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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28271
THE KNOT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3895178
(State of incorporation) (I.R.S. Employer Identification Number)
462 Broadway, 6th Floor
New York, New York 10013
(Address of Principal Executive Officer and Zip Code)
(212) 219-8555
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X]
As of May 7, 2004, there were 21,998,055 shares of the registrant's common stock
outstanding.
Page
Number
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PART I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003....................................................................... 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003........................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003........................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations... 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 27
Item 4: Controls and Procedures................................................................. 27
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................................... 28
Item 6: Exhibits and Reports on Form 8-K........................................................ 28
2
Item 1. Financial Statements (Unaudited)
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003*
(Unaudited)
----------- ------------
Assets
Current assets:
Cash and cash equivalents .................................................. $ 22,587,231 $ 22,511,025
Accounts receivable, net of allowances of $917,076 and $614,932 at..........
March 31, 2004 and December 31, 2003, respectively...................... 3,050,184 2,882,784
Inventories................................................................. 1,433,177 1,194,997
Deferred production and marketing costs..................................... 300,442 317,903
Other current assets........................................................ 786,428 747,467
----------- ------------
Total current assets........................................................... 28,157,462 27,654,176
Property and equipment, net.................................................... 1,990,021 2,005,977
Intangible assets, net......................................................... 8,709,136 8,734,136
Other assets................................................................... 306,443 312,741
------------ ------------
Total assets................................................................... $ 39,163,062 $ 38,707,030
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses....................................... $ 5,702,261 $ 5,790,211
Deferred revenue............................................................ 5,239,357 4,891,430
Current portion of long-term debt........................................... 39,446 39,446
------------ ------------
Total current liabilities...................................................... 10,981,064 10,721,087
Long-term debt................................................................. 195,455 195,455
Other liabilities.............................................................. 498,681 490,203
------------ ------------
Total liabilities.............................................................. 11,675,200 11,406,745
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 21,995,987
shares and 21,734,952 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively....................... 219,959 217,349
Additional paid-in-capital.................................................. 74,815,409 74,532,686
Accumulated deficit......................................................... (47,547,506) (47,449,750)
------------ ------------
Total stockholders' equity..................................................... 27,487,862 27,300,285
------------ ------------
Total liabilities and stockholders' equity..................................... $ 39,163,062 $ 38,707,030
============ ============
* The condensed consolidated balance sheet as of December 31, 2003 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
See accompanying notes.
3
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2004 2003
---- ----
Net revenues....................................................... $ 9,777,845 $ 8,665,640
Cost of revenues................................................... 2,809,055 2,930,924
----------- -----------
Gross profit....................................................... 6,968,790 5,734,716
Operating expenses:
Product and content development................................. 1,196,162 1,072,063
Sales and marketing............................................. 3,448,236 2,861,506
General and administrative...................................... 2,266,403 1,738,866
Non-cash compensation........................................... - 20,386
Depreciation and amortization................................... 197,070 253,155
----------- -----------
Total operating expenses........................................... 7,107,871 5,945,976
----------- -----------
Loss from operations............................................... (139,081) (211,260)
Interest income, net............................................... 53,435 15,870
----------- -----------
Loss before income taxes........................................... (85,646) (195,390)
Provision for income taxes......................................... 12,110 --
----------- -----------
Net Loss........................................................... $ (97,756) $ (195,390)
=========== ===========
Net loss per share - basic and diluted............................. $ (0.00) $ (0.01)
=========== ===========
Weighted average number of shares used in calculating
basic and diluted net loss per share............................ 21,829,044 18,394,233
=========== ===========
See accompanying notes.
4
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2004 2003
---- ----
Operating activities
Net loss ............................................................. $ (97,756) $(195,390)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:.......................................
Depreciation and amortization...................................... 172,070 228,155
Amortization of intangibles........................................ 25,000 25,000
Amortization of deferred compensation.............................. -- 20,386
Reserve for returns................................................ 818,516 678,584
Allowance for doubtful accounts.................................... 80,344 26,851
Other non-cash charges............................................. 16,216 5,968
Changes in operating assets and liabilities...........................
