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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 000-28271
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THE KNOT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3895178
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
462 BROADWAY
6TH FLOOR
NEW YORK, NEW YORK 10013
(212) 219-8555
(ADDRESS, INCLUDING ZIP CODE, AND THE TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 1, 2001 was approximately $5,025,645 (based on the last
reported sale price on the Nasdaq National Market on that date). The number of
shares outstanding of the registrant's common stock as of March 1, 2001 was
14,700,518.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders, which is to be filed subsequent to the date hereof, are
incorporated by reference into Part III.
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THE KNOT, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 24
ITEM 3. Legal Proceedings........................................... 24
ITEM 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 25
ITEM 6. Selected Financial Data..................................... 26
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 28
ITEM 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 36
ITEM 8. Consolidated Financial Statements and Supplementary Data.... 37
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 60
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 60
ITEM 11. Executive Compensation...................................... 60
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
ITEM 13. Certain Relationships and Related Party Transactions........ 60
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 60
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THIS REPORT CONTAINS PROJECTIONS OR OTHER FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS
ARE ONLY PREDICTIONS AND REFLECT OUR CURRENT BELIEFS AND EXPECTATIONS. ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS
OR FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. 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.
PART I
ITEM 1. BUSINESS
OVERVIEW
The Knot is the leading wedding resource providing products and services to
couples planning their weddings and future lives together. Our Web site, at
www.theknot.com, is the most trafficked wedding destination online and offers
comprehensive content, extensive wedding-related shopping, an online wedding
gift registry and an active community. The Knot is the premier wedding content
provider on America Online (AOL Keywords: Knot and weddings) and MSN. We publish
The Knot Wedding Gowns, a national wedding fashion magazine, and, through our
subsidiary, Weddingpages, Inc., publish regional wedding magazines in 45
company-owned and franchised markets in the U.S. We also author a series of
books on wedding planning and, through another subsidiary, Click Trips, Inc.,
offer honeymoon booking and other travel services. Our offline presence provides
cross-promotional opportunities and assists us in increasing our brand awareness
and our overall audience. We are based in New York and have several other
offices across the country.
INDUSTRY BACKGROUND
The Wedding Industry
Each year, approximately 2.3 million couples get married in the United
States. According to an independent research report, the domestic wedding market
generates approximately $50 billion in retail sales annually. Presumed to be a
once-in-a-lifetime occasion, a wedding is a major milestone event and,
therefore, consumers tend to allocate significant budgets to the wedding and
related purchases. According to a 1997 survey of readers of Bride's magazine,
the average amount spent on a wedding was $19,104, excluding the honeymoon.
Planning a wedding can be a stressful and confusing process. Engaged
couples must make numerous decisions and expensive purchases. A typical wedding
requires decisions and planning relating to bridal registries, invitations,
wedding gowns and wedding party attire, wedding rings, photographers, music,
caterers, flowers and honeymoons. In addition to the number of decisions faced
by engaged couples, the fixed date and the emotional significance of the event
intensify the stress. For the majority of engaged couples, the process of
planning a wedding is an entirely new one. They do not know where to find the
necessary information and services, how much services or goods should cost or
when decisions need to be made. These planning decisions are further complicated
because many couples choose to have their weddings in locations other than where
they live. Researching and soliciting local wedding services from distant
locations without traveling and making an enormous time commitment is extremely
difficult. Today's to-be-weds are seeking reliable resources and information to
assist in their planning and purchase decisions.
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. According to Modern Bride, during the six
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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. A disproportionate
amount of advertising revenues are generated per subscriber by bridal magazines.
According to Advertising Age, in 1999 the top three bridal magazines generated
an average of $227 in revenues per reader, compared to an average of $86 in
revenues per reader in the top three travel magazines and an average of $58 in
revenues per reader in the top three women's magazines.
The wedding market also represents significant opportunities for the retail
industry. According to a 1997 report by Bride's magazine, engaged couples
receive gifts from an average of 200 guests, most of whom are spending between
$70 and $100. Because items are selected by the engaged couple but paid for by
their guests, price sensitivity is minimal and registry products are rarely
discounted by retailers. Registry for products in all categories has grown,
prompting many national retailers -- previously without registries -- to enter
the gift registry market. Weddings also generate substantial revenues for travel
services companies. Honeymoon travel generates an estimated $4.5 billion
annually. According to a 1997 Bride's survey, over 99% of all newlyweds go on a
honeymoon with an average cost of $3,657 per couple.
The Internet and the Wedding Industry
To-be-weds are seeking a comprehensive resource to assist in their
preparation and planning for a wedding. Because of its global reach and capacity
to transmit information rapidly, the Internet represents an ideal medium over
which to-be-weds can easily access information and communicate with the widely-
dispersed providers of local wedding resources. We expect the impact of the
Internet on the wedding market to be significant.
In 1997, the median age was 26 for first-time brides and 28 for first-time
grooms, placing them in the demographic age group, 18 to 34 years, that
currently comprises approximately 38% of all Web users. As Internet use
continues to increase, engaged couples are more likely to turn to online
resources as the first place they look for wedding products, information and
registry services. Recognizing this trend, traditional providers of wedding
resources have begun to offer their services and products online. Like their
offline equivalents, however, these online offerings are single-service/product
focused. To-be-weds continue to search for a comprehensive solution to their
information, planning and purchasing needs at a single destination.
