition of potential liability for our content or services could require
us to implement measures to reduce our exposure to such liability arising out of
the content or services we offer, which may require the expenditure of
substantial resources, or to discontinue some content or service offerings. The
increased attention focused upon liability issues as a result of these lawsuits
and legislative proposals could affect the growth of Internet use. While we
carry general liability insurance, it may not be adequate to compensate us in
the event we become liable for our content or services. Any liability in excess
of our general liability insurance could materially harm our business, financial
condition or results of operations.
CONSUMER PROTECTION PRIVACY REGULATIONS COULD IMPAIR OUR ABILITY TO OBTAIN
INFORMATION ABOUT OUR USERS
Our network captures information regarding our registered members in order to
tailor content to them and assist advertisers in targeting their advertising
campaigns to particular demographic groups. However, privacy concerns may cause
users to resist providing the personal data necessary to support this tailoring
capability. Even the perception of security and privacy concerns, whether or not
valid, may indirectly inhibit market acceptance of our network. In addition,
legislative or regulatory requirements may heighten these concerns if businesses
must notify Internet users that the data may be used by marketing entities to
direct product promotion and advertising to the user. Other countries and
political entities, such as the European Economic Community, have adopted such
legislation or regulatory requirements. The United States may adopt similar
legislation or regulatory requirements. If consumer privacy concerns are not
adequately addressed, our business, financial condition and results of
operations could be materially harmed.
Our network currently uses cookies to track demographic information and user
preferences. A cookie is information keyed to a specific server, file pathway or
directory location that is stored on a user's hard drive, possibly without the
user's knowledge, but is generally removable by the user. Germany has imposed
laws limiting the use of cookies, and a number of Internet commentators,
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advocates and governmental bodies in the United States and other countries have
urged the passage of laws limiting or abolishing the use of cookies. If such
laws are passed, our business, financial condition and results of operations
could be materially harmed.
WE MAY EXPEND SIGNIFICANT RESOURCES TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
OR TO DEFEND CLAIMS OF INFRINGEMENT BY THIRD PARTIES, AND IF WE ARE NOT
SUCCESSFUL WE MAY LOSE RIGHTS TO USE SIGNIFICANT MATERIAL OR BE REQUIRED TO PAY
SIGNIFICANT FEES
Our success depends on the protection of our original interactive content and on
the goodwill associated with our trademarks and other proprietary intellectual
property rights. A substantial amount of uncertainty exists concerning the
application of copyright and trademark laws to the Internet and other digital
media, and there can be no assurance that existing laws provide adequate
protection of our content or our Internet addresses, commonly referred to as
domain names. We have filed applications to register a number of our trademarks,
trade names and service marks, but registrations have only been granted in
selected cases, and we may not be able to secure additional registrations.
We have also invested resources in acquiring domain names for existing and
potential future use. We cannot assure you, however, that we will be entitled to
use such names under applicable trademarks and similar laws or that other
desired domain names will be available. Furthermore, enforcing our intellectual
property rights could entail significant expense and could prove difficult or
impossible. In the past, third parties have alleged that we have infringed upon
their patent rights and we cannot assure you that in the future third parties
will not bring additional claims of copyright or trademark infringement, patent
violation or misappropriation of creative ideas or formats against us with
respect to our content or any third-party content carried by us. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management attention, require us to enter into costly
royalty or licensing arrangements or prevent us from using important
technologies, ideas or formats, any of which could materially harm our business,
financial condition or results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET
We are not currently subject to meaningful direct regulation applicable to
access to, or commerce on, the Internet by any government agency. Any new laws
or regulations relating to the Internet could substantially increase our
operating expenses or otherwise materially harm our business. It is possible
that in the future a number of laws and regulations may be adopted with respect
to the Internet and other digital media, covering issues such as user privacy,
electronic commerce, and the pricing, characteristics and quality of products
and services. Our distribution arrangements on the Internet could subject us to
the laws of a distant jurisdiction in an unpredictable manner. Several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and providers of online
services in a manner similar to long distance telephone carriers and to impose
access fees on these companies.
