10-Q 1 f71808e10-q.txt FORM 10-Q FOR PERIOD ENDED MARCH 31, 2001 1 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 March 31, 2001 Commission File Number 0-26055 WOMEN.COM NETWORKS, INC. (Exact name or registrant as specified in its charter) DELAWARE 13-4059516 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1820 GATEWAY DRIVE, SAN MATEO, CALIFORNIA 94404-2471 (Address of principal executive office) (Zip Code) 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 April 30, 2001 was 47,254,588. 2 WOMEN.COM NETWORKS, INC. FORM 10-Q MARCH 31, 2001 INDEX

2 3 Part I. Financial Information Item 1. Financial Statements WOMEN.COM NETWORKS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements 3 4 WOMEN.COM NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements 4 5 WOMEN.COM NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements 5 6 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, 2000. The accompanying consolidated financial statements have been prepared assuming that Women.com will continue as a going concern. Women.com has suffered recurring losses from operations and has an accumulated deficit of $214.9 million. Women.com has entered into a definitive agreement whereby iVillage, Inc., operator of the iVillage network, contingent upon the satisfaction of certain conditions, will acquire all of the outstanding shares of Women.com. If the sale to iVillage does not occur, Women.com will need to raise additional capital to fund their 2001 operations and may have to reduce certain discretionary spending and scale back their operations. There can be no assurance that the sale to iVillage will occur or that Women.com will be successful in raising additional funding if the sale does not occur. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 issued Statement of Financial Accounting Standards No. 133, (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" as amended. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. Subsequent amendments to SFAS 133 deferred the effective date until the first fiscal quarter of the fiscal year beginning after June 15, 2000. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. 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 are included in the diluted net loss per share to the extent such shares are dilutive. 6 7 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):

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". 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 150,000 pages of content organized into 17 topical channels, and offers content from 10 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 March 31, 2001, Women.com had an accumulated deficit of $214.9 million. We expect to incur significant operating losses and negative cash flows from operations for at least the next several years. Women.com's continuation as a going concern is dependent on its ability to obtain additional financing to meet its obligations. 7 8 On February 5, 2001, Women.com entered into a definitive agreement whereby iVillage Inc., operator of the iVillage Network, contingent upon the satisfaction of certain conditions, will acquire all of the outstanding shares of Women.com. This transaction, if approved by the stockholders of Women.com and iVillage, is expected to close during the second quarter of 2001 and will potentially have a significant impact on the future operations of Women.com. If the sale to iVillage does not occur, Women.com will need to raise additional capital to fund their 2001 operations and may have to reduce certain discretionary spending and scale back their operations. Women.com's revenues to date have been generated primarily from advertising and sponsorships. Advertising and sponsorship revenues represented 67% of total revenues for the three months ended March 31, 2001 and 77% for the three months ended March 31, 2000. Advertising revenues consist primarily of sales of banner advertisements and sponsorships. Advertising contracts are generally short-term, although Women.com has entered into long-term contracts and sponsorships with several customers. 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 promotion vehicles. Women.com has adopted the provisions of EITF 99-17 "Accounting for Advertising Barter Transactions" ("EITF 99-17") and revenue from barter transactions are recorded as advertising revenues at the fair value of the advertising surrendered only if the fair value of the advertising surrendered in the transaction is determinable based on Women.com's own historical practice of receiving cash for similar advertising from buyers unrelated to the counterparty in the barter transaction. Any barter revenue complying with these provisions is recognized when the advertisements are run on Women.com's Web site. Barter expenses are recorded when Women.com's advertisements run on the reciprocal media property, which is typically in the same period in which the advertisements runs on Women.com's network. There was no barter revenue for the three month periods ended March 31, 2001 and March 31, 2000. 11.4 million impressions were surrendered and received in the quarter ended March 31 2001 in barter transactions for which a fair value was not determinable based on the provisions of EITF 99-17. 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 consisted of commissions from the sale of magazine subscriptions and books sold on the network, sales of services on Astronet including personalized reports and readings and, to a lesser extent, payments from affiliate sales programs. Affiliate program e-commerce net revenues are recognized upon notification from the affiliate. Since Women.com does not meet the definition of a principal in any of these transactions, Women.com reports revenue net in accordance with the provisions of EITF 99-19 "Reporting Revenue Gross as a Principal Versus Net as an Agent". Results of Operations Revenues Revenues were $6.4 million for the three months ended March 31, 2001, a 55% decrease compared to the same period in 2000. The decrease in revenues was primarily due to a significant decline in the internet advertising market. Advertising and sponsorship revenues were $4.3 million for the three months ended March 31, 2001, a 61% decrease over the corresponding period in 2000. Revenues for the three months ended March 31, 2000 also included $1.6 million of production and hosting fees related to the launch of eharlequin.com in February 2000; there were no such production and hosting fees in 2001. 8 9 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 administrative expenses. Cost of revenues Cost of revenues include payments for revenue sharing and gaming prizes. Cost of revenues decreased to $776,000 for the three months ended March 31, 2001 from $985,000 for the same period in 2000. This decrease was primarily due to lower advertising revenue for the three months ended March 31, 2001. Production, product and technology expenses 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 decreased to $7.6 million for the three months ended March 31, 2001 from $9.0 million in the same period in 2000. This decrease was primarily due to personnel cost savings of approximately $0.7 million related to a reduction in force in December 2000 as well as attrition during the three months ended March 31, 2001. 