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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28271
THE KNOT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3895178
(State of incorporation) (I.R.S. Employer Identification Number)
462 Broadway, 6th Floor
New York, New York 10013
(Address of Principal Executive Officer and Zip Code)
(212) 219-8555
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X]
As of May 9, 2003, there were 18,404,036 shares of the registrant's common stock
outstanding.
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002....................................................................... 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002........................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002........................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations... 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 26
Item 4: Controls and Procedures................................................................. 26
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................................... 27
Item 6: Exhibits and Reports on Form 8-K........................................................ 27
2
Item 1. Financial Statements (Unaudited)
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002*
(Unaudited)
----------- ------------
Assets
Current assets:
Cash and cash equivalents .................................................. $ 9,412,927 $ 9,305,670
Restricted cash............................................................. 252,852 251,871
Accounts receivable, net of allowances of $1,283,991 and $960,223 at
March 31, 2003 and December 31, 2002, respectively..................... 3,771,429 4,791,458
Inventories................................................................. 1,493,290 1,291,866
Deferred production and marketing costs..................................... 205,766 443,502
Other current assets........................................................ 741,432 556,358
----------- ------------
Total current assets........................................................... 15,877,696 16,640,725
Property and equipment, net.................................................... 1,973,554 1,948,481
Intangible assets, net......................................................... 8,809,136 8,834,136
Other assets................................................................... 346,537 351,570
------------ ------------
Total assets................................................................... $ 27,006,923 $ 27,774,912
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses....................................... $ 4,883,319 $ 5,112,586
Deferred revenue............................................................ 5,489,133 5,827,432
Current portion of long-term debt........................................... 76,268 137,674
------------ ------------
Total current liabilities...................................................... 10,448,720 11,077,692
Long-term debt................................................................. 234,901 234,901
Other liabilities.............................................................. 473,566 445,088
------------ ------------
Total liabilities.............................................................. 11,157,187 11,757,681
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 18,404,036
shares and 18,373,327 shares issued and outstanding at
March 31, 2003 and December 31, 2002, respectively....................... 184,040 183,733
Additional paid-in-capital.................................................. 64,399,692 64,399,894
Deferred compensation....................................................... (27,045) (54,835)
Accumulated deficit......................................................... (48,706,951) (48,511,561)
------------- -------------
Total stockholders' equity..................................................... 15,849,736 16,017,231
------------ ------------
Total liabilities and stockholders' equity..................................... $ 27,006,923 $ 27,774,912
============ ============
*The condensed consolidated balance sheet as of December 31, 2002 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
---- ----
Net revenues....................................................... $ 8,665,640 $ 6,132,173
Cost of revenues................................................... 2,930,924 2,392,635
----------- -----------
Gross profit....................................................... 5,734,716 3,739,538
Operating expenses:
Product and content development................................. 1,072,063 1,033,769
Sales and marketing............................................. 2,861,506 2,615,188
General and administrative...................................... 1,738,866 2,037,620
Non-cash compensation........................................... 20,386 53,930
Non-cash sales and marketing.................................... - 163,308
Depreciation and amortization................................... 253,155 342,207
----------- -----------
Total operating expenses........................................... 5,945,976 6,246,022
----------- -----------
Loss from operations............................................... (211,260) (2,506,484)
Interest income, net............................................... 15,870 15,329
----------- -----------
Net loss........................................................... $ (195,390) $(2,491,155)
=========== ===========
Net loss per share - basic and diluted............................. $ (0.01) $ (0.15)
=========== ===========
Weighted average number of shares used in calculating
basic and diluted net loss per share............................ 18,394,233 16,540,836
=========== ===========
See accompanying notes.
4
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
---- ----
Operating activities
Net loss ............................................................. $ (195,390) $(2,491,155)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................... 228,155 317,207
Amortization of intangibles........................................ 25,000 25,000
Amortization of deferred compensation.............................. 20,386 53,930
Amortization of deferred sales and marketing....................... - 163,308
Reserve for returns................................................ 678,584 391,829
Allowance for doubtful accounts.................................... 26,851 290,951
Other non-cash charges............................................. 5,968 3,973
Changes in operating assets and liabilities...........................