TRADING IN OUR SHARES COULD BE SUBJECT TO EXTREME PRICE FLUCTUATIONS AND YOU
COULD HAVE DIFFICULTY TRADING YOUR SHARES
Our stock price may fluctuate dramatically due to a number of factors such as:
- actual or anticipated quarterly variations in our operating results
- changes in market expectations of our future financial performance or
changes in the estimates of securities analysts
- a limited public float due to Hearst's share ownership
- announcements by our competitors
- conditions affecting the market for Internet stocks or the stock
market in general
The trading price of our common stock may be volatile. The stock market in
general and the market for technology and Internet-related companies, in
particular, has experienced extreme volatility that often has been unrelated to
the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our common
stock, regardless of our actual operating performance.
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In the past, following periods of volatility in the market price of a company's
securities, class action litigation has often been filed. If this were to happen
to us, litigation would be expensive and would divert management's attention
from the operation of the business.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND ACTUAL RESULTS THAT DIFFER FROM THOSE STATEMENTS MAY
MATERIALLY HARM OUR BUSINESS
This report contains forward-looking statements that are inherently uncertain.
We use words such as "anticipates," "believes," "plans," "expects," "future,"
"intends" and similar expressions to identify any forward-looking statements.
Each of these forward-looking statements involves risks and uncertainties. In
addition to forward-looking statements made by us, this report may also contain
forward-looking statements attributed to third parties regarding estimates of
the growth of the use of the Internet by women, electronic-commerce over the
Internet and spending by advertisers on the Internet. You should not place undue
reliance on these forward-looking statements. Actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us described above in "Risk Factors" and
elsewhere in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Women.com maintains its cash equivalents in an institutional money market fund.
As of September 30, 2000 all of Women.com's cash equivalent investments will
mature in one year or less. Women.com did not hold derivative financial
instruments as of September 30, 2000 and has never held any such instruments.
Currently all sales and expenses are denominated in U.S. dollars and as a result
no foreign exchange gains or losses have been experienced to date. As a result
of the establishment of UK.Women.com in September 2000, Women.com Networks will
be involved with foreign currency transactions during 2000. Women.com Networks
has not engaged in foreign currency hedging to date.
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Part II. Other information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(b) Women.com's Registration Statement on Form S-1 (No. 333-78363) was
declared effective, and the offering commenced on October 14, 1999. All
securities were sold and the offering has terminated. The managing underwriters
were Morgan Stanley Dean Witter, Deutsche Banc Alex Brown and Salomon Smith
Barney. The class of securities registered was common stock. An aggregate of
4,312,500 shares of common stock was registered and sold for the account of
Women.com and the aggregate offering price was $43,125,000. Estimated expenses
for the offering were $1,500,000. Aggregate underwriting discounts and
commissions were $3,018,750.
Net proceeds to Women.com were $38,606,250. Through September 30, 2000 the
Company used $28.2 million of the net proceeds of the offering for the following
purposes: $9.2 million for the acquisition of World Gaming Corporation, $4.0
million for an investment in Medical Self Care, Inc., $2.0 million for the
acquisition of EZSharing.com, Inc., $3.9 million for the acquisition of various
intangible assets of ParentTime LLC and $9.1 million for purchases of property
and equipment. The use of proceeds from the offering did not represent a
material change in the use of the proceeds described in the registration
statement.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 23.
(b) No reports on Form 8-K were filed during the three months ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000
Women.com Networks, Inc.