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 $7.1 million for the three months ended March 31, 2001, a decrease of 37% over the same period of the prior year. This decrease is primarily attributable to a $1.3 million decrease in distribution expenses, a $0.8 million decrease in online advertising and personnel cost savings of $0.5 million related to the reduction in force in December 2000. Sales and marketing expenses for the three months ended March 31, 2000 also included $1.6 million in expenses related to the sponsorship of programming related to the Oscars on the E! television network; there were no such expenses in the three months ended March 31, 2001. General and administrative expenses General and administrative expenses consist primarily of personnel costs, occupancy costs, depreciation expenses, bad debt expense and legal and accounting fees. General and administrative expenses were $2.0 million for the three months ended March 31, 2001, a decrease of 24% over the same period in the prior year. The decrease was primarily attributable to a decrease in bad debt expense of approximately $1.1 million, partially offset by an increase in depreciation expense of $0.4 million related to fixed asset acquisitions made during the year ended December 31, 2000. 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. Stock-based compensation has been allocated between production, product and technology, sales and marketing and general and administrative expenses in Women.com's financial statements. Women.com's stock-based compensation expense was $178,000 for the three months ended March 31, 2001 compared with $172,000 for the same period in 2000. This increase was due to stock bonuses granted during the three months ended December 31, 2000. Amortization of acquired intangibles Amortization of acquired intangibles consists of the amortization of goodwill and intangible assets acquired. Women.com reported no amortization of acquired intangibles for the three months ended March 31, 2001 compared to $7.0 million for the same period in 2000. This decrease is due to the full impairment charge Women.com recorded against these assets in the fourth quarter of 2000. Other income 9 10 Other income consists of interest income and other miscellaneous income. Other income was $0.4 million for the three months ended March 31, 2001 compared with $1.1 million for the same period in 2000. The decrease is primarily due to Women.com's declining cash balances. Income taxes No provision for federal and state income taxes has been recorded as Women.com incurred net losses through March 31, 2001. 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. 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. As of March 31, 2001, Women.com had $20.2 million of cash and cash equivalents. In February 2001, Women.com entered into a definitive agreement whereby iVillage, Inc., operator of the iVillage network, contingent upon the satisfaction of certain conditions, will acquire all of the outstanding shares of Women.com. This transaction, if approved by the stockholders of Women.com and iVillage, is expected to close during the second quarter of 2001 and will potentially have a significant impact on the future operations of Women.com. If the transaction is not completed, Women.com will need to raise additional capital to fund its 2001 operations. There can be no assurance that the transaction with iVillage will be completed or that Women.com will be successful in raising additional funding if the transaction is not completed. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 to stretch our current cash positions beyond the end of the second quarter of 2001, additional capital will be necessary 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. These conditions raise substantial doubt about Women.com's ability to continue as a going concern. We expect to incur significant operating losses and negative cash flows from operations in 2001. If the transaction with iVillage is not completed, we may attempt to finance our future capital needs through some combination of commercial bank borrowing, 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: 10 11 o demand for our services or our cash flow from operations varies from projections; o our development plans or projections change or prove to be inaccurate; o we make any acquisitions; o we accelerate deployment of our network or otherwise alter the schedule of targets of our business plan implementation. Net cash used in operating activities increased to $9.7 million in the first quarter of 2001 from $7.2 million in the first quarter of 2000. This increase was primarily due to the reduction in revenue offset in part by decreased operating expenses. Net cash used in investing activities decreased to $232,000 in the first quarter of 2001 compared to $12.2 million in the first quarter of 2000. In the first quarter of 2000 the Company purchased $6.2 million of property and equipment, invested $4 million in Medical Self Care, Inc., and spent $2 million on the acquisition of EZSharing.com. Net cash provided by financing activities decreased to $1,000 in the first quarter of 2001 compared to $143,000 in the first quarter of 2000 due to fewer stock option exercises. Accounts receivable net of the allowance for doubtful accounts decreased by 65% to $2.1 million as of March 31, 2001. This decrease is attributable to the Company's continued focus on collections during 2001 as well as the decline in advertising revenues. Current liabilities decreased by 40% to $6.3 million as of March 31, 2001. This decrease is primarily attributable to the payment of several significant liabilities during the three months ended March 31, 2001, as well as reduced operating expenses. Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" as amended. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. Subsequent amendments to SFAS 133 deferred the effective date until the first fiscal quarter of the fiscal year beginning after June 15, 2000. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. 