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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 June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28271
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 August 8, 2003, there were 18,539,579 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 June 30, 2003 and
December 31, 2002....................................................................... 3
Condensed Consolidated Statements of Operations for the three months and six
months ended June 30, 2003 and 2002..................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 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.............................. 27
Item 4: Controls and Procedures................................................................. 27
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................................... 28
Item 4: Submission of Matters to a Vote of Security Holders..................................... 28
Item 6: Exhibits and Reports on Form 8-K........................................................ 28
2
Item 1. Financial Statements (Unaudited)
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2003 December 31,
(Unaudited) 2002*
----------- ------------
Assets
Current assets:
Cash and cash equivalents .......................................... $ 10,431,145 $ 9,305,670
Restricted cash .................................................... 251,871 251,871
Accounts receivable, net of allowances of $1,032,420 and $960,223 at
June 30, 2003 and December 31, 2002, respectively ............. 3,077,532 4,791,458
Inventories ........................................................ 1,759,701 1,291,866
Deferred production and marketing costs ............................ 657,584 443,502
Other current assets ............................................... 588,968 556,358
------------ ------------
Total current assets .................................................. 16,766,801 16,640,725
Property and equipment, net ........................................... 1,888,704 1,948,481
Intangible assets, net ................................................ 8,784,136 8,834,136
Other assets .......................................................... 331,458 351,570
------------ ------------
Total assets .......................................................... $ 27,771,099 $ 27,774,912
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses .............................. $ 5,461,968 $ 5,112,586
Deferred revenue ................................................... 4,900,920 5,827,432
Current portion of long-term debt .................................. 52,697 137,674
------------ ------------
Total current liabilities ............................................. 10,415,585 11,077,692
Long-term debt ........................................................ 234,901 234,901
Other liabilities ..................................................... 482,045 445,088
------------ ------------
Total liabilities ..................................................... 11,132,531 11,757,681
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized;
18,416,848 shares and 18,373,327 shares issued and outstanding at
June 30, 2003 and December 31, 2002, respectively ............... 184,168 183,733
Additional paid-in-capital ......................................... 64,397,769 64,399,894
Deferred compensation .............................................. (8,036) (54,835)
Accumulated deficit ................................................ (47,935,333) (48,511,561)
------------ ------------
Total stockholders' equity ............................................ 16,638,568 16,017,231
------------ ------------
Total liabilities and stockholders' equity ............................ $ 27,771,099 $ 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 June 30, Six Months Ended June 30,
2002 2003 2003 2002
---- ---- ---- ----
Net revenues $10,143,271 $ 8,274,063 $18,808,911 $14,406,236
Cost of revenues 3,303,201 2,932,525 6,234,125 5,325,160
----------- ----------- ----------- -----------
Gross profit 6,840,070 5,341,538 12,574,786 9,081,076
Operating expenses:
Product and content development 1,031,511 989,893 2,103,574 2,023,662
Sales and marketing 2,757,461 2,959,558 5,618,968 5,574,746
General and administrative 2,026,326 1,941,171 3,765,191 3,978,791
Non-cash compensation 11,605 39,234 31,991 93,164
Non-cash sales and marketing -- 163,308 -- 326,616
Depreciation and amortization 238,296 342,634 491,451 684,841
----------- ----------- ----------- -----------
Total operating expenses 6,065,199 6,435,798 12,011,175 12,681,820
----------- ----------- ----------- -----------
Income (loss) from operations 774,871 (1,094,260) 563,611 (3,600,744)
Interest and other income, net 26,747 33,216 42,617 48,545
----------- ----------- ----------- -----------
Income (loss) before income taxes 801,618 (1,061,044) 606,228 (3,552,199)
----------- ----------- ----------- -----------
Provision for income taxes 30,000 -- 30,000 --
----------- ----------- ----------- -----------
Net income (loss) $ 771,618 $(1,061,044) $ 576,228 $(3,552,199)
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.04 $ (0.06) $ 0.03 $ (0.20)
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.04 $ (0.06) $ 0.03 $ (0.20)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding
Basic 18,409,892 18,337,164 18,402,106 17,443,962
=========== =========== =========== ===========
Diluted 19,783,362 18,337,164 19,354,868 17,443,962
=========== =========== =========== ===========
See accompanying notes
4
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2003 2002
---- ----
Operating activities
Net income (loss)..................................................... $ 576,228 $(3,552,199)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:....................................
