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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2002
Commission File Number 000-28271
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THE KNOT, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3895178
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
462 Broadway, 6th Floor
New York, New York 10013
(Address of principal executive offices and zip code)
(212) 219-8555
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 28, 2002 was approximately $1,865,813 (based on the last
reported sale price on the NASD OTB Bulletin Board on that date). The number of
shares outstanding of the registrant's common stock as of March 1, 2003 was
18,404,036. The registrant does not have any non-voting stock outstanding.
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Documents Incorporated By Reference
Portions of Registrant's Proxy Statement for the 2003 Annual Meeting of
Stockholders, which is to be filed subsequent to the date hereof, are
incorporated by reference into Part III.
THE KNOT, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 21
Item 3. Legal Proceedings................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............... 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 22
Item 6. Selected Financial Data........................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 33
Item 8. Consolidated Financial Statements and Schedule.................... 34
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................. 59
PART III
Item 10. Directors and Executive Officers of the Registrant................ 59
Item 11. Executive Compensation............................................ 59
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters....................................... 59
Item 13. Certain Relationships and Related Transactions.................... 59
Item 14. Controls and Procedures........................................... 60
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 60
2
THIS REPORT MAY CONTAIN PROJECTIONS OR OTHER FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE KNOT. THESE
STATEMENTS ARE ONLY PREDICTIONS AND REFLECT THE CURRENT BELIEFS AND EXPECTATIONS
OF THE KNOT. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED
IN THE PROJECTIONS OR FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
AS MORE FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. THE KNOT
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR
ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN
THE FUTURE.
PART I
Item 1. Business
Overview
The Knot is the leading wedding resource providing products and services to
couples planning their weddings and future lives together. Our Web site, at
www.theknot.com, is the most trafficked wedding destination online and offers
comprehensive content, extensive wedding-related shopping, an online wedding
gift registry and an active community. The Knot is the leading wedding content
provider on America Online (AOL Keywords: Knot and weddings) and MSN. We publish
The Knot Magazine which features editorial content covering every major wedding
planning decision and is distributed to newsstands and bookstores across the
nation. Through our subsidiary, Weddingpages, Inc., we publish regional wedding
magazines in over 20 Company-owned and franchised markets in the United States.
We also author a book series on wedding planning and a gift-book series on
wedding gowns and wedding flowers. We are based in New York and have several
other offices across the country.
We commenced operations in May 1996 and recorded our first revenues in
September 1996, immediately following the launch of our first online property.
Our Web site was launched in July 1997. We launched The Knot Registry, our
online gift registry, in November 1998. In July 1999, we acquired the assets of
Bridalink.com, an Internet wedding supply store and the common stock of Click
Trips, an online travel agency. In August 1999, we acquired the assets of
Wedding Photographers Network, a searchable database of local wedding
photographers. In March 2000, we acquired Weddingpages, the largest publisher of
regional wedding magazines in the nation. In October 2001, we entered into a
strategic services and marketing agreement with a travel agency partner and no
longer promoted travel services through Click Trips. In October 2002, we
terminated this relationship and are currently seeking another travel partner.
Industry Background
The Wedding Industry
Each year, approximately 2.4 million couples get married in the United
States. According to an independent research report, the domestic wedding market
generates approximately $70 billion in retail sales annually. Presumed to be a
once-in-a-lifetime occasion, a wedding is a major milestone event and,
therefore, consumers tend to allocate significant budgets to the wedding and
related purchases. The average amount spent on a wedding is approximately
$22,000, excluding the honeymoon.
Planning a wedding can be a stressful and confusing process. Engaged
couples must make numerous decisions and expensive purchases. A typical wedding
requires decisions and planning relating to bridal registries, invitations,
wedding gowns and wedding party attire, wedding rings, photographers, music,
caterers, flowers and honeymoons. In addition to the number of decisions faced
by engaged couples, the fixed date and the emotional significance of the event
intensify the stress. For the majority of engaged couples, the process of
planning a wedding is an entirely new one. They do not know where to find the
necessary information and services, how much services or goods should cost or
when decisions need to be made. These planning decisions are further complicated
because many couples choose to have their weddings in locations other than where
they live. Researching and soliciting local wedding services from distant
locations without traveling and making an enormous time commitment is extremely
difficult. Today's to-be-weds are seeking reliable resources and information to
assist in their planning and purchase decisions.
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Vendors and advertisers highly value to-be-weds as a consumer group.
Replenished on an annual basis, wielding substantial budgets and facing a firm
deadline, engaged couples are ideal recipients of advertisers' messages and
vendors' products and services. During the six months prior to and the six
months following a wedding, the average couple will make more buying decisions
and purchase more products and services than at any other time in their lives.
The challenges and obstacles that engaged couples face make them especially
receptive to marketing messages. Therefore, a disproportionate amount of
advertising revenues are generated per subscriber by bridal magazines. According
to Advertising Age, in 2001 the top three bridal magazines generated an average
of $303 in revenues per reader, compared to an average of $94 in revenues per
reader in the top three travel magazines and an average of $66 in revenues per
reader in the top three women's magazines.
The wedding market also represents significant opportunities for the retail
industry. Engaged couples receive gifts from an average of 200 guests, most of
whom are spending between $70 and $100. Because items are selected by the
engaged couple but paid for by their guests, price sensitivity is minimal and
registry products are rarely discounted by retailers. Registry for products in
all categories has grown, prompting many national retailers -- previously
without registries -- to enter the gift registry market. Weddings also generate
substantial revenues for travel services companies. Honeymoon travel generates
an estimated $4.5 billion annually. Over 99% of all newlyweds go on a honeymoon
with an average cost of approximately $3,660 per couple.
The Internet and the Wedding Industry
To-be-weds are seeking a comprehensive resource to assist in their
preparation and planning for a wedding. Because of its global reach and capacity
to transmit information rapidly, the Internet represents an ideal medium over
which to-be-weds can easily access information and communicate with the
widely-dispersed providers of local wedding resources.
In 2000, the median age was 25 for first-time brides and 27 for first-time
grooms, placing them in the demographic age group, 18 to 29 years, that
currently comprises approximately 27% of all Web users. As Internet use
continues to increase, engaged couples are turning to online resources as the
first place they look for wedding products, information and registry services.
In 2000, websites became the primary source of wedding information, with 30% of
brides using the Internet at some point in their wedding planning, according to
Brides Decide II by Greenfield Online. In addition, a USA Today poll found that
80% of the more than 2 million couples that married in 2001 used the Internet to
help plan their wedding. Recognizing this trend, traditional providers of
wedding resources are offering their services and products online. Like their
offline equivalents, however, these online offerings are single-service/product
focused. To-be-weds continue to search for a comprehensive solution to their
information, planning and purchasing needs at a single destination.
The Knot Services
We offer both online and offline services to the wedding market. Our services
include:
Online Services
Relevant Wedding Content. We provide creative up-to-date information and
resources to attract users to our sites. Weddings are information-intensive
events requiring extensive research, planning and decision-making. Our sites
provide future brides and grooms with a searchable database that draws on
thousands of articles on wedding planning and numerous interactive wedding
planning tools including wedding checklists, a budgeter, a guest list manager
and personal wedding Web pages. Our online content is organized in ten channels
covering the topics of planning, "Ask Carley", real weddings, proposals,
fashion, beauty, grooms, maids and moms, love and life and honeymoons. All the
channels offer articles, ideas and advice covering a wide range of perspectives,
budgets, traditions and ethnicities.
We offer a searchable bridal gown database with more than 20,000 gown
images from over 200 designers plus searchable databases for bridesmaids,
mother-of-the-bride and flower girl dresses, bridal accessories including
headpieces, shoes and purses, engagement and wedding rings and tuxedos. We also
offer search tools for honeymoon locations, jewelry and tabletop products. Our
Web site features an "Index A-Z" of keywords in the center of the homepage and
on the bottom of every page, which allows users to find information on 360
pre-selected wedding topics. For each selected keyword, a page displays
articles, message board postings, "Ask Carley" questions and answers, promotions
and other resources relating to that keyword as well as appropriate e-commerce
offerings.
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We offer access to the local wedding market through over 50 online city
guides that host profiles for thousands of local vendors, such as reception
halls, bands, florists and caterers. Each local city guide provides a listing of
the area's marriage license offices and upcoming bridal shows, a question and
answer section with a local wedding expert and local message boards, where
to-be-weds can discuss vendors in their market. Region-specific articles on many
wedding topics including real wedding stories about local couples are also
featured in the city guides. Through our local market expansion, we are able to
influence many of the wedding-related decisions and purchases made on the local
level.
Active Membership and Community Participation. Our online sites generate a
high degree of member involvement through chats, message boards and personalized
interactive services. To-be-weds actively seek forums to exchange ideas and ask
questions during the planning process. We encourage and promote active
participation within our online community. The Knot community features include
24-hour chat rooms on both America Online and the Web which allow our members to
interact with other couples, as well as our own experts, on wedding planning
issues and concerns. For example, our "Ask Carley" channel is an interactive
area where information on wedding etiquette and answers to a variety of other
questions are posted daily by our experts on wedding planning. This area
includes a searchable database that draws from an archive of up-to-date answers
to thousands of questions. Other interactive services allow users to prepare and
modify their wedding budget, compile and manage their guest list and create
personalized checklists and Web pages. Additionally, we send out several
newsletters and emails to our members, many of which are targeted to the stage
where these members are in their wedding planning process by containing a
message that corresponds with the information they typically need at that time.
Other newsletters and emails are focused on specific topics, such as registries
and accessories or upcoming bridal events and new features on our site.
Convenient, Comprehensive Shopping Experience. We integrate our interactive
services and informative content with comprehensive shopping services, which
range from wedding gifts to a comprehensive array of supplies that relate to the
wedding itself. We place e-commerce offerings on every layer of our site.
Placement and selection of these items are often based on the specific
information that a couple is seeking. In addition, we have created a shopping
portal or "integrated shopping destination" called Shop The Knot. Shopping areas
include "Registry", "Home Store", "Gift Ideas", "Wedding Supplies", "Attendant
Gifts" and "Partner Boutiques".
The Knot Registry, which we believe is the Internet's most comprehensive
wedding gift registry, offers a broad selection of more than 15,000 products and
services from approximately 350 well-recognized brands. Wedding guests can
quickly and easily purchase gifts online or via phone or fax, 24-hours a day. We
buy the majority of our products directly from manufacturers. This enables us to
provide our users with a large selection of products from a wide range of
categories, while maintaining a high level of customer service. We offer
traditional registry categories such as tabletop, household appliances and
electronics, in addition to non-traditional categories, such as outdoor
recreational gear, barbeque grills and hi-tech entertainment products.
In April 1999, we entered into a services agreement with QVC. Under this
agreement, QVC provides us warehousing, sales, fulfillment and distribution
services in connection with The Knot Registry. At the customer's request, a
product generally can be shipped within 48-hours of order. Our services
agreement with QVC expires in December 2003. We have the option to extend the
term of the services agreement for an additional l80 days. QVC may terminate our
services agreement if we fail to pay any amounts due or otherwise breach the
terms of the agreement, or if we are sold or become bankrupt.
We continue to explore other strategic distribution partnerships that would
position us to capture a greater portion of the $17 billion wedding gift
registry market. We have entered into agreements with two strategic partners
through whom we are able to provide engaged couples access to an even wider
range of products in the categories of tabletop and linens. In addition to
product sourcing, these partners also provide us with fulfillment and
distribution services with respect to these products.
In February 2002, we initiated a strategic marketing alliance with May
Department Stores Company ("May") that links our Web site to the wedding gift
registry sites of May's full-line department store companies. Together, we have
implemented a multi-platform marketing campaign to promote May's department
store companies which offer wedding registry services -- Hecht's, Strawbridge's,
Foley's, Robinsons-May, Filene's, Kaufmann's, Famous-Barr, L.S. Ayres, The Jones
Stores and Meier & Frank -- to our online and offline audience of engaged
couples and wedding guests.
We sell wedding supplies to consumers through our integrated shopping
destination, Shop The Knot, as well as through Bridalink.com. Bridalink.com is
our separate online store for wedding supplies, which we maintain in order to
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attract new users and generate additional revenue. We offer over 1,500 products,
including decorated disposable cameras, wedding bubbles and bells, ring pillows,
toasting flutes, car decorating kits, table centerpieces, goblets and glasses,
garters and unity candles. These highly specialized items are often difficult to
find through traditional retail outlets, and the purchase of these items is
often left to the last minute. We offer personalization options for many of our
wedding supplies such as toasting glasses, cake servers, napkins and wedding
attendant gifts and favors. We have launched our own line of Knot-branded
wedding supplies called The Knot Wedding Collections. Our collections, which can
be personalized as well, include ring pillows, flower girl baskets, guest books
and pens. In addition, we sell wedding supplies directly to other select bridal
retailers through our wholesale wedding supplies division. This division offers
all 1,500 products and are featured online at our wholesale website,
WeddingSuppliesDirect.com, or in three wholesale catalogs including one
highlighting The Knot Wedding Collections. Participating bridal retailers,
numbering more than 1,000, have recognized that The Knot is a one-stop supplier
for these items. Normally, retailers must purchase wedding supplies from as many
as 10 suppliers to obtain the product mix offered through our wholesale program.
Consumers can place orders online, through a toll-free number, fax or via mail,
24-hours a day. Retailers can place orders through a toll-free number or fax
during business hours or via mail. We fulfill all wedding supplies orders from
our warehouse located in Redding, California.
Offline Services
Local Wedding Magazines. Our subsidiary Weddingpages, Inc. publishes local
wedding magazines in over 20 company-owned and franchised markets. We also
license the name Weddingpages for use in publication by former franchisees in
two local markets. In the Company-owned markets, the WEDDINGPAGES magazines
feature the look and feel of The Knot brand and combines the editorial
expertise of The Knot with up-to-date, region-specific information, making these
publications a must-have wedding planning companion for engaged couples.
The Knot Weddings Magazine. We publish The Knot Magazine, formerly The Knot
Wedding Gowns, semiannually. This 500 plus page publication is a comprehensive,
searchable shopping guide providing directories of wedding gowns, fine jewelry,
china, home products, invitations, wedding supplies and honeymoon packages. The
gown section, which features over 800 dresses from the industry's top designers,
is organized alphabetically by designer, and each gown image includes essential
information that is not found in other bridal magazines - price range, detailed
description and a coordinating URL that directs readers to The Knot Web site for
additional dresses by the same designer. Also featured are over 500 photos of
wedding party attire and accessories, including bridesmaid, mother-of-bride and
flower girl dresses, veils, shoes, and tuxedos. Understanding the importance of
localized wedding-planning information, we include a unique tool in the magazine
- - a store locator. As one of the most comprehensive bridal salon listings in the
bridal magazine market, brides can comb through the store locator's organized,
detailed salon listings to locate stores in their state that carry the designers
they love. We sell The Knot Magazine through newsstands and bookstores across
the nation and on our website.
The Knot Book Series. The Knot has two book series. Our first book series
consists of three books which have been published by Broadway Books, a division
of Random House. We developed the content of each book through the interaction
between our users and our wedding experts. This "real-world" approach, directed
by our editorial team and based on user experience and feedback, distinguishes
us from the approach of traditional wedding resources. Each book in this series
encourages readers to visit our sites. The first two books in the series are
detailed wedding-planning resources for to-be-weds, offering the information a
bride and groom need to plan their wedding and include worksheets, checklists,
etiquette, tips, calendars and answers to frequently-asked questions. Our third
book in this series tackles tricky wedding-related topics including toasts,
readings, music and personal vows and explains how couples can utilize each to
personalize their own ceremony or reception.
Our second book series consists of two books that are being published by
Chronicle Books. This book series expands the consumer reach of The Knot to the
gift book category. The first book celebrates the evolution of the wedding gown
while providing brides with all the information they need to make the big
purchase. The second book, The Knot Book of Wedding Flowers, featuring over 175
pages of pictures and illustrations, debuted in January 2003.
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Integrated Media Programs
We provide advertisers and sponsors with targeted access to couples
actively seeking information and advice and making meaningful spending decisions
relating to all aspects of their weddings. We offer advertisers and sponsors an
opportunity to establish brand loyalty with first-time purchasers of many
products and services.
Editorial content and advertising are often integrated on our sites. For
example, an article about wedding rings might feature an advertisement for a
jeweler. Instead of traditional banners or buttons, our sponsors usually select
our custom-developed marketing programs that offer special features, including
tools. Companies can also enter into arrangements to exclusively sponsor entire
editorial areas or special features. We may also offer sponsors additional
online promotional events such as sweepstakes, newsletter and direct e-mail
programs, or inclusion of their special offers in our membership gateway.
With the acquisition of Weddingpages and the further development of The
Knot Magazine, we have expanded the scope of the integrated marketing programs
we offer to our online advertisers to include many offline features. For
example, a program for an online sponsor could also include regional or national
print advertising in these magazines. We have also expanded the programs that we
are able to offer our WEDDINGPAGES print advertisers. Local wedding vendors can
supplement their print advertisements with profiles and sponsorship badges
within their appropriate online city guide, and they can also reach their market
areas through targeted local newsflash emails.
In addition, we have designed category specific standardized advertising
programs for Jewelry, Health and Beauty, Tabletop, Retail, Home, Finance and
Travel. These programs allow a broad range of advertisers in these markets to
gain targeted national exposure through a combination of our online programs and
magazines.
The Knot Strategy
Our objective is to expand our position as the leading wedding resource
providing comprehensive wedding planning, information, products and services.
Key elements of our business strategy include the following:
Build Strong Brand Recognition. Building brand recognition is critical to
attracting and expanding both our online and offline user base. We have secured
the leading position in the online wedding market, and to maintain this
position, we will continue to emphasize our online editorial and creative
content while marketing our magazine and book products offline.
We promote our brand through aggressive public relations outreach, securing
television appearances featuring Carley Roney, our Editor in Chief and lead
wedding expert. During 2002, she appeared on more than 30 national and local
television programs including The Oprah Winfrey Show, NBC's TODAY, ABC's The
View, Live with Regis & Kelly, CBS's The Early Show, CNN Headline News, Inside
Edition and Fox News Report. Carley's presentations cover a variety of wedding
topics from the most desirable engagement ring to the latest trends in wedding
fashions or wedding registry must-haves, all of which relate to information or
services available on our sites. In addition, Carley is frequently consulted for
her wedding expertise by the nation's top print publications including The New
York Times, Wall Street Journal, USA Today, InStyle, Vogue and Cosmopolitan.