Restricted cash.................................................... (981) (100,084)
Accounts receivable................................................ 314,594 44,849
Inventories........................................................ (201,424) (84,881)
Deferred production and marketing.................................. 237,736 186,901
Other current assets............................................... (185,074) 46,431
Other assets....................................................... 5,033 21,500
Accounts payable and accrued expenses.............................. (257,873) (76,624)
Deferred revenue................................................... (338,299) 567,157
Other liabilities.................................................. 28,478 32,229
----------- -----------
Net cash provided by (used in) operating activities................... 391,744 (607,479)
Investing activities
Purchases of property and equipment................................... (230,590) (49,059)
Acquisition of businesses, net of acquired cash....................... (38,400) (38,400)
----------- -----------
Net cash used in investing activities................................. (268,990) (87,459)
Financing activities
Repayment of current portion of long term borrowings.................. (23,006) (1,417,930)
Financing costs....................................................... - (33,000)
Proceeds from issuance of common stock................................ - 5,008,625
Proceeds from exercise of stock options............................... 7,509 -
----------- -----------
Net cash provided by (used in) financing activities................... (15,497) 3,557,695
Increase in cash and cash equivalents................................. 107,257 2,862,757
Cash and cash equivalents at beginning of period...................... 9,305,670 6,782,051
----------- -----------
Cash and cash equivalents at end of period............................ $ 9,412,927 $ 9,644,808
=========== ===========
See accompanying notes.
5
THE KNOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying financial information as of December 31, 2002 is
derived from audited financial statements. The financial statements as of March
31, 2003 and for the three months ended March 31, 2003 and 2002 are unaudited.
The unaudited interim financial statements have been prepared on the same basis
as the annual financial statements and, in the opinion of the Company's
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly its financial position as of March 31,
2003, the results of operations for the three months ended March 31, 2003 and
2002 and cash flows for the three months ended March 31, 2003 and 2002.
As a result of a weak national online advertising market in 2001 and
early 2002, the Company's national online sponsorship and advertising revenue
decreased from approximately $8.8 million for the year ended December 31, 2000
to approximately $1.7 million and $1.9 million for the years ended December 31,
2001 and 2002, respectively. To respond to its liquidity needs, the Company's
management completed a number of cost reduction initiatives during 2001
including reductions in staff, the restructuring of its international anchor
tenant agreement with America Online ("AOL"), reductions in capital
expenditures, as well as additional programs resulting in savings in a number of
other operating expense categories, the full annual benefits of which were
realized in 2002. Operating expenses before depreciation and amortization and
other non-cash charges decreased from approximately $27.1 million in 2001 to
$22.4 million in 2002. Further, in 2002, the Company added a number of category
specific advertising programs to broaden the group of potential national
advertisers who can benefit from targeting its audience. These programs
commenced in the third quarter of 2002 and are expected to contribute to further
growth in national online advertising revenue in 2003. The Company has also
increased the number of markets and advertising programs available to local
vendors and has expanded the product and service offerings available to
consumers of wedding supplies. 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.
As a result of these initiatives, 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
The condensed consolidated financial statements include the accounts of
The Knot and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results may differ from these estimates. Interim
results are not necessarily indicative of results for a full year.
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
6
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.
RESTRICTED CASH
Restricted cash as of March 31, 2003 and December 31, 2002 includes
money held for letters of credit securing certain inventory purchases and an
amount held in escrow with one of the Company's bankcard processing services
providers.
NET REVENUES BY TYPE
Net revenues by type are as follows:
Three Months Ended March 31,
2003 2002
---- ----
Sponsorship and advertising............................ $2,859,238 $1,313,219
Merchandise............................................ 3,777,231 3,061,286
Publishing and other................................... 2,029,171 1,757,668
---------- ----------
Total.................................................. $8,665,640 $6,132,173
========== ==========
For the three months ended March 31, 2003 and 2002, merchandise revenue
included outbound shipping and handling charges of approximately $435,000 and
$351,000, respectively.