THE KNOT SERVICES
We service both the online and offline wedding market. Our services
include:
Online Services
Relevant Wedding Content. We provide creative and up-to-date information
and resources to attract users to our sites. Weddings are information-intensive
events requiring extensive research, planning and decision-making. Our sites
provide future brides and grooms with a searchable database that draws on
thousands of articles on wedding planning and numerous interactive wedding
planning tools including wedding checklists, a budgeter, a guest list manager
and personal wedding Web pages. Our online content is organized in nine channels
covering the topics of planning, real weddings, proposals, fashion, beauty,
grooms, maids and moms, love and life, and honeymoons. All the channels offer
articles, ideas and advice covering a wide range of perspectives, budgets,
traditions and ethnicities.
We offer a searchable bridal gown database with more than 20,000 gown
images from over 200 designers and a searchable bridal accessory database with
more than 11,000 bridal accessories, including headpieces, shoes and purses. We
offer access to the local wedding market through a database of approximately
17,000 local vendors, such as reception halls, bands and caterers, in over 50
markets nationwide. Our Wedding Photographers Network allows to-be-weds to
search for local wedding photographers meeting their specific needs.
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Active Membership and Community Participation. Our online sites generate a
high degree of member involvement through chats, message boards and personalized
interactive services. To-be-weds actively seek forums to exchange ideas and ask
questions during the planning process. We encourage and promote active
participation within our online community. The Knot community features include
24-hour chat rooms on both America Online and the Web and allows our members to
interact with other couples, as well as our own experts, on wedding planning
issues and concerns. For example, our "Ask Carley" area is an interactive
service in which wedding etiquette and other questions are answered daily by our
experts on wedding planning. This area includes a searchable database that draws
from an archive of up-to-date answers to thousands of questions. We also send
out several newsletters to our subscribers updating them on new articles,
features and upcoming events on our sites and bi-weekly newsletters focused on
specific topics, such as registries and accessories. Additionally, our
interactive services allow users to prepare and modify their wedding budget and
create personalized checklists and Web pages.
Convenient, Comprehensive Shopping Experience. We integrate our
interactive services and informative content with comprehensive shopping
services, which range from wedding gifts and supplies to honeymoons. Our sites
place e-commerce offerings on every layer of our site. Placement and selection
of these items are based on the information that a couple is seeking. In
addition, we have created a shopping portal or "integrated shopping destination"
called The Knot Shop. Shopping areas include "Registry," "Home Store," "Gift
Center," "Wedding Store," "Attendant Gifts" and "Boutiques."
We have developed The Knot Registry, which we believe is the Internet's
most comprehensive wedding gift registry. The Knot Registry offers a broad
selection of more than 10,000 products and services from more than 500
well-recognized brands. Wedding guests can quickly and easily purchase gifts
online or via phone or fax, 24-hours a day. Unlike other online bridal
registries which link users to large retailers in exchange for a payment from
the retailer, we buy products directly from manufacturers. This enables us to
provide our users with a large selection of products from a wide range of
categories, while maintaining a high level of customer service. We offer
traditional registry categories, such as china, household appliances and
electronics, in addition to non-traditional categories, such as outdoor gear,
dance lessons, entertainment and travel. Couples also may register for services
which are typically not available from traditional bridal registries, such as
home mortgage down payments, car loans and leases and investment services such
as mutual funds.
In April 1999, we entered into a services agreement with QVC. Under this
agreement, QVC provides us warehousing, sales, fulfillment and distribution
services in connection with The Knot Registry. At the customer's request, a
product generally can be shipped within 48-hours of order. Our strategic
relationship with QVC also affords us the ability to purchase certain
merchandise for The Knot Registry from QVC vendors at a specified premium over
QVC's volume discount rate. Our services agreement with QVC expires in December
2003. We have the option to extend the term of the services agreement for an
additional l80 days. QVC may terminate our services agreement if we fail to pay
any amounts due or otherwise breach the terms of the agreement, or if we are
sold or become bankrupt. We will continue to explore other strategic
distribution partnerships that will add to our product offerings and further
leverage our brand.
We offer wedding supplies throughout www.theknot.com, including our
"integrated shopping destination" called The Knot Shop, as well as through
Bridalink.com. Bridalink.com is our separate online store for wedding supplies
which we maintain in order to attract new users and generate additional revenue.
We offer over 700 products, including decorated disposable cameras, wedding
bubbles and bells, ring pillows, toasting flutes, car decorating kits, table
centerpieces, goblets and glasses, garters and unity candles. These highly
specialized items are often difficult to find through traditional retail
outlets, and the purchase of these items is often left to the last minute.
Consumers can place orders online, through a toll-free number, fax or via mail,
24-hours a day. We fulfill all wedding supplies orders from our warehouse
located in Redding, California. In January 2001, we began to offer
personalization options for many of our wedding supplies such as toasting
glasses, cake servers, napkins and wedding attendant gifts and favors.
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Other Online Services. Through Click Trips, Inc., our online travel agency
located at www.clicktrips.com, users can plan their wedding travel and
honeymoon. Click Trips allows us to advance our brand-building initiative by
integrating the travel-related content and commerce platform with our existing
wedding-related offerings. Click Trips specializes in destination travel
packages to the Caribbean, Bermuda and Mexico. Click Trips closely monitors
honeymoon and leisure travel trends and is therefore able to offer a high level
of customer service and great knowledge of resorts. Click Trips can reach Knot
members through a targeted e-mail program driven by engaged couples' wedding
dates. The e-mails, which include discounts and planning advice, reach couples
during the time period when they are most likely planning and booking their
honeymoon.
