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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2003
Commission File Number 000-28271
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THE KNOT, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3895178
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
462 Broadway, 6th Floor
New York, New York 10013
(Address of principal executive offices and zip code)
(212) 219-8555
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 2003 was approximately $14,331,582 (based on the last
reported sale price on the OTC Bulletin Board on that date). The number of
shares outstanding of the registrant's common stock as of March 3, 2004 was
21,852,405. The registrant does not have any non-voting stock outstanding.
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Documents Incorporated By Reference
Portions of Registrant's Proxy Statement for the 2004 Annual Meeting of
Stockholders, which is to be filed subsequent to the date hereof, are
incorporated by reference into Part III.
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THE KNOT, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 21
Item 3. Legal Proceedings....................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..................... 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters... 22
Item 6. Selected Financial Data................................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 35
Item 8. Consolidated Financial Statements and Schedule.......................... 36
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................... 59
Item 9A. Controls and Procedures................................................. 59
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 59
Item 11. Executive Compensation.................................................. 59
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................................. 59
Item 13. Certain Relationships and Related Transactions.......................... 60
Item 14. Principal Accountant Fees and Services.................................. 60
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 60
2
THIS REPORT MAY CONTAIN PROJECTIONS OR OTHER FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE KNOT. THESE
STATEMENTS ARE ONLY PREDICTIONS AND REFLECT THE CURRENT BELIEFS AND EXPECTATIONS
OF THE KNOT. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED
IN THE PROJECTIONS OR FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
AS MORE FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. THE KNOT
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR
ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN
THE FUTURE.
PART I
Item 1. Business
Overview
The Knot is one of the world's leading wedding media and services companies
providing products and services to couples planning their weddings and future
lives together. Our website, 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 to America Online (AOL) 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.
We commenced operations in May 1996 and recorded our first revenues in
September 1996, immediately following the launch of our first online property.
Our website was launched in July 1997. We launched The Knot Registry, our online
gift registry, in November 1998. In July 1999, we acquired the assets of
Bridalink.com, an Internet wedding supply store. In March 2000, we acquired
Weddingpages, the largest publisher of regional wedding magazines in the nation.
Industry Background
The Wedding Industry
Each year, approximately 2.3 million couples get married in the United
States. According to an independent research report, the domestic wedding market
generates approximately $70 billion in retail sales annually. Presumed to be a
once-in-a-lifetime occasion, a wedding is a major milestone event and,
therefore, consumers tend to allocate significant budgets to the wedding and
related purchases. The average amount spent on a wedding is approximately
$22,000, excluding the honeymoon.
Planning a wedding can be a stressful and confusing process. Engaged
couples must make numerous decisions and expensive purchases. A typical wedding
requires decisions and planning relating to bridal registries, invitations,
wedding gowns and wedding party attire, wedding rings, photographers, music,
caterers, flowers, honeymoons and more. In addition to the number of decisions
faced by engaged couples, the fixed date and the emotional significance of the
event intensify the stress. For the majority of engaged couples, the process of
planning a wedding is an entirely new one. They do not know where to find the
necessary information and services, how much services or goods should cost or
when decisions need to be made. These planning decisions are further complicated
because many couples choose to have their weddings in locations other than where
they live. Researching and soliciting local wedding services from distant
locations without traveling and making an enormous time commitment is extremely
difficult. Today's to-be-weds are seeking reliable resources and information to
assist in their planning and purchase decisions.
Vendors and advertisers highly value to-be-weds as a consumer group.
Replenished on an annual basis, wielding substantial budgets and facing a firm
deadline, engaged couples are ideal recipients of advertisers' messages and
vendors' products and services. During the six months prior to and the six
months following a wedding, the average couple will
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make more buying decisions and purchase more products and services than at any
other time in their lives. The challenges and obstacles that engaged couples
face make them especially receptive to marketing messages. Therefore, a
disproportionate amount of advertising revenues are generated per subscriber by
bridal magazines. According to Advertising Age, in 2002 the top three bridal
magazines generated an average of $245 in revenues per reader, compared to an
average of $78 in revenues per reader in the top three travel magazines and an
average of $70 in revenues per reader in the top three women's magazines.
The wedding market also represents significant opportunities for the retail
industry. Engaged couples receive gifts from an average of 200 guests, most of
whom are spending between $70 and $100. Because items are selected by the
engaged couple but paid for by their guests, price sensitivity is minimal and
registry products are rarely discounted by retailers. Registry for products in
all categories has grown, prompting many national retailers -- previously
without registries -- to enter the gift registry market. Weddings also generate
substantial revenues for travel services companies. Honeymoon travel generates
an estimated $4.5 billion annually. Over 99% of all newlyweds go on a honeymoon
with an average cost of approximately $3,660 per couple.
The Internet and the Wedding Industry
To-be-weds are seeking a comprehensive resource to assist in their
preparation and planning for a wedding. Because of its global reach and capacity
to transmit information rapidly, the Internet represents an ideal medium over
which to-be-weds can easily access information and communicate with the
widely-dispersed providers of local wedding resources.
According to the 2000 Census, the median age was 25 for first-time brides
and 27 for first-time grooms, placing them in the demographic age group, 18 to
34 years, which currently comprises approximately 33.5% of all Web users. As
Internet use continues to increase, engaged couples are turning to online
resources as the first place they look for wedding products, information and
registry services. In 2000, websites became the primary source of wedding
information, with 30% of brides using the Internet at some point in their
wedding planning, according to Brides Decide II by Greenfield Online. In
addition, a USA Today poll found that 80% of the more than 2 million couples
that married in 2001 used the Internet to help plan their wedding. Recognizing
this trend, traditional providers of wedding resources are offering their
services and products online. Like their offline equivalents, however, these
online offerings are single-service/product focused. To-be-weds continue to
search for a comprehensive solution to their information, planning and
purchasing needs at a single destination.
The Knot Services
We offer both online and offline services to the wedding market. Our
services include:
Online Services
Relevant Wedding Content. We provide creative up-to-date information and
resources to attract users to our sites. Weddings are information-intensive
events requiring extensive research, planning and decision-making. Our sites
provide future brides and grooms with a searchable database that draws on
thousands of articles on wedding planning and numerous interactive wedding
planning tools including wedding checklists, a budgeter, a guest list manager
personal wedding and newlywed Web pages and an online notebook, which may store
favorite gowns, articles, vendors, honeymoons, wedding supplies and other
planning information. Our online content is organized into five major areas of
the site, which are My Knot, Ideas & Advice, Gowns, Local Resources and Index.
The My Knot area organizes a member's profile information, interactive tool
results, online notebook and local message boards, allowing him or her to easily
access all the couple's wedding planning information in one place. We offer
search tools for honeymoon locations, jewelry and tabletop products and each
tool can be accessed from the My Knot area and from other appropriate content
areas throughout the site. The Ideas & Advice area is further organized into
channels, which cover all main content categories including planning, "Ask
Carley", real weddings, proposals, fashion, beauty, grooms, the wedding party,
love and life and honeymoons. Each of the channels offers articles, ideas and
advice covering a wide range of perspectives, budgets, traditions and
ethnicities.
The Gowns area of the site offers a searchable bridal gown database with
more than 20,000 gown images from over 200 designers plus searchable databases
for bridesmaids, mother-of-the-bride and flower girl dresses, bridal accessories
including headpieces, shoes and purses, engagement and wedding rings and
tuxedos. In June 2003, we
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launched The Knot Video Runway, a new broadband application available in the
Gowns area. The Knot Video Runway is the first subscription-based online
resource of its kind proving brides access to more than 60 wedding gown fashion
shows offering previews of next season's wedding gowns well before they arrive
in local salons.
The Local Resources area provides access to the local wedding market
through 60 online city guides that host profiles for thousands of local vendors,
such as reception halls, bands, florists and caterers. Each local city guide
provides a listing of the area's marriage license offices and upcoming bridal
shows, a question and answer section with a local wedding expert and local
message boards, where to-be-weds can discuss vendors in their market.
Region-specific articles on many wedding topics including real wedding stories
about local couples are also featured in the city guides. Through our local
market expansion, we are able to influence many of the wedding-related decisions
and purchases made on the local level.
The Index area further organizes our content offerings with an "A-Z" of
keywords which allows users to find information on 125 pre-selected wedding
topics. For each selected keyword, a page displays articles, message board
postings, "Ask Carley" questions and answers, promotions and other resources
relating to that keyword as well as appropriate e-commerce offerings. The Index
area also provides access to a dozen interactive search tools and more than 10
special feature content areas covering topics ranging from Registry Dos and
Don'ts to Great Wedding Hairdos.
Convenient, Comprehensive Shopping Experience. We integrate our informative
content with comprehensive shopping services, which range from wedding gifts to
a comprehensive array of supplies that relate to the wedding itself. We have
created two shopping areas on The Knot website called The Knot Gift Store &
Registry and The Knot Wedding Shop.
The Knot Gift Store & Registry, which we believe is the Internet's most
comprehensive wedding gift registry, offers a broad selection of products and
services from over 700 well-recognized brands. Wedding guests can quickly and
easily purchase gifts online or via phone or fax, 24-hours a day. We buy the
majority of our products directly from manufacturers. This enables us to provide
our users with a large selection of products from a wide range of categories,
while maintaining a high level of customer service. We offer traditional
registry categories such as tabletop, household appliances and electronics, in
addition to non-traditional categories, such as outdoor recreational gear,
barbeque grills and hi-tech entertainment products.
In April 1999, we entered into a services agreement with QVC. Under this
agreement, QVC provides us warehousing, sales, fulfillment and distribution
services in connection with The Knot Registry. Our services agreement with QVC
expired in December 2003; however, pursuant to the agreement, we had the option
to continue to operate under the services agreement for an additional l80 days,
which we are currently doing. We expect to begin to use our Redding, California
warehouse and distribution facility to service The Knot Registry during 2004.
We continue to explore other strategic distribution partnerships that would
position us to capture a greater portion of the $17 billion wedding gift
registry market. We have entered into agreements with two strategic partners
through whom we are able to provide engaged couples access to an even wider
range of products in the categories of tabletop and linens. In addition to
product sourcing, these partners also provide us with fulfillment and
distribution services with respect to these products.
In February 2002, we initiated a strategic marketing alliance with May
Department Stores Company ("May') that links our website to the wedding gift
registry sites of May's full-line department store companies. Together, we have
implemented a multi-platform marketing campaign to promote May's department
store companies which offer wedding registry services -- Hecht's, Strawbridge's,
Foley's, Robinsons-May, Filene's, Kaufmann's, Famous-Barr, L.S. Ayres, The Jones
Stores and Meier & Frank -- to our online and offline audience of engaged
couples and wedding guests.
We sell wedding supplies to consumers through our integrated shopping
destination, The Knot Wedding Shop, as well as through Bridalink.com.
Bridalink.com is our separate online store for wedding supplies, which we
maintain in order to attract additional users and generate further revenue. We
offer 1,000 products, including decorated disposable cameras, wedding bubbles
and bells, ring pillows, toasting flutes, car decorating kits, table
centerpieces, goblets and glasses, garters and unity candles. These highly
specialized items are often difficult to find through traditional retail
outlets, and the purchase of these items is often left to the last minute. We
offer personalization options for many of our wedding supplies such as toasting
glasses, cake servers, napkins and wedding attendant gifts and favors. We have
launched our own line of Knot-branded wedding supplies called The Knot Wedding
Collections and our own line of
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wedding-themed apparel. The Knot Wedding Collections which can be personalized
as well, include ring pillows, flower girl baskets, guest books and pens.
Consumers can place orders online, through a toll-free number, fax or via mail,
24-hours a day. In addition, we sell wedding supplies directly to other select
bridal retailers through our wholesale wedding supplies division. This division
offers all 800 products which are featured online at our wholesale website,
WeddingSuppliesDirect.com, or in our wholesale catalog. Participating bridal
retailers, numbering more than 1,000, have recognized that The Knot is a
one-stop supplier for these items. Normally, retailers must purchase wedding
supplies from as many as 10 suppliers to obtain the product mix offered through
our wholesale program. Retailers can place orders through a toll-free number or
fax during business hours or via mail. We fulfill all retail and wholesale
wedding supplies orders from our warehouse and distribution facility located in
Redding, California.
Active Membership and Community Participation. The talk area of our online
sites generate a high degree of member involvement through chats, message boards
and personalized interactive services. To-be-weds actively seek forums to
exchange ideas and ask questions during the planning process. We encourage and
promote active participation within our online community. The Knot community
features include 24-hour chat rooms on both America Online and the Web which
allow our members to interact with other couples, as well as our own experts, on
wedding planning issues and concerns. In addition to being topic-specific, the
message boards can be regionalized, so a member can seek advice from other
members in the same geographical area. Other interactive services allow users to
prepare and modify their wedding budget, compile and manage their guest list and
create personalized checklists and Web pages. Additionally, we send out several
newsletters and emails to our members, many of which are targeted with specific
information for the stage where these members are in their wedding planning
process. Other newsletters and emails are focused on specific topics, such as
registries and accessories or upcoming bridal events and new features on our
site.
Offline Services
Local Wedding Magazines. Our subsidiary Weddingpages, Inc. publishes local
wedding magazines in 18 markets. During 2003, we terminated our remaining
franchise agreements. We currently license the name Weddingpages for use in
publication by four former franchisees in five local markets. In our markets,
The Knot WEDDINGPAGES magazines feature the look and feel of The Knot brand and
combines the editorial expertise of The Knot with up-to-date, region-specific
information, making these publications a must-have wedding planning companion
for engaged couples.
The Knot Magazine. We publish The Knot Magazine semiannually. This 700 plus
page national publication is a comprehensive, searchable shopping guide
providing directories of wedding gowns, fine jewelry, china, home products,
invitations, wedding supplies and honeymoon packages. The gown section, which
features over 800 dresses from the industry's top designers, is organized
alphabetically by designer, and each gown image includes essential information
that is not found in other bridal magazines - price range, detailed description
and a coordinating URL that directs readers to The Knot website for additional
dresses by the same designer. Also featured are over 600 photos of wedding party
attire and accessories, including bridesmaid, mother-of-bride and flower girl
dresses, veils, shoes, and tuxedos. Understanding the importance of localized
wedding-planning information, we include a unique tool in the magazine - a store
locator. As one of the most comprehensive bridal salon listings in the bridal
magazine market, brides can comb through the store locator's organized, detailed
salon listings to locate stores in their state that carry the designers they
love. We sell The Knot Magazine through newsstands and bookstores across the
nation and on our website.
The Knot Book Series. The Knot has two book series. Our first book series
consists of three books which have been published by Broadway Books, a division
of Random House. We developed the content of each book through the interaction
between our users and our wedding experts. This "real-world" approach, directed
by our editorial team and based on user experience and feedback, distinguishes
us from the approach of traditional wedding resources. The first two books in
the series are detailed wedding-planning resources for to-be-weds, offering the
information a bride and groom need to plan their wedding and include worksheets,
checklists, etiquette, tips, calendars and answers to frequently-asked
questions. Our third book in this series tackles tricky wedding-related topics
including toasts, readings, music and personal vows and explains how couples can
utilize each to personalize their own ceremony or reception.
Our second book series consists of two books which have been published by
Chronicle Books. This book series expands the consumer reach of The Knot to the
gift book category. The first book, The Knot Book of Wedding Gowns, celebrates
the evolution of the wedding gown while providing brides with all the
information they need to make the big purchase. The second book, The Knot Book
of Wedding Flowers, features over 175 pages of pictures and illustrations of
bouquets, centerpieces and innovative ideas for floral accents.
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Integrated Media Programs
We provide advertisers and sponsors with targeted access to couples
actively seeking information and advice and making meaningful spending decisions
relating to all aspects of their weddings. We also offer advertisers and
sponsors an opportunity to establish brand loyalty with first-time purchasers of
many products and services.