By: /s/ MARLEEN MCDANIEL
--------------------------------------
Title: Chief Executive Officer
Duly authorized officer and
Acting principal financial officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
3.1** Restated Certificate of Incorporation of the Registrant
3.2** Amended and Restated Bylaws of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2 hereof
4.2* Specimen Certificate for Registrant's common stock
4.3* Amended and Restated Investors' Rights Agreement, dated May 7, 1999,
by and among the Registrant, Marleen McDaniel, Ellen Pack, certain
holders of the Registrant's common stock and certain holders of
warrants to purchase the Registrant's common stock
4.4* Investor Rights Agreement, dated July 9, 1999, between the Registrant
and Torstar Corporation
4.5* Investor Rights Agreement, dated July 9, 1999, between the Registrant
and The Walt Disney Company
10.1.1* Amended and Restated 1998 Equity Incentive Plan
10.1.2* Employee Stock Purchase Plan
10.1.3* Amended and Restated 1994 Stock Option Plan
10.2* Magazine Content License and Hosting Agreement by and between the
Registrant and Hearst Communications, Inc., dated January 27, 1999
10.3+* Investment Agreement by and between the Registrant and Graphics
International, Inc. d/b/a Hallmark Connections, dated August 19,
1997, as amended on May 7, 1998
10.4* Investment agreement by and between the Registrant and MediaOne
Interactive Services, Inc. (formerly known as US West Interactive
Services, Inc.), dated July 7, 1997, as amended on April 7, 1998
10.5* Executive Employment Agreement by and between the Registrant and
Marleen McDaniel, dated January 29, 1999
10.6+* Investment Agreement by and between the Registrant and Rodale
Press, Inc., dated January 27, 1999
10.7* Letter Agreement by and between the Registrant and Rodale Press,
Inc., dated January 27, 1999
10.8+* Website Agreement by and between the Registrant and Rodale Press,
Inc., dated May 2, 1997
10.9* Warrant Purchase Agreement by and between the Registrant and
MediaOne Interactive Services, Inc. (formerly known as US West
Interactive Services, Inc.), dated July 7, 1997
10.10* Warrant Agreement by and between the Registrant and MediaOne
Interactive Services, Inc. (formerly known as US West Interactive
Services, Inc.), dated July 7, 1997
10.11* Lease Agreement, dated November 7, 1994, and Addendum thereto
dated November 8, 1994, by and between the Registrant and Golden
Century Investment Company
10.12* Amendment No. 1 to the Master Lease Agreement, dated December 1,
1994, by and between the Registrant and Golden Century Investment
Company
10.13* First Amendment to Lease Agreement, dated July 27, 1997, by and
between the Registrant and Carramerica Realty Corporation (the
successor in interest to Golden Century Investment Company)
10.14* Second Amendment to Lease Agreement, dated August 31, 1997, by
and between the Registrant and Carramerica Realty Corporation
10.15* Third Amendment to Lease Agreement, dated October 27, 1998, by
and between the Registrant and Carramerica Realty Corporation
10.19* Series D Preferred Stock Purchase Agreement by and among the
Registrant and the purchasers of Series D Preferred Stock, dated
June 5, 1998
10.20* Series E Preferred Stock Purchase Agreement by and among the
Registrant and the purchasers of Series E Preferred Stock, dated
May 7, 1998
10.22* Agreement of Merger and Purchase, by and among Hearst Communications,
Inc., Astronet, Inc., Hearst New Media, LLC and certain shareholders
and option holders of Astronet, Inc. dated December 23, 1998
10.24* Asset Purchase Agreement by and among the Registrant, Wild Wild Web,
Inc., Raymond B. Kropp and Victoria P. Kropp dated April 2, 1998
10.25* Fourth Amendment to Lease Agreement by and between the Registrant
and Carramerica Realty Corporation dated March 24, 1999
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.26* Stock Purchase Agreement by and between the Registrant and Hearst
Communications, Inc., dated July 9, 1999
10.27+* Letter Agreement by and among the Registrant, Torstar Corporation
and Harlequin Enterprise Limited, dated June 25, 1999, as amended
July 9, 1999
10.28* Amendment No. 1 to Letter Agreement by and among the Registrant,
Torstar Corporation and Harlequin Enterprise Limited, dated
July 9, 1999
10.29* Stock Purchase Agreement by and among the Registrant and Torstar
Corporation, dated July 9, 1999
10.31* Amendment No. 1 to Stock Purchase Agreement by and between the
Registrant and Hearst Communications, Inc., dated September 7, 1999
10.32* Amendment No. 1 to Stock Purchase Agreement by and between the
Registrant and Torstar Corporation, dated September 3, 1999
10.33* Form of Stock Purchase Agreement by and between the Registrant and
Hearst Communications, Inc.
10.34* Warrant Agreement by and between Women.com Networks and HC Crown
Corp., dated August 19, 1997
10.35* Fifth Amendment to Lease Agreement, dated May 25, 1999, by and
between the Registrant and Carramerica Realty Corporation
10.36* Agreement of Lease between the Registrant and Polestar Fifth Property
Associates LLC, dated July 31, 1999
27.1 Financial Data Schedule
</TABLE>
--------------
* Incorporated by reference to the exhibit to the Registration Statement on
Form S-1 (No. 333-78363).
** Incorporated by reference to the exhibit to the Registrant's Report on Form
10-Q for the quarter ended September 30, 1999.
+ Confidential treatment has been granted by the SEC on portions of this
Exhibit.
24