Offline Services
Local Wedding Magazines. In March 2000, we acquired Weddingpages, which
publishes local wedding magazines semiannually in 45 company-owned and
franchised markets that are supported by a veteran salesforce. Beginning in
December 2000, we began to release a redesigned Weddingpages magazine featuring
the look and feel of The Knot brand. Weddingpages now combines the editorial
expertise of The Knot with up-to-date, region-specific information from
Weddingpages, making this publication a must-have wedding planning companion for
engaged couples. Through February 2001, the new magazine had been released in 13
major company-owned markets including Washington, D.C., Seattle, Boston, Kansas
City and Atlanta. A rollout of additional issues is expected to occur by May
2001 in cities such as New York City, Los Angeles, Philadelphia, St. Louis and
Dallas.
We also support our offline local efforts through integration with our Web
site. We offer detailed online vendor listings throughout the United States and
have launched comprehensive online local city guides for more than 16 U.S.
cities. We will continue to roll out additional online city guides with
localized wedding content on an ongoing basis throughout the coming months.
Through our local market expansion, we are able to influence many of the
wedding-related decisions and purchases made on the local level.
The Knot Wedding Gowns Magazine. We published the second issue of the
highly successful The Knot Wedding Gowns magazine in January 2001. This 350-page
publication, with over 1,000 dresses from hundreds of the industry's top
designers, is organized alphabetically by designer, and each gown image includes
essential information that is not found in other bridal magazines -- price
range, detailed description and a coordinating URL that directs readers to The
Knot Web site for additional dresses by the same designer. Also featured are
over a hundred photos of bridesmaid dresses, flower girl dresses, veils, shoes,
tuxes and other accessories. Understanding the importance of localized
wedding-planning information, we introduced an unprecedented new tool to the
magazine -- The Salon Finder. As one of the most comprehensive salon listings on
the bridal magazine market, brides can comb through The Salon Finder's 30 pages
of organized, detailed salon listings to locate stores in their state that carry
the designers they love.
We intend to publish Wedding Gowns magazine twice a year. We sell Wedding
Gowns magazine through newsstands and bookstores across the nation.
The Knot Book Series. The Knot has two book series. Our first book series
consists of three books which have been published by Broadway Books, a division
of Random House. We developed the content of each book through the interaction
between our users and our wedding experts. This "real-world" approach, directed
by our editorial team and based on user experience and feedback, distinguishes
us from the approach of traditional wedding resources. Each book in this series
encourages readers to visit our sites. The first two books in the series
published in December 1998 and January 2000, respectively, are detailed
wedding-planning resources for to-be-weds, offering the information a bride and
groom need to plan their wedding and include worksheets, checklists, etiquette,
tips, calendars and answers to frequently-asked questions.
Our third and final book in this series, called The Knot Guide to Wedding
Vows and Traditions, was published in January 2001. Expanding on the information
presented in the first two books, this in-depth
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guide tackles tricky wedding-related topics including toasts, readings, music
and personal vows and explains how couples can utilize each to personalize their
own ceremony or reception. This book is full of information that brides and
grooms from around the world can use to individualize their walk down the aisle
by incorporating rituals and traditions that are relevant to a couple's own
heritage.
Our second book series consists of two books that are being published by
Chronicle Books. This book series expands the consumer reach of The Knot to the
gift book category. Featuring over 100 color pictures and illustrations, the
books will make great gifts for every newly-engaged woman and hopeful
brides-to-be. The first book, The Knot Complete Guide to Wedding Dresses, is set
to debut in January 2002. It celebrates the evolution of the wedding gown, while
providing brides with all the information they need to make the big purchase.
The second book will focus on wedding flowers.
Benefits to Advertisers, Sponsors and Vendors
We provide advertisers, sponsors and vendors with targeted access to
couples actively seeking information and advice and making meaningful spending
decisions relating to all aspects of their weddings. We offer advertisers,
sponsors and vendors an opportunity to establish brand loyalty with first-time
purchasers of many products and services.
Advertisers and Sponsors. We are able to deliver to advertisers and
sponsors significant leads of potential purchasers. Editorial content and
advertising are often integrated on our sites. For example, an article about
honeymoons might feature an advertisement for a resort. Instead of traditional
banners or buttons, our sponsors usually select our custom-developed marketing
programs that offer special features, including tools. When a user clicks on an
advertisement positioned on our sites, a sponsor's custom-designed window
appears which showcases the advertiser's products and services. These windows
can provide relevant product and contact information, electronic catalogues of
products or hyperlinks to the sponsor's Web site. Companies can also enter into
longer term arrangements to exclusively sponsor entire editorial areas or
special features. We may also offer sponsors additional online promotional
events such as a sweepstakes or targeted e-mail program.
With the acquisition of Weddingpages, the further development of The Knot
Wedding Gowns magazine and the launch of The Knot Membership Kit, we have
expanded the scope of the integrated marketing programs we offer to our
advertisers to include many offline features. For example, a program for an
online sponsor could also include national or regional print advertising in our
local wedding magazines or The Knot Wedding Gowns. A sponsor could also choose
to have collateral promotional material distributed to our members in The Knot
Membership Kit.
Vendors. We provide our vendors with a consumer group that will make more
buying decisions than at any other time in their lives. Our easy-to-use shopping
sites increasingly promote e-commerce. Vendors' products are attractively
displayed with color photographs and descriptions customized for the bridal
market. Through our interactive online features, such as chat rooms and message
boards, and by utilizing the creative content portions of our sites, we
encourage and assist our users in making purchasing decisions.
THE KNOT STRATEGY
Our objective is to expand our position as the leading wedding resource
providing comprehensive wedding planning information, products and services. Key
elements of our business strategy include the following:
Build Strong Brand Recognition. Building brand recognition is critical to
attracting and expanding both our online and offline user base. We have secured
the leading position in the online wedding market, and to maintain this focus we
will continue to emphasize our editorial and creative content while marketing
our magazine and book products offline.