COST OF REVENUES
Cost of revenues by type are as follows:
Three Months Ended March 31,
2003 2002
---- ----
Sponsorship and advertising............................ $ 90,601 $ 162,435
Merchandise............................................ 1,889,685 1,548,643
Publishing and other................................... 950,638 681,557
---------- ----------
Total.................................................. $2,930,924 $2,392,635
========== ==========
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.
For the three months ended March 31, 2003 and 2002, no customer
accounted for more than 2% of net revenues. At March 31, 2003 and December 31,
2002, no single customer accounted for more than 3% 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 Employee Stock Purchase Plan
7
("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.
Three Months Ended March 31,
2003 2002
---- ----
Net loss, as reported .......................... $ (195,390) $ (2,491,155)
Add: Total stock-based employee
compensation expense included in
reported net loss............................. 20,386 53,930
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards........ $ (59,425) $ (147,775)
-------------- ------------
Net loss, pro forma $ (234,429) $ (2,585,000)
============== ============
Basic and diluted net loss per share, as reported $ (0.01) $ (0.15)
============== ============
Basic and diluted net loss per share, pro forma $ (0.01) $ (0.16)
============== ============
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, the day prior to the Company's initial
public offering of its common stock, and using the Black-Scholes pricing model
thereafter.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 adopted SFAS No. 143 effective
January 1, 2003. The adoption of this new statement did not 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 and does not affect the recognition of costs under the Company's current
activities. Adoption of this standard may impact the timing of the recognition
of costs associated with future exit or disposal activities, depending upon the
actions initiated.
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 November 2002, the Emerging Issues Task Force (EITF") reached a
consensus opinion on EITF 00-21 "Revenue Arrangements with Multiple
Deliverables." This Issue addresses the determination of whether an arrangement
involving more than one deliverable contains more than one unit of accounting
and how arrangement consideration should be measured and allocated to the
separate units of accounting. EITF Issue 00-21 will be effective
8
for revenue arrangements entered into for fiscal quarters beginning after June
15, 2003, or the Company may elect to report the change in accounting as a
cumulative-effect adjustment. The Company is reviewing EITF 00-21 and has not
yet determined the impact this Issue will have on its operating results or
financial position.
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. SFAS No. 148 did not
require the Company to change to the fair value method of accounting for
stock-based compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" which requires the consolidation of variable
interest entities, as defined. This interpretation is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective July 1, 2003.
The Company has not created any variable interest entities.
3. INVENTORY
Inventory consists of the following:
March 31, December 31,
2003 2002
---- ----
Raw materials............................................ $ 88,315 $ 91,556
Finished goods........................................... 1,404,975 1,200,310
---------- ----------
$1,493,290 $1,291,866
========== ==========
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, December 31,
2003 2002
---- ----
Goodwill, net........................................... $8,409,136 $8,409,136
Covenant not to compete................................. 700,000 700,000
Less accumulated amortization....................... (300,000) (275,000)
---------- ----------
Net..................................................... 400,000 425,000
---------- ----------
Total................................................... $8,809,136 $8,834,136
========== ==========
The Company completed its most recent goodwill impairment test as of
October 1, 2002. The test involved the assessment of the fair market value of
the Company as the single reporting unit. No impairment of goodwill was
indicated at that time. 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.
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 2007.
9
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31, December 31,
2003 2002
---- ----
Accounts payable......................................... $ 983,613 $ 768,329
Distribution and other service fees...................... 2,593,001 2,574,024
Compensation and related benefits........................ 540,913 1,020,916
Other accrued expenses................................... 765,792 749,317
---------- ----------
Total.................................................... $4,883,319 $5,112,586
========== ==========
6. LONG-TERM DEBT
Long-term debt as of March 31, 2003 consists of the following:
Note due in annual installments of $60,000 through October 2008,
based on imputed interest of 8.75%............................................... $271,173
10.0% equipment installment note, due in monthly installments
of $8,131 through August 2003.................................................... 39,996
--------
Total long-term debt............................................................. 311,169
Less current portion of long-term debt........................................... 76,268
--------
Long term-debt, excluding current portion........................................ $234,901
========
Maturities of long-term obligations for the five years ending
March 31, 2008 are as follows: 2004, $76,268; 2005, $39,446; 2006,
$42,898; 2007, $46,651 and 2008, $50,733 and $55,173 thereafter.