Editorial content and advertising are often integrated on our sites. For
example, an article about wedding rings might feature an advertisement for a
jeweler. Instead of traditional banners or buttons, our sponsors usually select
our custom-developed marketing programs that offer special features, including
interactive tools. Companies can also enter into arrangements to exclusively
sponsor entire editorial areas or special features. We may also offer sponsors
additional online promotional events such as a sweepstakes, newsletter and
direct e-mail programs, or inclusion of their special offers in our membership
gateway.
With the acquisition of Weddingpages and the further development of The
Knot Magazine, we have expanded the scope of the integrated marketing programs
we offer to our online advertisers to include many offline features. For
example, a program for an online sponsor could also include regional or national
print advertising in these magazines. We have designed category specific
standardized advertising programs in The Knot Magazine for Jewelry, Health and
Beauty, Tabletop, Retail, Home, Finance and Travel. These programs allow a broad
range of advertisers in these markets to gain targeted national exposure through
a combination of our online programs and the national magazine. We have also
expanded the programs that we are able to offer The Knot WEDDINGPAGES print
advertisers. Local wedding vendors can supplement their print advertisements
with profiles and sponsorship badges within their appropriate online city guide,
and they can also reach their market areas through targeted local newsflash
emails. Also, in 2003, we began to offer programs to local vendors that include
advertising placement in The Knot Magazine. The current local resource directory
in The Knot Magazine now approximates 100 pages with nearly 1,000 individual
local vendor listings.
The Knot Strategy
Our objective is to expand our position as a leading wedding media and
services company providing comprehensive wedding planning, information, products
and services. Key elements of our business strategy include the following:
Build Strong Brand Recognition. Building a dominant brand is critical to
attracting and expanding both our online and offline user base and securing our
leading position in the bridal market.
We promote our brand through aggressive public relations outreach, securing
television appearances featuring Carley Roney, our Editor in Chief and lead
wedding expert. During 2003, she appeared on more than 30 national and local
television programs including The Oprah Winfrey Show, NBC's TODAY, ABC's The
View, Live with Regis & Kelly, CBS's The Early Show, CNN Headline News, Inside
Edition and Fox News Report. Carley's presentations cover a variety of wedding
topics from the most desirable engagement ring to the latest trends in wedding
fashions or wedding registry must-haves, all of which relate to information or
services available on our sites. In addition, Carley is frequently consulted for
her wedding expertise by the nation's top print publications including The New
York Times, Wall Street Journal, USA Today, InStyle, Vogue and Cosmopolitan.
In January 2003, "Real Weddings from The Knot" -- our very own branded
televised miniseries -- premiered on the Oxygen Network, and the second series
aired in January 2004. The Knot collaborated with Oxygen in the creation and
production of these two series, which followed couples planning through their
wedding process in the weeks leading up to their nuptials. Through this
reality-based show, we expanded the awareness of our brand and services to a
broad national audience.
Through The Knot WEDDINGPAGES magazines and the expansion of our in-depth
online city guides, we are aggressively increasing our brand awareness at the
local level. At the same time, we are taking advantage of the cross-promotional
opportunities that offline publications afford our online properties and
services. Our local advertising sales force further supports The Knot brand
through participation in their local wedding professional associations and
appearances at local bridal events.
We continue to be the leading wedding content partner for AOL and MSN,
providing their members and users with in-depth wedding planning information,
interactive tools, wedding gown galleries and an online community. In
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October 2003, we also became the exclusive wedding content provider for
Comcast.net, extending our reach to their high-speed Internet customers.
Aggressively Attract New Membership. We believe a large and active
membership base is critical to our success. Membership enrollment is free. Our
members enjoy the use of personal Web pages, message boards, budgeting and
planning tools, wedding checklists and wedding fashion and honeymoon searches.
During the first two months of 2004, we were enrolling an average of
approximately 4,100 new members per day. Our priority is to increase member
usage through our content and product offerings, interactive services, active
community participation and strategic relationships.
We recognize the importance of maintaining confidentiality of member
information, and we have established a privacy policy to protect personal
information. Our current privacy policy is set forth on our sites, and we are a
licensee of the TRUSTe Privacy Program. Our policy is not to tell any third
party any member's personal identifying information, but we may share aggregated
information about our members with other pre-screened organizations who have
specific direct mail product and service offers we think may be of interest to
our members. We may share aggregated member information with third parties, such
as zip code or gender. In addition, we may use information revealed by members
and information built from user behavior to target advertisements, content and
email.
Capitalize on Multiple Revenue Opportunities. We intend to leverage the
size and favorable demographics of our online and offline communities to
continue to generate multiple revenue streams. We are focused on providing our
sponsors and advertisers with targeted access to couples actively seeking
information and making purchase decisions. We maximize our advertising revenues
by offering targeted marketing opportunities to both our national advertising
sponsors and local wedding vendors through the integration of advertising with
editorial content on our site and in our magazines. With the addition of
category specific advertising programs to our customized marketing campaigns, we
have broadened the group of potential advertisers and sponsors who can benefit
from targeting The Knot's audience. We have continued to expand the number of
online markets and specific programs available to local vendors. Our efforts to
attract advertisers are supported by a national sales force in New York, by a
local sales force of approximately 45 people positioned in markets around the
United States and by independent sales representative agencies.
We expect to generate increasing online revenues from The Knot Registry and
our convenient gift and wedding supplies shops. Through our wholesale wedding
supplies division, we are extending our presence in the wedding supplies
business to the offline retail market. We will pursue additional revenue
opportunities in connection with the needs of today's engaged and newly married
couples including premium services such as The Knot Video Runway. We also intend
to extend the relationship we build with our users and provide access to
additional products and services relevant to newlyweds and growing families. The
pursuit of these strategies may involve potential acquisitions, or investments
in, complementary businesses or products.
Competition
The Internet advertising and online wedding markets are new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. We face competition primarily from three separate areas: online
sites, magazines and gift registries.
There are many wedding-related sites on the Internet developed and
maintained by online content providers. Retail stores, manufacturers, wedding
magazines and regional wedding directories also have online sites which compete
with us. We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry in our market.
We also face competition for our services from bridal magazines. Bride's
and Modern Bride, both published by Conde Nast, are the two dominant bridal
publications in terms of revenue and circulation. According to Advertising Age,
these two magazines and Bridal Guide, the third leading bridal magazine,
generated gross advertising revenues of $231.2 million in 2002.
The Knot Registry faces competition from online sources such as registry
aggregators. We compete with retail stores offering gift registries, especially
from retailers offering specific bridal gift registries. These stores,
particularly national department store chains, have strong brand awareness, many
years of retailing experience and most now have
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online transactional capabilities. Our wedding supplies business also faces
competition from online sources and retail stores offering similar products.
We believe that the principal competitive factors in the wedding market are
brand recognition, convenience, ease of use, information, quality of service and
products, member affinity and loyalty, reliability and selection. As to these
factors, we believe that we compete favorably. Our dedicated editorial, sales
and product staffs concentrate their efforts on producing the most comprehensive
wedding resources available.
Generally, many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources and high name recognition. Therefore, these competitors have
significant ability to attract advertisers and users. In addition, many of these
competitors may be able to respond more quickly than we can to new or emerging
technologies and changes in Internet user requirements and to devote greater
resources than we do to the development, promotion and sale of services. There
can be no assurance that our current or potential competitors will not develop
products and services comparable or superior to those developed by us or adapt
more quickly than we do to new technologies, evolving industry trends or
changing Internet user preferences. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which would
materially and adversely affect our business, results of operations and
financial condition.
Infrastructure, Operations and Technology
Our technology infrastructure provides for continuous availability of our
online services. There are three major components to our online services
comprised of our Web, domain name service ("DNS") and Database servers. Our Web
and DNS servers are fully redundant and allow for the failure of multiple
components. We have multiple Database servers serving various parts of our site
allowing us to section parts of the site for maintenance and upgrades.
Our operation is dependent on the ability to maintain our computer and
telecommunications system in effective working order and to protect our systems
against damage from fire, theft, natural disaster, power loss,
telecommunications failure or similar events. Our system hardware is co-located
at Globix Corporation's New York, New York data center; and our operations
depend, in part, on Globix's ability to protect its own systems and our systems
from similar unexpected adverse events. Globix provides us with auxiliary power
through the use of battery and diesel generators in the event of an unexpected
power outage. We maintain multiple backups of our data, thus allowing us to
quickly recover from any disaster. Additionally, at least once a week, copies of
backup tapes are sent to off-site storage.
Regular capacity planning allows us to quickly upgrade existing hardware
and integrate new hardware to react quickly to a rapidly expanding member base
and increased traffic to our sites. We generally operate at 99% uptime and no
unexpected downtime. Key content management and e-commerce components are
designed, developed and deployed by our in-house technology group. We also
license commercially available technology when appropriate in lieu of dedicating
our own human and financial resources. We employ several layers of security to
protect data transmission and prevent unauthorized access. We keep all of our
production servers behind firewalls. No outside access is allowed. Strict
password management and physical security measures are followed. All systems are
monitored 24/7, and emergency response teams respond to all alerts. We have also
contracted the services of an outside company to independently monitor the site,
including the e-commerce section of the site, to ensure that the site is
available, that users can add items to their cart and that the checkout process
completes successfully. E-commerce transactions employ secure sockets layer
encryption to secure data transmitted between clients and servers. Credit card
information captured during e-commerce transactions is never shared with outside
parties, and we provide shoppers with a toll-free number to place orders by
phone as an alternative to completing a transaction online.
Government Regulation
Laws applicable to e-commerce, online privacy and the Internet generally
are becoming more prevalent. It is possible that new laws and regulations may be
adopted regarding the Internet or other online services in the United States and
foreign countries. Such new laws and regulations may address user privacy,
freedom of expression, unsolicited commercial e-mail (spam), pricing, content
and quality of products and services, taxation, advertising, intellectual
property rights and information security. The nature of such legislation and the
manner in which it may be interpreted and enforced cannot be fully determined at
this time. Such legislation could subject us and/or our customers to potential
liability or restrict our present business practices, which, in turn, could have
an adverse effect on our business, results of operations and financial
condition. In addition, the FTC has investigated the privacy practices of
several companies that
9
collect information about individuals on the Internet. The adoption of any such
laws or regulations might also decrease the rate of growth of Internet use
generally, which, in turn, could decrease the demand for our service or increase
our cost of doing business or in some other manner have a material adverse
effect on our business, results of operations and financial condition.
Specifically, several states have proposed legislation that would limit the
use and disclosure of personally identifiable information gathered online about
users. To obtain membership on our sites, a user must disclose their name,
address, e-mail address and role in the wedding. We do not currently share any
member's personal identifying information to third parties without the member's
prior consent. We may share aggregated member information with third parties,
such as a member's zip code or gender and may use information revealed by
members and information built from user behavior to target advertising, content
and e-mail. Because we rely on the collection and use of personal data from our
members for targeting advertisements, we may be harmed by any laws or
regulations that restrict our ability to collect or use this data.
Privacy concerns in general may cause visitors to avoid online sites that
collect behavioral information and even the perception of security and privacy
concerns, whether or not valid, may indirectly inhibit market acceptance of our
services. In addition, if our privacy practices are deemed unacceptable by
watchdog groups or privacy advocates, such groups may attempt to harm our
business by blocking access to our sites or disparaging our reputation and our
business, and may have a material effect on our results of operation and
financial condition.
In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. It is
uncertain how such existing laws may apply to or address the unique issues of
the Internet and related technologies. For example, because our services are
accessible throughout the United States, other jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in a particular
state. We are currently qualified to do business in several states, however, our
failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify and could result in our inability to enforce contracts in such
jurisdictions. Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could harm us.
The international regulatory environment relating to the Internet market
could have a material and adverse effect on our business, results of operations
and financial condition if we elect to expand internationally. In particular,
the European Union privacy regulations limit the collection and use of some user
information and subject data collectors to a restrictive regulatory regime. The
cost of such compliance could be material, and we may not be able to comply with
the applicable national regulations in a timely or cost-effective manner, if at
all.
Changes to existing laws or the passage of new laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace that could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could in some other manner have a material adverse effect on
our business, results of operations and financial condition.
Intellectual Property and Proprietary Rights
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property as critical to
our success, and rely on trademark and copyright law, trade secret protection,
confidentiality and assignment of invention agreements, and/or license
agreements with employees, customers, independent contractors, partners and
others to protect our proprietary rights. We strategically pursue the
registration of our trademarks and service marks in the United States, and have
applied for and obtained registration in the United States for some of our
trademarks and service marks, including "THE KNOT". Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available online.
We have licensed in the past, and expect to continue to license in the
future, some of our proprietary rights, such as trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of our
brand is maintained by our licensees, there can be no assurance that our
licensees will not take actions that might materially
10
adversely affect the value of our proprietary rights or reputation, which could
have a material adverse effect on our business, financial condition and results
of operations.
The steps we have taken to protect our proprietary rights may not be
adequate and third parties may infringe or misappropriate our copyrights,
trademarks, trade secrets and similar proprietary rights. In addition, other
parties may assert claims of infringement of intellectual property against us.
Although we believe that our products and services do not infringe upon the
intellectual property rights of others and that we have all rights necessary to
utilize the intellectual property employed in our business, we may nonetheless
be subject to claims alleging infringement of third-party intellectual property
rights. Any such claims could require us to spend significant sums on
litigation, pay damages, delay product installments, develop non-infringing
intellectual property or acquire licenses to intellectual property that is the
subject of any such infringement, which licenses may not be available on
commercially reasonable terms, if at all. Therefore, such claims could have a
material adverse effect on our business, results of operations and financial
condition.
Employees
As of December 31, 2003, we had a total of 243 employees, of which 51 were
involved in product and content development, 161 were involved in sales and
marketing and 31 were involved in general and administrative functions. None of
our employees is represented by a labor union. We have not experienced any
work-stoppages, and we consider relations with our employees to be good.
Available Information
The Knot's website is located at www.theknot.com. The Knot makes available
free of charge, on or through our website, our annual, quarterly and current
reports, and any amendments to those reports, as soon as reasonably practicable
after electronically filing such reports with, or furnishing to, the Securities
and Exchange Commission ("SEC"). Information contained on The Knot's website is
not part of this report or any other report filed with the SEC.
The Knot's Code of Business Conduct and Ethics that applies to all
officers, directors and employees, Code of Ethics for the Chief Executive
Officer and Senior Financial Officers (and any amendments to, or waivers under
such code) and the charters of the Audit and Compensation Committees of our
Board of Directors are also available on The Knot's website and are available in
print to any stockholder upon request by writing to The Knot, Inc., 462
Broadway, 6th floor, New York, New York, 10013, Attention: Investor Relations.
11
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Important Factors Regarding Forward-Looking Statements
In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors currently or may have a significant impact on our business,
operating results or financial condition. This Annual Report on Form 10-K may
contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below and elsewhere in this
Annual Report. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
Risks Related to Our Business
We have an unproven business model, and it is uncertain whether online
wedding-related sites can generate sufficient revenues to survive.
Our model for conducting business and generating revenues is unproven. Our
business model depends in large part on our ability to generate revenue streams
from multiple sources through our online sites, including online sponsorship and
advertising fees from third parties and online sales of wedding gifts and
supplies.
It is uncertain whether wedding-related online sites that rely on
attracting sponsors and advertisers, as well as people to purchase wedding gifts
and supplies, can generate sufficient revenues to survive. For our business to
be successful, we must provide users with an acceptable blend of products,
information, services and community offerings that will attract wedding
consumers to our online sites frequently. In addition, we must provide sponsors,
advertisers and vendors the opportunity to reach these wedding consumers. We
provide our services to users without charge, and we may not be able to generate
sufficient revenues to pay for these services.