We plan to continue building brand recognition by leveraging our membership
base and creating innovative and integrated marketing solutions. In March 2000,
we launched The Knot Membership Kit, a
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direct marketing tool that is shipped at no charge to our eligible members. The
Knot Membership Kit contains Knot-branded collateral designed to help
newly-engaged couples plan their wedding and to drive them back to our online
sites for additional information. In addition, The Knot Membership Kit contains
collateral provided by participating third party advertisers and sponsors in
addition to material promoting our own services. The Knot Membership Kit allows
us to leverage our comprehensive database of member information and strengthen
The Knot brand awareness, while providing a unique advertising opportunity for
our advertisers by placing a distinctive product in the hands of engaged
couples.
We also promote our brand through television and radio appearances by
Carley Roney, our Editor-in-Chief and lead wedding expert. During the summer of
2000, The Knot joined NBC's TODAY Show, the #1-rated morning news show, to
create an unprecedented 12-week wedding planning series called "Today Ties The
Knot." The series featured live, on-air and online planning of one couple's
wedding. Throughout the series, Carley Roney, Editor-in-Chief of The Knot,
appeared on TODAY to present ideas for each aspect of the couple's wedding.
Nearly every detail -- from invitations to the honeymoon -- were determined by
votes cast weekly on the Web by TODAY's viewers.
In November 2000, we entered into a strategic relationship with Microsoft's
MSN Network, which makes The Knot the premier wedding content provider for MSN.
Content from The Knot is featured on the Weddings area of MSN WomenCentral. This
relationship allows us to feature our content and tools for the over 210 million
visitors on MSN each month. The Weddings area includes links to The Knot's
interactive planning tools as well as features Knot articles on wedding
planning.
With the initial releases of the revamped Weddingpages magazines in
December 2000 and the launches of our in-depth online city guides, we are
aggressively increasing our brand awareness at the local level while focusing on
expanding our revenue streams and meeting our customers needs in both content
and e-commerce applications. At the same time, we are taking advantage of the
cross-promotional opportunities these offline publications afford our online
properties and services.
Aggressively Grow Membership. We believe a large and active membership
base is critical to our success. Membership enrollment is free. Our members
enjoy the use of personal Web pages, message boards, budgeting and planning
tools, wedding checklists and gown search. New member enrollment per month has
grown from 137,000 in the fourth quarter of 1999 to over 192,000 in the fourth
quarter of 2000. Throughout 2000, we were enrolling as members an average of
over 2,250 new couples per day. We intend to continue to grow our membership
base and increase member usage through our content offerings, interactive
services, active community participation and strategic relationships.
We recognize the importance of maintaining confidentiality of member
information and we have established a privacy policy to protect personal
information. Our current privacy policy is set forth on our sites. Our policy is
not to tell any third party any member's personal identifying information, but
we may share aggregated information about our members with other pre-screened
organizations who have specific direct mail product and service offers we think
may be of interest to our members. We may share aggregated member information
with third parties, such as a member's zip code or gender. In addition, we may
use information revealed by members and information built from user behavior to
target advertisements, content and e-mail.
Provide Full-Service Wedding Resources. We facilitate the wedding planning
process by providing what we believe is one of the most comprehensive packages
of services, tools and commerce applications, online and offline. By continuing
to combine our extensive wedding content and our active community with a
full-service shopping solution, we plan to grow our leading market position and
expand the services and content we provide. The acquisitions of Weddingpages,
Click Trips, Bridalink and Wedding Photographers Network have helped allow us to
provide our audience with the most comprehensive wedding services solution. By
augmenting the editorial offerings and planning tools with various service
offerings, we are able to provide unmatched convenience and utility for our
users.
Capitalize on Multiple Revenue Opportunities. We intend to leverage the
size and favorable demographics of our online community to generate multiple
revenue streams. We are focused on providing
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our sponsors and advertisers with targeted access to couples actively seeking
information and making purchase decisions. We maximize our advertising revenues
with the targeted marketing opportunities offered to both our national
advertising sponsors and local wedding vendors by integrated advertising with
editorial content on our site and in our magazines. Sponsors benefit from our
special feature programs that typically include an exclusive Knot-designed
online site as well as site-wide banners and links to the sponsor's Web site.
We expect to generate increasing online revenues from The Knot Registry and
our convenient gift and supply shops. We will continue to use our content to
promote e-commerce opportunities. Additionally, we expect to realize offline
revenues from publishing our local magazines, semiannual gown magazine and books
series. We will pursue additional revenue opportunities, as appropriate, in
connection with the needs of today's engaged and newly married couples. We also
intend to extend the relationship we build with our users and provide access to
additional products and services relevant to newlyweds and growing families.
Continue to Pursue Strategic Alliances. During 2000, we entered into a
strategic relationship with Microsoft's MSN Network which provides an efficient
distribution and marketing vehicle for The Knot. Also in 2000, we entered into a
joint venture with Gerard Bedouk Holding (GBH), the largest wedding media
company in Europe, for the purpose of developing and operating a Web site in
French that offers wedding resources and services targeted to consumers in
France and certain other French speaking territories in Europe. In November
2000, this joint venture launched its first site in France, www.mariee.fr,
featuring The Knot's interactive planning tools, extensive bridal gown search
and editorial content. GBH publishes a bi-monthly wedding trade magazine and
three consumer wedding magazines, Mariee in France and Wedding Dresses in the
U.K. and the U.S. GBH also produces two annual wedding shows in Paris. Through
our relationship with GBH, we expect The Knot brand will gain broad exposure in
French speaking Europe. GBH will promote the joint venture in its consumer and
trade publications and bridal shows.