Interest expense for the three months ended March 31, 2003 and
2002 was $12,000 and $21,000, respectively.
10
Item 2. 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, from the sale of merchandise and from the publication of magazines.
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 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.
For the three months ended March 31, 2003, our top seven advertisers
accounted for 6% of our net revenues.
11
For the three months ended March 31, 2002, our top seven advertisers accounted
for 5% 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 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 certain 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
March 31, 2003 and December 31, 2002, our allowance for doubtful accounts
amounted to $744,000 and $774,000, 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
As of March 31, 2003, we had recorded goodwill and other intangible
assets of $8,809,000. In our most recent assessment of impairment of goodwill as
of 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 March 31,
2003, 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 March
31, 2003, we have established a full valuation allowance of $19.3 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.
12
Results of Operations
Net Revenues
Net revenues increased to $8.7 million for the three months ended March
31, 2003 from $6.1 million for the three months ended March 31, 2002.
Sponsorship and advertising revenues increased to $2.9 million for the
three months ended March 31, 2003, as compared to $1.3 million for the three
months ended March 31, 2002. Revenue from local vendor online advertising
programs increased by $820,000 or approximately 83% primarily as a result of
additional contracts sold which was due, in part, to expansion in the number of
local markets serviced and in the number of programs offered. In addition, there
was an increase of approximately $726,000 in national online sponsorship and
advertising revenue due to a larger number of contracts sold including contracts
related to our category specific programs. Sponsorship and advertising revenues
amounted to 33% of our net revenues for the three months ended March 31, 2003
and 21% of our net revenues for the three months ended March 31, 2002.
Merchandise revenues increased to $3.8 million for the three months
ended March 31, 2003, as compared to $3.1 million for the three months ended
March 31, 2002. This increase was primarily due to an increase in sales of
wedding supplies through our websites of $775,000, or by approximately 28% as a
result of the expansion of product and service offerings and increased
membership and traffic. Merchandise revenues amounted to 43% of our net revenues
for the three months ended March 31, 2003 and 50% of our net revenues for the
three months ended March 31, 2002.
Publishing and other revenues increased to $2.0 million for the three
months ended March 31, 2003, as compared to $1.8 million for the three months
ended March 31, 2002. The increase in revenue was primarily derived from The
Knot Magazine through the sale of a larger number of print advertising contracts
and an increase in the number of copies sold as a result of increased
circulation. Publishing and other revenues amounted to 23% of our net revenues
for the three months ended March 31, 2003 and 29% of our net revenues for the
three months ended March 31, 2002.
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
magazines and our national 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 $2.9 million for the three months ended
March 31, 2003, from $2.4 million for the three months ended March 31, 2002.
Cost of revenues from the sale of merchandise increased by $341,000 primarily as
a result of increased sales of wedding supplies. In addition, cost of revenues
for The Knot Magazine increased by $293,000 as a result of a larger number of
copies printed due to increased distribution for the February 2003 issue. As a
percentage of our net revenues, cost of revenues decreased to 34% for the three
months ended March 31, 2003, from 39% for the three months ended March 31, 2002
primarily due to a larger mix of higher margin sponsorship and advertising
revenues. The improvement resulting from the change in our revenue mix was
offset, in part, by a reduced publishing margin due to the investment associated
with the increased number of copies distributed of The Knot Magazine which we
expect to recover from further growth in print advertising in future issues of
this publication.
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 increased to $1.1 million for
the three months ended March 31, 2003 from $1.0 million for the three months
ended December 31, 2002. This increase resulted from small increases in
personnel and related expenses and in a number of other expense categories. As a
percentage of our net revenues, product and content development expenses
decreased to 12% for the three months ended March 31, 2003 from 17% for the
three months ended March 31, 2002.
13
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 advertising and promotional activities and
fulfillment and distribution of merchandise.