Restricted cash.................................................... -- (981)
Accounts receivable................................................ (1,066,260) 314,594
Inventories........................................................ (248,180) (201,424)
Deferred production and marketing.................................. 17,461 237,736
Other current assets............................................... (38,961) (185,074)
Other assets....................................................... 6,298 5,033
Accounts payable and accrued expenses.............................. (94,058) (257,873)
Deferred revenue................................................... 347,927 (338,299)
Other liabilities.................................................. 8,478 28,478
----------- -----------
Net cash provided by (used in) operating activities................... (52,905) 391,744
Investing activities
Purchases of property and equipment................................... (130,686) (230,590)
Acquisition of businesses, net of acquired cash....................... -- (38,400)
----------- -----------
Net cash used in investing activities................................. (130,686) (268,990)
Financing activities
Repayment of current portion of long term borrowings.................. -- (23,006)
Financing costs....................................................... (25,536) --
Proceeds from issuance of common stock................................ 25,564 --
Proceeds from exercise of stock options............................... 259,769 7,509
----------- -----------
Net cash provided by (used in) financing activities................... 259,797 (15,497)
Increase in cash and cash equivalents................................. 76,206 107,257
Cash and cash equivalents at beginning of period...................... 22,511,025 9,305,670
----------- -----------
Cash and cash equivalents at end of period............................ $22,587,231 $ 9,412,927
=========== ===========
See accompanying notes.
5
THE KNOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying financial information as of December 31, 2003 is
derived from audited financial statements. The financial statements as of March
31, 2004 and for the three months ended March 31, 2004 and 2003 are unaudited.
The unaudited interim financial statements have been prepared on the same basis
as the annual financial statements and, in the opinion of the Company's
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly its financial position as of March 31,
2004, the results of operations for the three months ended March 31, 2004 and
2003 and cash flows for the three months ended March 31, 2004 and 2003.
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 $47,547,506 as of March 31, 2004. 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 condensed 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 United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results may differ from these estimates. Interim
results are not necessarily indicative of results for a full year.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No.
128, "Earnings per Share." Basic net loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding during the
period. Diluted net loss per share adjusts basic loss per share for the effects
of convertible securities, stock options and other potentially dilutive
financial instruments, only in the periods in which such effect is dilutive.
There were no dilutive securities for the three months ended March 31, 2004 and
2003.
SEGMENT INFORMATION
The Company operates in one segment.
NET REVENUES BY TYPE
Net revenues by type are as follows:
6
Three Months Ended March 31,
2004 2003
---- ----
Sponsorship and advertising............................ $ 3,960,925 $ 2,859,238
Merchandise............................................ 3,220,311 3,777,231
Publishing and other................................... 2,596,609 2,029,171
----------- -----------
Total.................................................. $ 9,777,845 $ 8,665,640
=========== ===========
For the three months ended March 31, 2004 and 2003, merchandise revenue
included outbound shipping and handling charges of approximately $351,000 and
$435,000, respectively.
COST OF REVENUES
Cost of revenues by type are as follows:
Three Months Ended March 31,
2004 2003
---- ----
Sponsorship and advertising............................ $ 173,612 $ 90,601
Merchandise............................................ 1,658,140 1,889,685
Publishing and other................................... 977,303 950,638
----------- -----------
Total.................................................. $ 2,809,055 $ 2,930,924
=========== ===========
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with three
major financial institutions. The Company's customers are primarily concentrated
in the United States. The Company performs on-going credit evaluations,
generally does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. To date, such losses have been within management's
expectations.
For the three months ended March 31, 2004 and 2003, no customer
accounted for more than 2% of net revenues. At March 31, 2004 and December 31,
2003, no single customer accounted for more than 4% and 2%, respectively, of
accounts receivable.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for by using the intrinsic
value-based method in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, and the Company complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the
Company only records compensation expense for any stock options granted with an
exercise price that is less than the fair market value of the underlying stock
at the date of grant. The Company does not record compensation expense for
rights to purchase shares under its Employee Stock Purchase Plan ("ESPP")
because it satisfies certain conditions under APB 25.
The following table details the effect on net income and earnings per
share had stock-based compensation expense been recorded based on the fair value
method under SFAS No. 123, as amended.