We intend to seek other opportunities to form strategic relationships that
will enhance our business and increase shareholder value.
RELATIONSHIP WITH AOL
On July 23, 1999, we entered into an amended anchor tenant agreement with
AOL, which extended the term of our existing agreement with AOL through January
6, 2003 and expanded our presence on AOL. Under the terms of the agreement, The
Knot is the primary wedding content provider on AOL and several other of AOL's
leading brands, including AOL.com, Netscape Netcenter and CompuServe. AOL
provides promotions and reserves programming areas for The Knot.
Under our original services agreement with AOL, we obtained usage fees from
AOL based on the number of customers visiting our AOL site, and we paid AOL
commissions on our advertising revenues. Under the new agreement, we now pay AOL
a quarterly carriage fee, with no obligation to pay AOL advertising commissions.
AOL may terminate the agreement regarding our carriage on specific properties
upon 30 days' prior written notice.
On May 1, 2000, we entered into an International Anchor Tenant Agreement
with AOL, whereby we receive distribution within AOL and its affiliates within
international markets. The agreement expires on May 1, 2003 and provides for
quarterly carriage fees payable over the term of the agreement.
COMPETITION
The Internet advertising and online wedding markets are new, rapidly
evolving and intensely competitive, and we expect such competition to intensify
in the future. We face competition primarily from three separate areas: online
sites, magazines and gift registries.
There are many wedding-related sites on the Internet developed and
maintained by online content providers. Retail stores, manufacturers, wedding
magazines and regional wedding directories also have online sites which compete
with us. We expect competition to increase because of the business
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opportunities presented by the growth of the Internet and e-commerce.
Competition may also intensify as a result of industry consolidation and a lack
of substantial barriers to entry in our market. Moreover, we face competition
for sponsorship and advertising sales from other online content providers and
advertisement server companies that provide banner advertisement services that
might be considered an alternative marketing solution.
We also face competition for our services from bridal magazines. Bride's
and Modern Bride are the two dominant bridal publications in terms of revenue
and circulation. According to Advertising Age, these two magazines and Bridal
Guide, the third leading bridal magazine, generated gross advertising revenues
of $229.6 million in 1999.
The Knot Registry faces competition from online sources such as registry
aggregators. We compete with retail stores offering gift registries, especially
from retailers offering specific bridal gift registries. These stores,
particularly national department store chains, have strong brand awareness, many
years of retailing experience, and most now have online transactional
capabilities. Our wedding supplies business also faces competition from online
sources and retail stores offering similar products.
We believe that the principal competitive factors in the wedding market are
brand recognition, convenience, ease of use, information, quality of service and
products, member affinity and loyalty, reliability and selection. As to these
factors, we believe that we compete favorably. Our dedicated editorial, sales
and products staffs concentrate their efforts on producing the most
comprehensive wedding resources available.
Generally, many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user or membership
bases than we have. Therefore, these competitors have a significantly greater
ability to attract advertisers and users. In addition, many of these competitors
may be able to respond more quickly than we can to new or emerging technologies
and changes in Internet user requirements and to devote greater resources than
we do to the development, promotion and sale of services. There can be no
assurance that our current or potential competitors will not develop products
and services comparable or superior to those developed by us or adapt more
quickly than we do to new technologies, evolving industry trends or changing
Internet user preferences. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which would
materially and adversely affect our business, results of operation and financial
condition.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
Our technology infrastructure provides for continuous availability of our
online service. All of the critical components of the system are redundant,
allowing us to withstand unexpected component failure and to undergo maintenance
or upgrades. Our operation is dependent on the ability to maintain our computer
and telecommunications systems in effective working order and to protect our
systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Our system hardware is co-located
at Globix Corporation's New York, New York data center. Systems administrators
and network managers at Globix monitor our servers, operate our network and
execute backups. Our servers have access to auxiliary power during outages. Our
systems are copied to backup tapes daily, which are in turn sent to us for
offsite storage. Database and Web servers are redundant and operate using
clustering technology for effective load-balancing and fault tolerance.
Regular capacity planning allows us to quickly upgrade existing hardware
and integrate new hardware to react quickly to a rapidly expanding member base
and increased traffic to our sites. We generally operate at 99% uptime and no
unexpected downtime. Key content management and e-commerce components are
designed, developed and deployed by our in-house technology group. We also
license commercially available technology when appropriate in lieu of dedicating
our own human or financial resources. Current examples include NetGravity, our
ad server and MapQuest for geographical mapping applications.
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We employ several layers of security to protect data transmission and
prevent unauthorized access. We keep all of our production servers behind
firewalls for security purposes and do not allow outside access, at the
operating systems level, except via special secure channels. Strict password
management and physical security measures are followed. Computer emergency
response team alerts are read, and, where appropriate, recommended action is
taken to address security risks and vulnerabilities. From time to time, we use
the services of third party computer security experts and penetration tests have
been performed to help improve security.
E-commerce transactions and browser-based administration screens employ
secure sockets layer encryption to secure data transmitted between clients and
servers. Credit card information captured during e-commerce transactions is
never shared with outside parties, and we provide shoppers with a toll-free
number to place orders by phone as an alternative to completing a transaction
online.