Moreover, we face many of the risks and difficulties frequently encountered
in new and rapidly evolving markets, including the online advertising and
e-commerce markets. These risks include our ability to:
o increase the audience on our sites;
o broaden awareness of our brand;
o strengthen user-loyalty;
o offer compelling content;
o maintain our leadership in generating traffic;
o maintain our current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of industries;
o respond effectively to competitive pressures;
o continue to develop and upgrade our technology; and
o attract, integrate, retain and motivate qualified personnel.
These risks could negatively impact our financial condition if left
unaddressed. Accordingly, we are not certain that our business model will be
successful or that we can sustain revenue growth or profitability.
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 last fiscal year, and
have incurred significant accumulated losses. As of December 31, 2003, our
accumulated deficit was $47.4 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
12
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.
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.
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 and the execution of a
contract with a national sponsor or advertiser is often lengthy, typically
ranging from six weeks for smaller programs and several months for larger
programs, and may be 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 websites;
o seasonal demand for e-commerce;
o the addition or loss of advertisers;
o the advertising budgeting cycles of specific advertisers;
o the regional and national magazines' publishing cycles;
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.
13
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 2002, according
to the National Center of Health Statistics, 19% of weddings in the United
States occurred in the first quarter, 27% occurred in the second quarter, 30%
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 wedding related merchandise revenues generally are lower
in the first and fourth quarters of each 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 websites.
We depend on establishing and maintaining distribution relationships with
high-traffic websites such as AOL and MSN 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 or maintain distribution relationships with these
websites, 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 websites.
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 34% of our net revenues for the year ended December 31, 2003. Our national
online sponsorship and advertising revenue was approximately $1.7 million for
the year ended December 31, 2001, $1.9 million for the year ended December 31,
2002 and $4.4 million for the year ended December 31, 2003. The Internet
advertising market is still developing, and it cannot yet be compared with
traditional advertising media to gauge its effectiveness. As a result, demand
for and market acceptance of Internet advertising solutions are uncertain. Many
of our current and potential customers have little or no experience with
Internet advertising and have allocated only a limited portion of their
advertising and marketing budgets to Internet activities. The adoption of
Internet advertising, particularly by entities that have historically relied
upon traditional methods of advertising and marketing, requires the acceptance
of a new way of advertising and marketing. These customers may find Internet
advertising to be less effective for meeting their business needs than
traditional methods of advertising and marketing. Furthermore, there are
software programs that limit or prevent advertising from being delivered to a
user's computer. Widespread adoption of this software by users would
significantly undermine the commercial viability of Internet advertising.
We may be unable to continue to build awareness of The Knot brand name which
would negatively impact our business and cause our revenues to decline.
Building recognition of our brand is critical to attracting and expanding
our online user base and our offline readership. Because we plan to continue
building brand recognition, we may find it necessary to accelerate expenditures
on our sales and marketing efforts or otherwise increase our financial
commitment to creating and maintaining brand awareness. Our failure to
successfully promote and maintain our brand would adversely affect our business
and cause us to incur significant expenses in promoting our brand without an
associated increase in our net revenues.
14
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.
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
15
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 32% of our products, excluding products sold
through our retail partners. Our services agreement with QVC expired in December
2003; however, pursuant to the agreement, we had the option to continue to
operate under the services agreement for an additional l80 days, which we are
currently doing. We expect to begin to use our Redding, California warehouse and
distribution facility to service The Knot Registry during 2004. QVC does not
have any obligation to renew this agreement. If we are unable to transfer these
services to our facility and we are unable to further extend the services
agreement with QVC, 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 websites targeted at brides and grooms as well as the
online sites of retail stores, manufacturers and regional wedding
directories;
o bridal magazines, such as Bride's and Modern Bride (both part of the Conde
Nast family); and
o online and retail stores offering gift registries, especially from
retailers offering specific bridal gift registries.
We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Our competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, high 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.
16
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
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
17
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 stockholders who each owned greater than
5% of our common stock exercise significant control over all matters requiring a
stockholder vote.
As of December 31, 2003, our executive officers and directors and
stockholders who each owned greater than 5% of our common stock, and their
affiliates, in the aggregate, beneficially owned approximately 80% of our
outstanding common stock. As a result, these stockholders are able to exercise
control over all matters requiring approval by our stockholders, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership could also have the effect of delaying or preventing
a change in control.
Anti-takeover provisions in our charter documents and Delaware law may make it
difficult for a third party to acquire us.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders.
Risks Related to the Securities Markets
The delisting of our common stock from the Nasdaq National Market has resulted,
and could continue to result, in a limited public market for our common stock
and larger spreads in the bid and ask prices for shares of our common stock and
could result in lower prices for shares of our common stock and make obtaining
future equity financing more difficult.
On August 23, 2001, our common stock was delisted from the Nasdaq National
Market. Our common stock is currently available for quotation on the OTC
Bulletin Board. Selling our common stock has become, and may continue to 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 or
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.
In addition, because our common stock is not listed on the Nasdaq National
Market, we are subject to Rule 15g-9 under the Securities and Exchange Act of
1934, as amended. That rule imposes additional sales practice requirements on
broker-dealers that sell low-priced securities to persons other than established
customers and institutional accredited investors. For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may
18
affect the ability of broker-dealers to sell the common stock and affect the
ability of holders to sell their shares of our common stock in the secondary
market.
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.
Sales or the perception of future sales of our common stock may adversely affect
our stock price.
Sales of substantial numbers of shares of our common stock in the public
market, or the perception that significant sales are likely, could adversely
affect the market price of our common stock. The number of shares of common
stock subject to the registration statement we filed in December 2003,
registering the resale of up to 2,800,000 shares of common stock by the selling
stockholders named in the related prospectus, is much greater than the average
weekly trading volume for our shares. No prediction can be made as to the
effect, if any, that market sales of these or other shares of our common stock
will have on the market price of our common stock. Sales of substantial amounts
of our common stock in the public market could adversely affect the market price
of our common stock.
Risks Related to the Internet Industry
If the use of the Internet and commercial online services as media for commerce
does not continue to grow, our business and prospects would be materially and
adversely affected.
We cannot assure you that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and commercial online services as media
for commerce, particularly for purchases of wedding gifts and supplies. Even if
consumers adopt the Internet or commercial online services as a media for
commerce, we cannot be sure that the necessary infrastructure will be in place
to process such transactions. Our long-term viability depends substantially upon
the widespread acceptance and the development of the Internet or commercial
online services as effective media for consumer commerce and for advertising.
Use of the Internet or commercial online services to effect retail transactions
and to advertise is at an early stage of development. Convincing consumers to
purchase wedding gifts and supplies online may be difficult.
Demand for recently introduced services and products over the Internet and
commercial online services is subject to a high level of uncertainty. Few proven
services and products exist. The development of the Internet and commercial
online services into a viable commercial marketplace is subject to a number of
factors, including:
o continued growth in the number of users of such services;
o concerns about transaction security;
o continued development of the necessary technological infrastructure;
o consistent quality of service;
o availability of cost-effective, high speed service;
o uncertain and increasing government regulation; and
o the development of complementary services and products.
If users experience difficulties because of capacity constraints of the
infrastructure of the Internet and other commercial online services, potential
users may not be able to access our sites, and our business and prospects would
be harmed.
19
To the extent that the Internet and other online services continue to
experience growth in the number of users and frequency of use by consumers
resulting in increased bandwidth demands, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. The Internet and other online services
have experienced outages and delays as a result of damage to portions of their
infrastructure, power failures, telecommunication outages, network service
outages and disruptions, natural disasters and vandalism and other misconduct.
Outages or delays could adversely affect online sites, e-mail and the level of
traffic on all sites. We depend on online access providers that provide our
users with access to our services. In the past, users have experienced
difficulties due to systems failures unrelated to our systems. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity or to increased
governmental regulation. Insufficient availability of telecommunications
services to support the Internet or other online services also could result in
slower response times and negatively impact use of the Internet and other online
services generally, and our sites in particular. If the use of the Internet and
other online services fails to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services does not effectively
support growth that may occur or if the Internet and other online services do
not become a viable commercial marketplace, 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 and advertising and
merchandise revenues could decline and our business and prospects could suffer.
Laws and regulations directly applicable to Internet communications,
privacy, commerce and advertising are becoming more prevalent. Laws and
regulations may be adopted covering issues such as user privacy, freedom of
expression, pricing, unsolicited commercial e-mail (spam), content, taxation
quality of products and services, advertising, intellectual property rights and
information security. Any new legislation could hinder the growth in use of the
Internet and other online services generally and decrease the acceptance of the
Internet and other online services as media of communications, commerce and
advertising. The governments of states and foreign countries might attempt to
regulate our transmissions or levy sales or other taxes relating to our
activities. The laws governing the Internet remain largely unsettled, even in
areas where legislation has been enacted. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel and taxation apply to the Internet and Internet advertising services. In
addition, the growth and development of the market for e-commerce may prompt
calls for more stringent consumer protection laws, both in the United States and
abroad, which may impose additional burdens on companies conducting business
online. The adoption or modification of laws or regulations relating to the
Internet and other online
20
services could cause our sponsorship and advertising and merchandise revenues to
decline and our business and prospects to suffer.
We may be sued for information retrieved from our sites.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
We may incur potential product liability for products sold online.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user. To date, we have had
limited experience selling products online and developing relationships with
manufacturers or suppliers of such products. We sell a range of products
targeted specifically at brides and grooms through The Knot Registry, The Knot
Shop, Bridalink.com or other e-commerce sites that we may acquire in the future.
Such a strategy involves numerous risks and uncertainties. Although our
agreements with manufacturers typically contain provisions intended to limit our
exposure to liability claims, these limitations may not prevent all potential
claims. Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could seriously damage our financial results, reputation and
brand name.
We may incur significant expenses related to the security of personal
information online.
The need to transmit securely confidential information online has been a
significant barrier to e-commerce and online communications. Any well-publicized
compromise of security could deter people from using the Internet or other
online services or from using them to conduct transactions that involve
transmitting confidential information. Because our success depends on the
acceptance of online services and e-commerce, we may incur significant costs to
protect against the threat of security breaches or to alleviate problems caused
by such breaches.
Item 2. Properties
We currently lease approximately 20,000 square feet of space at our
headquarters in New York City and we lease approximately 44,000 square feet of
space for warehousing and operations in Redding, California. Weddingpages, our
subsidiary in Omaha, Nebraska, leases approximately 16,000 square feet. The New
York, Redding and Omaha leases expire on March 31, 2012, July 24, 2008 and
October 15, 2005, respectively.
Item 3. Legal Proceedings
On September 19, 2003, WeddingChannel.com, Inc. ("WeddingChannel") filed a
complaint against The Knot in the United States District Court for the Southern
District of New York. The complaint alleges that The Knot has violated U.S.
Patent 6,618,753 ("Systems and Methods for Registering Gift Registries and for
Purchasing Gifts"), and further alleges that certain actions of The Knot give
rise to various federal statute, state statute and common law causes of actions.
WeddingChannel is seeking, among other things, unspecified damages and
injunctive relief. If The Knot is found to have willfully infringed the
patent-in-suit, enhanced damages are awardable. This complaint was served on The
Knot on September 22, 2003.
Based on information currently available, The Knot believes that the claims
are without merit and is vigorously defending itself against all claims. On
October 14, 2003, The Knot filed an answer and counterclaims against
WeddingChannel. The Knot's answer raises various defenses to the counts alleged
by WeddingChannel. Additionally, The Knot has brought counterclaims including a
request that the court declare the patent-in-suit is invalid, unenforceable
21
and not infringed. The Knot's counterclaims further allege that certain actions
taken by, or on behalf of WeddingChannel give rise to various federal statutory
claims, state statutory claims and common law causes of action.
The Knot is engaged in other 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 or
cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
PRICE RANGE OF COMMON STOCK
Our common stock was quoted on the Nasdaq National Market under the symbol
"KNOT" through August 22, 2001. Since that time, our common stock has been
available for quotation on the OTC Bulletin Board under the symbol "KNOT.OB".
The following table sets forth, for the periods indicated, the high and low
sales prices per share of our common stock as reported on the OTC Bulletin
Board:
High Low
----- -----
2002:
First Quarter............... $0.94 $0.33
Second Quarter.............. $0.85 $0.36
Third Quarter............... $1.05 $0.22
Fourth Quarter.............. $0.95 $0.65
2003:
First Quarter............... $1.05 $0.71
Second Quarter.............. $2.90 $0.90
Third Quarter............... $4.55 $2.60
Fourth Quarter.............. $5.00 $2.75
On December 31, 2003, the last reported sale price of the common stock on
the OTC Bulletin Board was $4.00. On March 16, 2004, the last reported sale
price of our common stock on the OTC Bulletin Board was $4.10.
HOLDERS
As of March 16, 2004, there were approximately 168 holders of record of our
common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends for the foreseeable
future.
Securities Authorized for Issuance Under Equity Compensation Plans
Incorporated by reference to the section entitled "Equity Compensation Plan
Information" in Item 12.
22
Recent Sale of Unregistered Securities
On November 18, 2003, we sold an aggregate of 2,800,000 newly-issued shares
of common stock, par value $0.01, for aggregate gross proceeds of $10.5 million,
before placement fees and offering expenses. Allen & Company LLC acted as
placement agent and received a fee of $525,000. The issuance was made under the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, because the issuance did not involve any public offering. We
sold shares and received gross proceeds as follows:
Purchaser Shares Gross Proceeds
- ------------------------------------------------- --------- --------------
T. Rowe Price Associates, Inc. (1):
T. Rowe Price New Horizons Fund .............. 1,350,000 $ 5,062,500
T. Rowe Price Global Technology Fund ......... 10,000 $ 37,500
T. Rowe Price Media & Telecommunications Fund 75,000 $ 281,250
TD Entertainment & Communications Fund ....... 15,000 $ 56,250
NYC 457/401K Small Cap Account ............... 50,000 $ 187,500
--------- -----------
Total ............................... 1,500,000 $ 5,625,000
Capital Research and Management Company (2):
Smallcap World Fund, Inc. .................... 1,200,000 $ 4,500,000
American Funds Insurance Series - Global Small
Capitalization Fund ....................... 100,000 $ 375,000
--------- -----------
Total .................................. 1,300,000 $ 4,875,000
========= ===========
Aggregate Total ........................ 2,800,000 $10,500,000
(1) These shares are owned by various individual and institutional investors,
for which T. Rowe Price Associates, Inc. (Price Associates) serves as
investment adviser with power to direct investments and/or sole power to
vote the shares. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, as amended, Price Associates is deemed to
be a beneficial owner of such shares; however, Price Associates expressly
disclaims that it is, in fact, the beneficial owner of such shares.
(2) These shares are owned by funds for which Capital Research and Management
Company (Capital Research) serves as investment adviser. For purposes of
the reporting requirements of the Securities Exchange Act of 1934, as
amended, Capital Research is deemed to be a beneficial owner of such
shares; however, Capital Research expressly disclaims that it is, in fact,
the beneficial owner of such shares.
Item 6. Selected Financial Data
The selected balance sheet data as of December 31, 2003 and December 31,
2002 and the selected statement of operations data for the years ended December
31, 2003, 2002 and 2001 have been derived from our audited financial statements
included elsewhere herein. The selected balance sheet data as of December 31,
2001, 2000 and 1999 and the statement of operations data for the years ended
December 31, 2000 and 1999 have been derived from our audited financial
statements not included herein. Unaudited pro forma basic and diluted net loss
per share have been calculated assuming the conversion of all previously
outstanding preferred stock into common stock, as if the shares had converted
immediately upon their issuance. You should read these selected financial data
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our financial statements and the notes to those
statements included elsewhere herein.