In January 2003, "Real Weddings from The Knot" -- our very own branded
televised miniseries -- premiered on the Oxygen Network. The Knot collaborated
with Oxygen in the creation and production of the series, which followed six
couples planning through their wedding process in the weeks leading up to their
nuptials. Through this reality-based show, we expanded the awareness of our
brand and services to a broad national audience.
Through our WEDDINGPAGES magazines and the expansion of our in-depth online
city guides, we are aggressively increasing our brand awareness at the local
level. At the same time, we are taking advantage of the cross-promotional
opportunities that offline publications afford our online properties and
services. Our local advertising sales force further supports The Knot brand
through participation in their local wedding professional associations and
appearances at local bridal events.
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In January 2003, we extended our long-standing relationship with AOL; and,
additionally, we renewed our agreement with MSN. As a result, we will continue
to be the leading wedding content partner for AOL and MSN, providing their
members and users with in-depth wedding planning information, interactive tools,
wedding gown galleries and an online community.
Aggressively Grow Membership. We believe a large and active membership base
is critical to our success. Membership enrollment is free. Our members enjoy the
use of personal Web pages, message boards, budgeting and planning tools, wedding
checklists and wedding fashion searches. During the first two months of 2003, we
were enrolling an average of approximately 4,300 new members per day. We intend
to continue to grow our membership base and increase member usage through our
content offerings, interactive services, active community participation and
strategic relationships.
We recognize the importance of maintaining confidentiality of member
information, and we have established a privacy policy to protect personal
information. Our current privacy policy is set forth on our sites, and we are a
licensee of the TRUSTe Privacy Program. Our policy is not to tell any third
party any member's personal identifying information, but we may share aggregated
information about our members with other pre-screened organizations who have
specific direct mail product and service offers we think may be of interest to
our members. We may share aggregated member information with third parties, such
as zip code or gender. In addition, we may use information revealed by members
and information built from user behavior to target advertisements, content and
email.
Capitalize on Multiple Revenue Opportunities. We intend to leverage the
size and favorable demographics of our online and offline communities to
continue to generate multiple revenue streams. We are focused on providing our
sponsors and advertisers with targeted access to couples actively seeking
information and making purchase decisions. We maximize our advertising revenues
by offering targeted marketing opportunities to both our national advertising
sponsors and local wedding vendors through the integration of advertising with
editorial content on our site and in our magazines. With the addition of
category specific advertising programs to our customized marketing campaigns, we
have broadened the group of potential advertisers and sponsors who can benefit
from targeting The Knot's audience. Our advertising efforts are supported by a
national sales force in New York, by a local sales force of approximately 45
people positioned in markets around the United States and by independent sales
representative agencies supplementing our national sales force.
We expect to generate increasing online revenues from The Knot Registry and
our convenient gift and wedding supplies shops. We will continue to use our
content to promote e-commerce opportunities. Through our wholesale wedding
supplies division, we are extending our presence in the wedding supplies
business to the offline retail market. We will pursue additional revenue
opportunities, as appropriate, in connection with the needs of today's engaged
and newly married couples. We also intend to extend the relationship we build
with our users and provide access to additional products and services relevant
to newlyweds and growing families.
Competition
The Internet advertising and online wedding markets are new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. We face competition primarily from three separate areas: online
sites, magazines and gift registries.
There are many wedding-related sites on the Internet developed and
maintained by online content providers. Retail stores, manufacturers, wedding
magazines and regional wedding directories also have online sites which compete
with us. We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry in our market.
We also face competition for our services from bridal magazines. Bride's
and Modern Bride, both published by Conde Nast, are the two dominant bridal
publications in terms of revenue and circulation. According to Advertising Age,
these two magazines and Bridal Guide, the third leading bridal magazine,
generated gross advertising revenues of $285.7 million in 2001.
The Knot Registry faces competition from online sources such as registry
aggregators. We compete with retail stores offering gift registries, especially
from retailers offering specific bridal gift registries. These stores,
particularly
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national department store chains, have strong brand awareness, many years of
retailing experience and most now have online transactional capabilities. Our
wedding supplies business also faces competition from online sources and retail
stores offering similar products.
We believe that the principal competitive factors in the wedding market are
brand recognition, convenience, ease of use, information, quality of service and
products, member affinity and loyalty, reliability and selection. As to these
factors, we believe that we compete favorably. Our dedicated editorial, sales
and product staffs concentrate their efforts on producing the most comprehensive
wedding resources available.
Generally, many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources and greater name recognition than we have. Therefore, these
competitors have significant ability to attract advertisers and users. In
addition, many of these competitors may be able to respond more quickly than we
can to new or emerging technologies and changes in Internet user requirements
and to devote greater resources than we do to the development, promotion and
sale of services. There can be no assurance that our current or potential
competitors will not develop products and services comparable or superior to
those developed by us or adapt more quickly than we do to new technologies,
evolving industry trends or changing Internet user preferences. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which would materially and adversely affect our business, results
of operations and financial condition.
Infrastructure, Operations and Technology
Our technology infrastructure provides for continuous availability of our
online services. There are three major components to our online services
comprised of our Web, domain name service ("DNS") and Database servers. Our Web
and DNS servers are fully redundant and allow for the failure of multiple
components. We have multiple Database servers serving various parts of our site
allowing us to section parts of the site for maintenance and upgrades.
Our operation is dependent on the ability to maintain our computer and
telecommunications system in effective working order and to protect our systems
against damage from fire, theft, natural disaster, power loss,
telecommunications failure or similar events. Our system hardware is co-located
at Globix Corporation's New York, New York data center; and our operations
depend, in part, on Globix's ability to protect its own systems and our systems
from similar unexpected adverse events. Globix provides us with auxiliary power
through the use of battery and diesel generators in the event of an unexpected
power outage. We maintain multiple backups of our data, thus allowing us to
quickly recover from any disaster. Additionally, at least once a week, copies of
backup tapes are sent to off-site storage.
Regular capacity planning allows us to quickly upgrade existing hardware
and integrate new hardware to react quickly to a rapidly expanding member base
and increased traffic to our sites. We generally operate at 99% uptime and no
unexpected downtime. Key content management and e-commerce components are
designed, developed and deployed by our in-house technology group. We also
license commercially available technology when appropriate in lieu of dedicating
our own human and financial resources. Current examples include OpenAdStream,
our ad server and MapQuest for geographical mapping applications.
We employ several layers of security to protect data transmission and
prevent unauthorized access. We keep all of our production servers behind
firewalls. No outside access is allowed. Strict password management and physical
security measures are followed. All systems are monitored 24/7, and emergency
response teams respond to all alerts. E-commerce transactions employ secure
sockets layer encryption to secure data transmitted between clients and servers.
Credit card information captured during e-commerce transactions is never shared
with outside parties, and we provide shoppers with a toll-free number to place
orders by phone as an alternative to completing a transaction online.
Government Regulation
Laws applicable to e-commerce, online privacy and the Internet generally
are becoming more prevalent. It is possible that new laws and regulations may be
adopted regarding the Internet or other online services in the United States and
foreign countries. Such new laws and regulations may address user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
The nature of such legislation and the manner in which it may be interpreted and
enforced cannot be fully determined at this time. Such legislation could subject
us and/or our customers to potential liability or restrict our present business
practices, which, in turn, could have an adverse effect on our business, results
of operations and financial condition. In addition, the
9
FTC has investigated the privacy practices of several companies that collect
information about individuals on the Internet. The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use generally,
which, in turn, could decrease the demand for our service or increase our cost
of doing business or in some other manner have a material adverse effect on our
business, results of operations and financial condition.
Specifically, several states have proposed legislation that would limit the
use and disclosure of personally identifiable information gathered online about
users. To obtain membership on our sites, a user must disclose their name,
address, e-mail address and role in the wedding. We do not currently share any
member's personal identifying information to third parties without the member's
prior consent. We may share aggregated member information with third parties,
such as a member's zip code or gender and may use information revealed by
members and information built from user behavior to target advertising, content
and e-mail. Because we rely on the collection and use of personal data from our
members for targeting advertisements, we may be harmed by any laws or
regulations that restrict our ability to collect or use this data.
Privacy concerns in general may cause visitors to avoid online sites that
collect behavioral information and even the perception of security and privacy
concerns, whether or not valid, may indirectly inhibit market acceptance of our
services. In addition, if our privacy practices are deemed unacceptable by
watchdog groups or privacy advocates, such groups may attempt to harm our
business by blocking access to our sites or disparaging our reputation and our
business, and may have a material effect on our results of operation and
financial condition.
In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. It is
uncertain how such existing laws may apply to or address the unique issues of
the Internet and related technologies. For example, because our services are
accessible throughout the United States, other jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in a particular
state. We are currently qualified to do business in several states, however, our
failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify and could result in our inability to enforce contracts in such
jurisdictions. Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could harm us.
The international regulatory environment relating to the Internet market
could have a material and adverse effect on our business, results of operations
and financial condition if we elect to expand internationally. In particular,
the European Union privacy regulations limit the collection and use of some user
information and subject data collectors to a restrictive regulatory regime. The
cost of such compliance could be material and we may not be able to comply with
the applicable national regulations in a timely or cost-effective manner, if at
all.
Changes to existing laws or the passage of new laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace that could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could in some other manner have a material adverse effect on
our business, results of operations and financial condition.
Intellectual Property and Proprietary Rights
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property as critical to
our success, and rely on trademark and copyright law, trade secret protection,
confidentiality and assignment of invention agreements, and/or license
agreements with employees, customers, independent contractors, partners and
others to protect our proprietary rights. We strategically pursue the
registration of our trademarks and service marks in the United States, and have
applied for and obtained registration in the United States for some of our
trademarks and service marks, including "THE KNOT". Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available online.
We have licensed in the past, and expect to continue to license in the
future, some of our proprietary rights, such as trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of our
brand is maintained by our licensees, there can be no assurance that our
licensees will not take actions that might materially
10
adversely affect the value of our proprietary rights or reputation, which could
have a material adverse effect on our business, financial condition and results
of operations.
The steps we have taken to protect our proprietary rights may not be
adequate and third parties may infringe or misappropriate our copyrights,
trademarks, trade secrets and similar proprietary rights. In addition, other
parties may assert claims of infringement of intellectual property against us.
Although we believe that our products and services do not infringe upon the
intellectual property rights of others and that we have all rights necessary to
utilize the intellectual property employed in our business, we may nonetheless
be subject to claims alleging infringement of third-party intellectual property
rights. Any such claims could require us to spend significant sums on
litigation, pay damages, delay product installments, develop non-infringing
intellectual property or acquire licenses to intellectual property that is the
subject of any such infringement, which licenses may not be available on
commercially reasonable terms, if at all. Therefore, such claims could have a
material adverse effect on our business, results of operations and financial
condition.
Employees
As of December 31, 2002, we had a total of 217 employees, of which 48 were
involved in product and content development, 137 were involved in sales and
marketing and 32 were involved in general and administrative functions. None of
our employees is represented by a labor union. We have not experienced any
work-stoppages, and we consider relations with our employees to be good.
11
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Important Factors Regarding Forward-Looking Statements
In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors currently or may have a significant impact on our business,
operating results or financial condition. This Annual Report on Form 10-K may
contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below and elsewhere in this
Annual Report. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
Risks Related to Our Business
We have an unproven business model, and it is uncertain whether online
wedding-related sites can generate sufficient revenues to survive.
Our model for conducting business and generating revenues is unproven. Our
business model depends in large part on our ability to generate revenue streams
from multiple sources through our online sites, including online sponsorship and
advertising fees from third parties and online sales of wedding gifts and
supplies.
It is uncertain whether wedding-related online sites that rely on
attracting sponsors and advertisers, as well as people to purchase wedding gifts
and supplies, can generate sufficient revenues to survive. For our business to
be successful, we must provide users with an acceptable blend of products,
information, services and community offerings that will attract wedding
consumers to our online sites frequently. In addition, we must provide sponsors,
advertisers and vendors the opportunity to reach these wedding consumers. We
provide our services to users without charge, and we may not be able to generate
sufficient revenues to pay for these services.
Moreover, we face many of the risks and difficulties frequently encountered
in new and rapidly evolving markets, including the online advertising and
e-commerce markets. These risks include our ability to:
o increase the audience on our sites;
o broaden awareness of our brand;
o strengthen user-loyalty;
o offer compelling content;
o maintain our leadership in generating traffic;
o maintain our current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of industries;
o respond effectively to competitive pressures;
o continue to develop and upgrade our technology; and
o attract, integrate, retain and motivate qualified personnel.
These risks could negatively impact our financial condition if left
unaddressed. Accordingly, we are not certain that our business model will be
successful or that we can sustain revenue growth or be profitable. For more
information on the effects of some of these risks, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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We have a history of significant losses since our inception and may continue to
incur significant losses for the foreseeable future.
We have not achieved profitability and have continued to incur significant
losses and negative cash flow. We incurred net losses of $15.8 million for the
year ended December 31, 2000, $15.1 million for the year ended December 31, 2001
and $5.1 million for the year ended December 31, 2002. As of December 31, 2002,
our accumulated deficit was $48.5 million. We also expect to continue to incur
significant operating expenses and, as a result, we will need to generate
significant revenues to achieve and maintain profitability. Even if we do
achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. Failure to achieve
or maintain profitability may materially and adversely affect our business,
results of operations and financial condition and the market price of our common
stock. For more information on our losses and the effects of our expenses on our
financial performance, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We lack significant revenues and may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall.
Our revenues for the foreseeable future will remain dependent on online
user traffic levels, advertising activity both online and offline and the
expansion of our e-commerce activity. In addition, we plan to expand and develop
content and to continue to upgrade and enhance our technology and
infrastructure. We incur a significant percentage of our expenses, such as
employee compensation, prior to generating revenues associated with those
expenses. Moreover, our expense levels are based, in part, on our expectation of
future revenues. We may be unable to adjust spending quickly enough to offset
any unexpected revenue shortfall. If we have a shortfall in revenues or if
operating expenses exceed our expectations or cannot be adjusted accordingly,
then our results of operations would be materially and adversely affected. For
more information on our net revenues and the effects of our expenses on our
financial performance, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
If sales to sponsors or advertisers forecasted in a particular period are
delayed or do not otherwise occur, our results of operations for a particular
period would be materially and adversely affected.
The time between the date of initial contact with a potential sponsor or
advertiser and the execution of a contract with the sponsor or advertiser is
often lengthy, typically ranging from six weeks for smaller agreements and
longer for larger agreements, and is subject to delays over which we have little
or no control, including:
o the occurrence of extraordinary events, such as the attacks on September
11, 2001;
o customers' budgetary constraints;
o customers' internal acceptance reviews;
o the success and continued internal support of advertisers' and sponsors'
own development efforts; and
o the possibility of cancellation or delay of projects by advertisers or
sponsors.
During the sales cycle, we may expend substantial funds and management
resources in advance of generating sponsorship or advertising revenues.
Accordingly, if sales to advertisers or sponsors forecasted in a particular
period are delayed or do not otherwise occur, we would generate less sponsorship
and advertising revenues during that period, and our results of operations may
be adversely affected.
Our quarterly revenues and operating results are subject to significant
fluctuation, and these fluctuations may adversely affect the trading price of
our common stock.
Our quarterly revenues and operating results have fluctuated significantly
in the past and are expected to continue to fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. These factors include:
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o the level of online usage and traffic on our Web sites;
o seasonal demand for online and offline advertising and e-commerce;
o the addition or loss of advertisers;
o the advertising budgeting cycles of specific advertisers;
o the magazine publishing cycle of WEDDINGPAGES;
o the amount and timing of capital expenditures and other costs relating to
the expansion of our operations, including those related to acquisitions;
o the introduction of new sites and services by us or our competitors;
o changes in our pricing policies or the pricing policies of our competitors;
and
o general economic conditions, as well as economic conditions specific to the
Internet, online and offline media and electronic commerce.
We do not believe that period-to-period comparisons of our operating
results are necessarily meaningful and you should not rely upon these
comparisons as indicators of our future performance.
Due to the foregoing factors, it is also possible that our results of
operations in one or more future quarters may fall below the expectations of
investors and/or securities analysts. In such event, the trading price of our
common stock is likely to decline.
Because the frequency of weddings vary from quarter to quarter, our operating
results may fluctuate due to seasonality.
Seasonal and cyclical patterns may affect our revenues. In 2001, according
to the National Center of Health Statistics, 19% of weddings in the United
States occurred in the first quarter, 28% occurred in the second quarter, 29%
occurred in the third quarter and 24% occurred in the fourth quarter. We have
limited experience generating merchandise revenues. Based upon our limited
experience, we believe merchandise revenues generally are lower in the fourth
quarter of each year. In addition, we believe that advertising sales in
traditional media, such as television and radio, and print generally are lower
in the first and third calendar quarters of each year. Historically, we have
experienced increases in our traffic during the first and second quarters of the
year. As a result of these factors, we may experience fluctuations in our
revenues from quarter to quarter.
We depend on our strategic relationships with other Web sites.
We depend on establishing and maintaining distribution relationships with
high-traffic Web sites such as AOL, MSN and Yahoo! for a portion of our traffic.
There is intense competition for placements on these sites, and we may not be
able to continue to enter into such relationships on commercially reasonable
terms, if at all. Even if we enter into distribution relationships with these
Web sites, they themselves may not attract a significant number of users.
Therefore, our sites may not receive additional users from these relationships.
Moreover, we may be required to pay significant fees to establish and maintain
these relationships. Our business, results of operations and financial condition
could be materially and adversely affected if we do not establish and maintain
strategic relationships on commercially reasonable terms or if any of our
strategic relationships do not result in increased use of our Web sites.
The market for Internet advertising is still developing, and if the Internet
fails to gain further acceptance as a media for advertising, we would experience
slower revenue growth than expected or a decrease in revenue and would incur
greater than expected losses.
Our future success depends, in part, on a significant increase in the use
of the Internet as an advertising and marketing medium. Sponsorship and
advertising revenues constituted 45% of our net revenues for the year ended
December 31, 2000, 20% of our net revenues for the year ended December 31, 2001
and 23% of our net revenues for the year ended December 31, 2002. Our national
online sponsorship and advertising revenue was approximately $8.8 million for
the year ended December 31, 2000, approximately $1.7 million for the year ended
December 31, 2001 and
14
approximately $1.9 million for the year ended December 31, 2002. The Internet
advertising market is still developing, and it cannot yet be compared with
traditional advertising media to gauge its effectiveness. As a result, demand
for and market acceptance of Internet advertising solutions are uncertain. Many
of our current and potential customers have little or no experience with
Internet advertising and have allocated only a limited portion of their
advertising and marketing budgets to Internet activities. The adoption of
Internet advertising, particularly by entities that have historically relied
upon traditional methods of advertising and marketing, requires the acceptance
of a new way of advertising and marketing. These customers may find Internet
advertising to be less effective for meeting their business needs than
traditional methods of advertising and marketing. Furthermore, there are
software programs that limit or prevent advertising from being delivered to a
user's computer. Widespread adoption of this software by users would
significantly undermine the commercial viability of Internet advertising.