Sales and marketing expenses increased to $2.9 million for the three
months ended March 31, 2003 from $2.6 million for the three months ended March
31, 2002. The increase was the result of higher personnel and related costs of
$133,000 to support the growth of our wedding supplies operation, higher
commissions of $185,000 as a result of increased advertising revenue and an
increase of approximately $196,000 in promotion, fulfillment and other costs
related to the increased distribution of The Knot Magazine. These increases were
partially offset by the elimination of $300,000 of quarterly distribution fees
under our anchor tenant agreement with AOL. As a percentage of our net revenues,
sales and marketing expenses decreased to 33% for the three months ended March
31, 2003 from 43% for the three months ended March 31, 2002.
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 $1.7 million for the
three months ended March 31, 2003 from $2.0 million for the three months ended
March 31, 2002. This decrease was primarily due to reduced bad debt expense of
$264,000 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. As a percentage of our
net revenues, general and administrative expenses decreased to 20% for the three
months ended March 31, 2003 from 33% for the three months ended March 31, 2002.
Non-Cash Compensation
We recorded no deferred compensation during the three months ended
March 31, 2003. Amortization of deferred compensation for this period decreased
to $20,000 from $54,000 for the three months ended March 31, 2002.
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. Deferred sales and marketing was fully amortized as of
December 31, 2002.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and capitalized software and amortization
of intangible assets related to acquisitions.
Depreciation and amortization expenses decreased to $253,000 for the
three months ended March 31, 2003, from $342,000 for the three months ended
March 31, 2002. The decrease was primarily due to a reduction in capital
expenditures in fiscal 2002 and 2001.
Interest Income
Interest income, net of interest expense, was $16,000 for the three
months ended March 31, 2003, which approximated the amount in the corresponding
period for 2002.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
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asset retirement costs. We adopted SFAS No. 143 effective January 1, 2003. The
adoption of this new statement did not have a material impact on our 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 and does not affect the recognition of costs under our current activities.
Adoption of this standard may impact the timing of the recognition of costs
associated with future exit or disposal activities, depending upon the actions
initiated.
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 November 2002, the Emerging Issues Task Force (EITF") reached a
consensus opinion on EITF 00-21 "Revenue Arrangements with Multiple
Deliverables." This Issue addresses the determination of whether an arrangement
involving more than one deliverable contains more than one unit of accounting
and how arrangement consideration should be measured and allocated to the
separate units of accounting. EITF Issue 00-21 will be effective for revenue
arrangements entered into for fiscal quarters beginning after June 15, 2003, or
we may elect to report the change in accounting as a cumulative-effect
adjustment. We are reviewing EITF 00-21 and have not yet determined the impact
this Issue will have on our operating results or financial position.
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. SFAS No. 148 did not require
us to change to the fair value method of accounting for stock-based
compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" which requires the consolidation of variable
interest entities, as defined. This interpretation is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective July 1, 2003.
We have not created any variable interest entities.
Liquidity and Capital Resources
As of March 31, 2003, our cash and cash equivalents amounted to $9.4
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 provided by operating activities was $392,000 for the three
months ended March 31, 2003. Depreciation and amortization, reserve for returns
and other non-cash charges exceeded the loss for the period by $790,000 and
accounts receivable and deferred production and marketing costs decreased by
$315,000 and $238,000, respectively. These sources of cash were partially offset
by increases in inventory and other current assets of $201,000 and $185,000,
respectively, and by decreases in accounts payable and accrued expenses of
$258,000 and deferred
15
revenue of $338,000. 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 $1.2 million from December 31, 2002
through March 31, 2003. Net cash used in operating activities was $607,000 for
the three months ended March 31, 2002. This resulted primarily from the loss for
the period, as adjusted for depreciation and amortization and other non-cash
charges of $1.2 million, partially offset by a decrease in deferred production
and marketing expense of $187,000 and an increase in deferred revenue of
$567,000.
Net cash used in investing activities was $269,000 for the three months
ended March 31, 2003 primarily due to purchases of property and equipment. Net
cash used in investing activities was $87,000 for the three months ended March
31, 2002, primarily due to purchases of property and equipment of $49,000 and
cash paid of $38,000 with respect to a termination liability resulting from the
acquisition of Weddingpages.
Net cash used in financing activities was $15,000 for the three months
ended March 31, 2003 primarily due to repayments of the current portion of
long-term debt. Net cash provided by financing activities was $3,558,000 for the
three months ended March 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 $5,000,000, less related costs, partially offset by the repayment of
the outstanding balance under Weddingpages' line of credit agreement on February
22, 2002 of $1,245,668.