Year Ended December 31,
-----------------------------------------------------------------
2003 (a) 2002 (b) 2001 (d) 2000(c)(d) 1999 (d)
----------- ----------- ----------- ----------- ----------
(in thousands, except share and per share data)
Statement of Operations Data:
Net revenues ................................... $ 36,697 $ 29,476 $ 24,120 $ 24,235 $ 5,126
Cost of revenues ............................... 11,717 10,224 8,872 6,689 1,441
----------- ----------- ----------- ----------- ----------
23
Gross profit ................................... 24,980 19,252 15,248 17,546 3,685
Operating expenses:
Product and content development ............. 4,220 3,870 4,440 5,556 2,678
Sales and marketing ......................... 11,354 11,243 13,870 16,728 5,148
General and administrative .................. 7,505 7,295 8,801 8,840 3,629
Non-cash compensation ....................... 33 139 332 789 1,072
Non-cash sales and marketing ................ -- 653 653 653 290
Depreciation and amortization ............... 858 1,244 2,545 2,195 547
----------- ----------- ----------- ----------- ----------
Total operating expenses ....................... 23,970 24,444 30,641 34,761 13,364
----------- ----------- ----------- ----------- ----------
Income (loss) from operations ............... 1,010 (5,192) (15,393) (17,215) (9,679)
Interest income, net ........................ 102 112 306 1,425 483
----------- ----------- ----------- ----------- ----------
Income (loss) before income taxes ........... 1,112 (5,080) (15,087) (15,790) (9,196)
Provision for income taxes .................. 50 -- -- -- --
----------- ----------- ----------- ----------- ----------
Net income (loss) ........................... $ 1,062 $ (5,080) $ (15,087) $ (15,790) $ (9,196)
=========== =========== =========== =========== ==========
Earnings (loss) per share:
Basic ....................................... $ 0.06 $ (0.28) $ (1.03) $ (1.08) $ (2.31)
=========== =========== =========== =========== ==========
Diluted ..................................... $ 0.05 $ (0.28) $ (1.03) $ (1.08) $ (2.31)
=========== =========== =========== =========== ==========
Weighted average number of shares used in
calculating earnings (loss) per share:
Basic ....................................... 18,900,861 17,909,492 14,716,741 14,603,381 3,982,358
=========== =========== =========== =========== ==========
Diluted ..................................... 20,308,658 17,909,492 14,716,741 14,603,381 3,982,358
=========== =========== =========== =========== ==========
Pro forma earnings (loss) per share:
Basic ....................................... $ 0.06 $ (0.28) $ (1.03) $ (1.08) $ (0.96)
=========== =========== =========== =========== ==========
Diluted ..................................... $ 0.05 $ (0.28) $ (1.03) $ (1.08) $ (0.96)
=========== =========== =========== =========== ==========
Pro forma weighted average number of shares used
in calculating net earnings (loss) per share
Basic ....................................... 18,900,861 17,909,492 14,716,741 14,603,381 9,628,454
=========== =========== =========== =========== ==========
Diluted ..................................... 20,308,658 17,909,492 14,716,741 14,603,381 9,628,454
=========== =========== =========== =========== ==========
December 31,
-----------------------------------------------
2003(a) 2002(b) 2001 2000(c) 1999
------- ------- ------- ------- -------
(in thousands, except share and per share data)
Balance Sheet Data:
Cash and cash equivalents ...... $22,511 $ 9,306 $ 6,782 $15,860 $40,006
Working capital ................ 16,933 5,563 3,790 16,078 41,137
Total assets ................... 38,707 27,775 26,010 41,354 45,486
Total stockholders' equity ..... 27,300 16,017 15,320 29,391 43,575
(a) As described in Note 9 of our financial statements, on November 20, 2003,
the Company completed the sale of 2,800,000 shares of common stock to two
institutional investor groups. Net proceeds after placement fees and other
offering expenses were $9,872,000.
(b) As described in Note 8 of our financial statements, on February 19, 2002,
the Company entered into a Common Stock Purchase Agreement with May Bridal
Corporation ("May Bridal"), an affiliate of May Department Stores Company,
pursuant to which the Company sold 3,575,747 shares of its common stock to May
Bridal for $5,000,000 in cash.
(c) On March 29, 2000, the Company acquired Weddingpages, Inc. for $10.0 million
in cash.
(d) Includes amortization of goodwill.
Quarterly Results of Operations Data
The following table sets forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 2003.
This information is unaudited, but in the opinion of management, it has been
prepared substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this report and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts
24
stated below to present fairly the unaudited consolidated quarterly results of
operations. The consolidated quarterly data should be read in conjunction with
our audited consolidated financial statements and the notes to such statements
appearing elsewhere in this report. The results of operations for any quarter
are not necessarily indicative of the results of operations for any future
period.
Three Months Ended
-------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
2003 2003 2003 2003 2002 2002 2002 2002
------- -------- ------- ------- ------- -------- ------- -------
(in thousands, except per share data)
Net revenues $8,149 $9,739 $10,143 $8,665 $7,034 $8,036 $ 8,274 $ 6,132
Gross profit 6,060 6,345 6,840 5,735 5,026 5,145 5,341 3,740
Net income (loss) 284 202 772 (195) (551) (977) (1,061) (2,491)
Net earnings (loss)
per share ---
Basic $ 0.01 $ 0.01 $ 0.04 $(0.01) $(0.03) $(0.05) $ (0.06) $ (0.15)
Diluted $ 0.01 $ 0.01 $ 0.04 $(0.01) $(0.03) $(0.05) $ (0.06) $ (0.15)
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included elsewhere in this report.
This discussion contains forward-looking statements relating to future events
and the future performance of The Knot based on our current expectations,
assumptions, estimates and projections about us and our industry. These
forward-looking statements involve risks and uncertainties. Our actual results
and timing of various events could differ materially from those anticipated in
such forward-looking statements as a result of a variety of factors, as more
fully described in this section and elsewhere in this report. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
Overview
The Knot is one of the world's leading wedding media and services companies
providing products and services to couples planning their weddings and future
lives together. Our website, 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 to America Online (AOL) 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.
For the year ended December 31, 2003, we recorded net income of $1.1
million as compared to a net loss of $5.1 million for the year ended December
31, 2002. Our primary goal in 2003 was to achieve profitability, which we
accomplished over the last three quarters and for the full fiscal year. The most
significant factor contributing to the improvement in our bottom line in 2003 as
compared to 2002 was the growth of national and local online advertising
revenue. While overall revenues increased to $36.7 million for the year ended
December 31, 2003 or 24% higher than revenues of $29.5 million in 2002, our
higher margin online advertising revenues grew by $5.6 million to $12.5 million
or over 80% as a result of the increased expansion of our client base at both
the national and local level.
Merchandise revenue, which primarily represents the sale of wedding
supplies, increased by $1.8 million in 2003 or 13% over 2002, generally as a
result of revenue increases of approximately 20% in the first six months of 2003
compared to the first six months of 2002. For the last six months of 2003,
merchandise revenue increased by 5% compared to the last six months of 2002,
which was due, in part, to the leveling of our new membership at approximately
1.1 million members in 2003 and 2002. New membership impacts supplies sales
directly since our brides or members are the buyers. To respond to this trend,
we have been developing a new e-commerce strategy which we expect to deploy
during 2004 to improve our product merchandising, product selection and the
online shopping experience on our sites. As part of this strategy, we also plan
to install a new e-commerce platform, currently scheduled to launch in the
fourth quarter of fiscal 2004, which we believe will help us better target and
communicate with our members. Our primary goal is to increase the percentage of
members who purchase merchandise from us online and their average spending to
support further revenue growth from our existing membership.
Publishing and other revenue declined slightly to $8.7 million in 2003 as
compared to $8.9 million in 2002. An increase in national print revenue from The
Knot Magazine of approximately $900,000 was generally offset by a decrease of
$865,000 in local print advertising. The growing interest in online programs by
local vendors continued to have some downward impact on their tendencies to buy
print. We have responded to this trend by offering a new extended reach program
to local vendors, which integrates local print and online media with placement
in our national print publication. We believe that this program will help to
augment local print revenue as we publish in 2004.
Overall, product and content, sales and marketing and general and
administrative expenses increased to an aggregate amount of $23.1 million from
$22.4 million in 2002, or 3%. Personnel and related expenses increased by
approximately $785,000 due to general compensation increases as well as staff
increases in information technology and warehouse and fulfillment personnel to
support growth in shipments of wedding supplies products. In 2003, we were
generally able to leverage our existing national and local sales forces to
support growth in our advertising revenue streams with sales force expense
increases primarily related to higher sales commission expense of $655,000.
Fulfillment and other costs related to the distribution of The Knot Magazine
rose by approximately $240,000 due to an increase in the
26
number of copies printed. Operating expenses in 2003 were favorably impacted by
the elimination of quarterly online distribution fees, which amounted to $1.2
million in 2002.
With respect to non-cash charges, depreciation and amortization expenses
decreased by $386,000 in 2003, as compared to 2002, due to the reduction of
capital expenditures in 2001 and 2002 and as a result of certain assets acquired
prior to 2001 becoming fully depreciated. In addition, amortization of non-cash
sales and marketing, related to the issuance of a warrant to AOL in 1999, was
completed as of December 31, 2002. In 2002, this amortization amounted to
$653,000.
In November 2003, we completed the sale of 2,800,000 shares of common stock
to two institutional investor groups. Net proceeds after placement fees and
other offering expenses were $9,872,000. We intend to use these proceeds for
general corporate purposes including potential acquisitions, or investments in,
complementary businesses or products.
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
and direct e-mail marketing. They also include online listings, including
preferred placement and other premium programs, in the local area of our website
for local wedding vendors. Local vendors may 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 year ended December 31, 2003, our top seven advertisers accounted
for 5% of our net revenues. For the year ended December 31, 2002, our top seven
advertisers accounted for 4% of our net revenues. For the year ended December
31, 2001, our top eight advertisers accounted for 6% of our net revenues.
Merchandise revenues include the selling price of wedding supplies and
products from our gift registry sold by us through our websites 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.
27
Publishing revenue includes print advertising revenue derived from the
publication of The Knot 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.
For contracts with multiple elements, including programs which combine
online and print advertising components, we allocate revenue to each element
based on evidence of its fair value. Evidence of fair value is the normal
pricing and discounting practices for those deliverables when sold separately.
We defer revenue for any undelivered elements and recognize revenue allocated to
each element in accordance with the revenue recognition policies set forth
above.
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. During
2003, we experienced a further improvement in our collection efforts due, in
part, to increased credit card usage and the receipt of amounts owed by former
franchisees. Accordingly, as of December 31, 2003, we reduced our allowance for
doubtful accounts to $414,000 from $774,000 as of December 31, 2002. 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 December 31, 2003, we had recorded goodwill and other intangible
assets of $8.7 million. In our most recent assessment of impairment of goodwill
as of October 1, 2003, we made estimates of fair value using several approaches.
In our ongoing assessment of impairment of goodwill and other intangible assets,
we consider whether events or changes in circumstances such as significant
declines in revenues, earnings or material adverse changes in the business
climate, indicate that the carrying value of assets may be impaired. As of
December 31, 2003, no impairment has occurred. Future adverse changes in market
conditions or poor operating results of strategic investments could result in
losses or an inability to recover the carrying value of the investments, thereby
possibly requiring impairment charges in the future.
Deferred Taxes
A tax valuation allowance is established, as needed, to reduce net deferred
tax assets to the amount for which recovery is probable. As of December 31,
2003, we have established a full valuation allowance of $18.8 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 including limitations which may arise
from changes in the Company's ownership, 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.
Stock-Based Compensation
28
We account for stock-based compensation 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. Accordingly, we only record 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.
Results of Operations
The following table sets forth for the periods presented certain data from
our statement of operations, expressed as a percentage of net revenues.
Year Ended December 31,
--------------------------------------
2003 2002 2001 2000 1999
----- ----- ----- ----- ------
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 31.9 34.7 36.8 27.6 28.1
----- ----- ----- ----- ------
Gross profit......................... 68.1 65.3 63.2 72.4 71.9
Operating expenses:
Product and content development... 11.5 13.1 18.4 22.9 52.2
Sales and marketing............... 30.9 38.1 57.5 69.0 100.4
General and administrative........ 20.5 24.8 36.4 36.5 70.8
Non-cash compensation............. 0.1 0.5 1.4 3.3 20.9
Non-cash sales and marketing...... 0.0 2.2 2.7 2.7 5.7
Depreciation and amortization..... 2.3 4.2 10.6 9.1 10.7
----- ----- ----- ----- ------
Total operating expenses............. 65.3 82.9 127.0 143.5 260.7
Income (loss) from operations........ 2.8 (17.6) (63.8) (71.1) (188.8)
Interest income, net................. 0.2 0.4 1.3 5.9 9.4
----- ----- ----- ----- ------
Income (loss) before income taxes.... 3.0 (17.2) (62.5) (65.2) (179.4)
Provision for income taxes........... 0.1 0.0 0.0 0.0 0.0
----- ----- ----- ----- ------
Net Income (loss).................... 2.9% (17.2)% (62.5)% (65.2)% (179.4)%
===== ===== ===== ===== ======
Years Ended December 31, 2003 and December 31, 2002
Net revenues increased to $36.7 million for the year ended December 31,
2003 from $29.5 million for the year ended December 31, 2002.
Sponsorship and advertising revenues increased to $12.5 million for the
year ended December 31, 2003, as compared to $6.9 million for the year ended
December 31, 2002. Revenue from local vendor online advertising programs
increased by $3.1 million or approximately 63% 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 $2.4 million in national online sponsorship and
advertising revenue due to a larger number of contracts sold including contracts
related to our category specific programs. Sponsorship and advertising revenues
amounted to 34% of our net revenues for the year ended December 31, 2003 and 23%
of our net revenues for the year ended December 31, 2002.
Merchandise revenues increased to $15.5 million for the year ended December
31, 2003, as compared to $13.7 million for the year ended December 31, 2002.
This increase was primarily due to an increase in the sales of wedding supplies
through our websites of $2.0 million or approximately 16% as a result of the
expansion of product and service offerings and increases in the number of
orders. Merchandise revenues amounted to 42% of our net revenues for the year
ended December 31, 2003, as compared to 46% of our net revenues for the year
ended December 31, 2002.
Publishing and other revenues decreased to $8.7 million for the year ended
December 31, 2003, as compared to $8.9 million for the year ended December 31,
2002. Revenue derived from The Knot Magazine increased by approximately $900,000
due to the sale of a larger number of designer and national advertising
contracts and an increase in the number of copies sold as a result of increased
distribution. This increase was generally offset by a decrease in local
29
print advertising of $866,000 due to a reduction in advertising pages sold in a
majority of local markets. In addition, franchise service fees and royalties
declined by $325,000 due to the termination of all remaining franchise
agreements. This decline was offset, in part, by additional license fees of
$140,000 from several former franchisees who continue to license the use of the
Weddingpages name in their markets. Publishing and other revenue amounted to 24%
of our net revenues for the year ended December 31, 2003, and 30% of our net
revenues for the year ended December 31, 2002.
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 $11.7 million for the year ended December 31,
2003 from $10.2 million for the year ended December 31, 2002. This was due, in
part, to an increase in the cost of revenues from the sale of merchandise, which
increased by $1.1 million as a result of increased sales of wedding supplies.
Cost of revenues related to publishing also increased by $408,000 due to higher
costs of $693,000 associated with The Knot Magazine as a result of both
increased distribution and average book size. This increase was offset, in part,
by a decline in cost of revenues of $286,000 related to regional print magazines
as a result of a reduction in average book sizes. As a percentage of our net
revenues, cost of revenues decreased to 32% for the year ended December 31,
2003, from 35% for the year ended December 31, 2002. The margin improvement
resulted primarily from a greater mix of higher margin sponsorship and
advertising revenue. This improvement 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 2003. We expect to recover this
investment 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 $4.2 million for the
year ended December 31, 2003, as compared to $3.9 million for the year ended
December 31, 2002. These increases were primarily the result of higher personnel
and related expenses primarily related to information technology staff and
additional computer hardware and software costs to upgrade equipment and
applications. As a percentage of our net revenues, product and content
development expenses decreased to 11% for the year ended December 31, 2003, from
13% for the year ended December 31, 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 increased to $11.4 million for the year ended
December 31, 2003, from $11.2 million for the year ended December 31, 2002.