We may be unable to continue to build awareness of The Knot brand name which
would negatively impact our business and cause our revenues to decline.
Building recognition of our brand is critical to attracting and expanding
our online user base and our offline readership. Because we plan to continue
building brand recognition, we may find it necessary to accelerate expenditures
on our sales and marketing efforts or otherwise increase our financial
commitment to creating and maintaining brand awareness. Our failure to
successfully promote and maintain our brand would adversely affect our business
and cause us to incur significant expenses in promoting our brand without an
associated increase in our net revenues.
Our business could be adversely affected if we are not able to successfully
integrate any future acquisitions or successfully operate under our strategic
partnerships.
In the future, we may acquire, or invest in, complementary companies,
products or technologies or enter into new strategic partnerships. Acquisitions,
investments and partnerships involve numerous risks, including:
o difficulties in integrating operations, technologies, products and
personnel;
o diversion of financial and management resources from existing operations;
o risks of entering new markets;
o potential loss of key employees; and
o inability to generate sufficient revenues to offset acquisition or
investment costs.
The costs associated with potential acquisitions or strategic alliances could
dilute your investment or adversely affect our results of operations.
To pay for an acquisition or to enter into a strategic alliance, we might
use equity securities, debt, cash, or a combination of the foregoing. If we use
equity securities, our stockholders may experience dilution. In addition, an
acquisition may involve non-recurring charges, including writedowns of
significant amounts of goodwill. The related increases in expenses could
adversely affect our results of operations. Any such acquisitions or strategic
alliances may require us to obtain additional equity or debt financing, which
may not be available on commercially acceptable terms, if at all.
If we cannot protect our domain names, it will impair our ability to
successfully brand The Knot.
We currently hold various Web domain names, including www.theknot.com. The
acquisition and maintenance of domain names generally is regulated by Internet
regulatory bodies. The regulation of domain names in the United States and in
foreign countries is subject to change. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may be unable
to acquire or maintain relevant domain names in all countries in which we
conduct business. Furthermore, it is unclear whether laws protecting trademarks
and similar proprietary rights will be extended to protect domain names.
Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. We may not successfully carry out our
business strategy of establishing a strong brand for The Knot if we cannot
prevent others from using similar domain names or trademarks. This could impair
our ability to increase market share and revenues.
15
Our business and prospects would suffer if we are unable to protect and enforce
our intellectual property rights.
We rely upon copyright, trade secret and trademark law, assignment of
invention and confidentiality agreements and license agreements to protect our
proprietary technology, processes, content and other intellectual property to
the extent that protection is sought or secured at all. The steps we might take
may not be adequate to protect against infringement and misappropriation of our
intellectual property by third parties. Similarly, third parties may be able to
independently develop similar or superior technology, processes, content or
other intellectual property. The unauthorized reproduction or other
misappropriation of our intellectual property rights could enable third parties
to benefit from our technology without paying us for it. If this occurs, our
business and prospects would be materially and adversely affected. In addition,
disputes concerning the ownership or rights to use intellectual property could
be costly and time-consuming to litigate, may distract management from other
tasks of operating the business, and may result in our loss of significant
rights and the loss of our ability to operate our business.
Our products and services may infringe on intellectual property rights of third
parties and any infringement could require us to incur substantial costs and
distract our management.
Although we avoid knowingly infringing intellectual rights of third
parties, including licensed content, we may be subject to claims alleging
infringement of third-party proprietary rights. If we are subject to claims of
infringement or are infringing the rights of third parties, we may not be able
to obtain licenses to use those rights on commercially reasonable terms, if at
all. In that event, we would need to undertake substantial reengineering to
continue our online offerings. Any effort to undertake such reengineering might
not be successful. Furthermore, a party making such a claim could secure a
judgment that requires us to pay substantial damages. A judgment could also
include an injunction or other court order that could prevent us from selling
our products. Any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid, and could
distract our management from our business.
We depend upon QVC to provide us warehousing, fulfillment and distribution
services, and system failures or other problems at QVC could cause us to lose
customers and revenues.
We have a services agreement with QVC to warehouse, fulfill and arrange for
distribution of approximately 39% of our products, excluding products sold
through our retail partners. Our agreement with QVC expires in December 2003.
QVC does not have any obligation to renew this agreement. If QVC's ability to
provide us with these services in a timely fashion or at all is impaired,
whether through labor shortage, slow down or stoppage, deteriorating financial
or business condition, system failures or for any other reason, or if the
services agreement is not renewed, we would not be able, at least temporarily,
to sell or ship certain of our products to our customers. We may be unable to
engage alternative warehousing, fulfillment and distribution services on a
timely basis or upon terms favorable to us.
Increased competition in our markets could reduce our market share, the number
of our advertisers, our advertising revenues and our margins.
The Internet advertising and online wedding markets are still developing.
Additionally, both the Internet advertising and online wedding markets and the
wedding magazine publishing markets are intensely competitive, and we expect
competition to intensify in the future.
We face competition for members, users, readers and advertisers from the
following areas:
o online services or Web sites targeted at brides and grooms as well as the
online sites of retail stores, manufacturers and regional wedding
directories;
o bridal magazines, such as Bride's and Modern Bride (both part of the Conde
Nast family); and
o online and retail stores offering gift registries, especially from
retailers offering specific bridal gift registries.
We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Our competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user, membership or
readership bases than we have and, therefore, have significant ability to
attract advertisers, users and readers. In addition,
16
many of our competitors may be able to respond more quickly than we can to new
or emerging technologies and changes in Internet user requirements, as well as
devote greater resources than we can to the development, promotion and sale of
services.
There can be no assurance that our current or potential competitors will
not develop products and services comparable or superior to those that we
develop or adapt more quickly than we do to new technologies, evolving industry
trends or changing Internet user preferences. Increased competition could result
in price reductions, lower margins or loss of market share. There can be no
assurance that we will be able to compete successfully against current and
future competitors.
Our potential inability to compete effectively in our industry for qualified
personnel could hinder the success of our business.
Competition for personnel in the Internet and wedding industries is
intense. We may be unable to retain employees who are important to the success
of our business. We may also face difficulties attracting, integrating or
retaining other highly qualified employees in the future. If we cannot attract
new personnel or retain and motivate our current personnel, our business may not
succeed.
Terrorism and the uncertainty of war may have a material adverse effect on our
operating results.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, and other acts of violence or war may
affect the market on which our common stock will trade, the markets in which we
operate or our operating results. Further terrorist attacks against the United
States or U.S. businesses may occur. The potential near-term and long-term
effect these attacks may have for our customers, the market for our common
stock, the markets for our services and the U.S. economy are uncertain. The
consequences of any terrorist attacks, or any armed conflicts which may result,
are unpredictable, and we may not be able to foresee events that could have an
adverse effect on our business.
We may not be able to obtain additional financing necessary to execute our
business strategy.
We currently believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements for
at least the next twelve months. Our ability to meet our obligations in the
ordinary course of business is dependent upon our ability to achieve profitable
operations and/or raise additional financing through public or private equity
financings, or other arrangements with corporate sources, or other sources of
financing to fund operations. However, there is no assurance that we will
achieve profitable operations or that additional funding, if required, will be
available to us in amounts or on terms acceptable to us.
Systems disruptions and failures could cause advertiser or user dissatisfaction
and could reduce the attractiveness of our sites.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our advertisers and sponsors, users and members may
become dissatisfied by any systems disruption or failure that interrupts our
ability to provide our services and content to them. Substantial or repeated
system disruption or failures would reduce the attractiveness of our online
sites significantly. Substantially all of our systems hardware required to run
our sites are located at Globix Corporation's facilities in New York, New York.
Globix emerged from bankruptcy protection in April 2002. Fire, floods,
earthquakes, power loss, telecommunications failures, break-ins, acts of
terrorism and similar events could damage these systems. Our operations depend
on the ability of Globix to protect its own systems and our systems in its data
center against damage from fire, power loss, water damage, telecommunications
failure, vandalism and similar unexpected adverse events. Although Globix
provides comprehensive facilities management services, Globix does not guarantee
that our Internet access will be uninterrupted, error-free or secure. In
addition, computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect our online sites. Our business could be
materially and adversely affected if our systems were affected by any of these
occurrences. We do not presently have any secondary "off-site" systems or a
formal disaster recovery plan. Our sites must accommodate a high volume of
traffic and deliver frequently updated information. Our sites have in the past
experienced slower response times. These types of occurrences in the future
could cause users to perceive our sites as not functioning properly and
therefore cause them to use another online site or other methods to obtain
information or services. In addition, our users depend on Internet
17
service providers, online service providers and other site operators for access
to our online sites. Many of them have experienced significant outages in the
past, and could experience outages, delays and other difficulties due to system
disruptions or failures unrelated to our systems. Although we carry general
liability insurance, our insurance may not cover any claims by dissatisfied
advertisers or customers or may not be adequate to indemnify us for any
liability that may be imposed in the event that a claim were brought against us.
Any system disruption or failure, security breach or other damage that
interrupts or delays our operations could cause us to lose users, sponsors and
advertisers and adversely affect our business and results of operations.
We may not be able to deliver various services if third parties fail to provide
reliable software, systems and related services to us.
We are dependent on various third parties for software, systems and related
services in connection with our hosting, placement of advertising, accounting
software, data transmission and security systems. Several of the third parties
that provide software and services to us have a limited operating history and
have relatively new technology. These third parties are dependent on reliable
delivery of services from others. If our current providers were to experience
prolonged systems failures or delays, we would need to pursue alternative
sources of services. Although alternative sources of these services are
available, we may be unable to secure such services on a timely basis or on
terms favorable to us. As a result, we may experience business disruptions if
these third parties fail to provide reliable software, systems and related
services to us.
We may be liable if third parties misappropriate our users' personal
information.
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal or credit card information, we could be
subject to liability. Our liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims as well as for other misuses of personal information, such as for
unauthorized marketing purposes. These claims could result in costly and
time-consuming litigation which could adversely affect our financial condition.
In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. We could have additional expenses if new regulations regarding the
use of personal information are introduced or if our privacy practices are
investigated.
Our executive officers, directors and 5% or greater stockholders exercise
significant control over all matters requiring a stockholder vote.
As of December 31, 2002, our executive officers and directors and
stockholders who each owned greater than 5% of our common stock, and their
affiliates, in the aggregate, beneficially owned approximately 68% of our
outstanding common stock. As a result, these stockholders are able to exercise
control over all matters requiring approval by our stockholders, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership could also have the effect of delaying or preventing
a change in control.
Anti-takeover provisions in our charter documents and Delaware law may make it
difficult for a third party to acquire us.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders.
Risks Related to the Securities Markets
The delisting of our common stock from the Nasdaq National Market has resulted,
and could continue to result, in a limited public market for our common stock
and larger spreads in the bid and ask prices for shares of our common stock and
could result in lower prices for shares of our common stock and make obtaining
future equity financing more difficult.
On August 23, 2001, our common stock was delisted from the Nasdaq National
Market. Our common stock is currently available for quotation on the OTC
Bulletin Board. Selling our common stock has become, and may continue to
18
be, more difficult because smaller quantities of shares are bought and sold on
the OTC Bulletin Board, transactions could be delayed and news media coverage of
us has been reduced. These factors have resulted, and could continue to result,
in larger spreads in the bid and ask prices for shares of our common stock and
could result in lower prices for shares of our common stock.
The delisting of our common stock from the Nasdaq National Market and any
further declines in our stock price could also greatly impair our ability to
raise additional necessary capital through equity or debt financing and
significantly increase the dilution to stockholders caused by our issuing equity
in financing or other transactions. The price at which we issue shares in such
transactions is generally based on the market price of our common stock, and a
decline in our stock prices could result in the need for us to issue a greater
number of shares to raise a given amount of funding or acquire a given dollar
value of goods or services.
Our stock price has been highly volatile and is likely to experience extreme
price and volume fluctuations in the future that could reduce the value of your
investment and subject us to litigation.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile, with extreme price and volume
fluctuations. These broad market and industry factors may harm the market price
of our common stock, regardless of our actual operating performance, and for
this or other reasons, we could continue to suffer significant declines in the
market price of our common stock. In the past, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were to become the object of securities class
action litigation, it could result in substantial costs and a diversion of our
management's attention and resources.
Risks Related to the Internet Industry
If the use of the Internet and commercial online services as media for commerce
does not continue to grow, our business and prospects would be materially and
adversely affected.
We cannot assure you that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and commercial online services as media
for commerce, particularly for purchases of wedding gifts and supplies. Even if
consumers adopt the Internet or commercial online services as a media for
commerce, we cannot be sure that the necessary infrastructure will be in place
to process such transactions. Our long-term viability depends substantially upon
the widespread acceptance and the development of the Internet or commercial
online services as effective media for consumer commerce and for advertising.
Use of the Internet or commercial online services to effect retail transactions
and to advertise is at an early stage of development. Convincing consumers to
purchase wedding gifts and supplies online may be difficult.
Demand for recently introduced services and products over the Internet and
commercial online services is subject to a high level of uncertainty. Few proven
services and products exist. The development of the Internet and commercial
online services into a viable commercial marketplace is subject to a number of
factors, including:
o continued growth in the number of users of such services;
o concerns about transaction security;
o continued development of the necessary technological infrastructure;
o consistent quality of service;
o availability of cost-effective, high speed service;
o uncertain and increasing government regulation; and
o the development of complementary services and products.
If users experience difficulties because of capacity constraints of the
infrastructure of the Internet and other commercial online services, potential
users may not be able to access our sites, and our business and prospects would
be harmed.
19
To the extent that the Internet and other online services continue to
experience growth in the number of users and frequency of use by consumers
resulting in increased bandwidth demands, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. The Internet and other online services
have experienced outages and delays as a result of damage to portions of their
infrastructure, power failures, telecommunication outages, network service
outages and disruptions, natural disasters and vandalism and other misconduct.
Outages or delays could adversely affect online sites, e-mail and the level of
traffic on all sites. We depend on online access providers that provide our
users with access to our services. In the past, users have experienced
difficulties due to systems failures unrelated to our systems. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity or to increased
governmental regulation. Insufficient availability of telecommunications
services to support the Internet or other online services also could result in
slower response times and negatively impact use of the Internet and other online
services generally, and our sites in particular. If the use of the Internet and
other online services fails to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services does not effectively
support growth that may occur or if the Internet and other online services do
not become a viable commercial marketplace, we may not achieve profitability.
We may be unable to respond to the rapid technological change in the Internet
industry and this may harm our business.
If we are unable, for technological, legal, financial or other reasons, to
adapt in a timely manner to changing market conditions or customer requirements,
we could lose users and market share to our competitors. The Internet and
e-commerce are characterized by rapid technological change. Sudden changes in
user and customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices could render our existing online sites and proprietary
technology and systems obsolete. The emerging nature of products and services in
the online wedding market and their rapid evolution will require that we
continually improve the performance, features and reliability of our online
services. Our success will depend, in part, on our ability:
o to enhance our existing services;
o to develop and license new services and technology that address the
increasingly sophisticated and varied needs of our prospective customers
and users; and
o to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of online sites and other proprietary technology entails
significant technological and business risks and requires substantial
expenditures and lead time. We may be unable to use new technologies effectively
or adapt our online sites, proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. Updating our
technology internally and licensing new technology from third parties may
require significant additional capital expenditures.
If we become subject to burdensome government regulation and legal uncertainties
related to doing business online, our sponsorship, advertising and merchandise
revenues could decline and our business and prospects could suffer.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. The governments of states and foreign countries might
attempt to regulate our transmissions or levy sales or other taxes relating to
our activities. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet and Internet advertising
services. In addition, the growth and development of the market for e-commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, which may impose additional burdens on companies conducting
20
business online. The adoption or modification of laws or regulations relating to
the Internet and other online services could cause our sponsorship, advertising
and merchandise revenues to decline and our business and prospects to suffer.
We may be sued for information retrieved from our sites.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
We may incur potential product liability for products sold online.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user. To date, we have had
limited experience selling products online and developing relationships with
manufacturers or suppliers of such products. We sell a range of products
targeted specifically at brides and grooms through The Knot Registry, The Knot
Shop, Bridalink.com or other e-commerce sites that we may acquire in the future.
Such a strategy involves numerous risks and uncertainties. Although our
agreements with manufacturers typically contain provisions intended to limit our
exposure to liability claims, these limitations may not prevent all potential
claims. Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could seriously damage our financial results, reputation and
brand name.
We may incur significant expenses related to the security of personal
information online.
The need to transmit securely confidential information online has been a
significant barrier to e-commerce and online communications. Any well-publicized
compromise of security could deter people from using the Internet or other
online services or from using them to conduct transactions that involve
transmitting confidential information. Because our success depends on the
acceptance of online services and e-commerce, we may incur significant costs to
protect against the threat of security breaches or to alleviate problems caused
by such breaches.
Item 2. Properties
We currently lease approximately 20,000 square feet of space at our
headquarters in New York City. The lease expires on March 31, 2012. We also
lease approximately 13,500 square feet of space for warehousing and operations
in Redding, California. In addition, on October 9, 2002, we entered into an
operating lease for a 40,000 square foot building currently being constructed to
house our expanding operations in Redding. This building will replace our
existing facilities for which the leases have been extended until the new
building is completed, currently anticipated to occur in May 2003. The term of
the new lease is five years commencing upon completion of construction.
Weddingpages, our subsidiary in Omaha, Nebraska, leases approximately 16,000
square feet, and the lease for this space expires on October 15, 2005.
Item 3. Legal Proceedings
On August 14, 2000, certain Weddingpages franchisees commenced litigation
in the Supreme Court, New York County, New York against The Knot and certain
officers, including David Liu, the Chairman and Chief Executive Officer. The
plaintiffs sought (1) to enjoin The Knot from taking actions, primarily relating
to the sale of advertising in certain local markets, which plaintiffs claim will
damage the value of their Weddingpages franchises, and (2) money damages in an
unspecified amount. On October 19, 2000, The Knot filed its initial response.