Three Months Ended March 31,
2004 2003
---- ----
Net loss, as reported ....................................... $ (97,756) $(195,390)
Add: Total stock-based employee
compensation expense included in
reported net loss....................................... -- 20,386
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards.................. (187,929) (59,425)
---------- ---------
Net loss, pro forma $ (285,685) $(234,429)
========== =========
Basic and diluted net loss per share, as reported $ (0.00) $ (0.01)
========== =========
Basic and diluted net loss per share, pro forma $ (0.01) $ (0.01)
========== =========
7
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.
The Financial Accounting Standards Board ("FASB") is currently
developing a new standard for stock-based compensation. Tentative decisions by
the FASB indicate that recording compensation expense for stock options will be
required beginning in fiscal 2005. The FASB has issued an exposure draft and
expects to issue its final standard later in 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
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 material impact on the Company's
operating results or financial position.
3. INVENTORY
Inventory consists of the following:
March 31, December 31,
2004 2003
---- ----
Raw materials........................................................... $ 127,634 $ 127,713
Finished goods.......................................................... 1,305,543 1,067,284
---------- ----------
$1,433,177 $1,194,997
========== ==========
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, December 31,
2004 2003
---- ----
Goodwill, net.......................................................... $8,409,136 $8,409,136
---------- ----------
Covenant not to compete................................................ 700,000 700,000
Less accumulated amortization.......................................... (400,000) (375,000)
---------- ----------
Covenant not to compete, net........................................... 300,000 325,000
---------- ----------
Total.................................................................. $8,709,136 $8,734,136
========== ==========
The Company completed its most recent goodwill impairment test as of
October 1, 2003. The test involved the assessment of the fair market value of
the Company as the single reporting unit. No impairment of goodwill was
indicated at that time. Under SFAS No. 142, the Company is required to perform
goodwill impairment tests on at least an annual basis or more frequently if
circumstances dictate. There can be no assurance that future goodwill impairment
tests will not result in a charge to income.
The covenant not to compete is being amortized over the related
contractual period of seven years and related amortization expense was $25,000
for the three months ended March 31, 2004 and 2003. 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.
8
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31, December 31,
2004 2003
---- ----
Accounts payable....................................................... $1,588,422 $1,055,748
Distribution and other service fees.................................... 2,741,445 2,569,248
Compensation and related benefits...................................... 475,614 1,292,901
Other accrued expenses................................................. 896,780 872,314
---------- ----------
Total.................................................................. $5,702,261 $5,790,211
========== ==========
6. LONG-TERM DEBT
Long-term debt as of March 31, 2004 consists of the following:
Note due in annual installments of $60,000 through October 2008,
based on imputed interest of 8.75%............................................... $234,901
Less current portion............................................................. 39,446
--------
Long term-debt, excluding current portion........................................ $195,455
========
Maturities of long-term obligations for the four years ending March 31, 2008 are
as follows: 2005, $39,446; 2006, $42,898; 2007, $46,651; 2008, $50,733 and $55,173
thereafter. Interest expense for the three months ended March 31, 2004 and 2003 was
$5,000 and $12,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
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.
9
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.
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, including gifts
purchased from couples' registries. 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. Weddings also
generate substantial revenues for travel services companies. Honeymoon travel
generates an estimated $4.5 billion annually.
Vendors and advertisers highly value to-be-weds as a consumer group.
Replenished on an annual basis, wielding substantial budgets and facing a firm
deadline, engaged couples are ideal recipients of advertisers' messages and
vendors' products and services. During the six months prior to and the six
months following a wedding, the average couple will make more buying decisions
and purchase more products and services than at any other time in their lives.
The challenges and obstacles that engaged couples face make them especially
receptive to marketing messages. We provide national and local advertisers with
targeted access to couples actively seeking information and advice and making
meaningful spending decisions relating to all aspects of their weddings.
National online advertisers can enter into arrangements to exclusively
sponsor entire editorial areas or special features on our site. 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 with the
further development of The Knot Magazine, we have expanded the scope of the
integrated marketing programs we offer to our national online advertisers to
include print advertising in our national and regional magazines.