Depreciation and amortization...................................... 441,451 634,841
Amortization of intangible assets.................................. 50,000 50,000
Amortization of deferred compensation.............................. 31,991 93,164
Amortization of deferred sales and marketing....................... - 326,616
Reserve for returns................................................ 768,011 497,128
Allowance for doubtful accounts.................................... 124,371 426,928
Other non-cash charges............................................. 11,868 10,674
Changes in operating assets and liabilities
Restricted cash.................................................... -- (59,560)
Accounts receivable................................................ 821,544 (654,382)
Inventories........................................................ (467,835) (384,959)
Deferred production and marketing.................................. (214,082) (51,111)
Other current assets............................................... (32,610) 118,780
Other assets....................................................... 20,112 104,867
Accounts payable and accrued expenses.............................. 346,422 860,936
Deferred revenue................................................... (926,512) 856,029
Other liabilities.................................................. 36,957 60,707
----------- -----------
Net cash provided by (used in) operating activities................... 1,587,916 (661,541)
Investing activities
Purchases of property and equipment................................... (390,582) (126,109)
Acquisition of businesses, net of acquired cash....................... (38,400) (76,800)
----------- -----------
Net cash used in investing activities................................. (428,982) (202,909)
Financing activities
Repayment of short-term borrowings.................................... (46,577) (1,452,196)
Financing costs....................................................... -- (33,000)
Proceeds from issuance of common stock................................ 7,486 5,008,625
Proceeds from exercise of stock options............................... 5,632 --
----------- -----------
Net cash provided by (used in) financing activities................... (33,459) 3,523,429
Increase in cash and cash equivalents................................. 1,125,475 2,658,979
Cash and cash equivalents at beginning of period...................... 9,305,670 6,782,051
----------- -----------
Cash and cash equivalents at end of period............................ $10,431,145 $ 9,441,030
=========== ===========
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 June
30, 2003 and for the three and six months ended June 30, 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
June 30, 2003, the results of operations for the three and six months ended June
30, 2003 and 2002 and cash flows for the six months ended June 30, 2003 and
2002.
As a result of a weak national online advertising market in 2001 and
through the first six months of 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.
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 sustain 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 INCOME/LOSS PER SHARE
The Company computes net income or loss per share in accordance with
SFAS No. 128, "Earnings per Share." Basic net income or loss per share is
computed by dividing net income or loss by the weighted average number of common
shares outstanding during the period. Diluted net income or loss per share
adjusts basic income or
6
loss per share for the effects of convertible securities, stock options and
other potentially dilutive financial instruments, only in the periods in which
such effect is dilutive. For the three and six months ended June 30, 2003, the
weighted average number of shares used in calculating diluted earnings per share
includes options to purchase common stock of 1,373,470 and 952,762,
respectively. The calculation of earnings or loss per share for the three and
six months ended June 30, 2003 excludes the weighted average number of
securities listed below because to include them in the calculation would be
antidilutive.
Three Months Six Months
Ended June 30, Ended June 30,
2003 2003
---- ----
Options to purchase common stock 587,000 1,157,000
Common stock warrant 431,000 431,000
--------- ---------
1,018,000 1,588.000
========= =========
There were no dilutive securities in the three and six month periods ended June
30, 2002.
SEGMENT INFORMATION
The Company operates in one segment.
RESTRICTED CASH
Restricted cash as of June 30, 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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Type
Sponsorship and advertising $ 2,912,019 $ 1,439,670 $ 5,771,257 $ 2,752,889
Merchandise 5,022,021 4,227,301 8,799,252 7,288,587
Publishing and other 2,209,231 2,607,092 4,238,402 4,364,760
----------- ----------- ----------- -----------
Total $10,143,271 $ 8,274,063 $18,808,911 $14,406,236
=========== =========== =========== ===========
For the three months ended June 30, 2003 and 2002, merchandise revenue
included outbound shipping and handling charges of approximately $601,000 and
$489,000, respectively. For the six months ended June 30, 2003 and 2002,
merchandise revenue included outbound shipping and handling charges of
approximately $1,036,000 and $839,000, respectively.