On October 27, 2000, the Supreme Court of the State of New York refused to
grant preliminary injunctions sought by certain Weddingpages franchisees. The
court ordered that the parties submit their dispute to a neutral mediator. In
February, March and April 2001, as a result of negotiations among the parties,
with the assistance of the mediator, non-monetary settlements were reached with
seven of the plaintiffs in the action. Six franchisees did not execute the
settlement agreement as negotiated. Five of those franchisees sought a temporary
restraining order and a preliminary injunction to keep The Knot from, among
other things, soliciting Internet advertisement sales within those franchisees'
Weddingpages franchise territories.
21
On May 31, 2001, the Court denied the franchisees' motion for a temporary
restraining order. On July 2, 2001, the Court heard arguments on the
franchisees' motion for a preliminary injunction. At the same time, the Court
heard arguments on Weddingpages' cross-motion to compel arbitration and on the
Knot's cross-motion to stay litigation pending arbitration.
On August 22, 2001, the Court denied the remaining franchisees' request for
injunctive relief against The Knot, effectively ordered the franchisees to
arbitrate their claims against Weddingpages, and stayed the action against The
Knot pending the completion of such arbitration. In denying the remaining
franchisees' motion for injunctive relief, the Court agreed with The Knot's
legal arguments in every material respect. Most significantly, in a three-page
opinion, the Court held that the franchisees would be unlikely to succeed on the
merits of their claims against The Knot.
Despite the Court's order, the franchisees failed to take any action to
initiate arbitration of their dispute with Weddingpages. Thus, on January 25,
2002, Weddingpages commenced arbitration by filing a Demand for Arbitration
before the American Arbitration Association.
On April 17, 2002, the franchisees filed a motion to lift the stay in favor
of The Knot and for a preliminary injunction enjoining The Knot from directly
soliciting the franchisees' customers for The Knot's Internet Web site. On May
23, 2002, The Knot and Weddingpages settled with three of the five remaining
franchisees with no admission of liability, damages or payments being made to
the franchisees. The settlement was stipulated to on the record in court and "So
Ordered" by the judge, and is believed by The Knot to be final and binding on
the parties. In October 2002, these three franchisees signed a written
settlement agreement and release and made certain payments to Weddingpages
related thereto. Additionally, two of the three have signed a related license
agreement with Weddingpages. The Knot and Weddingpages have also reached a final
settlement with one of the two remaining franchisees. As to the final
franchisee, though no release or settlement has been entered, all legal
proceedings in New York have been dismissed, and Weddingpages and the franchisee
are presently engaged in litigation in Texas to which The Knot is not a party.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
PRICE RANGE OF COMMON STOCK
Our common stock was quoted on the Nasdaq National Market under the symbol
"KNOT" through August 22, 2001. Since that time, our common stock has been
available for quotation on the NASD OTC Bulletin Board under the symbol
"KNOT.OB". The following table sets forth, for the periods indicated, the high
and low sales prices per share of our common stock as reported on the Nasdaq
National Market or the NASD OTC Bulletin Board:
High Low
---- ---
2001:
First Quarter ......................... $1.19 $0.62
Second Quarter ........................ $0.75 $0.39
Third Quarter ......................... $0.85 $0.25
Fourth Quarter ........................ $0.68 $0.25
2002:
First Quarter ......................... $0.94 $0.33
Second Quarter ........................ $0.85 $0.36
Third Quarter ......................... $1.05 $0.22
Fourth Quarter ........................ $0.95 $0.65
22
On December 31, 2002, the last reported sale price of the common stock on
the NASD OTC Bulletin Board was $0.81. On March 26, 2003, the last reported sale
price of our common stock on the NASD OTC Bulletin Board was $0.86.
HOLDERS
As of March 26, 2003, there were approximately 157 holders of record of our
common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends for the foreseeable
future.
Securities Authorized for Issuance Under Equity Compensation Plans
Incorporated by reference to the section entitled "Equity Compensation Plan
Information" in Item 12.
Item 6. Selected Financial Data
The selected balance sheet data as of December 31, 2002 and December 31,
2001 and the selected statement of operations data for the years ended December
31, 2002, 2001 and 2000 have been derived from our audited financial statements
included elsewhere herein. The selected balance sheet data as of December 31,
2000, 1999 and 1998 and the statement of operations data for the years ended
December 31, 1999 and 1998 have been derived from our audited financial
statements not included herein. Unaudited pro forma basic and diluted net loss
per share have been calculated assuming the conversion of all previously
outstanding preferred stock into common stock, as if the shares had converted
immediately upon their issuance. You should read these selected financial data
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our financial statements and the notes to those
statements included elsewhere herein.
Year Ended December 31,
-----------------------
2002 (a) 2001 2000 (b) 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except share and per share data)
Statement of Operations Data:
Net revenues .................................... $ 29,476 $ 24,120 $ 24,235 $ 5,126 $ 1,040
Cost of revenues ................................ 10,224 8,872 6,689 1,441 131
------------ ------------ ------------ ------------ ------------
Gross profit .................................... 19,252 15,248 17,546 3,685 909
Operating expenses:
Product and content development .............. 3,870 4,440 5,556 2,678 1,031
Sales and marketing .......................... 11,243 13,870 16,728 5,148 768
General and administrative ................... 7,295 8,801 8,840 3,629 809
Non-cash compensation ........................ 139 332 789 1,072 93
Non-cash sales and marketing ................. 653 653 653 290 --
Depreciation and amortization ................ 1,244 2,545 2,195 547 122
------------ ------------ ------------ ------------ ------------
Total operating expenses ........................ 24,444 30,641 34,761 13,364 2,823
------------ ------------ ------------ ------------ ------------
Loss from operations ......................... (5,192) (15,393) (17,215) (9,679) (1,914)
Interest income, net ......................... 112 306 1,425 483 405*
------------ ------------ ------------ ------------ ------------
Net loss ..................................... $ (5,080) $ (15,087) $ (15,790) $ (9,196) $ (1,509)
============ ============ ============ ============ ============
Loss per share--basic and diluted:
Net loss per share ........................... $ (0.28) $ (1.03) $ (1.08) $ (2.31) $ (0.60)
============ ============ ============ ============ ============
Weighted average number of shares used in
calculating basic and diluted net loss
per share .................................... 17,909,492 14,716,741 14,603,381 3,982,358 2,497,065
============ ============ ============ ============ ============
Pro forma basic and diluted net loss per share .. $ (0.28) $ (1.03) $ (1.08) $ (0.96) $ (0.32)
============ ============ ============ ============ ============
Pro forma weighted average number of shares
used in calculating basic and diluted net loss
per share .................................... 17,909,492 14,716,741 14,603,381 9,628,454 4,780,024
============ ============ ============ ============ ============
23
* Includes a reclassification of $390,000 for gain on extinguishment of debt
previously reported as an extraordinary item. This is in compliance with SFAS
No. 145, which rescinds earlier pronouncements for reporting gains and losses
from extinguishment of debt.
December 31,
------------
2002 (a) 2001 2000 (b) 1999 1998
------- ------- ------- ------- -------
(in thousands, except share and per share data)
Balance Sheet Data:
Cash and cash equivalents .... $ 9,306 $ 6,782 $15,860 $40,006 $ 1,038
Working capital .............. 5,563 3,790 16,078 41,137 1,003
Total assets ................. 27,775 26,010 41,354 45,486 1,950
Convertible preferred stock .. -- -- -- -- 3,938
Total stockholders' equity ... 16,017 15,320 29,391 43,575 1,646
(a) As described in Note 9 of our financial statements, on February 19, 2002,
the Company entered into a Common Stock Purchase Agreement with May Bridal
Corporation ("May Bridal"), an affiliate of May Department Stores Company,
pursuant to which the Company sold 3,575,747 shares of its common stock to May
Bridal for $5,000,000 in cash.
(b) As described in Note 10 of our financial statements, on March 29, 2000, the
Company acquired Weddingpages, Inc.
Quarterly Results of Operations Data
The following table sets forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 2002.
This information is unaudited, but in the opinion of management, it has been
prepared substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this report and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited consolidated quarterly
results of operations. The consolidated quarterly data should be read in
conjunction with our audited consolidated financial statements and the notes to
such statements appearing elsewhere in this report. The results of operations
for any quarter are not necessarily indicative of the results of operations for
any future period.
Three Months Ended
------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
2002 2002 2002 2002 2001 2001 2001 2001
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
Net revenues $ 7,034 $ 8,036 $ 8,274 $ 6,132 $ 6,224 $ 6,464 $ 6,209 $ 5,223
Gross profit 5,026 5,145 5,341 3,740 4,410 3,952 3,879 3,007
Net loss (551) (977) (1,061) (2,491) (1,859) (3,213) (4,166) (5,849)
Net loss per share-- $ (0.03) $ (0.05) $ (0.06) $ (0.15) $ (0.13) $ (0.22) $ (0.28) $ (0.40)
basic and diluted
24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included elsewhere in this report.
This discussion contains forward-looking statements relating to future events
and the future performance of The Knot based on our current expectations,
assumptions, estimates and projections about us and our industry. These
forward-looking statements involve risks and uncertainties. Our actual results
and timing of various events could differ materially from those anticipated in
such forward-looking statements as a result of a variety of factors, as more
fully described in this section and elsewhere in this report. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
Overview
The Knot is the leading wedding resource providing products and services to
couples planning their weddings and future lives together. Our Web site, at
www.theknot.com, is the most trafficked wedding destination online and offers
comprehensive content, extensive wedding-related shopping, an online wedding
gift registry and an active community. The Knot is the leading wedding content
provider on America Online (AOL Keywords: Knot and weddings) and MSN. We publish
The Knot Magazine, which features editorial content covering every major wedding
planning decision and is distributed to newsstands and bookstores across the
nation. Through our subsidiary, Weddingpages, Inc., we publish regional wedding
magazines in over 20 Company-owned and franchised markets in the United States.
We also author a book series on wedding planning and a gift-book series on
wedding gowns and wedding flowers. We are based in New York and have several
other offices across the country.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities on an on-going basis. We evaluate these estimates including
those related to revenue recognition, allowances for doubtful accounts and
returns, inventory reserves, impairment of intangible assets including goodwill
and deferred taxes. Actual results may differ from these estimates under
different assumptions or conditions.
Revenue Recognition
We derive revenues from the sale of online sponsorship and advertising
contracts and from the sale of merchandise. We also derive revenue from the
publication of magazines.
Sponsorship revenues are derived principally from longer-term contracts
currently ranging up to thirty-six months. Sponsorships are designed to
integrate advertising with specific online editorial content. Sponsors can
purchase the exclusive right to promote products or services on a specific
online editorial area and can purchase a special feature on our sites. These
programs commonly include banner advertisements and direct e-mail marketing.
Online advertising revenues are derived principally from short-term
contracts that typically range from one month up to one year. These contracts
may include online banner advertisements, placement in our online search tools,
direct e-mail marketing and online listings in the local area of our Web site
for local wedding vendors. Local vendors may also purchase online listings
through fixed term or open-ended subscriptions.
Certain online sponsorship and advertising contracts provide for the
delivery of a minimum number of impressions. Impressions are the featuring of a
sponsor's advertisement, banner, link or other form of content on our sites. To
date, we have recognized our sponsorship and advertising revenues over the
duration of the contracts on a straight-line basis, as we have exceeded minimum
guaranteed impressions. To the extent that minimum guaranteed impressions are
not met, we are generally obligated to extend the period of the contract until
the guaranteed impressions are achieved. If this were to occur, we would defer
and recognize the corresponding revenues over the extended period.
25
For the year ended December 31, 2002, our top seven advertisers accounted
for 4% of our net revenues. For the year ended December 31, 2001, our top eight
advertisers accounted for 6% of our net revenues. For the year ended December
31, 2000, our top five advertisers accounted for 15% of our net revenues.
Merchandise revenues include the selling price of wedding supplies and
products from our gift registry sold by us through our web sites and, prior to
July 2001, through a co-branded site with QVC, Inc., as well as related outbound
shipping and handling charges. Merchandise revenues also include commissions
earned in connection with the sale of products from our gift registry under
agreements with certain strategic partners. Merchandise revenues are recognized
when products are shipped to customers, reduced by discounts as well as an
allowance for estimated sales returns.
Publishing revenue includes print advertising revenue derived from the
publication of The Knot Weddings magazine and the publication of regional
WEDDINGPAGES magazines by our subsidiary Weddingpages, Inc., as well as service
fees and royalty fees from the publication of the WEDDINGPAGES magazine by
franchisees and fees from the license of the Weddingpages' name for use in
publication by former franchisees. These revenues and fees are recognized upon
the publication of the related magazines, at which time all material services
related to the magazine have been performed, or as fees are earned under the
terms of license agreements. Additionally, publishing revenues are derived from
the sale of magazines on newsstands, in bookstores and online and from author
royalties received related to book publishing contracts. Revenues from the sale
of magazines are recognized when the products are shipped, reduced by an
allowance for estimated sales returns. Royalties are recognized when all
contractual obligations have been met, which typically include the delivery and
acceptance of a final manuscript.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. As of
December 31, 2002 and 2001, our allowance for doubtful accounts amounted to
$774,000 and $814,000, respectively. In determining these allowances, we
evaluate a number of factors, including the credit risk of customers, historical
trends and other relevant information. If the financial condition of our
customers were to deteriorate, additional allowances may be required.
Inventory
In order to record our inventory at its lower of cost or market, we assess
the ultimate realizability of our inventory, which requires us to make judgments
as to future demand and compare that with current inventory levels. We record a
provision to adjust our inventory balance based upon that assessment. As our
merchandise revenues grow, the investment in inventory will likely increase. It
is possible that we may need to further increase our inventory provisions in the
future.
Goodwill
We have acquired businesses and invest in technologies and intangible
assets in areas within our strategic focus, some of which have highly volatile
fair values and uncertain profit potentials. As of December 31, 2002, we had
recorded goodwill and other intangible assets of $8,834,000. In our assessment
of impairment of goodwill as of January 1 and October 1, 2002, we made estimates
of fair value using several approaches. In our ongoing assessment of impairment
of goodwill and other intangible assets, we consider whether events or changes
in circumstances such as significant declines in revenues, earnings or material
adverse changes in the business climate, indicate that the carrying value of
assets may be impaired. As of December 31, 2002, no impairment has occurred.
Future adverse changes in market conditions or poor operating results of
strategic investments could result in losses or an inability to recover the
carrying value of the investments, thereby possibly requiring impairment charges
in the future.
Deferred Taxes
A tax valuation allowance is established, as needed, to reduce net deferred
tax assets to the amount for which recovery is probable. As of December 31,
2002, we have established a full valuation allowance of $20.4 million against
our net deferred tax assets because of our history of operating losses.
Depending on the amount and timing of taxable income we may ultimately generate
in the future, as well as other factors, we could recognize no benefit from our
deferred tax assets, in accordance with our current estimate, or we could
recognize some or all of their full value.
26
Results of Operations
The following table sets forth for the periods presented certain data from
our statement of operations, expressed as a percentage of net revenues.
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1988
----- ----- ----- ----- -----
Net revenues ..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................. 34.7 36.8 27.6 28.1 12.6
----- ----- ----- ----- -----
Gross profit ..................... 65.3 63.2 72.4 71.9 87.4
Operating expenses:
Product and content development 13.1 18.4 22.9 52.2 99.1
Sales and marketing ........... 38.1 57.5 69.0 100.4 73.9
General and administrative .... 24.8 36.4 36.5 70.8 77.9
Non-cash compensation ......... 0.5 1.4 3.3 20.9 9.0
Non-cash sales and marketing .. 2.2 2.7 2.7 5.7 --
Depreciation and amortization . 4.2 10.6 9.1 10.7 11.7
----- ----- ----- ----- -----
Total operating expenses ......... 82.9 127.0 143.5 260.7 271.6
Loss from operations ............. (17.6) (63.8) (71.1) (188.8) (184.2)
Interest income, net ............. 0.4 1.3 5.9 9.4 38.9*
----- ----- ----- ----- -----
Net Loss ...................... (17.2)% (62.5)% (65.2)% (179.4)% (145.3)%
===== ===== ===== ===== =====
* Reflects a reclassification for gain on extinguishment of debt previously
reported as an extraordinary item. This is in compliance with SFAS No. 145,
which rescinds earlier pronouncements for reporting gains and losses from
extinguishment of debt.
Years Ended December 31, 2002 and December 31, 2001
Net Revenues
Net revenues increased to $29.5 million for the year ended December 31,
2002 from $24.1 million for the year ended December 31, 2001.
Sponsorship and advertising revenues increased to $6.9 million for the year
ended December 31, 2002, as compared to $4.9 million for the year ended December
31, 2001. Revenue from local vendor online advertising programs increased by
$1.7 million or approximately 54% for the year ended December 31, 2002,
primarily as a result of additional contracts sold and, in part, due to
expansion in the number of local market services and programs offered. In
addition, there was an increase of approximately $218,000 in national online
sponsorship and advertising revenue primarily due to the launch of category
specific programs. Sponsorship and advertising revenues amounted to 23% of our
net revenues for the year ended December 31, 2002 and 20% of our net revenues
for the year ended December 31, 2001.
Merchandise revenues increased to $13.7 million for the year ended December
31, 2002, as compared to $8.1 million for the year ended December 31, 2001. This
increase was primarily due to an increase in sales of wedding supplies through
our websites of $5.4 million, or by approximately 79% as a result of the
expansion of product and service offerings, an increase in the average order
size and increased traffic. Merchandise revenues amounted to 46% of our net
revenues for the year ended December 31, 2002 and 34% of our net revenues for
the year ended December 31, 2001.
Publishing and other revenues decreased to $8.9 million for the year ended
December 31, 2002, as compared to $11.1 million for the year ended December 31,
2001. An increase in revenue from The Knot Weddings magazine of approximately
$562,000 due primarily to a larger number of print advertising contracts sold
was more than offset by a decrease in publishing revenue derived from the
Weddingpages operation of $2.5 million. This decrease included approximately
$695,000 associated with a reduction in the number of magazines published in
local markets in 2002, principally in Florida, and $682,000 due to a net
reduction in advertising pages sold in comparable markets, offset, in part, by
$141,000 of additional revenue due to the timing of publication of Weddingpages
magazines in certain markets. In addition, franchise service fees and royalties
declined by $1.2 million due primarily to the termination of certain
27
franchisees. Publishing and other revenues amounted to 30% for the year ended
December 31, 2002 and 46% for the year ended December 31, 2001.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the costs related to the production of regional
WEDDINGPAGES magazines and The Knot Weddings magazine, payroll and related
expenses for our personnel who are responsible for the production of online and
offline media, and costs of Internet and hosting services.