GOVERNMENT REGULATION
Due to the increasing popularity and use of the Internet and other online
services, laws applicable to e-commerce, privacy and the Internet generally are
becoming more prevalent. It is possible that a number of new laws and
regulations may be adopted regarding the Internet or other online services which
will address issues such as user privacy, freedom of expression, pricing,
content and quality of products and services, taxation, advertising,
intellectual property rights and information security. The nature of such
legislation and the manner in which it may be interpreted and enforced cannot be
fully determined at this time. Such legislation could subject us and/or our
customers to potential liability or restrict our present business practices,
which in turn could have an adverse effect on our business, results of
operations and financial condition. In addition, the FTC has investigated the
privacy practices of several companies that collect information about
individuals on the Internet. The adoption of any such laws or regulations might
also decrease the rate of growth of Internet use generally, which in turn could
decrease the demand for our service or increase our cost of doing business or in
some other manner have a material adverse effect on our business, results of
operations and financial condition.
Specifically, several states have proposed legislation that would limit the
use and disclosure of personally identifiable information gathered online about
users. To obtain membership on our sites, a user must disclose their name,
address, e-mail address and role in the wedding. We do not currently sell any
member's personal identifying information to third parties without the member's
prior consent. We may share aggregated member information with third parties,
such as a member's zip code or gender and may use information revealed by
members and information built from user behavior to target advertising, content
and e-mail. Because we rely on the collection and use of personal data from our
members for targeting advertisements shown on our services, we may be harmed by
any laws or regulations that restrict our ability to collect or use this data.
Privacy concerns in general may cause visitors to avoid online sites that
collect behavioral information and even the perception of security and privacy
concerns, whether or not valid, may indirectly inhibit market acceptance of our
services. In addition, if our privacy practices are deemed unacceptable by
watchdog groups or privacy advocates, such groups may attempt to harm our
business by blocking access to our sites or disparaging our reputation and our
business, results of operation and financial condition could be materially and
adversely affected.
In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. It is
uncertain how such existing laws may apply to or address the unique issues of
the Internet and related technologies. For example, because our services are
accessible throughout the United States, other jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in a particular
state. We are qualified to do business in New York, California, Nebraska and
Virginia and our failure to qualify as a foreign corporation in a jurisdiction
where we are required to do so could subject us to taxes and penalties for the
failure to qualify and could result in our inability to enforce contracts in
such
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jurisdictions. Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could harm us.
Additionally, while we only recently have begun to operate outside of the
United States, the international regulatory environment relating to the Internet
market could have a material and adverse effect on our business, results of
operations and financial condition if we continue to expand internationally. In
particular, the European Union recently enacted privacy regulations that limit
the collection and use of some user information and subject data collectors to a
restrictive regulatory regime. The cost of such compliance could be material and
we may not be able to comply with the applicable national regulations in a
timely or cost-effective manner, if at all.
Changes to existing laws or the passage of new laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace that could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could in some other manner have a material adverse effect on
our business, results of operations and financial condition.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property as critical to
our success, and rely on trademark and copyright law, trade secret protection,
confidentiality and assignment of invention agreements, and/or license
agreements with employees, customers, independent contractors, partners and
others to protect our proprietary rights. We strategically pursue the
registration of our trademarks and service marks in the United States, and have
applied for and obtained registration in the United States for some of our
trademarks and service marks, including "THEKNOT". Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available online.
We have licensed in the past, and expect to continue to license in the
future, some of our proprietary rights, such as trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of our
brand is maintained by our licensees, there can be no assurance that our
licensees will not take actions that might materially adversely affect the value
of our proprietary rights or reputation, which could have a material adverse
effect on our business, financial condition and results of operations. There can
be no assurance that the steps we have taken to protect our proprietary rights
will be adequate or that third parties will not infringe or misappropriate our
copyrights, trademarks, trade secrets and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert claims of
infringement of intellectual property against us. Although we believe that our
products and services do not infringe upon the intellectual property rights of
others and that we have all rights necessary to utilize the intellectual
property employed in our business, we may nonetheless be subject to claims
alleging infringement of third-party intellectual property rights. Any such
claims could require us to spend significant sums on litigation, pay damages,
delay product installments, develop non-infringing intellectual property or
acquire licenses to intellectual property that is the subject of any such
infringement, which licenses may not be available on commercially reasonable
terms, if at all. Therefore, such claims could have a material adverse effect on
our business, results of operations and financial condition.
EMPLOYEES
As of December 31, 2000, we had a total of 280 employees, of which 70 were
involved in product and content development, 171 were involved in sales and
marketing, and 39 were involved in general and administrative functions. None of
our employees is represented by a labor union. We have not experienced any
work-stoppages and we consider relations with our employees to be good.
Competition for qualified personnel in our industry is intense. We believe that
we will need to continue to attract, hire and retain qualified personnel to be
successful in the future.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Important Factors Regarding Forward-Looking Statements
In addition to other information in this Annual Report on Form 10-K and in
the documents we are incorporating by reference, the following risk factors
should be carefully considered in evaluating our business because such factors
currently or may have a significant impact on our business, operating results or
financial condition. This Annual Report on Form 10-K contains forward-looking
statements that have been made pursuant to the provisions of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in the forward-looking statements as a result of the risk
factors set forth below and elsewhere in this Annual Report.