Increases in personnel and related expenses of $536,000 to support the growth in
sales of wedding supplies products, sales commission expense of $655,000 related
to increased advertising revenue and $240,000 of higher fulfillment and other
costs related to the increased distribution of The Knot Magazine was generally
offset by the elimination of $1.2 million of annual distribution fees under our
anchor tenant agreement with AOL. As a percentage of our net revenues, sales and
marketing expenses decreased to 31% for the year ended December 31, 2003, from
38% for the year ended December 31, 2002.
General and Administrative
General and administrative expenses consist primarily of payroll and
related expenses for our executive management, finance and administrative
personnel, legal and accounting fees, facilities costs, insurance and bad debts.
General and administrative expenses increased to $7.5 million for the year
ended December 31, 2003, from $7.3 million for the year ended December 31, 2002.
This increase was primarily due to higher personnel and related expenses
30
of $367,000 and increased fees of $146,000 for credit card usage related to
higher merchandise and local online advertising revenue and a greater proportion
of local vendors paying by credit card. These increases were offset, in part, by
reduced bad debt expense of $250,000 as a result of improved collections from
national advertisers, local vendors and former franchisees. As a percentage of
our net revenues, general and administrative expenses decreased to 20% for the
year ended December 31, 2003, from 25% for the year ended December 31, 2002.
Non-Cash Compensation
We recorded no deferred compensation during the year ended December 31,
2003. Amortization of deferred compensation decreased to $33,000 for the year
ended December 31, 2003, from $139,000 for the year ended December 31, 2002.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing of $2.3 million related to the
issuance of a warrant to AOL in connection with our amended anchor tenant
agreement in July 1999. Deferred sales and marketing was fully amortized as of
December 31, 2002.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and capitalized software and amortization
of intangible assets related to acquisitions.
Depreciation and amortization expenses decreased to $858,000 for the year
ended December 31, 2003, from $1.2 million for the year ended December 31, 2002.
This decrease was primarily due to a reduction in capital expenditures in fiscal
2002 and 2001 and the impact of certain assets acquired prior to 2001 becoming
fully depreciated.
Interest and Other Income
Interest and other income, net of interest expense, decreased to $102,000
for the year ended December 31, 2003, from $112,000 for the year ended December
31, 2002. This decrease was primarily the result of lower interest rates earned
on cash invested.
Provision for Taxes on Income
For the year ended December 31, 2003, we were subject to income tax expense
of $50,000 due to operating income generated in certain states. No federal
income tax has been provided as we utilize net operating loss carryforwards.
Years Ended December 31, 2002 and December 31, 2001
Net Revenues
Net revenues increased to $29.5 million for the year ended December 31,
2002 from $24.1 million for the year ended December 31, 2001.
Sponsorship and advertising revenues increased to $6.9 million for the year
ended December 31, 2002, as compared to $4.9 million for the year ended December
31, 2001. Revenue from local vendor online advertising programs increased by
$1.7 million or approximately 54% for the year ended December 31, 2002,
primarily as a result of additional contracts sold and, in part, due to
expansion in the number of local market services and programs offered. In
addition, there was an increase of approximately $218,000 in national online
sponsorship and advertising revenue primarily due to the launch of category
specific programs. Sponsorship and advertising revenues amounted to 23% of our
net revenues for the year ended December 31, 2002 and 20% of our net revenues
for the year ended December 31, 2001.
Merchandise revenues increased to $13.7 million for the year ended December
31, 2002, as compared to $8.1 million for the year ended December 31, 2001. This
increase was primarily due to an increase in sales of wedding
31
supplies through our websites of $5.4 million, or by approximately 79% as a
result of the expansion of product and service offerings, an increase in the
average order size and increased traffic. Merchandise revenues amounted to 46%
of our net revenues for the year ended December 31, 2002 and 34% of our net
revenues for the year ended December 31, 2001.
Publishing and other revenues decreased to $8.9 million for the year ended
December 31, 2002, as compared to $11.1 million for the year ended December 31,
2001. An increase in revenue from The Knot Magazine of approximately $562,000
due primarily to a larger number of print advertising contracts sold was more
than offset by a decrease in publishing revenue derived from the Weddingpages
operation of $2.5 million. This decrease included approximately $695,000
associated with a reduction in the number of magazines published in local
markets in 2002, principally in Florida, and $682,000 due to a net reduction in
advertising pages sold in comparable markets, offset, in part, by $141,000 of
additional revenue due to the timing of publication of The Knot WEDDINGPAGES
magazines in certain markets. In addition, franchise service fees and royalties
declined by $1.2 million due primarily to the termination of certain
franchisees. Publishing and other revenues amounted to 30% for the year ended
December 31, 2002 and 46% for the year ended December 31, 2001.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the costs related to the production of regional The
Knot WEDDINGPAGES magazines and The Knot Magazine, payroll and related expenses
for our personnel who are responsible for the production of online and offline
media, and costs of Internet and hosting services.
Cost of revenues increased to $10.2 million for the year ended December 31,
2002, from $8.9 million for the year ended December 31, 2001. Cost of revenues
from the sale of merchandise increased by $2.4 million for the year ended
December 31, 2002, primarily as a result of the increased sales of wedding
supplies. These increases were offset, in part, by a reduction in cost of
revenue as a result of a decrease in publishing revenue due to fewer advertising
pages sold and printed and by improved margins with respect to merchandise sales
and publishing revenue. Our margins on the sale of wedding supplies have
improved as a result of sourcing products at lower costs and the introduction of
higher margin products. Publishing margins improved as a result of higher
effective rates for print advertising in our regional The Knot WEDDINGPAGES
magazines. As a percentage of our net revenues, cost of revenues decreased to
35% for the year ended December 31, 2002, from 37% for the year ended December
31, 2001.
Product and Content Development
Product and content development expenses consist primarily of payroll and
related expenses for editorial, creative and information technology personnel.
Product and content development expenses decreased to $3.9 million for the
year ended December 31, 2002 from $4.4 million for the year ended December 31,
2001. This decrease was primarily the result of cost reduction initiatives,
which reduced personnel and related expenses. As a percentage of our net
revenues, product and content development expenses decreased to 13% for the year
ended December 31, 2002, from 18% for the year ended December 31, 2001.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses for sales and marketing, customer service and public relations
personnel, as well as the costs for AOL anchor tenant agreements, advertising
and promotional activities and fulfillment and distribution of merchandise.
Sales and marketing expenses decreased to $11.2 million for the year ended
December 31, 2002 from $13.9 million for the year ended December 31, 2001. The
decrease was the result of various cost reduction initiatives, which reduced
personnel and related expenses, commission expense and promotion expense by
$704,000, $484,000, and $724,000, respectively. In addition, there was a
reduction in fees of $823,000 under our International Anchor Tenant agreement
with AOL. This agreement was amended effective March 31, 2001, to limit to
France the international markets where we receive distribution from AOL. To
effect this amendment with AOL, we incurred a one-time restructuring fee in the
first quarter of 2001. As a percentage of our net revenues, sales and marketing
expenses decreased to 38% for the year ended December 31, 2002, from 58% for the
year ended December 31, 2001.
32
General and Administrative
General and administrative expenses consist primarily of payroll and
related expenses for our executive management, finance and administrative
personnel, legal and accounting fees, facilities costs, insurance and bad debts
expenses.
General and administrative expenses decreased to $7.3 million for the year
ended December 31, 2002 from $8.8 million for the year ended December 31, 2001.
This decrease was primarily due to reduced bad debt expense of $1.4 million as a
result of improved collections from local vendors due, in part, to a higher
proportion of payments made through credit cards, as well as improved
collections from national advertisers and franchisees. In addition, general and
administrative expenses were reduced as a result of cost reduction initiatives,
which reduced personnel and related expenses by approximately $281,000. As a
percentage of our net revenues, general and administrative expenses decreased to
25% for the year ended December 31, 2002 from 36% for the year ended December
31, 2001.
Non-Cash Compensation
We recorded no deferred compensation during the year ended December 31,
2002. Amortization of deferred compensation decreased to $139,000 from $332,000
for the year ended December 31, 2001.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing of $2.3 million related to the
issuance of a warrant to AOL in connection with our amended anchor tenant
agreement in July 1999. Amortization of deferred sales and marketing was
$653,000 for each of the years ended December 31, 2002 and 2001.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and capitalized software and amortization
of goodwill and other intangible assets related to acquisitions.
Depreciation and amortization expenses decreased to $1.2 million for the
year ended December 31, 2002, from $2.5 million for the year ended December 31,
2001. The decrease was primarily due to the implementation of SFAS No. 142,
effective January 1, 2002, resulting in goodwill no longer being amortized. For
the year ended December 31, 2001, we recorded goodwill amortization of $1.2
million. We perform goodwill impairment tests on at least an annual basis. There
can be no assurance that future goodwill impairment tests will not result in a
charge to income.
Interest Income
Interest income, net of interest expense, decreased to $112,000 for the
year ended December 31, 2002, from $307,000 for the year ended December 31,
2001. This decrease resulted from lower interest rates and lower average amounts
of cash and cash equivalents available for investment.
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
operating results or financial position.
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
33
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. The provisions of EITF Issue 00-21 are effective for revenue
arrangements entered into for fiscal quarters beginning after June 15, 2003. The
adoption of EITF No. 00-21 did not have a significant impact on our operating
results or financial position.
Liquidity and Capital Resources
As of December 31, 2003, our cash and cash equivalents amounted to $22.5
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 $4.0 million for the year
ended December 31, 2003. This resulted primarily from the net income for the
period, as adjusted for depreciation and amortization, of $2.0 million, a
decrease in accounts receivable, net of deferred revenue, of approximately $1.0
million due to improved collection efforts and an increase in credit card usage
by local vendors, and an increase in accounts payable and accrued expenses of
$647,000 due, in part, to the timing of payment of magazine production costs.
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 December 31, 2003.
Net cash used in operating activities was $525,000 for the year ended December
31, 2002. This resulted primarily from the loss for the period, as adjusted for
depreciation and amortization, of $3.0 million and an increase in inventory of
$580,000, partially offset by an increase in accounts payable and accrued
expenses of $1.5 million and a decrease in accounts receivable, net of deferred
revenue, of approximately $1.4 million.
Net cash used in investing activities was $866,000 for the year ended
December 31, 2003 primarily due to purchases of property and equipment. Net cash
used in investing activities was $383,000 for the year ended December 31, 2002,
primarily due to purchases of property and equipment of $229,000, net of
proceeds from the sale of property and equipment, and cash paid of $154,000 with
respect to a termination liability resulting from the acquisition of
Weddingpages.
Net cash provided by financing activities was $10.1 million for the year
ended December 31, 2003, primarily due to net proceeds of $9.9 million received
in connection with a private placement of 2.8 million shares of common stock in
November 2003. Net cash provided by financing activities was $3.4 million for
the year ended December 31, 2002, primarily due to proceeds from May Bridal
Corporation in connection with the issuance of 3,575,747 shares of our common
stock for $5.0 million, less related costs, partially offset by debt repayments
of $1.6 million, primarily the outstanding balance under Weddingpages' expired
line of credit agreement.
Since our inception in May 1996, with the exception of fiscal 2003, we have
experienced annual operating losses, and we have an accumulated deficit of $47.4
million as of December 31, 2003. 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, as well as
continuing emphasis on controlling 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.
34
Contractual Obligations and Commitments
We do not have any special purposes entities or capital leases, and other
than operating leases, which are described below, we do not engage in
off-balance sheet financing arrangements.
In the ordinary course of business, we enter into various arrangements with
vendors and other business partners principally for magazine production,
inventory purchases, host services and bandwidth. There are no material purchase
commitments for these arrangements extending beyond 2004.
As of December 31, 2003, we had no material commitments for capital
expenditures.
As of December 31, 2003, we had commitments under non-cancelable operating
leases amounting to approximately $5.8 million.
At December 31, 2003, other long term liabilities of $490,000 substantially
represented accruals to recognize rent expense on a straight-line basis over the
respective lives of two of our operating leases under which rental payments
increase over the lease periods. These accruals will be reduced as the operating
lease payments, summarized in the table of contractual obligations below, are
made.
Our contractual obligations as of December 31, 2003 are summarized as
follows:
Payments due by period
-----------------------------------------------------
(in thousands)
Less than 1 1-3 3-5 More than 5
Total year years years years
------ ----------- ------ ------- -----------
Contractual Obligations
Long term debt............... $ 235 $ 39 $ 90 $ 106 $ --
Operating leases............. 5,761 830 1,539 1,485 1,907
Purchase commitments......... 1,300 1,300 -- -- --
------ ------ ------ ------ ------
Total.................. $7,296 $2,169 $1,629 $1,591 $1,907
====== ====== ====== ====== ======
Seasonality
We believe that the impact of the frequency of weddings from quarter to
quarter results in lower merchandise revenues in the first and fourth quarters.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
We are exposed to some market risk through interest rates related to the
investment of our current cash and cash equivalents of approximately $22.5
million as of December 31, 2003. These funds are generally invested in highly
liquid debt instruments with short-term maturities. As such instruments mature
and the funds are re-invested, we are exposed to changes in market interest
rates. This risk is not considered material, and we manage such risk by
continuing to evaluate the best investment rates available for short-term, high
quality investments.
We have no activities related to derivative financial instruments or
derivative commodity instruments, and we are not currently subject to any
significant foreign currency exchange risk.
35
Item 8. Consolidated Financial Statements and Schedule
(a)(1) Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Auditors................................................. 37
Consolidated Balance Sheets as of December 31, 2003 and 2002 .................. 38
Consolidated Statements of Operations for the years ended December 31, 2003,
2002 and 2001............................................................... 39
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001 ........................................... 40
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001............................................................... 41
Notes to Consolidated Financial Statements..................................... 43
Schedule II - Valuation and Qualifying Accounts............................... 58
The unaudited supplementary data regarding quarterly results of operations are
incorporated by reference to the information set forth in Item 6, "Selected
Financial Data", in the section captioned, "Quarterly Results of Operations
Data".
36
Report Of Independent Auditors
The Board of Directors and Stockholders of
The Knot, Inc.
We have audited the accompanying consolidated balance sheets of The Knot,
Inc. (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2003. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2003 and 2002, and the consolidated results of its operations and
cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principle generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
New York, New York
February 20, 2004
37
The Knot, Inc.
Consolidated Balance Sheets
December 31,
2003 2002
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 22,511,025 $ 9,305,670
Restricted cash -- 251,871
Accounts receivable, net of allowances of $614,932 and $960,223
at December 31, 2003 and December 31, 2002, respectively. 2,882,784 4,791,458
Inventories 1,194,997 1,291,866
Deferred production and marketing costs 317,903 443,502
Other current assets 747,467 556,358
---------------------------
Total current assets 27,654,176 16,640,725
Property and equipment, net 2,005,977 1,948,481
Intangible assets, net 8,734,136 8,834,136
Other assets 312,741 351,570
---------------------------
Total assets $ 38,707,030 $ 27,774,912
===========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 5,790,211 $ 5,112,586
Deferred revenue 4,891,430 5,827,432
Current portion of long-term debt 39,446 137,674
---------------------------
Total current liabilities 10,721,087 11,077,692
Long term debt 195,455 234,901
Other liabilities 490,203 445,088
---------------------------
Total liabilities 11,406,745 11,757,681
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding at December 31, 2003 and 2002 -- --
Common stock, $.01 par value; 100,000,000 shares, authorized;
21,734,952 shares and 18,373,327 shares issued and outstanding
at December 31, 2003 and 2002, respectively 217,349 183,733
Additional paid-in capital 74,532,686 64,399,894
Deferred compensation -- (54,835)
Accumulated deficit (47,449,750) (48,511,561)
---------------------------
Total stockholders' equity 27,300,285 16,017,231
===========================
Total liabilities and stockholders' equity $ 38,707,030 $ 27,774,912
===========================
See accompanying notes.