Cost of revenues increased to $10.2 million for the year ended December 31,
2002, from $8.9 million for the year ended December 31, 2001. Cost of revenues
from the sale of merchandise increased by $2.4 million for the year ended
December 31, 2002, primarily as a result of the increased sales of wedding
supplies. These increases were offset, in part, by a reduction in cost of
revenue as a result of a decrease in publishing revenue due to fewer advertising
pages sold and printed and by improved margins with respect to merchandise sales
and publishing revenue. Our margins on the sale of wedding supplies have
improved as a result of sourcing products at lower costs and the introduction of
higher margin products. Publishing margins improved as a result of higher
effective rates for print advertising in our regional Weddingpages magazines. As
a percentage of our net revenues, cost of revenues decreased to 35% for the year
ended December 31, 2002, from 37% for the year ended December 31, 2001.
Product and Content Development
Product and content development expenses consist primarily of payroll and
related expenses for editorial, creative and information technology personnel.
Product and content development expenses decreased to $3.9 million for the
year ended December 31, 2002 from $4.4 million for the year ended December 31,
2001. This decrease was primarily the result of cost reduction initiatives,
which reduced personnel and related expenses. As a percentage of our net
revenues, product and content development expenses decreased to 13% for the year
ended December 31, 2002, from 18% for the year ended December 31, 2001.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses for sales and marketing, customer service and public relations
personnel, as well as the costs for AOL anchor tenant agreements, advertising
and promotional activities and fulfillment and distribution of merchandise.
Sales and marketing expenses decreased to $11.2 million for the year ended
December 31, 2002 from $13.9 million for the year ended December 31, 2001. The
decrease was the result of various cost reduction initiatives, which reduced
personnel and related expenses, commission expense and promotion expense by
$704,000, $484,000, and $724,000, respectively. In addition, there was a
reduction in fees of $823,000 under our International Anchor Tenant agreement
with AOL. This agreement was amended effective March 31, 2001, to limit to
France the international markets where we receive distribution from AOL. To
effect this amendment with AOL, we incurred a one-time restructuring fee in the
first quarter of 2001. As a percentage of our net revenues, sales and marketing
expenses decreased to 38% for the year ended December 31, 2002, from 58% for the
year ended December 31, 2001.
General and Administrative
General and administrative expenses consist primarily of payroll and
related expenses for our executive management, finance and administrative
personnel, legal and accounting fees, facilities costs, insurance and bad debts
expenses.
General and administrative expenses decreased to $7.3 million for the year
ended December 31, 2002 from $8.8 million for the year ended December 31, 2001.
This decrease was primarily due to reduced bad debt expense of $1.4 million as a
result of improved collections from local vendors due, in part, to a higher
proportion of payments made through credit cards, as well as improved
collections from national advertisers and franchisees. In addition, general and
administrative expenses were reduced as a result of cost reduction initiatives,
which reduced personnel and related expenses by approximately $281,000. As a
percentage of our net revenues, general and administrative expenses
28
decreased to 25% for the year ended December 31, 2002 from 36% for the year
ended December 31, 2001.
Non-Cash Compensation
We recorded no deferred compensation during the year ended December 31,
2002. Amortization of deferred compensation decreased to $139,000 from $332,000
for the year ended December 31, 2001.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing of $2.3 million related to the
issuance of a warrant to AOL in connection with our amended anchor tenant
agreement in July 1999. Amortization of deferred sales and marketing was
$653,000 for each of the years ended December 31, 2002 and 2001.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and capitalized software and amortization
of goodwill and other intangible assets related to acquisitions.
Depreciation and amortization expenses decreased to $1.2 million for the
year ended December 31, 2002, from $2.5 million for the year ended December 31,
2001. The decrease was primarily due to the implementation of SFAS No. 142,
effective January 1, 2002, resulting in goodwill no longer being amortized. For
the year ended December 31, 2001, we recorded goodwill amortization of $1.2
million. We perform goodwill impairment tests on at least an annual basis. There
can be no assurance that future goodwill impairment tests will not result in a
charge to income.
Interest Income
Interest income, net of interest expense, decreased to $112,000 for the
year ended December 31, 2002, from $307,000 for the year ended December 31,
2001. This decrease resulted from lower interest rates and lower average amounts
of cash and cash equivalents available for investment.
Years Ended December 31, 2001 and December 31, 2000
Net Revenues
Net revenues decreased to $24.1 million for the year ended December 31,
2001 from $24.2 million for the year ended December 31, 2000.
Sponsorship and advertising revenues decreased to $4.9 million for the year
ended December 31, 2001, as compared to $11.0 million for the year ended
December 31, 2000. A reduction in the number and average value of national
sponsorship contracts as a result of an overall downturn in the online
advertising sector contributed to the $6.1 million decrease. Within sponsorship
and advertising revenues, revenue from local vendor online advertising programs
increased by $1.1 million, or approximately 51%, for the year ended December 31,
2001, as a result of additional contracts sold. Sponsorship and advertising
revenues amounted to 20% of our net revenues for the year ended December 31,
2001 and 45% for the year ended December 31, 2000.
Merchandise revenues increased to $8.1 million for the year ended December
31, 2001, as compared to $4.5 million for the year ended December 31, 2000.
These increases were primarily due to an increase in sales of wedding supplies
through Bridalink.com and The Knot Shop of $3.7 million due, in part, to the
expansion of product and service offerings. Merchandise revenues amounted to 34%
of our net revenues for the year ended December 31, 2001 and 18% of our net
revenues for the year ended December 31, 2000.
Publishing and other revenues increased to $11.1 million for the year ended
December 31, 2001, as compared to $8.8 million for the year ended December 31,
2000. These revenues are primarily attributed to print advertising and newsstand
revenues derived from the publication of regional wedding magazines by
Weddingpages, service fees and royalties from producing the WEDDINGPAGES
magazine for certain franchisees, as well as print advertising and
29
newsstand revenues from The Knot Wedding Gowns magazine. Advertising and
newsstand revenues, service fees and royalties derived from the Weddingpages
operation, which commenced in the quarter ended June 30, 2000, contributed $1.8
million of the revenue increase primarily due to the inclusion of a full twelve
months of revenue in the year ended December 31, 2001. In addition, during the
year ended December 31, 2001, we published two Wedding Gowns magazines as
compared to one magazine in the corresponding period in 2000 and commenced
selling print advertising into this publication, which accounted for $661,000 of
the revenue increase. Publishing and other revenues amounted to 46% and 36% of
our net revenue for the years ended December 31, 2001 and 2000, respectively.
Cost of Revenues
Cost of revenues increased to $8.9 million for the year ended December 31,
2001, from $6.7 million for the year ended December 31, 2000. Cost of revenues
from the sale of merchandise increased by $1.4 million for the year ended
December 31, 2001, as compared to the corresponding period in 2000, as a result
of increased sales. Cost of revenues related to the production of regional
wedding magazines commenced in the second quarter of 2000 and accounted for
$672,000 of the increase in cost of revenues for the year ended December 31,
2001. Cost of revenues related to the production of The Knot Wedding Gowns
magazine increased by $268,000 for the year ended December 31, 2001, as a result
of publishing both a Spring and Fall edition of The Knot Wedding Gowns magazine
in 2001 as compared to solely a Spring edition in 2000. As a percentage of our
net revenues, cost of revenues increased to 37% for the year ended December 31,
2001, from 28% for the year ended December 31, 2000. This was a result of a
lower mix in 2001 of online advertising revenue, which generates a higher margin
than merchandise and publishing revenue, partially offset by improved margins
realized in 2001 with respect to the sale of wedding supplies.
Product and Content Development
Product and content development expenses decreased to $4.4 million for the
year ended December 31, 2001 from $5.6 million for the year ended December 31,
2000. This decrease was primarily the result of the continuation of cost
reduction initiatives instituted at the end of 2000, which reduced personnel and
related expenses by $1.1 million. This cost savings was offset, in part, by an
increase of $142,000 in personnel and other product and content development
costs associated with our Weddingpages subsidiary, which commenced in the
quarter ended June 30, 2000, primarily due to the inclusion of a full twelve
months of expense in the year ended December 31, 2001. As a percentage of our
net revenues, product and content development expenses decreased to 18% for the
year ended December 31, 2001, from 23% for the year ended December 31, 2000.
Sales and Marketing
Sales and marketing expenses decreased to $13.9 million for the year ended
December 31, 2001 from $16.7 million for the year ended December 31, 2000. The
decrease was the result of various cost reduction initiatives, which reduced
personnel and related expenses by $1.2 million, promotional expenses by $1.2
million, and produced smaller cost savings in a number of other areas. In
addition, there was a reduction in sales commission expense of $554,000 due to a
decline in sponsorship and advertising revenues. These cost decreases were
offset, in part, by an increase of $437,000 in personnel and other sales and
marketing costs associated with the local sales force of Weddingpages, which
commenced in the second quarter of 2000. Additionally, in 2001, there was an
increase of $335,000 in fees related to our international anchor tenant
agreement with AOL. This included the quarterly carriage fee through March 2001
and a one-time restructuring fee paid in connection with the amendment of this
agreement, effective March 31, 2001, to limit the international markets where we
will receive distribution from AOL to France. As a percentage of our net
revenues, sales and marketing expenses decreased to 58% for the year ended
December 31, 2001, from 69% for the year ended December 31, 2000.
General and Administrative
General and administrative expenses were $8.8 million for each of the years
ended December 31, 2001 and 2000. In 2001, there was an increase of $576,000 in
personnel and related general and administrative costs associated with our
Weddingpages operation, which commenced in the second quarter of 2000. In
addition, in 2001, there was an increase in bad debts expense of $626,000
primarily related to local advertisers and an increase in credit card fees of
$148,000 as a result of higher merchandise sales. These cost increases were
offset, in part, by lower personnel and related expenses associated with our New
York office of $612,000 due to cost reduction initiatives, a reduction of
$438,000 in legal and other professional fees and additional cost savings of
approximately $300,000 from a number of other administrative cost
30
categories. As a percentage of our net revenues, general and administrative
expenses were 36% for each of the years ended December 31, 2001 and 2000.
Non-Cash Compensation
We recorded no deferred compensation during year ended December 31, 2001.
Amortization of deferred compensation decreased to $332,000 for the year ended
December 31, 2001, from $789,000 for the year ended December 31, 2000. As a
percentage of our net revenues, amortization of deferred compensation decreased
to 1% for the year ended December 31, 2001, from 3% for the year ended December
31, 2000.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing of $2.3 million related to the
issuance of a warrant to AOL in connection with our amended anchor tenant
agreement in July 1999. Amortization of deferred sales and marketing was
$653,000 for each of the years ended December 31, 2001 and 2000. As a percentage
of our net revenues, amortization of deferred sales and marketing was 3% for
each of the years ended December 31, 2001 and 2000.
Depreciation and Amortization
Depreciation and amortization expenses increased to $2.5 million for the
year ended December 31, 2001, from $2.2 million for the year ended December 31,
2000. The increase was due to increases in depreciation expense and amortization
of goodwill and other intangible assets of approximately $203,000 and $146,000,
respectively, primarily related to Weddingpages, which was acquired in March
2000. As a percentage of net revenues, depreciation and amortization expenses
increased to 11% for the year ended December 31, 2001 from 9% for the year ended
December 31, 2000.
Interest Income
Interest income, net of interest expense, decreased to $307,000 for the
year ended December 31, 2001, from $1.4 million for the year ended December 31,
2000. This decrease was a result of lower amounts of cash and cash equivalents
available for investment and lower interest rates.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
guidance of the provisions of SFAS No. 142. Other intangible assets will
continue to be amortized over their respective useful lives to their estimated
residual values and reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. We adopted the
provisions of SFAS No. 141 and SFAS No. 142 effective January 1, 2002. For the
years ended December 31, 2001 and 2000, we recorded goodwill amortization of
$1.2 million and $1.0 million, respectively.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement of tangible long-lived assets and the associated
asset retirement costs. We are required to adopt SFAS No. 143 effective January
1, 2003. The adoption of this new statement is not expected to have a material
impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This standard supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The standard retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands on the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has
31
been disposed of or is classified as held for sale. We adopted SFAS No. 144
effective January 1, 2002. The adoption of this new statement did not have a
material impact on our financial statements for the year ended December 31,
2002.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This standard addresses issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that currently are
accounted for pursuant to the guidance that the Emerging Issues Task Force set
forth in Issue No. 94-3. The scope of SFAS No. 146 also includes (1) costs
related to terminating a contract that is not a capital lease, (2) termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred- compensation contract and (3) costs to consolidate
facilities or relocate employees. SFAS No. 146 is required to be effective for
exit or disposal activities initiated after December 31, 2002. The adoption of
this new statement is not expected to have a material impact on our financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of the
Interpretation apply on a prospective basis to guarantees issued or modified
after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The provisions of SFAS No. 148 are effective for financial statements
for fiscal years and interim periods ending after December 15, 2002. We have
adopted the disclosure provisions of SFAS No. 148 (see note 2 to our financial
statements). SFAS No. 148 did not require us to change to the fair value method
of accounting for stock-based compensation.
Liquidity and Capital Resources
As of December 31, 2002, our cash and cash equivalents amounted to $9.3
million. We currently invest primarily in short-term debt instruments that are
highly liquid, of high-quality investment grade, and have maturities of less
than three months, with the intent to make such funds readily available for
operating purposes.
Net cash used in operating activities was $525,000 for the year ended
December 31, 2002. This resulted primarily from the loss for the period, as
adjusted for depreciation and amortization and other non-cash charges, of $1.7
million, increases in accounts receivable of $1.0 million and inventory of
$580,000, partially offset by increases in accounts payable and accrued expenses
of $1.5 million and deferred revenue of $1.1 million. Effective October 1, 2002,
local vendors are no longer pre-billed for their full contractual amounts via
statements but are invoiced for individual amounts due in accordance with our
standard payment terms. The impact of this billing modification reduced accounts
receivable and deferred revenue in equal amounts of approximately $512,000
through December 31, 2002. Net cash used in operating activities was $7.9
million for the year ended December 31, 2001. This resulted primarily from the
loss for the period, as adjusted for depreciation and amortization and other
non-cash charges of $8.9 million, and decreases in deferred revenue of $526,000,
partially offset by decreases in accounts receivable of $539,000 and deferred
production and marketing costs of $856,000.
Net cash used in investing activities was $383,000 for the year ended
December 31, 2002, primarily due to purchases of property and equipment of
$229,000, net of proceeds from the sale of property and equipment, and cash paid
of $154,000 with respect to a termination liability resulting from the
acquisition of Weddingpages. Net cash used in investing activities was $747,000
for the year ended December 31, 2001, primarily due to cash of $346,000 paid by
Weddingpages for the acquisition of former franchise markets, less amounts
received from escrow in May 2001 in
32
satisfaction of certain claims against the sellers of Weddingpages. In addition,
purchases of property and equipment amounted to $397,000.
Net cash provided by financing activities was $3.4 million for the year
ended December 31, 2002, primarily due to proceeds from May Bridal Corporation
in connection with the issuance of 3,575,747 shares of our common stock for $5.0
million, less related costs, partially offset by debt repayments of $1.6
million, primarily the outstanding balance under Weddingpages' expired line of
credit agreement. Net cash used in financing activities was $389,000 for the
year ended December 31, 2001, primarily due to net repayments of short term
borrowings offset, in part, by proceeds from the exercise of stock options and
the issuance of common stock.
As of December 31, 2002, we had no material commitments for capital
expenditures.
As of December 31, 2002, we had commitments under non-cancelable operating
leases amounting to approximately $6.5 million, of which $760,000 will be due on
or before December 31, 2003, an aggregate of $2.4 million will be due in the
three years ended December 31, 2006, and $3.3 million will be due thereafter.
These commitments include amounts under an operational lease, signed in October
2002, for a new building being constructed to house our expanding operations in
Redding, California. The term of this lease is five years commencing upon
completion of construction, which is currently anticipated to occur in May 2003.
As a result of a weak national online advertising market in 2001, our
national online sponsorship and advertising revenue decreased to approximately
$1.7 million for the year ended December 31, 2001 from approximately $8.8
million for the year ended December 31, 2000. To respond to our liquidity needs,
we completed a number of cost reduction initiatives during 2001, including
sourcing wedding supplies products at lower costs, reductions in staff,
restructuring of our international anchor tenant agreement with AOL, reductions
in capital expenditures, as well as additional programs resulting in savings in
a number of operating expense categories, the full annual benefits of which were
realized in 2002. Further, in 2002, we have added a number of category specific
advertising programs to broaden the group of potential national advertisers who
can benefit from targeting our audience. Revenues from these programs commenced
in the third quarter of 2002. We have supplemented our national sales force in
New York with independent sales representative agencies in key markets across
the United States. We have also expanded the number of markets and advertising
programs available to local vendors. In addition, as discussed above, in
February 2002, we raised additional capital of $5.0 million, less related costs,
from the sale of common stock to May Bridal Corporation ("May Bridal"), a
subsidiary of May Department Stores Company ("May") and also entered into a
Media Services Agreement with May (see note 9 to our financial statements).
We believe that our current cash and cash equivalents will be sufficient to
fund our working capital and capital expenditure requirements for at least the
next twelve months. This expectation is primarily based on internal estimates of
revenue growth, which relate to expected increased advertising, merchandising
and publishing revenues as well as continuing emphasis on controlling all
operating expenses. However, there can be no assurance that actual costs will
not exceed amounts estimated, that actual revenues will equal or exceed
estimated amounts, or that we will achieve profitable operations, due to
significant uncertainties surrounding our estimates and expectations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
We are exposed to some market risk through interest rates related to the
investment of our current cash and cash equivalents of approximately $9.3
million as of December 31, 2002. These funds are generally invested in highly
liquid debt instruments with short-term maturities. As such instruments mature
and the funds are re-invested, we are exposed to changes in market interest
rates. This risk is not considered material, and we manage such risk by
continuing to evaluate the best investment rates available for short-term, high
quality investments.
We have no activities related to derivative financial instruments or
derivative commodity instruments, and we are not currently subject to any
significant foreign currency exchange risk.
33
Item 8. Consolidated Financial Statements and Schedule
(a)(1) Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Auditors................................................35
Consolidated Balance Sheets as of December 31, 2002 and 2001 .................36
Consolidated Statements of Operations for the years ended December 31, 2002,
2001 and 2000..............................................................37
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000 ..........................................38
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000..............................................................39
Notes to Consolidated Financial Statements....................................41
Schedule II - Valuation and Qualifying Accounts..............................58
The unaudited supplementary data regarding quarterly results of operations are
incorporated by reference to the information set forth in Item 6, "Selected
Financial Data", in the section captioned, "Quarterly Results of Operations
Data".