As of March 31, 2003, we had no material commitments for capital
expenditures.
As of March 31, 2003, we had commitments under non-cancelable operating
leases amounting to approximately $6.3 million, of which $793,000 will be due on
or before March 31, 2004, an aggregate of $2.4 million will be due in the three
years ended March 31, 2007, and $3.2 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 June
2003.
As a result of a weak national online advertising market in 2001 and
early 2002, our national online sponsorship and advertising revenue decreased
from approximately $8.8 million for the year ended December 31, 2000, to
approximately $1.7 million and $1.9 million for the years ended December 31,
2001 and 2002, respectively. To respond to our liquidity needs, we completed a
number of cost reduction initiatives during 2001, including reductions in staff,
the 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. Operating expenses before depreciation and
amortization and other non-cash charges decreased from approximately $27.1
million in 2001 to $22.4 million in 2002. Further, in 2002, we added a number of
category specific advertising programs to broaden the group of potential
national advertisers who can benefit from targeting our audience. These programs
commenced in the third quarter of 2002 and are expected to contribute to further
growth in national online advertising revenue in 2003. We have also increased
the number of markets and advertising programs available to local vendors and
have expanded the product and service offerings available to consumers of
wedding supplies. 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.
As a result of these initiatives, 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.
16
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Quarterly Report on
Form 10-Q, 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 Quarterly
Report on Form 10-Q 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 Quarterly 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."
17
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 incurred significant
losses. We incurred net losses of $15.1 million for the year ended December 31,
2001, $5.1 million for the year ended December 31, 2002 and approximately
$195,000 for the three months ended March 31, 2003. As of March 31, 2003, our
accumulated deficit was $48.7 million. We 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:
o the level of online usage and traffic on our Web sites;
18
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 regional magazine publishing cycle;
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 20% of our net revenues for the year ended
December 31, 2001, 23% of our net revenues for the year ended December 31, 2002
and 33% of our net revenues for the three months ended March 31, 2003. Our
national online sponsorship and advertising revenue was approximately $1.7
million for the year ended December 31, 2001, $1.9 million for the year ended
December 31, 2002 and $1.1 million for the three months ended March 31, 2003.
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
19
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.
20
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 43% 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
21
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, 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
22
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 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 March 31, 2003, 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 78% 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
23
is currently available for quotation on the OTC Bulletin Board. Selling our
common stock has become, and may continue to 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.
24
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.
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 three years to
determine
25
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
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 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, result 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 $9.4
million as of March 31, 2003. 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.
Item 4. 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 quarterly report, the Chief Executive Officer and the
Chief Financial Officer have concluded that such controls and procedures are
effective.
26
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is engaged in legal actions arising in the ordinary course
of business and believes that the ultimate outcome of these actions will not
have a material effect on its results of operations and financial position.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
99.1 Certification of Chairman and 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.
b) Reports on Form 8-K
We filed a current report on Form 8-K, item 5, dated January 6, 2003
and filed on January 9, 2003, reporting that we entered into the First
Amendment to the Amended and Restated Anchor Tenant Agreement with
America Online, Inc.
We filed a current report on Form 8-K, item 5, dated February 25, 2003
and filed on February 26, 2003, reporting that we issued a press
release announcing our financial results as of and for the quarter and
year ended December 31, 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 2003 THE KNOT, INC.
By: /s/ Richard Szefc
------------------------------------------
Richard Szefc
Chief Financial Officer (Principal Financial Officer
and Duly Authorized Officer)
28
CERTIFICATIONS
I, DAVID LIU, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Knot, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: May 13, 2003
By: /s/ DAVID LIU
----------------------------------------
Name: David Liu
Title: Chairman and Chief Executive Officer
(principal executive officer)
29
I, RICHARD SZEFC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Knot, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: May 13, 2003 By: /s/ RICHARD SZEFC
--------------------------------------------
Name: Richard Szefc
Title: Chief Financial Officer, Treasurer
and Secretary
(principal financial officer)
30
EXHIBIT INDEX
Number Description
- ------ -----------
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.