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 new and
unproven. Our business model depends in large part on our ability to generate
revenue streams from multiple sources through our online sites, including:
- Internet sponsorship and advertising fees from third parties; and
- online sales of wedding gifts, supplies and honeymoon travel packages
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. Accordingly, we are not certain
that our business model will be successful or that we can sustain revenue growth
or be profitable.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
We have not achieved profitability and expect to continue to incur
significant losses and negative cash flow for the foreseeable future. We
incurred net losses of $1.5 million for the year ended December 31, 1998, $9.2
million for the year ended December 31, 1999 and $15.8 million for the year
ended December 31, 2000. As of December 31, 2000, our accumulated deficit was
$28.3 million. We also expect to continue to incur significant operating
expenses and capital expenditures and, as a result, we will need to generate
significant revenues to achieve and maintain profitability. Even if we do
achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. Failure to achieve
or maintain profitability may materially and adversely affect our business,
results of operations and financial condition and the market price of our common
stock. For more information on our losses and the effects of our expenses on our
financial performance, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WE LACK SIGNIFICANT REVENUES AND MAY BE UNABLE TO ADJUST SPENDING QUICKLY ENOUGH
TO OFFSET ANY UNEXPECTED REVENUE SHORTFALL.
Our revenues for the foreseeable future will remain dependent on online
user traffic levels, advertising activity both online and offline and the
expansion of our e-commerce activity. In addition, we plan to expand and develop
content and to upgrade and enhance our technology and infrastructure to support
our growth. We incur a significant percentage of our expenses, such as employee
compensation and rent, 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
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unexpected revenue shortfall. If we have a shortfall in revenues in relation to
our growth in expenses, then our results of operations would be materially and
adversely affected. For more information on our net revenues and the effects of
our expenses on our financial performance, see and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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:
- the level of online usage and traffic on our Web site;
- demand for online and offline advertising;
- seasonal trends in both online usage and advertising placements;
- the addition or loss of advertisers;
- the advertising budgeting cycles of specific advertisers;
- the number of users that purchase merchandise from us;
- the magazine publishing cycle of Weddingpages;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our operations, including those related to acquisitions;
- the introduction of new sites and services by us or our competitors;
- changes in our pricing policies or the pricing policies of our
competitors; and
- general economic conditions; and economic conditions specific to the
Internet, electronic commerce, online and offline media.
We do not believe that period-to-period comparisons of our operating
results are necessarily meaningful and you should not rely upon these
comparisons as indicators of our future performance.
Due to the foregoing factors, it is possible that our results of operations
in one or more future quarters may fall below the expectations of securities
analysts and investors. 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 SEASONAL FACTORS.
Seasonal and cyclical patterns may affect our revenues. In 1999, 18.2% of
weddings occurred in the first quarter, 25.9% occurred in the second quarter,
29.3% occurred in the third quarter and 26.6% occurred in the fourth quarter.
Because we launched The Knot Registry in November 1998 and acquired Bridalink in
July 1999, we have limited experience generating merchandise revenues. Based
upon our limited experience, we believe merchandise revenues generally are lower
in the fourth quarter of each year. In addition, we believe that advertising
sales in traditional media, such as television and radio, and print generally
are lower in the first and third calendar quarters of each year. Historically,
we have experienced increases in our traffic during the first and second
quarters of the year. As a result of these factors, we may experience
fluctuations in our revenues from quarter to quarter.
IF SALES TO SPONSORS OR ADVERTISERS FORECASTED IN A PARTICULAR PERIOD ARE
DELAYED OR DO NOT OTHERWISE OCCUR, OUR RESULTS OF OPERATIONS FOR A PARTICULAR
PERIOD WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
The time between the date of initial contact with a potential sponsor or
advertiser and the execution of a contract with the sponsor or advertiser is
often lengthy, typically ranging from six weeks for smaller
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agreements to nine months for larger agreements, and is subject to delays over
which we have little or no control, including:
- customers' budgetary constraints;
- customers' internal acceptance reviews;
- the success and continued internal support of advertisers' and sponsors'
own development efforts; and
- 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 for
that period would suffer.
OUR FINANCIAL CONDITION AND REVENUES WOULD BE ADVERSELY AFFECTED IF TRAFFIC ON
OUR AOL SITE DECREASED OR IF CARRIAGE OF OUR SITES ON AOL WAS DISCONTINUED.
AOL has accounted for a significant portion of our online traffic to date.
During the year ended December 31, 2000, approximately 16% of our users were
customers of AOL's Internet services. If the financial condition and operations
of AOL were to deteriorate significantly, or if the traffic on our AOL site were
to substantially decrease, our revenues could be adversely affected.
In addition, our anchor tenant agreement with AOL expires on January 6,
2003. AOL may extend it for an additional two years, but does not have any
obligation to extend or renew the agreement. Through the AOL agreement, we
provide content on America Online, AOL.com, AOL Hometown, Netscape and
CompuServe. Under the terms of the agreement, AOL may terminate the agreement
without cause only with respect to our carriage on AOL Hometown, Netscape, and
CompuServe upon 30 days' prior written notice. If the carrying of our sites on
AOL is discontinued, we would lose members, sponsors and advertisers and our
business, results of operations and financial condition would be materially and
adversely affected.
WE HAVE A LIMITED OPERATING HISTORY AND EXPECT TO ENCOUNTER DIFFICULTIES FACED
BY EARLY STAGE COMPANIES IN THE INTERNET ADVERTISING AND ONLINE WEDDING MARKETS.
We commenced operations in May 1996 and recorded our first revenues in
September 1996, immediately following the launch of our first online property.
Accordingly, we have only a limited operating history and face many of the risks
and difficulties frequently encountered by early stage companies in new and
rapidly evolving markets, such as the Internet advertising and online wedding
markets. These risks include our ability to:
- increase the audience on our sites;
- broaden awareness of our brand;
- strengthen user-loyalty;
- offer compelling content;
- maintain our leadership in generating traffic;
- maintain our current, and develop new, strategic relationships;
- attract a large number of advertisers from a variety of industries;
- respond effectively to competitive pressures;
- generate revenues from the sale of merchandise and e-commerce;
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- continue to develop and upgrade our technology; and
- attract, integrate, retain and motivate qualified personnel.