34
Report Of Independent Auditors
The Board of Directors and Stockholders of
The Knot, Inc.
We have audited the accompanying consolidated balance sheets of The Knot,
Inc. (the "Company") as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2002 and 2001, and the consolidated results of its operations and
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
As described in note 2 to the consolidated financial statements, the
Company adopted SFAS No. 142 Goodwill and Other Intangible Assets.
Ernst & Young LLP
New York, New York
February 14, 2003
35
The Knot, Inc.
Consolidated Balance Sheets
December 31,
2002 2001
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 9,305,670 $ 6,782,051
Restricted cash 251,871 184,419
Accounts receivable, net of allowances of $960,223 and $1,010,615 at December 31,
2002 and December 31, 2001, respectively 4,791,458 5,011,930
Inventories 1,291,866 729,285
Deferred production and marketing costs 443,502 293,529
Other current assets 556,358 778,775
----------------------------
Total current assets 16,640,725 13,779,989
Property and equipment, net 1,948,481 2,923,100
Intangible assets, net 8,834,136 8,934,136
Other assets 351,570 372,874
----------------------------
Total assets $ 27,774,912 $ 26,010,099
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 5,112,586 $ 3,599,195
Short term borrowings -- 1,384,470
Deferred revenue 5,827,432 4,682,893
Current portion of long-term debt 137,674 323,709
----------------------------
Total current liabilities 11,077,692 9,990,267
Long term debt 234,901 372,234
Other liabilities 445,088 327,423
----------------------------
Total liabilities 11,757,681 10,689,924
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding at December 31, 2002 and 2001 -- --
Common stock, $.01 par value; 100,000,000 shares, authorized; 18,373,327 shares and
14,736,053 shares issued and outstanding at December 31, 2002 and 2001,
respectively 183,733 147,360
Additional paid-in capital 64,399,894 59,512,193
Deferred compensation (54,835) (254,983)
Deferred sales and marketing -- (653,213)
Accumulated deficit (48,511,561) (43,431,182)
----------------------------
Total stockholders' equity 16,017,231 15,320,175
----------------------------
Total liabilities and stockholders' equity $ 27,774,912 $ 26,010,099
============================
See accompanying notes.
36
The Knot, Inc.
Consolidated Statements Of Operations
Year ended December 31,
2002 2001 2000
--------------------------------------------
Net revenues $ 29,476,173 $ 24,120,463 $ 24,234,905
Cost of revenues 10,223,839 8,872,203 6,689,077
--------------------------------------------
Gross profit 19,252,334 15,248,260 17,545,828
Operating expenses:
Product and content development 3,870,493 4,439,834 5,556,123
Sales and marketing 11,242,814 13,870,456 16,728,500
General and administrative 7,294,694 8,801,435 8,839,944
Non-cash compensation 139,069 332,186 788,609
Non-cash sales and marketing 653,213 653,232 653,232
Depreciation and amortization 1,244,289 2,544,836 2,194,991
--------------------------------------------
Total operating expenses 24,444,572 30,641,979 34,761,399
--------------------------------------------
Loss from operations (5,192,238) (15,393,719) (17,215,571)
Interest income, net 111,859 306,570 1,425,262
--------------------------------------------
Net loss $ (5,080,379) $(15,087,149) $(15,790,309)
============================================
Net loss per share - basic and diluted $ (0.28) $ (1.03) $ (1.08)
============================================
Weighted average number of shares used in calculating
basic and diluted net loss per share 17,909,492 14,716,741 14,603,381
============================================
See accompanying notes
37
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
--------------- ---------------------- Paid-In Deferred
Shares Amount Shares Par Value Capital Compensation
------ ------ ---------- -------- ----------- ------------
Balance at December 31, 1999 .................... -- $ -- 14,510,612 $145,106 $60,206,664 $(2,262,974)
------ ------ ---------- -------- ----------- -----------
Issuance of common stock in connection with
exercise of vested stock options ............ -- -- 89,295 893 57,899 --
Issuance of common stock in connection with
employee stock purchase plan ................ -- -- 31,842 318 104,561 --
Issuance of common stock ........................ -- -- 44,504 445 (445) --
Amortization of deferred compensation ........... -- -- -- -- -- 788,609
Amortization of deferred sales
and marketing ............................... -- -- -- -- -- --
Reversal of deferred compensation related
to common stock and common stock options
forfeited ................................... -- -- -- -- (711,291) 711,291
Net loss for the year ended
December 31, 2000 ........................... -- -- -- -- -- --
------ ------ ---------- -------- ----------- -----------
Balance at December 31, 2000 .................... -- $ -- 14,676,253 $146,762 $59,657,388 $ (763,074)
------ ------ ---------- -------- ----------- -----------
Issuance of common stock in connection with
exercise of vested stock options ............ -- -- 14,579 146 3,215 --
Issuance of common stock in connection with
employee stock purchase plan ................ -- -- 45,221 452 27,495 --
Amortization of deferred compensation ........... -- -- -- -- -- 332,186
Amortization of deferred sales
and marketing ............................... -- -- -- -- -- --
Reversal of deferred compensation related
to common stock options forfeited ........... -- -- -- -- (175,905) 175,905
Net loss for the year ended
December 31, 2001 ........................... -- -- -- -- -- --
------ ------ ---------- -------- ----------- -----------
Balance at December 31, 2001 .................... -- $ -- 14,736,053 $147,360 $59,512,193 $ (254,983)
------ ------ ---------- -------- ----------- -----------
Issuance of common stock in connection with
proceeds from May Bridal Corp., net of cost
of approximately $33,000 .................... -- -- 3,575,747 35,758 4,931,243 --
Issuance of common stock in connection with
employee stock purchase plan ................ -- -- 61,527 615 17,538 --
Amortization of deferred compensation ........... -- -- -- -- -- 139,068
Amortization of deferred sales
and marketing ............................... -- -- -- -- -- --
Reversal of deferred compensation related
to common stock options forfeited ........... -- -- -- -- (61,080) 61,080
Net loss for the year ended
December 31, 2002 ........................... -- -- -- -- -- --
------ ------ ---------- -------- ----------- -----------
Balance at December 31, 2002 .................... -- $ -- 18,373,327 $183,733 $64,399,894 $ (54,835)
------ ------ ---------- -------- ----------- -----------
Deferred Total
Sales and Accumulated Stockholders'
Marketing Deficit Equity
----------- ------------ ------------
Balance at December 31, 1999 .................... $(1,959,677) $(12,553,724) $ 43,575,395
----------- ------------ ------------
Issuance of common stock in connection with
exercise of vested stock options ............ -- -- 58,792
Issuance of common stock in connection with
employee stock purchase plan ................ -- -- 104,879
Issuance of common stock ........................ -- -- --
Amortization of deferred compensation ........... -- -- 788,609
Amortization of deferred sales
and marketing ............................... 653,232 -- 653,232
Reversal of deferred compensation related
to common stock and common stock options
forfeited ................................... -- -- --
Net loss for the year ended
December 31, 2000 ........................... -- (15,790,309) (15,790,309)
----------- ------------ ------------
Balance at December 31, 2000 .................... $(1,306,445) $(28,344,033) $ 29,390,598
----------- ------------ ------------
Issuance of common stock in connection with
exercise of vested stock options ............ -- -- 3,361
Issuance of common stock in connection with
employee stock purchase plan ................ -- -- 27,947
Amortization of deferred compensation ........... -- -- 332,186
Amortization of deferred sales
and marketing ............................... 653,232 -- 653,232
Reversal of deferred compensation related
to common stock options forfeited ........... -- -- --
Net loss for the year ended
December 31, 2001 ........................... -- (15,087,149) (15,087,149)
----------- ------------ ------------
Balance at December 31, 2001 .................... $ (653,213) $(43,431,182) $ 15,320,175
----------- ------------ ------------
Issuance of common stock in connection with
proceeds from May Bridal Corp., net of cost
of approximately $33,000 .................... -- -- 4,967,001
Issuance of common stock in connection with
employee stock purchase plan ................ -- -- 18,153
Amortization of deferred compensation ........... -- -- 139,068
Amortization of deferred sales
and marketing ............................... 653,213 -- 653,213
Reversal of deferred compensation related
to common stock options forfeited ........... -- -- --
Net loss for the year ended
December 31, 2002 ........................... -- (5,080,379) (5,080,379)
----------- ------------ ------------
Balance at December 31, 2002 .................... $ -- $(48,511,561) $ 16,017,231
----------- ------------ ------------
See accompanying notes.
38
The Knot, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
2002 2001 2000
--------------------------------------------
Operating activities
Net loss $ (5,080,379) $(15,087,149) $(15,790,309)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,144,289 1,276,879 1,073,468
Amortization of intangibles 100,000 1,267,957 1,121,523
Amortization of deferred compensation 139,069 332,186 788,609
Amortization of deferred sales and marketing 653,213 653,232 653,232
Reserve for returns 942,698 881,841 376,979
Allowance for doubtful accounts 301,713 1,701,619 1,075,274
Other non-cash charges 64,667 114,921 --
Changes in operating assets and liabilities (net of the
effects of acquisitions):
Restricted cash (67,452) (184,419) --
Accounts receivable (1,023,939) 539,331 (5,126,799)
Inventories (580,286) 94,373 (388,196)
Deferred production and marketing expenses (149,973) 856,080 79,964
Other current assets 222,417 131,875 36,078
Other assets 21,304 17,898 (18,924)
Accounts payable and accrued expenses 1,525,894 (143,356) 1,524,802
Deferred revenue 1,144,539 (526,466) 2,797,477
Other liabilities 117,665 131,415 138,915
--------------------------------------------
Net cash used in operating activities (524,561) (7,941,783) (11,657,907)
Investing activities
Purchases of property and equipment (277,135) (397,105) (2,875,915)
Maturity of investment -- -- 619,514
Proceeds from sales of property and equipment 48,000 -- --
Acquisition of businesses, net of cash acquired (153,599) (349,605) (9,866,845)
--------------------------------------------
Net cash used in investing activities (382,734) (746,710) (12,123,246)
Financing activities
Proceeds from short term borrowings -- 497,295 775,189
Repayment of short term and current portion of long term
borrowings (1,554,240) (917,683) (789,170)
Financing costs (33,000) -- (515,088)
Proceeds from issuance of common stock 5,018,154 27,947 104,879
Proceeds from exercise of stock options -- 3,361 58,792
--------------------------------------------
Net cash provided by (used in) financing activities 3,430,914 (389,080) (365,398)
--------------------------------------------
Increase (decrease) in cash and cash equivalents 2,523,619 (9,077,573) (24,146,551)
Cash and cash equivalents at beginning of year 6,782,051 15,859,624 40,006,175
--------------------------------------------
Cash and cash equivalents at end of year $ 9,305,670 $ 6,782,051 $ 15,859,624
============================================
39
The Knot, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
2002 2001 2000
------------------------------
Summary of non-cash investing and financing activities
Accrued costs for business acquisitions $ -- $ -- $495,600
Forgiveness of accounts receivable in connection with a business
acquisition -- 226,951 101,748
------------------------------
Total noncash investing and financing activities $ -- $226,951 $597,348
==============================
Supplemental disclosure of cash flow information:
Year ended December 31,
2002 2001 2000
------------------------------
Cash paid for interest $ 61,843 $173,302 $184,332
See accompanying notes.
40
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
1. Organization and Nature of Operations
The Knot, Inc. (the "Company") was incorporated in the state of Delaware on
May 2, 1996.
The Company is the leading wedding resource providing products and services
to couples planning their weddings and future lives together. The Company's Web
site, at www.theknot.com, is the most trafficked wedding destination online and
offers comprehensive content, extensive wedding-related shopping, an online
wedding gift registry and an active community. The Company is the leading
wedding content provider on America Online (AOL Keywords: Knot and weddings) and
MSN. The Company publishes The Knot Magazine, which features editorial content
covering every major wedding planning decision and is distributed to newsstands
and bookstores across the nation. Through its subsidiary, Weddingpages, Inc.,
the Company publishes regional wedding magazines in over 20 Company-owned and
franchised markets in the United States. The Company also authors a book series
on wedding planning and a gift-book series on wedding gowns and wedding flowers.
The Company is based in New York and has several other offices across the
country.
As a result of a weak national online advertising market in 2001, the
Company's national online sponsorship and advertising revenue decreased to
approximately $1.7 million for the year ended December 31, 2001 from
approximately $8.8 million for the year ended December 31, 2000. To respond to
its liquidity needs, the Company completed a number of cost reduction
initiatives during 2001, including sourcing wedding supplies products at lower
costs, reductions in staff, restructuring of its international anchor tenant
agreement with AOL (see note 9), reductions in capital expenditures, as well as
additional programs resulting in savings in a number of operating expense
categories, the full annual benefits of which were realized in 2002. Further, in
2002, the Company has added a number of category specific advertising programs
to broaden the group of potential national advertisers who can benefit from
targeting its audience. Revenues from these programs commenced in the third
quarter of 2002. The Company has supplemented its national sales force in New
York with independent sales representative agencies in key markets across the
United States. The Company has also expanded the number of markets and
advertising programs available to local vendors. In addition, in February 2002,
the Company raised additional capital of $5.0 million, less related costs, from
the sale of common stock to May Bridal Corporation ("May Bridal"), an affiliate
of May Department Stores Company ("May") and also entered into a Media Services
Agreement with May (see note 9).
The Company believes that its current cash and cash equivalents will be
sufficient to fund its working capital and capital expenditure requirements for
at least the next twelve months. This expectation is primarily based on internal
estimates of revenue growth, which relate to expected increased advertising,
merchandising and publishing revenues as well as continuing emphasis on
controlling all operating expenses. However, there can be no assurance that
actual costs will not exceed amounts estimated, that actual revenues will equal
or exceed estimated amounts, or that the Company will achieve profitable
operations, due to significant uncertainties surrounding its estimates and
expectations.
2. Summary of Significant Accounting Policies
Principles of Consolidation
41
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Restricted Cash
Restricted cash as of December 31, 2002 includes money held in escrow with
the Company's bankcard processing services provider.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments. The carrying amounts of outstanding borrowings approximate fair
value.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
were approximately $8,067,000 and $6,565,000 at December 31, 2002 and 2001,
respectively. The market value of the Company's cash equivalents approximates
their cost plus accrued interest.
Inventory
Inventory consists of finished goods and raw materials. Inventory costs are
determined principally by using the average cost method and are stated at the
lower of cost or net realizable value.
Deferred Production and Marketing Costs
Deferred production and marketing costs include certain magazine production
and commission costs which are deferred and expensed upon publication.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the related lease agreement.
Goodwill, Other Intangible and Long-Lived Assets
Goodwill is the excess of purchase price over the fair value of identified
net assets of businesses acquired. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible Assets and
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
effective January 1, 2002. Goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but instead are subject to annual
impairment tests in accordance with the provisions of SFAS
42
No. 142. Other intangible assets are amortized over their respective useful
lives and reviewed for impairment whenever events or changes in circumstances
such as significant declines in revenues, earnings or cash flows or material
adverse changes in the business climate indicate that the carrying amount of an
asset may be impaired. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to future estimated
undiscounted net cash flows expected to be generated by the assets. If the
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. As of December 31, 2002, no impairment has occurred.
Income Taxes
The Company accounts for income taxes on the liability method as required
by SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequence
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax liabilities of a change in tax rates is recognized in results of
operations in the period that includes the enactment date.
Net Revenues by Type
Net revenues by type:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Sponsorship and advertising $ 6,888,024 $ 4,922,866 $10,969,146
Merchandise ............... 13,673,709 8,097,671 4,464,807
Publishing and other ...... 8,914,440 11,099,926 8,800,952
----------- ----------- -----------
Total ..................... $29,476,173 $24,120,463 $24,234,905
=========== =========== ===========
For the years ended December 31, 2002, 2001 and 2000, merchandise revenue
included outbound shipping and handling charges of approximately $1,614,000,
$923,000 and $490,000, respectively.
Revenue Recognition
Sponsorship and Advertising
Online sponsorship revenues are derived principally from longer-term
contracts currently ranging up to thirty-six months. Sponsorships are designed
to integrate advertising with specific online editorial content. Sponsors can
purchase the exclusive right to promote products or services on a specific
online editorial area and can purchase a special feature on our sites. These
programs commonly include banner advertisements and direct e-mail marketing.
Online advertising revenues are derived principally from short-term
contracts that typically range from one month up to one year. These contracts
may include online banner advertisements, placement in the Company's online
search tools, direct e-mail marketing and online listings in the local area of
the Company's Web site for local wedding vendors. Local vendors may also
purchase online listings through fixed term or open-ended subscriptions.
43
Certain online sponsorship and advertising contracts provide for the
delivery of a minimum number of impressions. Impressions are the featuring of a
sponsor's advertisement, banner, link or other form of content on the Company's
sites. To date, the Company has recognized its sponsorship and advertising
revenues over the duration of the contracts on a straight-line basis, as the
Company has exceeded minimum guaranteed impressions. To the extent that minimum
guaranteed impressions are not met, the Company is generally obligated to extend
the period of the contract until the guaranteed impressions are achieved. If
this were to occur, the Company would defer and recognize the corresponding
revenues over the extended period.
To promote The Knot brand on third-party sites, the Company produces online
sites for third parties featuring both The Knot and the third party. The cost of
production of these sites is included in the Company's operating expenses. In
return, the Company receives distribution and exposure to their viewers,
outbound links to the Company's sites and, in some circumstances, offline brand
marketing. The Company does not recognize revenues with respect to these barter
transactions.
Merchandise
Merchandise revenues include the selling price of wedding supplies and
products from the Company's gift registry sold through its web sites and, prior
to July 2001, through a co-branded site with QVC, Inc., as well as related
outbound shipping and handling charges. Merchandise revenues also include
commissions earned in connection with the sale of products from the Company's
gift registry under agreements with certain strategic partners. Merchandise
revenues are recognized when products are shipped to customers, reduced by
discounts as well as an allowance for estimated sales returns.
Publishing and Other
Publishing revenue includes print advertising revenue derived from the
publication of The Knot Weddings magazine and the publication of regional
WEDDINGPAGES magazines by the Company's subsidiary Weddingpages, Inc., as well
as service fees and royalty fees from the publication of the WEDDINGPAGES
magazine by franchisees and fees from the license of the Weddingpages' name for
use in publication by former franchisees. These revenues and fees are recognized
upon the publication of the related magazines, at which time all material
services related to the magazine have been performed, or as fees are earned
under the terms of license agreements. Additionally, publishing revenues are
derived from the sale of magazines on newsstands, in bookstores and online and
from author royalties received related to book publishing contracts. Revenues
from the sale of magazines are recognized when the products are shipped, reduced
by an allowance for estimated sales returns. Royalties are recognized when all
contractual obligations have been met, which typically include the delivery and
acceptance of a final manuscript.