COST OF REVENUES
Cost of revenues by type are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Type
Sponsorship and advertising $ 124,949 $ 139,298 $ 215,550 $ 301,732
Merchandise 2,552,803 2,078,649 4,442,489 3,627,292
Publishing and other 625,449 714,578 1,576,086 1,396,136
---------- ---------- ---------- ----------
Total $3,303,201 $2,932,525 $6,234,125 $5,325,160
========== ========== ========== ==========
7
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 and six months ended June 30, 2003 and 2002, no customer
accounted for more than 2% of net revenues. At June 30, 2003 and December 31,
2002, no single customer accounted for more than 6% and 3%, respectively, of
accounts receivable.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for by using the intrinsic
value-based method in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, and the Company complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the
Company only records compensation expense for any stock options granted with an
exercise price that is less than the fair market value of the underlying stock
at the date of grant. The Company does not record compensation expense for
rights to purchase shares under its Employee Stock Purchase Plan ("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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported ............... $ 771,618 $ (1,061,044) $ 576,228 $(3,552,199)
Add: Total stock-based employee
compensation expense included in
reported net loss ....................... 11,605 39,234 31,991 93,164
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards .. $ (61,931) $ (163,195) $(121,356) $ (310,970)
----------- ------------- --------- -----------
Net income (loss), pro forma ................. $ 721,292 $ (1,185,005) $ 486,863 $(3,770,005)
=========== ============= ========= ===========
Basic earnings (loss) per share, as reported . $ 0.04 $ (0.06) $ 0.03 $ (0.20)
=========== ============= ========= ===========
Basic earnings (loss) per share, pro forma ... $ 0.04 $ (0.06) $ 0.03 $ (0.22)
=========== ============= ========= ===========
Diluted earnings (loss) per share, as reported $ 0.04 $ (0.06) $ 0.03 $ (0.20)
=========== ============= ========= ===========
Diluted earnings (loss) per share, pro forma . $ 0.04 $ (0.06) $ 0.03 $ (0.22)
=========== ============= ========= ===========
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
8
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 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 the Company
may elect to report the change in accounting as a cumulative-effect adjustment.
The Company does not believe EITF 00-21 will have a significant impact 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:
June 30, December 31,
2003 2002
---- ----
Raw materials .............................................................. $ 97,750 $ 91,556
Finished goods ............................................................. 1,661,951 1,200,310
---------- ----------
$1,759,701 $1,291,866
========== ==========
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
9
June 30, December 31,
2003 2002
---- ----
Goodwill, net.......................................................... $8,409,136 $8,409,136
Covenant not to compete................................................ 700,000 700,000
Less accumulated amortization...................................... (325,000) (275,000)
---------- ----------
Net.................................................................... 375,000 425,000
---------- ----------
Total.................................................................. $8,784,136 $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. The annual impairment test for fiscal 2003 will be
completed in the fourth quarter. 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 and related amortization expense was $25,000
for the three months ended June 30, 2003 and 2002, and $50,000 for the six
months ended June 30, 2003 and 2002. 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.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, December 31,
2003 2002
---- ----
Accounts payable....................................................... $1,064,891 $ 768,329
Distribution and other service fees.................................... 2,583,214 2,574,024
Compensation and related benefits...................................... 926,290 1,020,916
Other accrued expenses................................................. 887,573 749,317
---------- ----------
Total.................................................................. $5,461,968 $5,112,586
========== ==========
6. LONG-TERM DEBT
Long-term debt as of June 30, 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 July 2003 and $8,294 in August 2003............................ 16,425
--------
Total long-term debt............................................................... 287,598
Less current portion of long-term debt........................................... 52,697
--------
Long term-debt, excluding current portion.......................................... $234,901
========
Maturities of long-term obligations for the five years ending June
30, 2008 are as follows: 2004, $52,697; 2005, $39,446; 2006,
$42,898; 2007, $46,651 and 2008, $50,733 and $55,173 thereafter.
Interest expense for the three and six months ended June 30, 2003
was $7,000 and $18,000, respectively. Interest expense for the
three and six months ended June 30, 2002 was $24,000 and $45,000,
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 18 markets in the United States. We also author books on
wedding related topics. 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 June 30, 2003, our top seven advertisers
accounted for 5% of our net revenues. For the three months ended June 30, 2002,
our top seven advertisers accounted for 3% of our net revenues. For the six
months ended June 30, 2003, our top seven advertisers accounted for 5% of our
net revenues. For the six
11
months ended June 30, 2002, our top seven advertisers accounted for 4% 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
magazines by our subsidiary Weddingpages, Inc., as well as 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
June 30, 2003 and December 31, 2002, our allowance for doubtful accounts
amounted to $759,000 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 June 30, 2003, we had recorded goodwill and other intangible
assets of $8.8 million. 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 June
30, 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. We will complete an annual
impairment test of goodwill in the fourth quarter of 2003.