The Local Resources area on our site provides access to the local
wedding market through over 60 online city and regional guides that host
profiles for thousands of local vendors, such as reception halls, bands,
florists and caterers. Local wedding vendors can supplement print advertisements
in our regional magazines with profiles and sponsorship badges as well as
preferred placement and other premium programs within their appropriate online
city guide, and they can also reach their market areas through targeted local
emails. We also offer programs to local vendors that include advertising
placement in The Knot Magazine.
We address a portion of the retail opportunity in the wedding market by
integrating our informative content with 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 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.
10
We sell wedding supplies to consumers through The Knot Wedding Shop. We
offer approximately 1,000 products including decorated disposable cameras,
wedding bubbles and bells, ring pillows and other highly specialized items that
are often difficult to find through traditional retail outlets. We offer
personalization options for many of these wedding supplies. 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.
Our strategy is to continue 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,
including television appearances by Carley Roney, our editor in chief and lead
wedding expert. Through our regional magazines and the expansion of our in-depth
online city guides, we are aggressively increasing our brand awareness at the
local level. 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, and in October 2003, we 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.
Membership growth has leveled off from 2002 into 2003 and 2004. During the first
three months of 2004, we enrolled an average of approximately 3,700 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.
Capitalize on Multiple Revenue Opportunities. We intend to leverage the
size and favorable demographics of our online and offline communities to
continue to grow our existing multiple revenue streams within the wedding space.
We will pursue additional revenue opportunities in connection with the needs of
today's engaged and newly married couples including premium services. We also
intend to extend the relationship we build with our membership base 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.
In the first quarter of 2004, our revenue grew by $1.1 million, or
approximately 13%, when compared to the corresponding period in the prior year.
This growth resulted primarily from increases in our higher margin online
advertising revenues of $1.1 million, or 39%, as a result of the continued
expansion of our client base at both the national and local level. In addition,
revenue from our national publication, The Knot Magazine, grew by $391,000, also
39%, due to an increase in the sale of national advertising pages, higher
pricing for designer advertising and an increase in the number of copies sold.
The growth from these revenue sources was offset, in part, by a decrease in
merchandise revenue, primarily wedding supplies, of $557,000 or 15%. The
leveling of new membership growth from 2002 to 2003 and into the first quarter
of 2004 impacts supplies sales directly since our brides or members are the
buyers. In addition, first quarter 2004 supplies revenue was also affected by
the installation of new warehouse management software, which resulted in certain
operational difficulties for customer service. These operational issues are
being addressed, and we have also taken measures to increase the size and
upgrade the quality of our customer service staff. Further, we are continuing to
focus on our new e-commerce strategy to improve our product merchandising,
product selection and the online shopping experience on our sites. The launch of
a new e-commerce platform, as part of this strategy, remains on schedule for the
fourth quarter of fiscal 2004. 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.
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
11
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 contracts or open-ended subscriptions.
Certain online sponsorship and advertising contracts provide for the
delivery of a minimum number of impressions. Impressions are the featuring of a
sponsor's advertisement, banner, link or other form of content on our sites. To
date, we have recognized our sponsorship and advertising revenues over the
duration of the contracts on a straight-line basis, as we have exceeded minimum
guaranteed impressions. To the extent that minimum guaranteed impressions are
not met, we are generally obligated to extend the period of the contract until
the guaranteed impressions are achieved. If this were to occur, we would defer
and recognize the corresponding revenues over the extended period.
For the three months ended March 31, 2004 and 2003, our top seven
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.
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. As of
March 31, 2004 and December 31, 2003, our allowance for doubtful accounts
amounted to $453,000 and $414,000, respectively. In determining these
allowances, we evaluate a number
12
of factors, including the credit risk of customers, historical trends and other
relevant information. If the financial condition of our customers were to
deteriorate, additional allowances may be required.
Inventory
In order to record our inventory at its lower of cost or market, we
assess the ultimate realizability of our inventory, which requires us to make
judgments as to future demand and compare that with current inventory levels. We
record a provision to adjust our inventory balance based upon that assessment.
As our merchandise revenues grow, the investment in inventory will likely
increase. It is possible that we may need to further increase our inventory
provisions in the future.