Deferred Revenue
Deferred revenue represents payments received or billings in excess of
revenue recognized related to online and print advertising contracts.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the production costs of regional and national wedding
magazines, payroll and related expenses for personnel who are responsible for
the production of online and offline media and costs of Internet and hosting
services.
44
Cost of revenues by type:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Sponsorship and advertising ....... $ 504,297 $ 585,942 $ 766,244
Merchandise ....................... 6,897,402 4,534,482 3,104,168
Publishing and other .............. 2,822,140 3,751,779 2,818,665
----------- ----------- -----------
Total ............................. $10,223,839 $ 8,872,203 $ 6,689,077
=========== =========== ===========
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense totaled
approximately $103,000, $82,000 and $247,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with three
major financial institutions. The Company's customers are primarily concentrated
in the United States. The Company performs on-going credit evaluations,
generally does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. To date, such losses have been within management's
expectations.
At December 31, 2002 and 2001, no single customer accounted for more than
3% and 4%, respectively, of accounts receivable.
Stock-Based Compensation
Stock-based compensation is accounted for by using the intrinsic
value-based method in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, and the Company complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the
Company only records compensation expense for any stock options granted with an
exercise price that is less than the fair market value of the underlying stock
at the date of grant. The Company does not record compensation expense for
rights to purchase shares under its ESPP because it satisfies certain conditions
under APB 25.
The following table details the effect on net income and earnings per share
had stock-based compensation expense been recorded based on the fair value
method under SFAS No. 123, as amended (see note 14).
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Net loss, as reported ........................... $ (5,080,379) $(15,087,149) $(15,790,309)
Add: Total stock-based employee
compensation expense included in
reported net loss .......................... 139,069 332,186 788,609
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards ..... (573,683) (970,896) (1,826,760)
------------ ------------ ------------
Net loss, pro forma ............................. $ (5,514,993) $(15,725,859) $(16,828,460)
============ ============ ============
Basic and diluted net loss per share, as reported $ (0.28) $ (1.03) $ (1.08)
============ ============ ============
Basic and diluted net loss per share, pro forma . $ (0.31) $ (1.07) $ (1.15)
============ ============ ============
45
For purposes of pro forma disclosures, the estimated fair value of
stock-based employee compensation is amortized to expense over the related
vesting period and valuation allowances are included for net deferred tax
assets.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share. Basic net loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding during the period.
Diluted net loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive financial
instruments, only in the periods in which such effect is dilutive. There were no
dilutive securities in any of the periods presented herein.
Segment Information
The Company operates in one segment.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. The Company's comprehensive net loss is
equal to its net loss for all periods presented.
Software Development Costs
The costs of computer software developed or obtained for internal use are
being amortized over their estimated useful lives, which has been determined by
management to be three years. Amortization of software development costs begins
when the software is ready for its intended use.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligations. This standard addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement of
tangible long-lived assets and the associated asset retirement costs. The
Company is required to adopt SFAS No. 143 effective January 1, 2003. The
adoption of this new statement is not expected to have a material impact on the
Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This standard addresses issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that currently are
accounted for pursuant to the guidance that the Emerging Issues Task Force set
forth in Issue No. 94-3. The scope of SFAS No. 146 also includes (1) costs
related to terminating a contract that is not a capital lease, (2) termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred- compensation contract and (3) costs to consolidate
facilities or relocate employees. SFAS No. 146 is required to be effective for
exit or disposal activities initiated after December 31, 2002. The adoption of
this new statement is not expected to have a material impact on the Company's
financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("Interpretation").
46
This Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair market value of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions of the Interpretation apply on a prospective basis to guarantees
issued or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The provisions of SFAS No. 148 are effective for financial statements
for fiscal years and interim periods ending after December 15, 2002. The Company
has adopted the disclosure provisions of SFAS No. 148 (see note 2 to the
Company's financial statements). SFAS No. 148 did not require the Company to
change to the fair value method of accounting for stock-based compensation.
3. Inventory
Inventory consists of the following:
December 31,
2002 2001
---- ----
Raw materials ........................ $ 91,556 $ 45,861
Finished goods ....................... 1,200,310 683,424
---------- ----------
$1,291,866 $ 729,285
========== ==========
4. Property and Equipment
Property and equipment consists of the following:
December 31,
2002 2001
---- ----
Leasehold improvements ............................. $1,415,718 $1,397,230
Software ........................................... 1,186,547 1,088,758
Furniture and fixtures ............................. 216,011 216,011
Computer and office equipment ...................... 2,617,735 2,671,901
---------- ----------
$5,436,011 $5,373,900
Less accumulated depreciation and amortization ..... 3,487,530 2,450,800
---------- ----------
$1,948,481 $2,923,100
========== ==========
5. Intangible Assets
Intangibles assets consists of the following:
December 31,
2002 2001
---- ----
47
Goodwill ............................... $ 10,912,347 $ 10,912,347
Less accumulated amortization .......... (2,503,211) (2,503,211)
------------ ------------
Net ........................... 8,409,136 8,409,136
Covenant not to compete ................ 700,000 700,000
Less accumulated amortization .......... (275,000) (175,000)
------------ ------------
Net ...................... 425,000 525,000
------------ ------------
Total .................................. $ 8,834,136 $ 8,934,136
============ ============
During the year ended December 31, 2002, the Company completed goodwill
impairment tests as of January 1, 2002, its initial impairment test, and as of
October 1, 2002. The tests involved the assessment of the fair market value of
the Company as the single reporting unit. No impairment of goodwill was
indicated as a result of these tests. Under SFAS No. 142, the Company is
required to perform goodwill impairment tests on at least an annual basis or
more frequently if circumstances dictate. There can be no assurance that future
goodwill impairment tests will not result in a charge to income.
A reconciliation of reported net loss to net loss adjusted to reflect the
impact of the discontinuance of the amortization of goodwill for the years ended
December 31, 2001 and 2000 is as follows:
Year Ended December 31,
2001 2000
---- ----
Reported net loss ........................... $ (15,087,149) $ (15,790,309)
Goodwill amortization ....................... 1,167,956 1,046,524
-------------- --------------
Adjusted net loss ........................... $ (13,919,193) $ (14,743,785)
============== ==============
Reported basic and diluted net loss per share $ (1.03) $ (1.08)
Goodwill amortization ....................... $ 0.08 $ 0.07
-------------- --------------
Adjusted basic and diluted net loss per share $ (0.95) $ (1.01)
============== ==============
The covenant not to compete is being amortized over the related contractual
period of seven years. Estimated annual amortization expense of the covenant not
to compete is $100,000 in each of fiscal years 2003 through 2006 and $25,000 in
fiscal year 2007.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31,
2002 2001
---- ----
Accounts payable ............................. $ 768,329 $ 772,695
Distribution and other service fees .......... 2,574,024 1,378,020
Compensation and related benefits ............ 1,020,916 892,122
Deposits from customers ...................... -- 54,404
Other accrued expenses ....................... 749,317 501,954
----------
$5,112,586 $3,599,195
========== ==========
48
7. Short Term Borrowings
The Company's subsidiary, Weddingpages, Inc., had a line of credit with a
bank that expired February 1, 2002, and the remaining outstanding borrowings
under this line of credit of $1,245,668 were repaid.
8. Long Term Debt
Long-term debt as of December 31, 2002 and 2001 consists of the following:
December 31,
2002 2001
---- ----
Note due in annual installments of $60,000 through October 2008,
based on imputed interest of 8.75% ............................. $271,173 $304,527
9.0% equipment installment note, due in monthly installments
of $4,566 through December 2002 ................................ $ -- $ 50,028
10.0% equipment installment note, due in monthly installments
of $8,131 through August 2003 .................................. $ 63,002 $149,388
Termination liability, due in monthly installments
of $12,800 through March 2003 .................................. $ 38,400 $192,000
-------- --------
Total long-term debt ........................................... $372,575 $695,943
Less current portion of long-term debt ......................... $137,674 $323,709
-------- --------
Long term debt, excluding current portion ...................... $234,901 $372,234
======== ========
Maturities of long-term obligations for the five years ending December 31, 2007
are as follows: 2003, $137,674; 2004, $39,446; 2005, $42,898; 2006, $46,651;
2007, $50,733 and $55,173 thereafter.
9. Relationship with AOL, QVC, Inc. and May
AOL
In July 1999, the Company entered into an amended and restated Anchor
Tenant Agreement with AOL ("AOL Agreement"). Pursuant to the AOL Agreement, the
Company issued a warrant to purchase 366,667 shares of the Company's common
stock at $7.20 per share, subject to certain anti-dilution provisions. As of
December 31, 2002, the effect of these anti-dilution provisions was to reduce
the exercise price under the warrant to $6.12 per share. The warrant is
immediately exercisable and expires in July 2007. The Company valued this
warrant at approximately $2,250,000, by using the Black-Scholes option pricing
model with an expected volatility factor of 55%, risk free interest rate of 5%,
no dividend yield, and a 2-year life, which is being recognized as non-cash
sales and marketing expense on a straight-line basis over the term of the
agreement which expires January 6, 2003.
On May 1, 2000, the Company entered into an International Anchor Tenant
Agreement with AOL, whereby the Company received distribution within AOL and its
affiliates within certain international
49
markets. The agreement originally provided for an expiration date of May 1, 2003
and for quarterly carriage fees payable by the Company over the term of the
agreement. Effective March 31, 2001, the International Anchor Tenant Agreement
was amended to limit the International Markets where the Company will receive
distribution from AOL to France. In exchange for this amendment, the Company
paid in May 2001 a one-time restructuring fee of $550,000 and a total carriage
fee for France for the remaining term of the amended agreement of $200,000. The
amended agreement expires on May 1, 2003.
The Company recorded aggregate carriage fees to AOL in the amount of
$1,200,000, $2,023,000 and $1,687,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
QVC, Inc. ("QVC")
On April 13, 1999, the Company sold 4,000,000 shares of Series B
Convertible Preferred Stock ("Series B") for $15,000,000 to QVC. The Company
also entered into a services agreement with QVC (the "Services Agreement"),
whereby QVC provides warehousing, fulfillment and distribution, and billing
services with respect to the Company's gift registry products. Additionally, the
Services Agreement, which expires December 2, 2003, provides for the Company to
purchase certain merchandise through QVC at amounts in excess of QVC's cost. The
fees for such services were negotiated on an arm's length basis.
At December 31, 2002 and 2001, the Company had recorded a receivable due
from QVC of approximately $48,000 and $60,000, respectively.
For the years ended December 31, 2002, 2001 and 2000, the Company purchased
merchandise and incurred warehousing, fulfillment, distribution and billing
costs under the Services Agreement with QVC in the aggregate amounts of
$118,000, $128,000 and $515,000, respectively.
May
On February 19, 2002, the Company entered into a Common Stock Purchase
Agreement (the "Agreement") with May Bridal, pursuant to which the Company sold
3,575,747 shares of its common stock to May Bridal for $5,000,000 in cash. The
Agreement provides that if the Company proposes to sell, transfer or otherwise
issue any common or preferred stock or other interest convertible into common
stock ("equity interests") to any third party (other than shares previously
reserved or certain shares which shall be reserved for future issuance pursuant
to Stock Incentive Plans approved by the Board of Directors or stockholders of
the Company) and which transaction would dilute May Bridal's interest in the
common stock or voting power of the Company prior to such transaction by more
than one percentage point, then the Company shall offer May Bridal the right to
acquire a similar equity interest, on the same terms and conditions as offered
to the third party, in such amount as to preserve its percentage interest in the
common stock and voting power of the Company. If the Company proposes to acquire
any equity interest from a third party, which transaction would result in May
Bridal's interest in the common stock or voting power of the Company exceeding
20%, then the Company shall offer to acquire equity interests from May Bridal on
the same terms as offered to the third party, to permit May Bridal to own less
than 20% of the common stock or voting power of the Company after the
transaction. In addition, so long as May Bridal owns more than 15% of the common
stock or voting power of the Company, May Bridal shall have the right to
designate one member of the Board of Directors of the Company and to nominate
and submit such person for election by the stockholders of the Company.
The Company also entered into a Media Services Agreement with May pursuant
to which the Company and May will develop an integrated marketing program to
promote and support May department store companies, which offer wedding registry
services. The Media Services Agreement has an initial term
50
of three years, which may be extended under certain conditions, and may be
renewed by May for up to three additional one-year terms.
For the year ended December 31, 2002, the Company recorded revenues under
the Media Services Agreement in the amount of $151,000.
10. Purchase Transactions
2001 Purchase Transactions
In February 2001, Weddingpages, Inc. purchased a former franchise market
for $140,000 in cash and the forgiveness of a receivable from the franchisee of
$226,951. In May 2001, Weddingpages, Inc. completed the purchase of another
former franchise market for a total purchase price of $90,000. The aggregate
purchase price for these acquisitions of $456,951 was recorded as goodwill.
2000 Purchase Transactions
Weddingpages, Inc.
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated
as of February 1, 2000, by and among the Company, Knot Acquisition Corporation,
a Delaware corporation and wholly-owned subsidiary of the Company ("Buyer"), and
Weddingpages, Buyer merged with and into Weddingpages on March 29, 2000, with
Weddingpages as the surviving Corporation.
The purchase price of $10.0 million consisted of approximately $9.2 million
for the common stock and outstanding common stock options of Weddingpages,
inclusive of $700,000 payable to the former Chief Executive Officer of
Weddingpages in consideration for the execution of a non-compete agreement and
approximately $775,000 of other costs associated with the acquisition. The
excess of the purchase price over the fair value of net tangible and intangible
assets and liabilities acquired of $10.0 million was recorded as goodwill.
Approximately $527,000 of the purchase price was held in an escrow account and
was subject to certain deductions in the event of third party claims against
indemnified parties. In May 2001, the Company received $150,000 from the escrow
account in satisfaction of certain claims against the sellers. This amount was
recorded as a reduction of goodwill.
Results of operations for Weddingpages have been included with those of the
Company subsequent to March 29, 2000. Unaudited pro forma data for the Company
for the year ended December 31, 2000, which gives effect to the acquisition of
Weddingpages as if it had occurred on January 1, 2000, are shown below. The pro
forma data does not necessarily reflect the actual results that would have been
achieved, nor is it necessarily indicative of future consolidated results of the
Company.
Year ended December 31,
2000
------------
Net revenue $ 25,589,000
Net loss $(16,671,330)
------------
Net loss per share $ (1.14)
============
In August 2000, Weddingpages, Inc. purchased a former franchise market for
$140,000 in cash, the forgiveness of a receivable from the franchisee of
$102,000 and an additional obligation to pay $150,000 in
51
cash in July 2001. In December 2000, Weddingpages, Inc. purchased another former
franchise market for $100,000 in cash. The aggregate purchase price for these
acquisitions of $492,000 was recorded as goodwill.
11. Joint Venture
Gerard Bedouk Holding ("GBH")
In October 2002, the Company terminated its joint venture with Gerard
Bedouk Holding ("GBH"), which had been formed for the purpose of developing and
operating a web site that offered wedding resources and services targeted to
consumers in France and certain other territories in Europe. Under the
termination agreement, GBH is reimbursing the Company for certain expenses
incurred on behalf of the joint venture.
As of December 31, 2002, the Company had recorded a receivable of $49,000
from GBH.
12. Capital Stock
The Company's Amended and Restated Certificate of Incorporation provides
for 105,000,000 authorized shares of capital stock consisting of 100,000,000
shares of common stock each having a par value of $0.01 per share and 5,000,000
shares of preferred stock, each having a par value of $0.001.
Preferred Stock
The Board of Directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 5,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, preferences,
rights, and any qualifications, limitations or restrictions, of the shares of
each series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designation of series.
Common Stock
At December 31, 2002, the Company had reserved the following shares of
common stock for future issuance:
Options under the 1999 Stock Incentive Plan .................... 5,192,439
Options under the 2000 Stock Incentive Plan .................... 435,000
Common stock warrants .......................................... 431,443
Shares under the Employee Stock Purchase Plan .................. 238,473
Options related to the acquisition of Bridalink.com ............ 10,000
---------
Total common stock reserved for future issuance ................ 6,307,355
=========
13. Stock Plans
The 1999 Stock Incentive Plan (the "1999 Plan") was adopted by the Board of
Directors and approved by the stockholders in November 1999, as a successor plan
to the Company's 1997 Long Term Incentive Plan (the "1997 Plan"). All options
under the 1997 Plan have been incorporated into the 1999 Plan and no further
option grants will be made under the 1997 Plan. The 1999 Plan became effective
upon completion of the Company's initial public offering of its common stock.
52
Under the terms of the 1999 Plan, 3,849,868 shares of common stock of the
Company were initially reserved for incentive stock options, nonqualified stock
options (incentive and nonqualified stock options are collectively referred to
as "Options"), stock issuances, or any combination thereof. On May 15, 2001, the
Company's stockholders approved a further increase of 1,000,000 to the number of
shares reserved for issuance under the 1999 Plan. On January 2, 2001 and
January 2, 2002, 293,525 shares and 294,721 shares, respectively, were added to
the reserve pursuant to the automatic share increase provisions of the 1999
Plan. Awards may be granted to such non-employee directors, officers, employees
and consultants of the Company as the Compensation Committee of the Board of
Directors shall in its discretion select. Only employees of the Company are
eligible to receive grants of incentive stock options. The shares reserved under
the 1999 Plan will automatically increase on the first trading day in January
each calendar year, beginning with calendar year 2001, by an amount equal to two
percent (2%) of the total number of shares of the Company's common stock
outstanding on the last trading day of December in the prior calendar year, but
in no event will this annual increase exceed 1,000,000 shares (or such other
lesser number determined by the Board of Directors). Generally, options are
granted at the fair market value of the stock on the date of grant which was
determined by the Board of Directors prior to the completion of the Company's
initial public offering of its stock in December 1999. Options vest over periods
up to four years and have terms not to exceed 10 years.
During 1998 and 1999, the Company granted certain options with exercise
prices that were subsequently determined to be less than the value for financial
reporting purposes on the date of grant. As a result, the Company has recorded
deferred compensation of approximately $2,948,000, net of reversals of stock
options forfeited. This amount is recognized as noncash compensation expense on
an accelerated basis over the vesting period of the options.