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 11 12 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 because of 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 March 31, 2001, we had an accumulated deficit of $214.9 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. IF THE MERGER WITH IVILLAGE IS NOT COMPLETED, WE MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS TO FUND OUR OPERATIONS On February 5, 2001, we entered into a definitive agreement whereby iVillage, Inc., operator of the iVillage network, contingent upon the satisfaction of certain conditions, will acquire all of our outstanding shares. If the closing conditions contained in the definitive merger agreement, including the approval of the stockholders of Women.com and iVillage, are not satisfied, the merger may not be completed. If the merger is not completed and we continue to function as an independent company, we will need to raise additional capital to fund our operations. There can be no assurance that the merger with iVillage will be completed or that we will be successful in raising additional capital if the merger is not completed. If the merger is not completed and we are unable to raise additional capital on acceptable terms, we do not expect our current cash and cash equivalents to meet our operating and capital requirements at our currently anticipated levels of operations beyond the end of second quarter of 2001. If we are not able to 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: o fluctuations in the demand for internet advertising or electronic commerce o bankruptcies of internet companies which are a source of advertising revenue o changes in the level of traffic on our network o 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. 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 12 13 with the Internet as an advertising medium. Our ability to generate significant advertising revenues depends upon several other factors, including: o the development of a large, demographically attractive base of users on our network o our ability to continue to develop and update effective advertising delivery and measurement systems o 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. DUE TO THE PENDING MERGER WITH IVILLAGE, WE EXPECT OUR ADVERTISING REVENUES TO DECREASE SIGNIFICANTLY. As a result of the announcement on February 5, 2001 of our pending merger with iVillage, Inc., numerous advertisers have informed us of their intent to delay current and future advertising on our network until the iVillage merger has been completed. We expect the merger with iVillage to be completed in the second quarter of 2001. Accordingly, we expect our advertising revenues to decrease significantly in the second quarter of 2001. If the merger with iVillage is not completed and we continue to operate as an independent company, advertisers that have delayed current and future advertising may choose to discontinue advertising on our network entirely, which could significantly harm our business. IF WE ARE UNABLE TO COMPLY WITH THE NASDAQ NATIONAL MARKET'S CONTINUED LISTING REQUIREMENTS, OUR COMMON STOCK MAY BE DELISTED FROM NASDAQ. On December 29, 2000, we received a letter from the Nasdaq Stock Market, Inc. stating that Women.com had failed to maintain a minimum bid price of $1.00 over the last 30 consecutive trading days, which is required for continued listing on the Nasdaq National Market. We failed to regain compliance with this rule and have scheduled a formal hearing. Depending upon the results of this scheduled hearing, our shares may be delisted as early as May 18, 2001. If our common stock is delisted, it would seriously limit the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could have a material adverse effect on our business or harm our business. THE HEARST CORPORATION CONTROLS ACTIONS REQUIRING BOARD AND STOCKHOLDER APPROVAL WHICH WEAKENS THE EFFECT OF OTHER STOCKHOLDERS' VOTES Hearst representatives currently fill four of the eight seats on our board of directors. In addition, Hearst beneficially owns approximately 46% of our outstanding 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 six 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 13 14 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 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 March 2001, approximately 21% of our page views were generated by Astronet and, during the same period, approximately 33% 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 14 15 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, 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. 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. 15 16 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. The recent power shortages and potential for future power shortages in California could cause future interruptions in our network. 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: o security concerns o inconsistent quality of service o inadequate network infrastructure o consumers returning to traditional or alternative sources for information, shopping and services o lack of cost-effective, high-speed connectivity o the failure of the Internet as a viable commercial marketplace THE SUCCESS OF OUR BUSINESS WILL DEPEND ON CONTINUED GROWTH IN INTERNET COMMERCE 16 17 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. 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. 17 18 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, 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: o actual or anticipated quarterly variations in our operating results o changes in market expectations of our future financial performance or changes in the estimates of securities analysts o a limited public float due to Hearst's share ownership o announcements by our competitors o conditions affecting the market for Internet stocks or the stock market in general 18 19 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. 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. YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN. 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 March 31, 2001 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 March 31, 2001 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. Women.com Networks does not expect any transactions in foreign currencies during 2001 nor has it engaged in foreign currency hedging to date. 19 20 Part II. Other information Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds 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 March 31, 2001 the Company used $29.1 million of the net proceeds of the offering for the following purposes: $9.7 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 $9.5 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 Item 6. Exhibits and Reports on Form 8-K (a) See Exhibit Index on page 22. (b) On February 13, 2001, the Registrant filed a Current Report on Form 8-K relating to the execution of a definitive merger agreement among the Registrant and iVillage, Inc. On March 7, 2001, the Registrant filed a Current Report on Form 8-K relating to an amendment to the definitive merger agreement among the Registrant and iVillage, Inc. 21 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: May 10, 2001 Women.com Networks, Inc. By: /s/ GREG PANAWEK -------------------------------------- Title: Senior Vice President and Chief Financial Officer Duly authorized officer and Principal financial officer 21 22 EXHIBIT INDEX

------------ * 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. *** Incorporated by reference to the exhibit to the Registrants Report on Form 8K filed with the SEC on February 13, 2001. **** Incorporated by reference to the exhibit to the Registrants Report on Form 8K filed with the SEC on March 7, 2001. + Confidential treatment has been granted by the SEC on portions of this Exhibit.

WOMEN COM NETWORKS INC 10-Q