Goodwill
As of March 31, 2004, 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 March
31, 2004, no impairment has occurred. Future adverse changes in market
conditions or poor operating results of strategic investments could result in
losses or an inability to recover the carrying value of the investments, thereby
possibly requiring impairment charges in the future.
Deferred Taxes
A tax valuation allowance is established, as needed, to reduce net
deferred tax assets to the amount for which recovery is probable. As of March
31, 2004, 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
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.
The Financial Accounting Standards Board ("FASB") is currently
developing a new standard for stock-based compensation. Tentative decisions by
the FASB indicate that recording compensation expense for stock options will be
required beginning in fiscal 2005. The FASB has issued an exposure draft and
expects to issue its final standard later in 2004.
Results of Operations
Net Revenues
Net revenues increased to $9.8 million for the three months ended March
31, 2004 from $8.7 million for the three months ended March 31, 2003.
Sponsorship and advertising revenues increased to $4.0 million for the
three months ended March 31, 2004, as compared to $2.9 million for the three
months ended March 31, 2003. Revenue from local vendor online advertising
programs increased by $830,000, or approximately 46%, primarily as a result of
additional contracts sold which was due, in part, to expansion in the number of
local markets serviced and in the number of programs offered. In addition, there
was an increase of approximately $272,000 in national online sponsorship and
advertising revenue, also due to a larger number of contracts sold, including
contracts related to our category specific programs. Sponsorship and advertising
revenues amounted to 41% of our net revenues for the three months ended March
31, 2004 and 33% of our net revenues for the three months ended March 31, 2003.
13
Merchandise revenues decreased to $3.2 million for the three months
ended March 31, 2004, as compared to $3.8 million for the three months ended
March 31, 2003. The decrease was primarily due to a decrease in sales of wedding
supplies through our websites of $537,000, or by approximately 15%, as a result
of the leveling of our new membership growth and the impact of certain
operational difficulties affecting customer service arising from the
installation of new warehouse management software at our Redding, California
facility. Merchandise revenues amounted to 33% of our net revenues for the three
months ended March 31, 2004 and 44% of our net revenues for the three months
ended March 31, 2003.
Publishing and other revenues increased to $2.6 million for the three
months ended March 31, 2004, as compared to $2.0 million for the three months
ended March 31, 2003. Revenue derived from national print publications increased
by $459,000, primarily related to The Knot Magazine, through the sale of a
larger number of national advertising pages, an increase in rates for designer
advertising and an increase in the number of copies sold. Local print and other
revenue increased by $108,000 as a result of higher sales through our expanded
reach program for local advertisers and increased licensed fees from former
franchisees. Publishing and other revenues amounted to 27% of our net revenues
for the three months ended March 31, 2004 and 23% of our net revenues for the
three months ended March 31, 2003.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the costs related to the production of regional
magazines and our national magazine, payroll and related expenses for our
personnel who are responsible for the production of online and offline media,
and costs of Internet and hosting services.
Cost of revenues decreased to $2.8 million for the three months ended
March 31, 2004, from $2.9 million for the three months ended March 31, 2003.
Cost of revenues from the sale of merchandise decreased by $232,000 primarily as
a result of decreased sales of wedding supplies. Advertising cost of revenues
increased by $83,000 as a result of increased bandwidth costs to support
increased page views and traffic on our website. As a percentage of our net
revenues, cost of revenues decreased to 29% for the three months ended March 31,
2004, from 34% for the three months ended March 31, 2003, primarily due to a
larger mix of higher margin sponsorship and advertising revenues. In addition,
publishing margins improved as a result of the growth of national print
advertising revenue associated with The Knot Magazine as well as higher revenue
from the sale of copies of this publication. The costs to produce and print The
Knot Magazine remained relatively flat.
Product and Content Development
Product and content development expenses consist primarily of payroll
and related expenses for editorial, creative and information technology
personnel.
Product and content development expenses increased to $1.2 million for
the three months ended March 31, 2004 from $1.1 million for the three months
ended December 31, 2003. This increase resulted from additional costs to upgrade
computer equipment as well as small increases in a number of other expense
categories. As a percentage of our net revenues, product and content development
expenses were 12% for each of the three month periods ended March 31, 2004 and
2003.