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 June 30,
2003, we have established a full valuation allowance of $18.9 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 were $10.1 million and $18.8 million for the three and six
months ended June 30, 2003, compared to $8.3 million and $14.4 million for the
corresponding periods in 2002.
Sponsorship and advertising revenues increased to $2.9 million and $5.8
million for the three and six months ended June 30, 2003, respectively, as
compared to $1.4 million and $2.8 million for the corresponding periods in 2002.
Revenue from local vendor online advertising programs increased by $744,000 and
$1.6 million for the three and six months ended June 30, 2003, respectively, or
by approximately 65% and 73% when compared to the corresponding periods in 2002,
as a result of additional contracts sold which was due, in part, to the
expansion in the number of local markets serviced and in the number of programs
offered. In addition, there was an increase of approximately $729,000 and $1.5
million in national online sponsorship and advertising revenue for the three and
six months ended June 30, 2003, respectively, due to a larger number of
contracts sold including contracts related to our category specific programs.
Sponsorship and advertising revenues amounted to 29% of our net revenues for the
three months ended June 30, 2003 and 17% for the three months ended June 30,
2002. For the six months ended June 30, 2003 and 2002, sponsorship and
advertising revenues amounted to 31% and 19% of our net revenues, respectively.
Merchandise revenues increased to $5.0 million and $8.8 million for the
three and six months ended June 30, 2003, respectively, as compared to $4.2
million and $7.3 million for the corresponding periods in 2002. These increases
were primarily due to increases in the sales of wedding supplies through our Web
sites of $812,000 and $1.6 million, respectively, or by over 19% in each period
as a result of the expansion of product and service offerings and increases in
the number of orders. Merchandise revenues amounted to 49% of our net revenues
for the three months ended June 30, 2003 and 51% for the three months ended June
30, 2002. For the six months ended June 30, 2003 and 2002, merchandise revenue
was 47% and 51% of our net revenues, respectively.
Publishing and other revenues decreased to $2.2 million and $4.2
million for the three and six months ended June 30, 2003, as compared to $2.6
million and $4.4 million for the corresponding periods in 2002. For the three
month period, local print advertising derived from the Weddingpages operation
decreased by $145,000 due to the timing of publication of WEDDINGPAGES magazines
in certain markets and the elimination of one market and an additional $380,000
due to a net reduction in advertising pages sold in comparable markets. These
decreases were offset, in part, by an increase in license fee revenue of
$70,000. For the six month period, an increase in revenue derived from The Knot
Magazine of $420,000 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
distribution was more than offset by a decrease in local print advertising of
$440,000, primarily due to a net reduction in advertising pages sold. Publishing
and other revenue amounted to 22% for the three months ended June 30, 2003 and
32% for the three months ended June 30, 2002. For the six months ended June 30,
2003 and 2002, publishing revenue was 22% and 30% of our net revenues,
respectively.
Cost of Revenues
Cost of revenues consists primarily 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 $3.3 million and $6.2 million for the
three and six months ended June 30, 2003, respectively, from $2.9 million and
$5.3 million for the corresponding periods in 2002. This was primarily due to an
increase in the cost of revenues from the sale of merchandise which increased by
$474,000 and $815,000 for the three and six month periods ended June 30, 2003,
respectively, as compared to the corresponding periods in 2002, as a result of
increased sales of wedding supplies. As a percentage of our net revenues, cost
of revenues decreased to 33% for the three months ended June 30, 2003, from 35%
for the quarter ended June 30, 2002. For the six-month period, cost of revenues
decreased to 33% of net revenue in 2003 from 37% in the prior year. These margin
improvements resulted primarily from a larger mix of higher margin sponsorship
and advertising revenue. The improvement resulting from the change in our
revenue mix for the six months ended June 30, 2003 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 in the
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first quarter of 2003 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 $1.0 million and
$2.1 million for the three and six months ended June 30, 2003, respectively, or
by $42,000 and $80,000 as compared to the corresponding periods in 2002. These
increases were primarily the result of small increases in costs in several
areas. As a percentage of our net revenues, product and content development
expenses decreased to 10% and 11% for the three and six months ended June 30,
2003, respectively, from 12% and 14% for the corresponding periods in 2002.
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 decreased to $2.8 million for the three
months ended June 30, 2003 from $3.0 million for the three months ended June 30,
2002. Sales and marketing expenses were relatively flat at $5.6 million for the
six months ended June 30, 2003 as compared to the corresponding period in 2002.