38
The Knot, Inc.
Consolidated Statements Of Operations
Year ended December 31,
2003 2002 2001
----------------------------------------
Net revenues $36,696,947 $29,476,173 $ 24,120,463
Cost of revenues 11,717,657 10,223,839 8,872,203
----------------------------------------
Gross profit 24,979,290 19,252,334 15,248,260
Operating expenses:
Product and content development 4,219,332 3,870,493 4,439,834
Sales and marketing 11,354,316 11,242,814 13,870,456
General and administrative 7,505,181 7,294,694 8,801,435
Non-cash compensation 32,623 139,069 332,186
Non-cash sales and marketing -- 653,213 653,232
Depreciation and amortization 858,360 1,244,289 2,544,836
----------------------------------------
Total operating expenses 23,969,812 24,444,572 30,641,979
----------------------------------------
Income (loss) from operations 1,009,478 (5,192,238) (15,393,719)
Interest income, net 102,333 111,859 306,570
----------------------------------------
Income (loss) before income taxes 1,111,811 (5,080,379) (15,087,149)
Provision for income taxes 50,000 -- --
----------------------------------------
Net income (loss) $ 1,061,811 $(5,080,379) $(15,087,149)
========================================
Net earnings (loss) per share - basic $ 0.06 $ (0.28) $ (1.03)
========================================
Net earnings (loss) per share - diluted $ 0.05 $ (0.28) $ (1.03)
========================================
Weighted average number of common shares outstanding
Basic 18,900,861 17,909,492 14,716,741
========================================
Diluted 20,308,658 17,909,492 14,716,741
========================================
See accompanying notes.
39
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
--------------- ---------------------- Paid-In Deferred
Shares Amount Shares Par Value Capital Compensation
------ ------ ---------- --------- ----------- ------------
Balance at December 31, 2000 ................. -- $-- 14,676,253 $146,762 $59,657,388 $(763,074)
--- --- ---------- -------- ----------- ---------
Issuance of common stock in connection with
exercise of vested stock options .......... -- -- 14,579 146 3,215 --
Issuance of common stock in connection with
employee stock purchase plan .............. -- -- 45,221 452 27,495 --
Amortization of deferred compensation ........ -- -- -- -- -- 332,186
Amortization of deferred sales and
marketing ................................. -- -- -- -- -- --
Reversal of deferred compensation related
to common stock options forfeited ......... -- -- -- -- (175,905) 175,905
Net loss for the year ended
December 31, 2001 ......................... -- -- -- -- -- --
--- --- ---------- -------- ----------- ---------
Balance at December 31, 2001 ................. -- $-- 14,736,053 $147,360 $59,512,193 $(254,983)
--- --- ---------- -------- ----------- ---------
Issuance of common stock to May Bridal Corp.,
net of costs of approximately $33,000 ..... -- -- 3,575,747 35,758 4,931,243 --
Issuance of common stock in connection with
employee stock purchase plan .............. -- -- 61,527 615 17,538 --
Amortization of deferred compensation ........ -- -- -- -- -- 139,068
Amortization of deferred sales and
marketing ................................. -- -- -- -- -- --
Reversal of deferred compensation related to
common stock options forfeited ............ -- -- -- -- (61,080) 61,080
Net loss for the year ended
December 31, 2002 ......................... -- -- -- -- -- --
--- --- ---------- -------- ----------- ---------
Balance at December 31, 2002 ................. -- $-- 18,373,327 $183,733 $64,399,894 $ (54,835)
--- --- ---------- -------- ----------- ---------
Issuance of common stock in connection with
a private placement, net of costs
of approximately $628,000 ................. -- -- 2,800,000 28,000 9,844,000 --
Issuance of common stock in connection with
exercise of vested stock options .......... -- -- 501,875 5,019 294,864 --
Issuance of common stock in connection with
employee stock purchase plan .............. -- -- 59,750 597 16,140 --
Amortization of deferred compensation ........ -- -- -- -- -- 32,623
Reversal of deferred compensation related to
common stock options forfeited ............ -- -- -- -- (22,212) 22,212
Net income for the year ended
December 31, 2003 ......................... -- -- -- -- -- --
--- --- ---------- -------- ----------- ---------
Balance at December 31, 2003 ................. -- $-- 21,734,952 $217,349 $74,532,686 $ --
--- --- ---------- -------- ----------- ---------
Deferred Total
Sales and Accumulated Stockholders'
Marketing Deficit Equity
----------- ------------ -------------
Balance at December 31, 2000 ................. $(1,306,445) $(28,344,033) $ 29,390,598
----------- ------------ ------------
Issuance of common stock in connection with
exercise of vested stock options .......... -- -- 3,361
Issuance of common stock in connection with
employee stock purchase plan .............. -- -- 27,947
Amortization of deferred compensation ........ -- -- 332,186
Amortization of deferred sales and
marketing ................................. 653,232 -- 653,232
Reversal of deferred compensation related
to common stock options forfeited ......... -- -- --
Net loss for the year ended
December 31, 2001 ......................... -- (15,087,149) (15,087,149)
----------- ------------ ------------
Balance at December 31, 2001 ................. $ (653,213) $(43,431,182) $ 15,320,175
----------- ------------ ------------
Issuance of common stock to May Bridal Corp.,
net of costs of approximately $33,000 ..... -- -- 4,967,001
Issuance of common stock in connection with
employee stock purchase plan .............. -- -- 18,153
Amortization of deferred compensation ........ -- -- 139,068
Amortization of deferred sales and
marketing ................................. 653,213 -- 653,213
Reversal of deferred compensation related
to common stock options forfeited ......... -- -- --
Net loss for the year ended
December 31, 2002 ......................... -- (5,080,379) (5,080,379)
----------- ------------ ------------
Balance at December 31, 2002 ................. $ -- $(48,511,561) $ 16,017,231
----------- ------------ ------------
Issuance of common stock in connection with
a private placement, net of costs
of approximately $628,000 ................. -- -- 9,872,000
Issuance of common stock in connection with
exercise of vested stock options .......... -- -- 299,883
Issuance of common stock in connection with
employee stock purchase plan .............. -- -- 16,737
Amortization of deferred compensation ........ -- -- 32,623
Reversal of deferred compensation related
to common stock options forfeited ......... -- -- --
Net income for the year ended
December 31, 2003 ......................... -- 1,061,811 1,061,811
----------- ------------ ------------
Balance at December 31, 2003 ................. $ -- $(47,449,750) $ 27,300,285
----------- ------------ ------------
See accompanying notes.
40
The Knot, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
2003 2002 2001
----------------------------------------
Operating activities
Net income (loss) $ 1,061,811 $(5,080,379) $(15,087,149)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 758,360 1,144,289 1,276,879
Amortization of intangibles 100,000 100,000 1,267,957
Amortization of deferred compensation 32,623 139,069 332,186
Amortization of deferred sales and marketing -- 653,213 653,232
Reserve for returns 1,523,832 942,698 881,841
Allowance for doubtful accounts 51,414 301,713 1,701,619
Other non-cash charges 16,764 64,667 114,921
Changes in operating assets and liabilities:
Restricted cash 251,871 (67,452) (184,419)
Accounts receivable 333,428 (1,023,939) 539,331
Inventories 96,869 (580,286) 94,373
Deferred production and marketing costs 125,599 (149,973) 856,080
Other current assets (191,109) 222,417 131,875
Other assets 38,829 21,304 17,898
Accounts payable and accrued expenses 647,208 1,525,894 (143,356)
Deferred revenue (936,002) 1,144,539 (526,466)
Other liabilities 45,115 117,665 131,415
----------------------------------------
Net cash provided by (used in) operating activities 3,956,612 (524,561) (7,941,783)
Investing activities
Purchases of property and equipment (827,739) (277,135) (397,105)
Proceeds from sales of property and equipment -- 48,000 -
Acquisition of businesses, net of cash acquired (38,400) (153,599) (349,605)
----------------------------------------
Net cash used in investing activities (866,139) (382,734) (746,710)
Financing activities
Proceeds from short term borrowings -- -- 497,295
Repayment of short term and current portion of long term
borrowings (99,274) (1,554,240) (917,683)
Issuance costs (602,464) (33,000) --
Proceeds from issuance of common stock 10,516,737 5,018,154 27,947
Proceeds from exercise of stock options 299,883 -- 3,361
----------------------------------------
Net cash provided by (used in) financing activities 10,114,882 3,430,914 (389,080)
----------------------------------------
Increase (decrease) in cash and cash equivalents 13,205,355 2,523,619 (9,077,573)
Cash and cash equivalents at beginning of year 9,305,670 6,782,051 15,859,624
----------------------------------------
Cash and cash equivalents at end of year $22,511,025 $ 9,305,670 $ 6,782,051
========================================
41
The Knot, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
2003 2002 2001
-------------------------
Summary of non-cash investing and financing activities
Accrued financing costs in connection with a private placement
of common stock $25,536 $-- $ --
Forgiveness of accounts receivable in connection with a business
acquisition -- -- 226,951
-------------------------
Total non-cash investing and financing activities $25,536 $-- $226,951
=========================
Supplemental disclosure of cash flow information:
Year ended December 31,
2003 2002 2001
----------------------------
Cash paid for interest $29,287 $61,843 $173,302
Cash paid for income taxes $94,000 -- --
See accompanying notes.
42
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
1. Organization and Nature of Operations
The Knot, Inc. (the "Company") was incorporated in the state of Delaware on
May 2, 1996.
The Company is one of the world's leading wedding media and services
companies providing products and services to couples planning their weddings and
future lives together. The Company's website, at www.theknot.com, is the most
trafficked wedding destination online and offers comprehensive content,
extensive wedding-related shopping, an online wedding gift registry and an
active community. The Company is the leading wedding content provider to America
Online (AOL) and MSN. The Company publishes The Knot Magazine, which features
editorial content covering every major wedding planning decision and is
distributed to newsstands and bookstores across the nation. Through its
subsidiary, Weddingpages, Inc., the Company publishes regional wedding magazines
in 18 markets in the United States. The Company also authors books on wedding
related topics. The Company is based in New York and has several other offices
across the country.
Since its inception in May 1996, with the exception of fiscal 2003, the
Company has experienced annual operating losses and has an accumulated deficit
of $47,449,750 as of December 31, 2003. 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, as well
as continuing emphasis on controlling 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 consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
Preparing financial statements in conformity with accounting principles
generally accepted in the Unites States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results may differ from these estimates. Interim
results are not necessarily indicative of results for a full year.
Restricted Cash
Restricted cash as of December 31, 2002 included money held in escrow with
the Company's bankcard processing services provider.
43
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments. The carrying amounts of outstanding borrowings approximate fair
value.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
were approximately $21,203,000 and $8,067,000 at December 31, 2003 and 2002,
respectively. The market value of the Company's cash equivalents approximates
their cost plus accrued interest.
Inventory
Inventory consists of finished goods and raw materials. Inventory costs are
determined principally by using the average cost method and are stated at the
lower of cost or net realizable value.
Deferred Production and Marketing Costs
Deferred production and marketing costs include certain magazine production
and commission costs which are deferred and expensed upon publication and
prepaid sales commissions which are expensed as the related revenue is
recognized.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the related lease agreement.
Goodwill, Other Intangible and Long-Lived Assets
Goodwill is the excess of purchase price over the fair value of identified
net assets of businesses acquired. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible Assets and
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
effective January 1, 2002. Goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but instead are subject to annual
impairment tests in accordance with the provisions of SFAS No. 142. Other
intangible assets are amortized over their respective useful lives and reviewed
for impairment whenever events or changes in circumstances such as significant
declines in revenues, earnings or cash flows or material adverse changes in the
business climate indicate that the carrying amount of an asset may be impaired.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future estimated undiscounted net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. As of
December 31, 2003, no impairment has occurred.
Income Taxes
The Company accounts for income taxes on the liability method as required
by SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequence
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards.
44
Deferred tax liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax liabilities of a change
in tax rates is recognized in results of operations in the period that includes
the enactment date.
Net Revenues by Type
Net revenues by type are as follows:
Year Ended December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Sponsorship and advertising...... $12,462,452 $ 6,888,024 $ 4,922,866
Merchandise...................... 15,510,269 13,673,709 8,097,671
Publishing and other............. 8,724,226 8,914,440 11,099,926
----------- ----------- -----------
Total............................ $36,696,947 $29,476,173 $24,120,463
=========== =========== ===========
For the years ended December 31, 2003, 2002 and 2001, merchandise revenue
included outbound shipping and handling charges of approximately $1,756,000,
$1,614,000 and $923,000, respectively.
Revenue Recognition
The Company derives 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
and direct e-mail marketing. They also include online listings, including
preferred placement and other premium programs, in the local area of our website
for local wedding vendors. Local vendors may 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, the Company has recognized its sponsorship and advertising revenues over
the duration of the contracts on a straight-line basis, as the Company has
exceeded minimum guaranteed impressions. To the extent that minimum guaranteed
impressions are not met, the Company is generally obligated to extend the period
of the contract until the guaranteed impressions are achieved. If this were to
occur, the Company would defer and recognize the corresponding revenues over the
extended period.
Merchandise revenues include the selling price of wedding supplies and
products from the Company's gift registry sold through its websites as well as
related outbound shipping and handling charges. Merchandise revenues also
include commissions earned in connection with the sale of products from the
Company's gift registry under agreements with certain strategic partners.
Merchandise revenues are recognized when products are shipped to customers,
reduced by discounts as well as an allowance for estimated sales returns.
45
Publishing revenue includes print advertising revenue derived from the
publication of The Knot Magazine and the publication of regional magazines by
the Company's 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.
For contracts with multiple elements, including programs which combine
online and print advertising components, the Company allocates revenue to each
element based on evidence of its fair value. Evidence of fair value is the
normal pricing and discounting practices for those deliverables when sold
separately. The Company defers revenue for any undelivered elements and
recognizes revenue allocated to each element in accordance with the revenue
recognition policies set forth above.
Deferred Revenue
Deferred revenue represents payments received or billings in excess of
revenue recognized related to online and print advertising contracts.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the production costs of regional and national wedding
magazines, payroll and related expenses for personnel who are responsible for
the production of online and offline media and costs of Internet and hosting
services.
Cost of revenues by type are as follows:
Year Ended December 31,
--------------------------------------
2003 2002 2001
----------- ----------- ----------
Sponsorship and advertising......... $ 446,479 $ 504,297 $ 585,942
Merchandise......................... 8,041,269 6,897,402 4,534,482
Publishing and other................ 3,229,909 2,822,140 3,751,779
----------- ----------- ----------
Total............................... $11,717,657 $10,233,839 $8,872,203
=========== =========== ==========
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense totaled
approximately $114,000, $103,000 and $82,000 for the years ended December 31,
2003, 2002 and 2001, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with three
major financial institutions. The Company's customers are primarily concentrated
in the United States. The Company performs on-going credit evaluations,
generally does not require collateral, and
46
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information. To date,
such losses have been within management's expectations.
At December 31, 2003 and December 31, 2002, no single customer accounted
for more than 2% 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 as amended by SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure.
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 (see Note 10).