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 promotional activities and fulfillment and
distribution of merchandise.
Sales and marketing expenses increased to $3.4 million for the three
months ended March 31, 2004 from $2.9 million for the three months ended March
31, 2003. The increase was the result of higher personnel and related costs of
$230,000 to increase the size and upgrade the quality of our staff in support of
our wedding supplies business, in particular customer service, as well as to
increase our customer service staff to support the growth of our local revenue
streams. We have also invested in personnel to improve our efforts to better
merchandise our e-commerce product offerings. In addition, we incurred higher
sales commissions of $114,000 as a result of increased online advertising
revenue and revenue from The Knot Magazine and approximately $90,000 in
additional expenses associated with our new and expanded warehouse and
distribution facility in Redding, California. As a percentage of our net
revenues, sales and marketing expenses increased to 35% for the three months
ended March 31, 2004 from 33% for the three
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months ended March 31, 2003.
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 increased to $2.3 million for the
three months ended March 31, 2004 from $1.7 million for the three months ended
March 31, 2003. The increase was due, in part, to additional legal costs of
$323,000 primarily related to our current litigation with WeddingChannel.com,
Inc. We also incurred higher personnel and related costs of $67,000 to further
support the growth of our business. In addition, bad debt expense in the first
quarter of 2003 was favorably impacted by $50,000 as a result of collections of
previously reserved receivables from former franchisees. As a percentage of our
net revenues, general and administrative expenses increased to 23% for the three
months ended March 31, 2004 from 20% for the three months ended March 31, 2003.
Non-Cash Compensation
We recorded no deferred compensation during the three months ended
March 31, 2004. All previously recorded deferred compensation was fully
amortized during 2003. Amortization of deferred compensation was $20,000 for the
three months ended March 31, 2003.
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 $197,000 for the
three months ended March 31, 2004, from $253,000 for the three months ended
March 31, 2003. The 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 Income
Interest income, net of interest expense, increased to $53,000 for the
three months ended March 31, 2004, from $16,000 for the three months ended March
31, 2003, as a result of higher cash balances available for investment.
Provision for Taxes on Income
For the three months ended March 31, 2004, we were subject to income
tax expense of $12,000 due to operating income generated in certain states. No
federal income tax has been provided as we utilize net operating loss
carryforwards.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (EITF") reached a
consensus opinion on EITF 00-21 "Revenue Arrangements with Multiple
Deliverables." This Issue addresses the determination of whether an arrangement
involving more than one deliverable contains more than one unit of accounting
and how arrangement consideration should be measured and allocated to the
separate units of accounting. EITF Issue 00-21 will be effective for revenue
arrangements entered into for fiscal quarters beginning after June 15, 2003, or
we may elect to report the change in accounting as a cumulative-effect
adjustment. The adoption of EITF No. 00-21 did not have a material impact on our
operating results or financial position.
Liquidity and Capital Resources
As of March 31, 2004, our cash and cash equivalents amounted to $22.6
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.
15
Net cash used in operating activities was $53,000 for the three months
ended March 31, 2004. Depreciation and amortization exceeded the loss for the
period by $99,000 and accounts receivable, net of deferred revenue, decreased by
$180,000 due to improved collection efforts and an increase in credit card usage
by local vendors. These sources of cash were more than offset by an increase in
inventory of $238,000 in anticipation of higher seasonal sales of wedding
supplies in the second and third quarters and a decrease in accounts payable and
accrued expenses of $94,000. Net cash provided by operating activities was
$392,000 for the three months ended March 31, 2003. Depreciation and
amortization exceeded the loss for the period by $78,000, accounts receivable,
net of deferred revenue, decreased by $682,000 and deferred production and
marketing costs decreased by $238,000. These sources of cash were partially
offset by increases in inventory and other current assets of $201,000 and
$185,000, respectively, and by a decrease in accounts payable and accrued
expenses of $258,000. Effective October 1, 2002, local vendors are no longer
pre-billed for their full contractual amounts via statements but are invoiced
for individual amounts due in accordance with our standard payment terms. The
impact of this billing modification reduced accounts receivable and deferred
revenue in equal amounts of approximately $1.2 million from December 31, 2002
through March 31, 2003.