The 2000 Non-Officer Stock Incentive Plan (the "2000 Plan") was approved by
the Board of Directors in June 2000. Under the terms of the 2000 Plan, 435,000
shares of common stock of the Company have been reserved for nonqualified stock
options, stock issuances or any combination thereof. Awards may be granted to
employees (other than officers or directors of the Company) and consultants and
other independent advisors who provide services to the Company. Options are
granted at the fair market value of the stock on the date of grant. Generally,
options vest over a four-year period and have terms not to exceed 10 years.
The Employee Stock Purchase Plan (the "ESPP") was adopted by the Board of
Directors and approved by the stockholders in November 1999 and became effective
upon completion of the Company's initial public offering of its common stock.
Under the ESPP, employees of the Company who elect to participate are granted
options to purchase common stock at a 15 percent discount from the market value,
as defined, of such stock. The ESPP permits an enrolled employee to make
contributions to purchase shares of common stock by having withheld from his or
her salary an amount between 1 percent and 15 percent of compensation. The
Compensation Committee of the Board of Directors administers the ESPP. 300,000
shares of common stock of the Company were initially reserved for issuance under
the ESPP. The shares reserved automatically increase on the first trading day in
January of each calendar year, beginning in calendar year 2001, by the lesser of
the (i) the number of shares of common stock issued under the ESPP in the
immediately preceding calendar year, (ii) 300,000 shares or (iii) such other
lesser amount approved by the Board of Directors. On January 2, 2001 and January
2, 2002, 31,842 shares and 45,221 shares, respectively, were added to the
reserve pursuant to the automatic increase provision. During the year ended
December 31, 2002 and 2001, 61,527 shares and 45,221 shares, respectively, were
issued under the ESPP. As of December 31, 2002, there were 238,473 shares
available for issuance under the ESPP.
The following represents a summary of the Company's stock option activity
under the 1999 and 2000 Plans and related information:
53
Weighted
Average
Shares Exercise Price
---------- --------------
Options outstanding at December 31, 1999 ......... 1,618,906 $ 2.30
Options granted .................................. 2,091,750 3.17
Options exercised ................................ (89,295) 0.66
Options canceled ................................. (619,700) 3.91
---------- ----------
Options outstanding at December 31, 2000 ......... 3,001,661 $ 2.61
---------- ----------
Options granted .................................. 1,357,117 0.68
Options exercised ................................ (14,579) 0.23
Options canceled ................................. (1,237,831) 2.49
---------- ----------
Options outstanding at December 31, 2001 ......... 3,106,368 $ 1.83
---------- ----------
Options granted .................................. 242,800 0.63
Options exercised ................................ -- --
Options canceled ................................. (239,346) 2.68
---------- ----------
Options outstanding at December 31, 2002 ......... 3,109,822 $ 1.67
========== ==========
The following table summarizes information about options outstanding at December
31, 2002:
Options outstanding Options exercisable
---------------------- ----------------------
Weighted
average
Number remaining Weighted Number Weighted
outstanding contractual average exercisable average
as of life exercise as of exercise
Range of exercise price 12/31/02 (in years) price 12/31/02 price
- ----------------------- ----------- ----------- -------- ----------- --------
$0.01 to $1.06 ....... 2,099,922 7.77 $ 0.66 1,257,708 $ 0.63
$1.37 to $3.94 ....... 863,834 7.05 2.89 651,881 2.72
$7.87 to $9.44 ....... 146,066 6.64 9.00 121,602 9.00
--------- --------- -------- --------- --------
3,109,822 7.52 $ 1.67 2,031,191 $ 1.80
========= ========= ======== ========= ========
At December 31, 2002, there were 2,280,283 shares available for future
grants under the 1999 Plan and 237,334 shares available for the 2000 Plan.
The per share weighted average fair value of options granted were $0.43,
$0.35 and $1.86 in 2002, 2001 and 2000, respectively. The per share weighted
average fair value of ESPP rights were $0.18, $0.29 and $2.46 in 2002, 2001 and
2000, respectively. The fair value for options and ESPP rights granted have been
estimated on the date of grant using the minimum value method option pricing
model from inception through December 1, 1999 and using the Black-Scholes option
pricing model thereafter, with the following range of assumptions:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Expected option lives........ 1.25 - 4 years 1 .25 - 4 years 1.25 - 4 years
Risk-free interest rate...... 2.02% - 4.38% 4.77% - 5.74% 5.13% - 6.66%
Expected volatility.......... 83.1% 70.5% 72.6%
Dividend yield............... 0% 0% 0%
54
See note 2 for the Company's accounting policy for stock based
compensation, as well as the effect on net loss and net loss per share had
compensation for the stock plans been determined consistent with the provisions
of SFAS No. 123, as amended.
14. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
December 31,
------------
2002 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards ........ $ 16,376,000 $ 16,222,000
Accrued expenses ........................ 1,031,000 334,000
Allowance for doubtful accounts and
reserve for returns ..................... 366,000 467,000
Inventory reserve ....................... 42,000 41,000
Deferred rent ........................... 185,000 147,000
Depreciation and amortization ........... 1,773,000 1,392,000
Other ................................... 3,000 3,000
------------ ------------
Total deferred tax assets .................. 19,776,000 18,606,000
Deferred tax liabilities:
Capitalized software costs ................. (502,000) (326,000)
------------ ------------
Net deferred tax assets .................... 19,274,000 18,280,000
Valuation allowance ........................ (19,274,000) (18,280,000)
------------ ------------
Total net deferred tax assets .............. $ -- $ --
============ ============
Net deferred tax assets have been fully offset by a valuation allowance due
to the uncertainty of realizing such benefit.
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $39 million for federal tax purposes which are set to expire in
years 2011 through 2022.
The reconciliation of income tax expense computed at the U.S. federal
statutory rate to income tax expense for the years ended December 31, 2002, 2001
and 2000 are as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Benefit at federal statutory rate (35%) ..... (1,778,000) (5,280,000) (5,526,000)
Expenses not deductible for U.S. tax purposes 106,000 538,000 821,000
Losses for which no benefit has been provided 1,672,000 4,742,000 4,705,000
----------- ----------- -----------
Financial statement benefit ................. $ -- $ -- $ --
=========== =========== ===========
55
15. Commitments and Contingencies
Operating Leases
The Company leases office facilities and certain warehouse space under
noncancelable operating lease agreements which expire at various dates through
2012. Future minimum lease payments under noncancelable operating leases are as
follows:
Year ending December 31:
2003 .................................................... $ 760,000
2004 .................................................... 832,000
2005 .................................................... 779,000
2006 .................................................... 764,000
2007 .................................................... 789,000
Thereafter .............................................. 2,541,000
----------
Total ................................................... $6,465,000
==========
Future minimum lease payments include amounts under an operational lease,
signed in October 2002, for a new building being constructed to house our
expanding operations in Redding, California. The term of this lease is five
years commencing upon completion of construction, which is currently anticipated
to occur in May 2003.
Rent expense for the years ended December 31, 2002, 2001, and 2000 amounted
to approximately $754,000, $810,000 and $713,000, respectively.
There was no sublease income for the years ended December 31, 2002, 2001
and 2000.
Legal Proceedings
On August 14, 2000, certain Weddingpages franchisees commenced litigation
in the Supreme Court, New York County, New York against The Knot and certain
officers, including David Liu, the Chairman and Chief Executive Officer. The
plaintiffs sought (1) to enjoin The Knot from taking actions, primarily relating
to the sale of advertising in certain local markets, which plaintiffs claim will
damage the value of their Weddingpages franchises, and (2) money damages in an
unspecified amount. On October 19, 2000, The Knot filed its initial response.
On October 27, 2000, the Supreme Court of the State of New York refused to
grant preliminary injunctions sought by certain Weddingpages franchisees. The
court ordered that the parties submit their dispute to a neutral mediator. In
February, March and April 2001, as a result of negotiations among the parties,
with the assistance of the mediator, non-monetary settlements were reached with
seven of the plaintiffs in the action. Six franchisees did not execute the
settlement agreement as negotiated. Five of those franchisees sought a temporary
restraining order and a preliminary injunction to keep The Knot from, among
other things, soliciting Internet advertisement sales within those franchisees'
Weddingpages franchise territories.
On May 31, 2001, the Court denied the franchisees' motion for a temporary
restraining order. On July 2, 2001, the Court heard arguments on the
franchisees' motion for a preliminary injunction. At the same time, the Court
heard arguments on Weddingpages' cross-motion to compel arbitration and on the
Knot's cross-motion to stay litigation pending arbitration.
On August 22, 2001, the Court denied the remaining franchisees' request for
injunctive relief against The Knot, effectively ordered the franchisees to
arbitrate their claims against Weddingpages, and
56
stayed the action against The Knot pending the completion of such arbitration.
In denying the remaining franchisees' motion for injunctive relief, the Court
agreed with The Knot's legal arguments in every material respect. Most
significantly, in a three-page opinion, the Court held that the franchisees
would be unlikely to succeed on the merits of their claims against The Knot.
Despite the Court's order, the franchisees failed to take any action to
initiate arbitration of their dispute with Weddingpages. Thus, on January 25,
2002, Weddingpages commenced arbitration by filing a Demand for Arbitration
before the American Arbitration Association.
On April 17, 2002, the franchisees filed a motion to lift the stay in favor
of The Knot and for a preliminary injunction enjoining The Knot from directly
soliciting the franchisees' customers for The Knot's Internet Web site. On May
23, 2002, The Knot and Weddingpages settled with three of the five remaining
franchisees with no admission of liability, damages or payments being made to
the franchisees. The settlement was stipulated to on the record in court and "So
Ordered" by the judge, and is believed by the Knot to be final and binding on
the parties. In October 2002, these three franchisees signed a written
settlement agreement and release and made certain payments to Weddingpages
related thereto. Additionally, two of the three have signed a related license
agreement with Weddingpages. The Knot and Weddingpages have also reached a final
settlement with one of the two remaining franchisees. As to the final
franchisee, though no release or settlement has been entered, all legal
proceedings in New York have been dismissed, and Weddingpages and the franchisee
are presently engaged in litigation in Texas to which the Knot is not a party.
57
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Write-Offs,
Balance Charged to Charged to Net of Balance at
Beginning Costs and Other Recoveries & End of
Year Ended December 31, 2002 of Year Expenses Accounts Actual Returns Year
--------- ---------- ---------- -------------- ----------
Allowance for Doubtful Accounts............... $814,098 $ 301,713 $ -- $ 341,589 $774,222
Allowance for Returns......................... $196,517 $ 942,698 $ -- $ 953,214 $186,001
Year Ended December 31, 2001
Allowance for Doubtful Accounts............... $821,963 $1,701,619 $ -- $1,709,484 $814,098
Allowance for Returns......................... $ 43,494 $ 881,841 $ -- $ 728,818 $196,517
Year Ended December 31, 2000
Allowance for Doubtful Accounts............... $133,000 $1,075,274 $ -- $ 386,311 $821,963
Allowance for Loan Receivable................. $ 50,000 $ -- $ -- $ 50,000 $ --
Allowance for Returns......................... $ 5,606 $ 376,979 $ -- $ 339,091 $ 43,494
58
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the information in our proxy statement
for the 2003 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 11. Executive Compensation
Incorporated by reference from the information in our proxy statement
for the 2003 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about our equity
compensation plans as of December 31, 2002. All outstanding awards relate to our
common stock. For additional information about our equity compensation plans,
see note 13 to our financial statements in Item 8.
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column) (a)
- ------------- ----------------------- -------------------- ----------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders .......................... 2,912,156 $ 1.5187 2,280,283
Equity compensation plans not approved by
security holders .......................... 197,666 $ 3.9400 237,334
--------- --------- ---------
3,109,822 $ 1.6700 2,517,617
========= ========= =========
The other information required by this Item is incorporated herein by reference
from the information in our proxy statement for the 2003 Annual Meeting of
Stockholders which we will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the information in our proxy statement for
the 2003 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
59
Item 14. Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within 90
days of the filing of this annual report, the Chief Executive Officer and the
Chief Financial Officer have concluded that such controls and procedures are
effective.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their evaluation.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements.
See Index to Consolidated Financial Statements and Schedule on
page 34.
2. Financial Statement Schedules.
See Index to Consolidated Financial Statements and Schedule on
page 34.
(b) Reports on Form 8-K
None
(c) Exhibits
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of February 1, 2000, by and
among the Registrant and Weddingpages, Inc. (Incorporated by
reference to Registrant's Current Report on Form 8-K filed with the
S.E.C. on February 11, 2000)
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to the Registrant's Registration Statement on Form S-1
(Registration number 333-87345) (the "Form S-1")
3.2 Amended and Restated Bylaws (Incorporated by reference to the Form
S-1)
4.1 Specimen Common Stock certificate (Incorporated by reference to the
Form S-1)
4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights of
holders of common stock of the Registrant
4.3 Warrant Agreement of America Online, Inc. (Incorporated by reference
to the Form S-1)
10.1* Employment Agreement between The Knot, Inc. and David Liu
(Incorporated by reference to the Form S-1)
10.2* Employment Agreement between The Knot, Inc. and Carley Roney
(Incorporated by reference to the Form S-1)
10.3* Employment Agreement between The Knot, Inc. and Richard Szefc
(Incorporated by reference to the Form S-1)
10.4* Employment Agreement between The Knot, Inc. and Sandra Stiles
(Incorporated by reference to the Form S-1)
10.5* 2000 Non-Officer Stock Incentive Plan (Incorporated by reference to
Exhibit 99.1 to Registrant's Registration Statement on Form S-8
(Registration number 333-41960))
60
10.6* Amended and restated 1999 Stock Incentive Plan (Incorporated by
reference to Exhibit 99.1 to the Registrant's Registration Statement
on Form S-8 (Registration number 333-74398))
10.7* Employee Stock Purchase Plan (Incorporated by reference to the Form
S-1)
10.8 Third Amended and Restated Investor Rights Agreement (Incorporated
by reference to the Form S-1)
10.9+ Services Agreement between The Knot, Inc. and QVC, Inc.
(Incorporated by reference to the Form S-1)
10.10+ Amended and Restated Anchor Tenant Agreement between The Knot, Inc.
and America Online, Inc. (Incorporated by reference to the Form S-1)
10.11* Form of Indemnification Agreement (Incorporated by reference to the
Form S-1)
10.12 Common Stock Purchase Agreement between The Knot, Inc. and May
Bridal Corporation (Incorporated by reference to Exhibit 10.12 to
Registrant's Annual Report on Form 10-K filed on March 29, 2002)
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
99.1 Certification of Chairman and Chief Executive Officer Pursuant to 18
U.S.C Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ---------------
+ Confidential treatment has been granted for certain portions omitted from this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Confidential
portions of this Exhibit have been separately filed with the Securities and
Exchange Commission.
* Management contract or compensatory plan or arrangement
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, The Knot, Inc. has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York, State of New York, on this 28th day of March, 2003.
THE KNOT, INC.
By: /s/ DAVID LIU
-------------------------------------
David Liu
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 2003.
Signature Title(s)
--------- --------
President, Chief Executive Officer and Chairman of the
/s/ DAVID LIU Board of Directors (principal executive officer)
- ---------------------
David Liu
Chief Financial Officer, Treasurer and Secretary
/s/ RICHARD SZEFC (principal financial and accounting officer)
- ---------------------
Richard Szefc
Chief Operating Officer, Assistant Secretary and
/s/ SANDRA STILES Director
- ---------------------
Sandra Stiles
/s/ RANDY RONNING Director
- ---------------------
Randy Ronning
/s/ ANN WINBLAD Director
- ---------------------
Ann Winblad
/s/ JOSEPH BREHOB Director
- ---------------------
Joseph Brehob
62
CERTIFICATIONS
I, DAVID LIU, certify that:
1. I have reviewed this annual report on Form 10-K of The Knot, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ DAVID LIU
------------------------------------
Name: David Liu
Title: Chairman and Chief Executive Officer
(principal executive officer)
63
I, RICHARD SZEFC, certify that:
1. I have reviewed this annual report on Form 10-K of The Knot, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 By: /s/ RICHARD SZEFC
--------------------------
Name: Richard Szefc
Title: Chief Financial Officer, Treasurer
and Secretary
(principal financial officer)
64
EXHIBIT INDEX
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of February 1, 2000, by and
among the Registrant and Weddingpages, Inc. (Incorporated by
reference to Registrant's Current Report on Form 8-K filed with the
S.E.C. on February 11, 2000)
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to the Registrant's Registration Statement on Form S-1
(Registration number 333-87345) (the "Form S-1")
3.2 Amended and Restated Bylaws (Incorporated by reference to the Form
S-1)
4.1 Specimen Common Stock certificate (Incorporated by reference to the
Form S-1)
4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights of
holders of common stock of the Registrant
4.3 Warrant Agreement of America Online, Inc. (Incorporated by reference
to the Form S-1)
10.1* Employment Agreement between The Knot, Inc. and David Liu
(Incorporated by reference to the Form S-1)
10.2* Employment Agreement between The Knot, Inc. and Carley Roney
(Incorporated by reference to the Form S-1)
10.3* Employment Agreement between The Knot, Inc. and Richard Szefc
(Incorporated by reference to the Form S-1)
10.4* Employment Agreement between The Knot, Inc. and Sandra Stiles
(Incorporated by reference to the Form S-1)
10.5* 2000 Non-Officer Stock Incentive Plan (Incorporated by reference to
Exhibit 99.1 to Registrant's Registration Statement on Form S-8
(Registration number 333-41960))
10.6* Amended and restated 1999 Stock Incentive Plan (Incorporated by
reference to Exhibit 99.1 to the Registrant's Registration Statement
on Form S-8 (Registration number 333-74398))
10.7* Employee Stock Purchase Plan (Incorporated by reference to the Form
S-1)
10.8 Third Amended and Restated Investor Rights Agreement (Incorporated
by reference to the Form S-1)
10.9+ Services Agreement between The Knot, Inc. and QVC, Inc.
(Incorporated by reference to the Form S-1)
10.10+ Amended and Restated Anchor Tenant Agreement between The Knot, Inc.
and America Online, Inc. (Incorporated by reference to the Form S-1)
10.11* Form of Indemnification Agreement (Incorporated by reference to the
Form S-1)
10.12 Common Stock Purchase Agreement between The Knot, Inc. and May
Bridal Corporation (Incorporated by reference to Exhibit 10.12 to
Registrant's Annual Report on Form 10-K filed on March 29, 2002)
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
99.1 Certification of Chairman and Chief Executive Officer Pursuant to 18
U.S.C Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ---------------
+ Confidential treatment has been granted for certain portions omitted from this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Confidential
portions of this Exhibit have been separately filed with the Securities and
Exchange Commission.
* Management contract or compensatory plan or arrangement