Year Ended December 31,
---------------------------------------
2003 2002 2001
---------- ----------- ------------
Net income (loss), as reported ................... $1,061,811 $(5,080,379) $(15,087,149)
Add: Total stock-based employee compensation
expense included in reported net income
(loss) ........................................ 32,623 139,069 332,186
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards ................................ (588,692) (573,683) (970,896)
---------- ----------- ------------
Net income (loss), pro forma $ 505,742 $(5,514,993) $(15,725,859)
========== =========== ============
Basic earnings (loss) per share, as reported $ 0.06 $ (0.28) $ (1.03)
========== =========== ============
Basic earnings (loss) per share, pro forma $ 0.03 $ (0.31) $ (1.07)
========== =========== ============
Diluted earnings (loss) per share, as reported $ 0.05 $ (0.28) $ (1.03)
========== =========== ============
Diluted earnings (loss) per share, pro forma $ 0.02 $ (0.31) $ (1.07)
========== =========== ============
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.
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 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 year ended December 31, 2003,
the weighted average number of shares used in calculating diluted earnings per
47
share includes options to purchase common stock of 1,407,798. The calculation of
earnings or loss per share for the year December 31, 2003 excludes the weighted
average number of securities listed below because to include them in the
calculation would be antidilutive.
Year Ended December 31,
2003
---------
Options to purchase common stock 737,000
Common stock warrant 438,000
---------
1,175,000
=========
There were no dilutive securities for the years ended December 31, 2002 and
2001.
Segment Information
The Company operates in one segment.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. The Company's comprehensive net loss is
equal to its net loss for all periods presented.
Software Development Costs
The costs of computer software developed or obtained for internal use are
being amortized over their estimated useful lives, which has been determined by
management to range from one to three years. Amortization of software
development costs begins when the software is ready for its intended use.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for
Asset Retirement Obligations. This standard addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement of tangible long-lived assets and the
associated asset retirement costs. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of this new statement did not have a material
impact on the Company's operating results or financial position.
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.
48
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. The provisions of EITF Issue 00-21 are effective for revenue
arrangements entered into for fiscal quarters beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on the Company's operating
results or financial position.
3. Inventory
Inventory consists of the following:
December 31,
2003 2002
---------- ----------
Raw materials ................................... $ 127,713 $ 91,556
Finished goods .................................. 1,067,284 1,200,310
---------- ----------
$1,194,997 $1,291,866
========== ==========
4. Property and Equipment
Property and equipment consists of the following:
December 31,
2003 2002
---------- ----------
Leasehold improvements .......................... $1,467,901 $1,415,718
Software ........................................ 1,461,041 1,186,547
Furniture and fixtures .......................... 218,866 216,011
Computer and office equipment ................... 3,092,962 2,617,735
---------- ----------
$6,240,770 $5,436,011
Less accumulated depreciation and amortization .. 4,234,793 3,487,530
---------- ----------
$2,005,977 $1,948,481
========== ==========
5. Intangible Assets
Intangibles assets consists of the following:
December 31,
2003 2002
---------- ----------
Goodwill, net .................................. $8,409,136 $8,409,136
---------- ----------
Covenant not to compete ........................ 700,000 700,000
Less accumulated amortization ............... (375,000) (275,000)
---------- ----------
Covenant not to compete, net ................... 325,000 425,000
---------- ----------
Total .......................................... $8,734,136 $8,834,136
========== ==========
49
The Company completed its most recent goodwill impairment test as of
October 1, 2003. The tests involved the assessment of the fair market value of
the Company as the single reporting unit. No impairment of goodwill was
indicated at that time. Under SFAS No. 142, the Company is required to perform
goodwill impairment tests on at least an annual basis or more frequently if
circumstances dictate. There can be no assurance that future goodwill impairment
tests will not result in a charge to income.
A reconciliation of reported net loss to net loss adjusted to reflect the
impact of the discontinuance of the amortization of goodwill for the year ended
December 31, 2001 is as follows:
Year Ended December 31,
2001
------------
Reported net loss ................................... $(15,087,149)
Goodwill amortization ............................... 1,167,956
------------
Adjusted net loss ................................... $(13,919,193)
============
Reported basic and diluted net loss per share ....... $ (1.03)
Goodwill amortization ............................... $ 0.08
------------
Adjusted basic and diluted net loss per share ....... $ (0.95)
============
The covenant not to compete is being amortized over the related contractual
period of seven years and amortization expense was $100,000 for each of the
years ended December 31, 2003, 2002 and 2001. Estimated annual amortization
expense of the covenant not to compete is $100,000 in each of fiscal years 2004
through 2006 and $25,000 in fiscal 2007.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31,
2003 2002
---------- ----------
Accounts payable ................................ $1,055,748 $ 768,329
Distribution and other service fees ............. 2,569,248 2,574,024
Compensation and related benefits ............... 1,292,901 1,020,916
Other accrued expenses .......................... 872,314 749,317
---------- ----------
$5,790,211 $5,112,586
========== ==========
7. Long Term Debt
Long-term debt as of December 31, 2003 and 2002 consists of the following:
December 31,
2003 2002
-------- --------
Note due in annual installments of $60,000 through October 2008,
based on imputed interest of 8.75% .......................... $234,901 $271,173
10.0% equipment installment note, due in monthly installments
of $8,131 through August 2003 ............................... $ -- $ 63,002
50
Termination liability, due in monthly installments
of $12,800 through March 2003 ............................... $ -- $ 38,400
-------- --------
Total long-term debt ........................................... $234,901 $372,575
Less current portion ........................................... $ 39,446 $137,674
-------- --------
Long term debt, excluding current portion ...................... $195,455 $234,901
======== ========
Maturities of long-term obligations for the five years ending December 31, 2008
are as follows: 2004, $39,446; 2005, $42,898; 2006, $46,651; 2007, $50,733 and
2008, $55,173.
8. Relationship with AOL, QVC, Inc. and May
AOL
In July 1999, the Company entered into an amended and restated Anchor
Tenant Agreement with AOL ("AOL Agreement"). Pursuant to the AOL Agreement, the
Company issued a warrant to purchase 366,667 shares of the Company's common
stock at $7.20 per share, subject to certain anti-dilution provisions. As of
December 31, 2003, the effect of these anti-dilution provisions was to reduce
the exercise price under the warrant to $5.73 per share. The warrant is
immediately exercisable and expires in July 2007. The Company valued this
warrant at approximately $2,250,000, by using the Black-Scholes option pricing
model with an expected volatility factor of 55%, risk free interest rate of 5%,
no dividend yield, and a 2-year life, which was recognized as non-cash sales and
marketing expense on a straight-line basis over the term of the AOL Agreement,
which expired January 6, 2003. The Company entered into a further amendment of
the AOL Agreement, which extended the term to January 6, 2004 and eliminated
quarterly carriage fees.
On May 1, 2000, the Company entered into an International Anchor Tenant
Agreement with AOL, whereby the Company received distribution within AOL and its
affiliates within certain international markets. The agreement originally
provided for an expiration date of May 1, 2003 and for quarterly carriage fees
payable by the Company over the term of the agreement. Effective March 31, 2001,
the International Anchor Tenant Agreement was amended to limit the International
Markets where the Company will receive distribution from AOL to France. In
exchange for this amendment, the Company paid in May 2001 a one-time
restructuring fee of $550,000 and a total carriage fee for France for the
remaining term of the amended agreement of $200,000. The amended agreement
expired on May 1, 2003.
The Company recorded aggregate carriage fees to AOL in the amount of
$1,200,000 and $2,023,000 for the years ended December 31, 2002 and 2001,
respectively.
QVC, Inc. ("QVC")
On April 13, 1999, the Company sold 4,000,000 shares of Series B
Convertible Preferred Stock ("Series B") for $15,000,000 to QVC. The Company
also entered into a Services Agreement with QVC (the "Services Agreement"),
whereby QVC provides warehousing, fulfillment and distribution, and billing
services with respect to the Company's gift registry products. The fees for such
services were negotiated on an arm's length basis. The Services Agreement with
QVC expired in December 2003; however, pursuant to the agreement, the company
had the option to continue to operate under the services agreement for an
additional l80 days, which it is currently doing. The Company expects to begin
to use its Redding, California warehouse and distribution facility to service
The Knot Registry during 2004.
51
For the years ended December 31, 2003, 2002 and 2001, the Company purchased
merchandise and incurred warehousing, fulfillment, distribution and billing
costs under the Services Agreement with QVC in the aggregate amounts of
$123,000, $118,000 and $128,000, respectively. At December 31, 2003 and 2002,
the Company had recorded a receivable due from QVC of approximately $51,000 and
$48,000, respectively.
May
On February 19, 2002, the Company entered into a Common Stock Purchase
Agreement (the "Agreement") with May Bridal, pursuant to which the Company sold
3,575,747 shares of its common stock to May Bridal for $5,000,000 in cash. The
Agreement provides that if the Company proposes to sell, transfer or otherwise
issue any common or preferred stock or other interest convertible into common
stock ("equity interests") to any third party (other than shares previously
reserved or certain shares which shall be reserved for future issuance pursuant
to Stock Incentive Plans approved by the Board of Directors or stockholders of
the Company) and which transaction would dilute May Bridal's interest in the
common stock or voting power of the Company prior to such transaction by more
than one percentage point, then the Company shall offer May Bridal the right to
acquire a similar equity interest, on the same terms and conditions as offered
to the third party, in such amount as to preserve its percentage interest in the
common stock and voting power of the Company. If the Company proposes to acquire
any equity interest from a third party, which transaction would result in May
Bridal's interest in the common stock or voting power of the Company exceeding
20%, then the Company shall offer to acquire equity interests from May Bridal on
the same terms as offered to the third party, to permit May Bridal to own less
than 20% of the common stock or voting power of the Company after the
transaction. In addition, under an amendment to the Agreement dated November 11,
2003, so long as May Bridal owns more than 10% of the common stock or voting
power of the Company, May Bridal shall have the right to designate one member of
the Board of Directors of the Company and to nominate and submit such person for
election by the stockholders of the Company. May Bridal waived its right to
acquire equity interests in connection with the sale of common stock by the
Company in November 2003 (see Note 9).
The Company has also entered into a Media Services Agreement with May
pursuant to which the Company and May are developing an integrated marketing
program to promote and support May department store companies, which offer
wedding registry services. The Media Services Agreement, as amended, has an
initial term of three years, which may be extended under certain conditions, and
may be renewed by May for up to three additional one-year terms.
For the years ended December 31, 2003 and 2002, the Company recorded
revenues under the Media Services Agreement in the amounts of $253,000 and
$151,000, respectively
9. Capital Stock
The Company's Amended and Restated Certificate of Incorporation provides
for 105,000,000 authorized shares of capital stock consisting of 100,000,000
shares of common stock each having a par value of $0.01 per share and 5,000,000
shares of preferred stock, each having a par value of $0.001.
Preferred Stock
The Board of Directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 5,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, preferences,
rights, and any qualifications, limitations or restrictions, of the shares of
each series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designation of series.
52
Common Stock
At December 31, 2003, the Company had reserved the following shares of
common stock for future issuance:
Options under the 1999 Stock Incentive Plan......................... 5,073,031
Options under the 2000 Stock Incentive Plan......................... 420,000
Common stock warrant................................................ 460,976
Shares under the Employee Stock Purchase Plan....................... 240,250
Options related to the acquisition of Bridalink.com................. 10,000
---------
Total common stock reserved for future issuance..................... 6,204,257
=========
Private Placement of Common Stock
On November 20, 2003, the Company completed the sale of 2,800,000 shares of
common stock to two institutional investor groups for gross proceeds of
$10,500,000. Net proceeds after placement fees and other offering expenses were
$9,872,000.
10. Stock Plans
The 1999 Stock Incentive Plan (the "1999 Plan") was adopted by the Board of
Directors and approved by the stockholders in November 1999, as a successor plan
to the Company's 1997 Long Term Incentive Plan (the "1997 Plan"). All options
under the 1997 Plan have been incorporated into the 1999 Plan and no further
option grants will be made under the 1997 Plan. The 1999 Plan became effective
upon completion of the Company's initial public offering of its common stock.
Under the terms of the 1999 Plan, 3,849,868 shares of common stock of the
Company were initially reserved for incentive stock options, nonqualified stock
options (incentive and nonqualified stock options are collectively referred to
as "Options"), stock issuances, or any combination thereof. On May 15, 2001, the
Company's stockholders approved a further increase of 1,000,000 to the number of
shares reserved for issuance under the 1999 Plan. Through December 31, 2003, an
additional 955,713 shares were added to the reserve pursuant to the automatic
share increase provisions of the 1999 Plan. Awards may be granted to such
non-employee directors, officers, employees and consultants of the Company as
the Compensation Committee of the Board of Directors shall in its discretion
select. Only employees of the Company are eligible to receive grants of
incentive stock options. The shares reserved under the 1999 Plan will
automatically increase on the first trading day in January each calendar year,
beginning with calendar year 2001, by an amount equal to two percent (2%) of the
total number of shares of the Company's common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will this
annual increase exceed 1,000,000 shares (or such other lesser number determined
by the Board of Directors). Generally, options are granted at the fair market
value of the stock on the date of grant which was determined by the Board of
Directors prior to the completion of the Company's initial public offering of
its stock in December 1999. Options vest over periods up to four years and have
terms not to exceed 10 years.
During 1998 and 1999, the Company granted certain options with exercise
prices that were subsequently determined to be less than the value for financial
reporting purposes on the date of grant. As a result, the Company recorded
deferred compensation of approximately $2,948,000, net of reversals of stock
options forfeited. This amount was recognized as noncash compensation expense on
an accelerated basis over the vesting period of the options and was fully
amortized as of December 31, 2003.
The 2000 Non-Officer Stock Incentive Plan (the "2000 Plan") was approved by
the Board of Directors in June 2000. Under the terms of the 2000 Plan, 435,000
shares of common stock of the Company
53
have been reserved for nonqualified stock options, stock issuances or any
combination thereof. Awards may be granted to employees (other than officers or
directors of the Company) and consultants and other independent advisors who
provide services to the Company. Options are granted at the fair market value of
the stock on the date of grant. Generally, options vest over a four-year period
and have terms not to exceed 10 years.
The Employee Stock Purchase Plan (the "ESPP") was adopted by the Board of
Directors and approved by the stockholders in November 1999 and became effective
upon completion of the Company's initial public offering of its common stock.
Under the ESPP, employees of the Company who elect to participate are granted
options to purchase common stock at a 15 percent discount from the market value,
as defined, of such stock. The ESPP permits an enrolled employee to make
contributions to purchase shares of common stock by having withheld from his or
her salary an amount between 1 percent and 15 percent of compensation. The
Compensation Committee of the Board of Directors administers the ESPP. 300,000
shares of common stock of the Company were initially reserved for issuance under
the ESPP. The shares reserved automatically increase on the first trading day in
January of each calendar year, beginning in calendar year 2001, by the lesser of
the (i) the number of shares of common stock issued under the ESPP in the
immediately preceding calendar year, (ii) 300,000 shares or (iii) such other
lesser amount approved by the Board of Directors. Through December 31, 2003,
198,340 shares were issued under the ESPP and 138,590 were added to the reserve
pursuant to the automatic increase provision.
The following represents a summary of the Company's stock option activity
under the 1999 and 2000 Plans and related information:
Weighted
Average
Shares Exercise Price
---------- --------------
Options outstanding at December 31, 2000 ......... 3,001,661 $2.61
Options granted .................................. 1,357,117 0.68
Options exercised ................................ (14,579) 0.23
Options canceled ................................. (1,237,831) 2.49
---------- -----
Options outstanding at December 31, 2001 ......... 3,106,368 $1.83
---------- -----
Options granted .................................. 242,800 0.63
Options exercised ................................ -- --
Options canceled ................................. (239,346) 2.68
---------- -----
Options outstanding at December 31, 2002 ......... 3,109,822 $1.67
---------- -----
Options granted .................................. 990,200 2.81
Options exercised ................................ (501,875) 0.60
Options canceled ................................. (296,475) 3.06
---------- -----
Options outstanding at December 31, 2003 ......... 3,301,672 $2.05
========== =====
The following table summarizes information about options outstanding at December
31, 2003:
Options outstanding Options exercisable
---------------------- ----------------------
Weighted
average
Number remaining Weighted Number Weighted
outstanding contractual average exercisable average
as of life exercise as of exercise
Range of exercise price 12/31/03 (in years) price 12/31/03 price
- ----------------------- ----------- ----------- -------- ----------- --------
54
$0.27 to $1.06......... 1,539,751 6.99 $0.73 1,248,907 $0.69
$1.37 to $4.10......... 1,660,021 7.91 2.86 823,164 2.71
$9.00.................. 101,900 5.61 9.00 101,900 9.00
--------- ---- ----- --------- -----
3,301,672 7.41 $2.05 2,173,971 $1.85
========= ==== ===== ========= =====
At December 31, 2003, there were 1,934,859 shares available for future
grants under the 1999 Plan and 256,500 shares available for the 2000 Plan.