Net cash used in investing activities was $131,000 and $269,000 for the
three months ended March 31, 2004 and 2003, respectively, primarily due to
purchases of property and equipment.
Net cash provided by financing activities was $260,000 for the three
months ended March 31, 2004, primarily due to proceeds from the issuance of
common stock in connection with the exercise of stock options and through our
Employee Stock Purchase Plan. Net cash used in financing activities was $15,000
for the three months ended March 31, 2003 primarily due to repayments of the
current portion of long-term debt.
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
$47.5 million as of March 31, 2004. 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.
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 March 31, 2004, we had no material commitments for capital
expenditures.
As of March 31, 2004, we had commitments under non-cancelable operating
leases amounting to approximately $5.6 million.
At March 31, 2004, other long term liabilities of $499,000
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 March 31, 2004 are summarized as
follows:
Payments due by period
---------------------------------------------------------
(in thousands)
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
------ ------ --------- --------- ----------
Long term debt ............... $ 235 $ 39 $ 90 $ 106 $ --
Operating leases ............. 5,569 840 1,531 1,428 1,770
Purchase commitments ......... 492 492 -- -- --
------ ------ ------ ------ ------
Total ................... $6,296 $1,371 $1,621 $1,534 $1,770
====== ====== ====== ====== ======
16
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.
17
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Quarterly Report on Form 10-Q,
the following risk factors should be carefully considered in evaluating our
business because such factors currently or may have a significant impact on our
business, operating results or financial condition. This Quarterly Report on
Form 10-Q may contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below and elsewhere in this
Quarterly Report. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Risks Related to Our Business
We have an unproven business model, and it is uncertain whether online
wedding-related sites can generate sufficient revenues to survive.
Our model for conducting business and generating revenues is unproven.
Our business model depends in large part on our ability to generate revenue
streams from multiple sources through our online sites, including online
sponsorship and advertising fees from third parties and online sales of wedding
gifts and supplies.
It is uncertain whether wedding-related online sites that rely on
attracting sponsors and advertisers, as well as people to purchase wedding gifts
and supplies, can generate sufficient revenues to survive. For our business to
be successful, we must provide users with an acceptable blend of products,
information, services and community offerings that will attract wedding
consumers to our online sites frequently. In addition, we must provide sponsors,
advertisers and vendors the opportunity to reach these wedding consumers. We
provide our services to users without charge, and we may not be able to generate
sufficient revenues to pay for these services.
Moreover, we face many of the risks and difficulties frequently
encountered in new and rapidly evolving markets, including the online
advertising and e-commerce markets. These risks include our ability to:
o increase the audience on our sites;
o broaden awareness of our brand;
o strengthen user-loyalty;
o offer compelling content;
o maintain our leadership in generating traffic;
o maintain our current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of industries;
o respond effectively to competitive pressures;
o continue to develop and upgrade our technology; and
o attract, integrate, retain and motivate qualified personnel.
These risks could negatively impact our financial condition if left
unaddressed. Accordingly, we are not certain that our business model will be
successful or that we can sustain revenue growth or profitability.
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 March 31, 2004, our
accumulated deficit was $47.5 million. We expect to continue to incur
significant operating expenses and, as a result, we will need to generate
significant revenues to maintain profitability. We cannot assure you that we can
sustain or increase profitability on a quarterly or annual basis in the future.
Failure to maintain profitability may materially and adversely affect our
business, results of operations and financial condition and the market price of
our common stock.
18
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.
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.
19
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 23% of our net revenues for the year ended
December 31, 2002, 34% of our net revenues for the year ended December 31, 2003
and 41% of our net revenues for the three months ended March 31, 2004. Our
national online sponsorship and advertising revenue was approximately $1.9
million for the year ended December 31, 2002, $4.4 million for the year ended
December 31, 2003 and 1.3 million for the three months ended March 31, 2004. 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.
20
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
21
continue our online offerings. Any effort to undertake such reengineering might
not be successful. Furthermore, a party making such a claim could secure a
judgment that requires us to pay substantial damages. A judgment could also
include an injunction or other court order that could prevent us from selling
our products. Any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid, and could
distract our management from our business.