The decrease for the three month period resulted primarily from the elimination
of $300,000 of quarterly distribution fees under our anchor tenant agreement
with AOL which was offset, in part, by additional commissions of $124,000 as a
result of increased advertising revenues. For the six months ended June 30,
2003, AOL distribution fees decreased by $600,000 as compared to the
corresponding period in 2002. This decrease was primarily offset by additional
commissions of $310,000 related to increased advertising revenues, $150,000 in
higher personnel and related costs to support the growth of our wedding supplies
operation and $115,000 of higher fulfillment and other costs related to the
increased distribution of The Knot Magazine. As a percentage of our net
revenues, sales and marketing expenses decreased to 27% and 30% for the three
months and six months ended June 30, 2003, respectively, from 36% and 39% for
the corresponding periods in 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 were relatively flat at $2.0
million for the three months ended June 30, 2003 as compared to the
corresponding period in 2002. General and administrative expenses decreased to
$3.8 million for the six months ended June 30, 2003 as compared to $4.0 million
for the six months ended June 30, 2002. This decrease was primarily due to
reduced bad debt expense of $303,000 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. As a
percentage of our net revenues, general and administrative expenses decreased to
20% for the three and six months ended June 30, 2003, from 23% and 28% for the
corresponding periods in 2002.
Non-Cash Compensation
We recorded no deferred compensation during the three and six months
ended June 30, 2003. Amortization of deferred compensation decreased to $12,000
and $32,000 for the three and six months ended June 30, 2003, respectively, as
compared to $39,000 and $93,000 for the corresponding periods in 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.
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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 $238,000 and
$491,000 for the three and six month periods ended June 30, 2003, respectively,
as compared to $343,000 and $685,000 for the corresponding periods in 2002. The
decrease was primarily due to a reduction in capital expenditures in fiscal 2002
and 2001.
Interest and Other Income
Interest and other income net of interest expense decreased to $27,000
and $43,000 for the three and six months ended June 30, 2003, respectively, as
compared to $33,000 and $49,000 for the corresponding periods in 2002. These
decreases were primarily the result of lower interest rates earned on cash
invested.
Provision for Taxes on Income
In the three and six months ended June 30, 2003, we were subject to
income tax expense of $30,000 due to operating income generated in certain
states. No federal income tax has been provided as we utilize net operating loss
carryforwards.
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. 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 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 do not
believe EITF No. 00-21 will have a significant impact 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
15
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 June 30, 2003, our cash and cash equivalents amounted to $10.4
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 $1.6 million for the six
months ended June 30, 2003. This resulted primarily from the net income for the
period, as adjusted for depreciation and amortization, reserve for returns and
other non-cash charges, of $2.0 million, a decrease in accounts receivable of
$822,000 and an increase in accounts payable of $346,000. These sources of cash
were partially offset by increases in inventory and deferred production and
marketing costs of $468,000 and $214,000, respectively, and by a decrease in
deferred revenue of $927,000. 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 $1.8 million from December
31, 2002 through June 30, 2003. Net cash used in operating activities was
$662,000 for the six months ended June 30, 2002. This resulted primarily from
the loss for the period, as adjusted for depreciation and amortization and other
non-cash charges, of $1.5 million and increases in accounts receivable of
$654,000 and inventory of $385,000, partially offset by increases in accounts
payable and accrued expenses of $861,000 and deferred revenue of $856,000.
Net cash used in investing activities was $429,000 for the six months
ended June 30, 2003 primarily due to purchases of property and equipment. Net
cash used in investing activities was $203,000 for the six months ended June 30,
2002, primarily due to purchases of property and equipment of $126,000 and cash
paid of $77,000 with respect to a termination liability resulting from the
acquisition of Weddingpages.
Net cash used in financing activities was $33,000 for the six months
ended June 30, 2003 primarily due to repayments of the current portion of
long-term debt. Net cash provided by financing activities was $3.5 million for
the six months ended June 30, 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 $1.2 million.
As of June 30, 2003, we had no material commitments for capital
expenditures.
As of June 30, 2003, we had commitments under non-cancelable operating
leases amounting to approximately $6.2 million, of which $805,000 will be due on
or before June 30, 2004, an aggregate of $2.3 million will be due in the three
years ended June 30, 2007, and $3.0 million will be due thereafter. These
commitments include amounts under an operational lease, signed in October 2002,
for a new building that was constructed to house our expanding operations in
Redding, California. The term of this lease is five years commencing upon
completion of construction, which occurred in July 2003.
As a result of a weak national online advertising market in 2001 and
through the first six months of 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
16
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.
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 sustain profitable operations, due
to significant uncertainties surrounding our estimates and expectations.