The per share weighted average fair value of options granted were $1.62,
$0.43 and $0.35 in 2003, 2002 and 2001, respectively. The per share weighted
average fair value of ESPP rights were $0.94, $0.18 and $0.29 in 2003, 2002 and
2001, respectively. The fair value for options and ESPP rights granted have been
estimated on the date of grant using the minimum value method option pricing
model from inception through December 1, 1999 and using the Black-Scholes option
pricing model thereafter, with the following range of assumptions:
Year Ended December 31,
------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Expected option lives....... 1.25 - 4 years 1.25 - 4 years 1.25 - 4 years
Risk-free interest rate..... 1.66% - 2.27% 2.02% - 4.38% 4.77% - 5.74%
Expected volatility......... 76.4% 83.1% 70.5%
Dividend yield.............. 0% 0% 0%
See Note 2 for the Company's accounting policy for stock based
compensation, as well as the effect on net loss and net loss per share had
compensation for the stock plans been determined consistent with the provisions
of SFAS No. 123, as amended.
11. 401(k) Plan
In June 2003, the Company adopted a 401(k) plan covering all eligible
employees and provides for a Company match on a portion of participant
contributions. Employees may contribute up to 15% of their base salary, subject
to IRS maximums. The Company matches 25% of the first 4% of eligible
compensation contributed. The Company's matching contributions are made in cash
and amounted to $21,000 for the year ended December 31, 2003.
12. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
December 31,
-------------------------
2003 2002
----------- -----------
Deferred tax assets:
Net operating loss carryforwards ......... $16,039,000 $16,376,000
Depreciation and amortization ............ 2,019,000 1,773,000
Accrued expenses ......................... 1,131,000 1,031,000
55
Allowance for doubtful accounts and
reserve for returns ...................... 223,000 366,000
Other .................................... 255,000 230,000
------------ ------------
Total deferred tax assets ................... 19,667,000 19,776,000
Deferred tax liabilities:
Capitalized software costs .................. (628,000) (502,000)
Other ....................................... (212,000) --
------------ ------------
Total deferred tax liabilities .............. (840,000) (502,000)
------------ ------------
Net deferred tax assets ..................... 18,827,000 19,274,000
Valuation allowance ......................... (18,827,000) (19,274,000)
------------ ------------
Total net deferred tax assets ............... $ -- $ --
============ ============
Net deferred tax assets have been fully offset by a valuation allowance due
to the uncertainty of realizing such benefit.
At December 31, 2003, the Company had net operating loss carryforwards of
approximately $37 million for federal tax purposes which are set to expire in
years 2011 through 2023.
The reconciliation of income tax expense computed at the U.S. federal
statutory rate to income tax expense for the years ended December 31, 2003, 2002
and 2001 are as follows:
Year Ended December 31,
-------------------------------------
2003 2002 2001
--------- ----------- -----------
Income taxes (benefit) at federal statutory rate (35%) ... 389,000 (1,778,000) (5,280,000)
State income taxes, net of federal benefit ............... 33,000 -- --
Expenses not deductible for U.S. tax purposes ............ 75,000 106,000 538,000
Change in valuation allowances and other ................. (447,000) 1,672,000 4,742,000
--------- ----------- -----------
Provision for income taxes $ 50,000 $ -- $ --
========= =========== ===========
13. Commitments and Contingencies
Operating Leases
The Company leases office facilities and certain warehouse space under
noncancelable operating lease agreements which expire at various dates through
2012. Future minimum lease payments under noncancelable operating leases are as
follows:
Year ending December 31:
2004............................................................... $ 830,000
2005............................................................... 777,000
2006............................................................... 762,000
2007............................................................... 787,000
2008............................................................... 698,000
Thereafter......................................................... 1,907,000
----------
Total.............................................................. $5,761,000
==========
Rent expense for the years ended December 31, 2003, 2002, and 2001 amounted
to approximately $798,000, $754,000 and $810,000, respectively.
Sublease income was $24,000 for the year ended December 31, 2003.
56
Legal Proceedings
On September 19, 2003, WeddingChannel.com, Inc. ("WeddingChannel") filed a
complaint against the Company in the United States District Court for the
Southern District of New York. The complaint alleges that the Company has
violated U.S. Patent 6,618,753 ("Systems and Methods for Registering Gift
Registries and for Purchasing Gifts"), and further alleges that certain actions
of the Company give rise to various federal statute, state statute and common
law causes of actions. WeddingChannel is seeking, among other things,
unspecified damages and injunctive relief. If the Company is found to have
willfully infringed the patent-in-suit, enhanced damages are awardable. This
complaint was served on the Company on September 22, 2003.
Based on information currently available, the Company believes that the
claims are without merit and is vigorously defending itself against all claims.
On October 14, 2003, the Company filed an answer and counterclaims against
WeddingChannel. The Company's answer raises various defenses to the counts
alleged by WeddingChannel. Additionally, the Company has brought counterclaims
including a request that the court declare the patent-in-suit is invalid,
unenforceable and not infringed. The Company's counterclaims further allege that
certain actions taken by, or on behalf of WeddingChannel give rise to various
federal statutory claims, state statutory claims and common law causes of
action.
The Company is engaged in other 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
or cash flows.
57
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Write-Offs,
Balance Charged to Charged to Net of Balance at
Beginning Costs and Other Recoveries & End of
Year Ended December 31, 2003 of Year Expenses Accounts Actual Returns Year
--------- ---------- ---------- -------------- ----------
Allowance for Doubtful Accounts..... $774,222 $ 51,414 $-- $ 411,301 $414,335
Allowance for Returns............... $186,001 $1,523,832 $-- $1,509,236 $200,597
Year Ended December 31, 2002
Allowance for Doubtful Accounts..... $814,098 $ 301,713 $-- $ 341,589 $774,222
Allowance for Returns............... $196,517 $ 942,698 $-- $ 953,214 $186,001
Year Ended December 31, 2001
Allowance for Doubtful Accounts..... $821,963 $1,701,619 $-- $1,709,484 $814,098
Allowance for Returns............... $ 43,494 $ 881,841 $-- $ 728,818 $196,517
58
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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 Exchange Act of 1934, as amended (the "Exchange Act"), as
of December 31, 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 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 December 31, 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 III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the information in our proxy statement
for the 2004 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 11. Executive Compensation
Incorporated by reference from the information in our proxy statement
for the 2004 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about our equity
compensation plans as of December 31, 2003. All outstanding awards relate to our
common stock. For additional information about our equity compensation plans,
see notes 8 and 10 to our financial statements in Item 8.
59
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column) (a)
- ----------------------------------------- ----------------------- -------------------- ----------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders...................... 3,138,172 $1.9533 1,934,859
Equity compensation plans not approved by
security holders...................... 624,476(1) $5.2591 256,500
--------- ------- ---------
3,762,648 $2.5020 2,191,359
========= ======= =========
(1) Includes 460,976 shares of common stock to be issued upon exercise of a
warrant issued in July 1999, prior to our initial public offering.
The other information required by this Item is incorporated herein by reference
from the information in our proxy statement for the 2004 Annual Meeting of
Stockholders which we will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the information in our proxy statement
for the 2004 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 14. Principal Accountant Fees and Services
Incorporated by reference from the information in our proxy statement
for the 2004 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements.
See Index to Consolidated Financial Statements and Schedule on page
36.
2. Financial Statement Schedules.
See Index to Consolidated Financial Statements and Schedule on page
36.
(b) Reports on Form 8-K
Items 7 and 12, dated and furnished November 13, 2003 reporting that
we issued a press release and conducted a conference call announcing
our financial results as of and for the three months ended September
30, 2003.
Items 5 and 7, dated and filed November 19, 2003 reporting that we
issued a press release announcing that we had entered into definitive
agreements relating to a private placement of 2,800 000 newly-issued
shares of common stock to institutional investors.
Items 5 and 7, dated and filed November 20, 2003 reporting that we
issued a press release announcing the full funding of a private
placement of 2,800,000 new-issued shares of common stock to
institutional investors.
60
Information in any of our Current Reports on Form 8-K furnished under Item
12, "Results of Operations and Financial Condition," shall not be deemed to be
"filed" for the purposes of Section 18 of 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.
(c) Exhibits
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of February 1, 2000, by and among the Registrant and
Weddingpages, Inc. (Incorporated by reference to Registrant's Current Report on Form 8-K
filed with the S.E.C. on February 11, 2000)
3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration number 333-87345) (the "Form
S-1"))
3.2 Amended and Restated Bylaws (Incorporated by reference to the Form S-1)
4.1 Specimen Common Stock certificate (Incorporated by reference to the Form S-1)
4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights of holders of common stock of
the Registrant
4.3 Warrant Agreement of America Online, Inc. (Incorporated by reference to the Form S-1)
4.4 Subscription Agreement by and between The Knot and T. Rowe Price Associates, Inc. on behalf
of its participating clients specified therein, dated as of November 18, 2003 (Incorporated
by reference to the Registrant's Registration Statement on Form S-3 (Registration number
333-111060) (the "Form S-3"))
4.5 Subscription Agreement by and between The Knot and investment funds advised by Capital
Research and Management Company, dated as of November 18, 2003 (Incorporated by reference
to the Form S-3)
10.1* Employment Agreement between The Knot, Inc. and David Liu (Incorporated by reference to the
Form S-1)
10.2* Employment Agreement between The Knot, Inc. and Carley Roney (Incorporated by reference to
the Form S-1)
10.3* Employment Agreement between The Knot, Inc. and Richard Szefc (Incorporated by reference to
the Form S-1)
10.4* Employment Agreement between The Knot, Inc. and Sandra Stiles (Incorporated by reference to
the Form S-1)
10.5* 2000 Non-Officer Stock Incentive Plan (Incorporated by reference to Exhibit 99.1 to
Registrant's Registration Statement on Form S-8 (Registration number 333-41960))
10.6* Amended and restated 1999 Stock Incentive Plan (Incorporated by reference to
Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (Registration number
333-74398))
10.7* Employee Stock Purchase Plan (Incorporated by reference to the Form S-1)
10.8 Third Amended and Restated Investor Rights Agreement (Incorporated by reference to the Form
S-1)
10.9+ Services Agreement between The Knot, Inc. and QVC, Inc. (Incorporated by reference to the
Form S-1)
10.10+ Amended and Restated Anchor Tenant Agreement between The Knot, Inc. and America Online,
Inc. (Incorporated by reference to the Form S-1)
10.11* Form of Indemnification Agreement (Incorporated by reference to the Form S-1)
61
10.12 Common Stock Purchase Agreement between The Knot, Inc. and May Bridal Corporation
(Incorporated by reference to Exhibit 10.12 to Registrant's
Annual Report on Form 10-K filed on March 29, 2002)
10.13 Amendment to Common Stock Purchase Agreement between The Knot and May
Bridal Corporation, dated as of November 11, 2003 (Incorporated by
reference to the Form S-3)
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
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.
- ---------------
+ Confidential treatment has been granted for certain portions omitted from this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Confidential
portions of this Exhibit have been separately filed with the Securities and
Exchange Commission.
* Management contract or compensatory plan or arrangement
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, The Knot, Inc. has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York, State of New York, on this 19th day of March, 2004.
THE KNOT, INC.
By: /s/ DAVID LIU
----------------------------------
David Liu
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Report has been signed by the following persons on behalf of
the registrant and in the capacities indicated on March 19, 2004.
Signature Title(s)
--------- --------
President, Chief Executive Officer and Chairman of
/s/ DAVID LIU the Board of Directors (principal executive officer)
- ---------------------------------------
David Liu
Chief Financial Officer, Treasurer and Secretary
/s/ RICHARD SZEFC (principal financial and accounting officer)
- ---------------------------------------
Richard Szefc
Chief Operating Officer, Assistant Secretary and
/s/ SANDRA STILES Director
- ---------------------------------------
Sandra Stiles
/s/ RANDY RONNING Director
- ---------------------------------------
Randy Ronning
/s/ ANN WINBLAD Director
- ---------------------------------------
Ann Winblad
/s/ JOSEPH BREHOB Director
- ---------------------------------------
Joseph Brehob
63
EXHIBIT INDEX
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of February 1, 2000, by and among the Registrant and
Weddingpages, Inc. (Incorporated by reference to Registrant's Current Report on Form 8-K
filed with the S.E.C. on February 11, 2000)
3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration number 333-87345) (the "Form
S-1"))
3.2 Amended and Restated Bylaws (Incorporated by reference to the Form S-1)
4.1 Specimen Common Stock certificate (Incorporated by reference to the Form S-1)
4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights of holders of common stock of
the Registrant
4.3 Warrant Agreement of America Online, Inc. (Incorporated by reference to the Form S-1)
4.4 Subscription Agreement by and between The Knot and T. Rowe Price Associates, Inc. on behalf
of its participating clients specified therein, dated as of November 18, 2003 (Incorporated
by reference to the Registrant's Registration Statement on Form S-3 (Registration number
333-111060) (the "Form S-3"))
4.5 Subscription Agreement by and between The Knot and investment funds advised by Capital
Research and Management Company, dated as of November 18, 2003 (Incorporated by reference
to the Form S-3)
10.1* Employment Agreement between The Knot, Inc. and David Liu (Incorporated by reference to the
Form S-1)
10.2* Employment Agreement between The Knot, Inc. and Carley Roney (Incorporated by reference to
the Form S-1)
10.3* Employment Agreement between The Knot, Inc. and Richard Szefc (Incorporated by reference to
the Form S-1)
10.4* Employment Agreement between The Knot, Inc. and Sandra Stiles (Incorporated by reference to
the Form S-1)
10.5* 2000 Non-Officer Stock Incentive Plan (Incorporated by reference to Exhibit 99.1 to
Registrant's Registration Statement on Form S-8 (Registration number 333-41960))
10.6* Amended and restated 1999 Stock Incentive Plan (Incorporated by reference to Exhibit 99.1
to the Registrant's Registration Statement on Form S-8 (Registration number 333-74398))
10.7* Employee Stock Purchase Plan (Incorporated by reference to the Form S-1)
10.8 Third Amended and Restated Investor Rights Agreement (Incorporated by reference to the Form
S-1)
10.9+ Services Agreement between The Knot, Inc. and QVC, Inc. (Incorporated by reference to the
Form S-1)
10.10+ Amended and Restated Anchor Tenant Agreement between The Knot, Inc. and America Online,
Inc. (Incorporated by reference to the Form S-1)
10.11* Form of Indemnification Agreement (Incorporated by reference to the Form S-1)
10.12 Common Stock Purchase Agreement between The Knot, Inc. and May Bridal Corporation (Incorporated by
reference to Exhibit 10.12 to Registrant's Annual Report on Form 10-K filed on March 29,
2002)
10.13 Amendment to Common Stock Purchase Agreement between The Knot and May Bridal Corporation, dated
as of November 11, 2003 (Incorporated by reference to the Form S-3)
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
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.
64
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.
- ---------------
+ Confidential treatment has been granted for certain portions omitted from this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Confidential
portions of this Exhibit have been separately filed with the Securities and
Exchange Commission.
* Management contract or compensatory plan or arrangement
65