We have depended upon QVC to provide us warehousing, fulfillment and
distribution services for The Knot Registry.
We have a services agreement with QVC to warehouse, fulfill and arrange
for distribution of The Knot Registry 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 in May 2004. If we are unable
to effectively transfer these services to our facility, we would not be able, at
least temporarily, to sell or ship certain of our products to our customers.
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, greater name recognition and substantially larger user, membership or
readership bases than we have and, therefore, have significant ability to
attract advertisers, users and readers. In addition, many of our competitors may
be able to respond more quickly than we can to new or emerging technologies and
changes in Internet user requirements, as well as devote greater resources than
we can to the development, promotion and sale of services.
There can be no assurance that our current or potential competitors
will not develop products and services comparable or superior to those that we
develop or adapt more quickly than we do to new technologies, evolving industry
trends or changing Internet user preferences. Increased competition could result
in price reductions, lower margins or loss of market share. There can be no
assurance that we will be able to compete successfully against current and
future competitors.
Our potential inability to compete effectively in our industry for qualified
personnel could hinder the success of our business.
Competition for personnel in the Internet and wedding industries is
intense. We may be unable to retain employees who are important to the success
of our business. We may also face difficulties attracting, integrating or
retaining other highly qualified employees in the future. If we cannot attract
new personnel or retain and motivate our current personnel, our business may not
succeed.
Terrorism and the uncertainty of war may have a material adverse effect on our
operating results.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, and other acts of violence or war may
affect the market on which our common stock will trade, the markets in
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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 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.
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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 March 31, 2004, 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 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 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.
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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.
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
25
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 services could cause our sponsorship and advertising
revenues and merchandise revenues to decline and our business and prospects to
suffer.
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We may be sued for information retrieved from our sites.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
We may incur potential product liability for products sold online.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user. To date, we have had
limited experience selling products online and developing relationships with
manufacturers or suppliers of such products. We sell a range of products
targeted specifically at brides and grooms through The Knot Registry, The Knot
Shop, Bridalink.com or other e-commerce sites that we may acquire in the future.
Such a strategy involves numerous risks and uncertainties. Although our
agreements with manufacturers typically contain provisions intended to limit our
exposure to liability claims, these limitations may not prevent all potential
claims. Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could seriously damage our financial results, reputation and
brand name.
We may incur significant expenses related to the security of personal
information online.
The need to transmit securely confidential information online has been
a significant barrier to e-commerce and online communications. Any
well-publicized compromise of security could deter people from using the
Internet or other online services or from using them to conduct transactions
that involve transmitting confidential information. Because our success depends
on the acceptance of online services and e-commerce, we may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by such breaches.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, result of operations, or cash flows of the company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
We are exposed to some market risk through interest rates related to
the investment of our current cash and cash equivalents of approximately $22.6
million as of March 31, 2004. These funds are generally invested in highly
liquid debt instruments with short-term maturities. As such instruments mature
and the funds are re-invested, we are exposed to changes in market interest
rates. This risk is not considered material and we manage such risk by
continuing to evaluate the best investment rates available for short-term, high
quality investments.
We have no activities related to derivative financial instruments or
derivative commodity instruments, and we are not currently subject to any
significant foreign currency exchange risk.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Company's
"disclosure controls and procedures," as that term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of March 31, 2004. 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.
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There were no changes in the Company's internal control over financial
reporting during the quarter ended March 31, 2004 identified in connection with
the evaluation thereof by the Company's management, including the Chief
Executive Officer and Chief Financial Officer, that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 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 6. Exhibits and Reports on Form 8-K
a) Exhibits
31.1 Certification of Chairman and Chief Executive Officer
Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
Items 7 and 12, dated and furnished February 18, 2004, reporting that
we issued a press release and conducted a conference call announcing our
financial results as of and for the three months and year ended December 31,
2003.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 2004 THE KNOT, INC.
By: /s/ Richard Szefc
------------------------------
Richard Szefc
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
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EXHIBIT INDEX
Number Description
- ------ -----------
31.1 Certification of Chairman and Chief Executive Officer Pursuant to
Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Exchange Act Rule
13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer Pursuant to 18
U.S.C Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
30