17
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 profitability. For more
information on the effects of some of these risks, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
18
We have a history of significant losses since our inception and may incur
significant losses in the future.
We have only recently achieved profitability in the three months ended
June 30, 2003, and have incurred significant accumulated losses. As of June 30,
2003, our accumulated deficit was $47.9 million. We expect to continue to incur
significant operating expenses and, as a result, we will need to generate
significant revenues to maintain profitability. We cannot assure you that we can
sustain or increase profitability on a quarterly or annual basis in the future.
Failure to 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;
o seasonal demand for online and offline advertising and e-commerce;
19
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 31% of our net revenues for the six months ended June 30, 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 $2.1 million for the six months ended June 30, 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 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
20
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.
21
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 31% 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
22
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 maintain 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
maintain 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
23
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 June 30, 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
24
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.
25
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, it is possible that we will not be
able to maintain profitability.
We may be unable to respond to the rapid technological change in the Internet
industry and this may harm our business.
If we are unable, for technological, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or customer
requirements, we could lose users and market share to our competitors. The
Internet and e-commerce are characterized by rapid technological change. Sudden
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices could render our existing online sites and
proprietary technology and systems obsolete. The emerging nature of products and
services in the online wedding market and their rapid evolution will require
that we continually improve the performance, features and reliability of our
online services. Our success will depend, in part, on our ability:
o to enhance our existing services;
o to develop and license new services and technology that address the
increasingly sophisticated and varied needs of our prospective customers and
users; and
o to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of online sites and other proprietary technology
entails significant technological and business risks and requires substantial
expenditures and lead time. We may be unable to use new technologies effectively
or adapt our online sites, proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. Updating our
technology internally and licensing new technology from third parties may
require significant additional capital expenditures.
If we become subject to burdensome government regulation and legal uncertainties
related to doing business online, our sponsorship, advertising and merchandise
revenues could decline and our business and prospects could suffer.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. The governments of states and foreign countries might
attempt to regulate our transmissions or levy sales or other taxes relating to
our activities. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to determine
whether and
26
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 $10.4
million as of June 30, 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
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Company's
"disclosure controls and procedures," as that term is defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), as of June 30, 2003. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports
27
that the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms, and to ensure that such information is accumulated and communicated
to the Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
There were no changes in the Company's internal control over financial
reporting during the quarter ended June 30, 2003 identified in connection with
the evaluation thereof by the Company's management, including the Chief
Executive Officer and Chief Financial Officer, that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 14, 2003.
The stockholders elected Randy Ronning and Ann Winblad to the class of
directors whose terms expire at the 2006 Annual Meeting of Stockholders or until
their successors are elected and qualified.
The stockholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December 31, 2003.
Shares of common stock were voted as follows:
- ---------------------------------------------------------------------------------------------------------------------
Broker
Director Nominee or Proposal For Against/Withheld Abstentions Non-Votes
- ---------------------------------------------------------------------------------------------------------------------
Randy Ronning 16,059,778 1,315,576 0 37,077
- ---------------------------------------------------------------------------------------------------------------------
Ann Winblad 17,368,644 6,710 0 37,077
- ---------------------------------------------------------------------------------------------------------------------
Ratification of Auditors 17,364,067 8,487 2,800 37,077
- ---------------------------------------------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
31.1 Certification of Chairman and Chief Executive Officer Pursuant
to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Exchange
Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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
Items 9 and 12, dated and furnished on May 13, 2003, reporting that we
issued a press release announcing our financial results as of and for the three
months ended March 31, 2003. The information contained in the Current Report on
Form 8-K was intended to be furnished under Item 12, "Results of Operations and
Financial Condition," and was provided under Item 9 pursuant to interim guidance
issued by the Securities and Exchange Commission in
28
Release Nos. 33-8216 and 34-47583. As such, the information thereunder shall not
be deemed to be "filed" for the purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to
the liabilities of that section, nor shall it be incorporated by reference into
a filing under the Securities Act of 1933, as amended, or the Exchange Act,
except as shall be expressly set forth by specific reference in such a filing.
29
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: August 13, 2003 THE KNOT, INC.
By: /s/ Richard Szefc
---------------------------------------------------
Richard Szefc
Chief Financial Officer (Principal Financial Officer
and Duly Authorized Officer)
30
EXHIBIT INDEX
Number Description
- ------ -----------
31.1 Certification of Chairman and Chief Executive Officer Pursuant to
Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Exchange Act
Rule 13a-14(a), As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
31