As a result of our limited operating history, we do not have meaningful
historical financial data for a significant number of periods upon which to
forecast our revenues and results of operations.
These risks could negatively impact our financial condition if left
unaddressed. For more information on the effects of some of these risks, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE KNOT BRAND NAME WHICH
WOULD NEGATIVELY IMPACT OUR BUSINESS AND CAUSE OUR SPONSORSHIP AND ADVERTISING
REVENUES TO DECLINE.
Building recognition of our brand is critical to attracting and expanding
our online user base and our offline readership. Because we plan to continue
building brand recognition, we may find it necessary to accelerate expenditures
on our sales and marketing efforts or otherwise increase our financial
commitment to creating and maintaining brand awareness. Our failure to
successfully promote and maintain our brand would adversely affect our business
and cause us to incur significant expenses in promoting our brand without an
associated increase in our net revenues.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO SUCCESSFULLY
INTEGRATE OUR RECENT AND ANY FUTURE ACQUISITIONS OR SUCCESSFULLY OPERATE UNDER
OUR STRATEGIC PARTNERSHIPS.
In March 2000, we acquired Weddingpages, Inc., a publisher of local wedding
publications. We may not be able to successfully integrate and expand the
Weddingpages business model. In addition, we may still encounter difficulty
integrating the personnel, operations, technology and software of this acquired
business. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations.
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:
- difficulties in integrating operations, technologies, products and
personnel;
- diversion of financial and management resources from existing operations;
- risks of entering new markets;
- potential loss of key employees; and
- 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 or involve amortization 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 THE USE OF THE INTERNET AS AN ADVERTISING AND MARKETING MEDIUM GROWS MORE
SLOWLY THAN WE EXPECT OR DIMINISHES, OUR FUTURE REVENUES AND PROSPECTS WOULD BE
MATERIALLY AND ADVERSELY AFFECTED.
Our future success depends in part on a significant increase in the use of
the Internet as an advertising and marketing medium. Sponsorship, advertising
and production revenues constituted 45% of our net revenue for the year ended
December 31, 2000, 71% of our net revenues for the year ended December 31, 1999
and 82% of our net revenues for the year ended December 31, 1998. The Internet
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advertising market is new and rapidly evolving, 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 DEPEND ON A LIMITED NUMBER OF ONLINE SPONSORS AND ADVERTISERS AND THE LOSS OF
A NUMBER OF THESE WOULD RESULT IN A DECLINE IN OUR REVENUES.
We depend on a limited number of online sponsors and advertisers for a
significant part of our net revenues. Although no single sponsor or advertiser
accounted for 10% or more of our net revenues, our 7 largest sponsors and
advertisers accounted for 18% of our net revenues for the year ended December
31, 2000. Consequently, the loss of any of these online sponsors or advertisers
would cause our revenues to decline.
We anticipate that our future results of operations will continue to depend
to a significant extent upon revenues from a limited number of online sponsors
and advertisers. In addition, we anticipate that such online sponsors and
advertisers will continue to vary over time. To achieve our long-term goals, we
will need to attract additional significant online sponsors and advertisers on
an ongoing basis. If we fail to enter into a sufficient number of large
contracts during a particular period, our revenues for that period would be
adversely affected. For more information on our advertising revenues, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INTERNATIONAL OPERATIONS ARE SUBJECT TO ADDITIONAL RISKS.
We may decide to further expand internationally. Prior to our recent joint
venture, we had no experience in developing localized versions of our sites for
international markets and in marketing and selling internationally.
Additionally, we have limited information available to evaluate our prospects
abroad.
International operations and business expansion plans are subject to
numerous additional risks, including the impact of foreign government
regulations, currency fluctuations, political uncertainties, social instability,
differences in business practices or other developments not typical of
investments in the United States. There can be no assurance that foreign
governments will not adopt regulations or take other actions that would have a
direct or indirect adverse impact on our business or market opportunities within
such governments' countries. Furthermore, there can be no assurance that the
political, cultural and economic climate outside the United States will be
favorable to our operations and business strategy.
As a result of our recent joint venture, our operations have been exposed
to foreign competition. Many of these competitors have substantially greater
financial resources than we do and a significant operating history in the
jurisdictions in which we are seeking to establish ourselves. There can be no
assurance that we will be able to successfully compete in any foreign
jurisdiction or against such competitors.
IF WE CANNOT PROTECT OUR DOMAIN NAMES, IT WILL IMPAIR OUR ABILITY TO BRAND
SUCCESSFULLY 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,
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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 solely upon copyright, trade secret and trademark law and
assignment of invention and confidentiality agreements to protect our
proprietary technology, processes, content and other intellectual property to
the extent that protection is sought or secured at all. We cannot assure you
that any steps we might take will be adequate to protect against infringement
and misappropriation of our intellectual property by third parties. Similarly,
we cannot assure you that third parties will not 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 infringing known proprietary rights of third parties,
including licensed content, we may be subject to claims alleging infringement of
third-party proprietary rights. If we are subject to claims of infringement or
are infringing the rights of third parties, we may not be able to obtain
licenses to use those rights on commercially reasonable terms, if at all. In
that event, we would need to undertake substantial reengineering to continue our
online offerings. Any effort to undertake such reengineering might not be
successful. Furthermore, a party making such a claim could secure a judgment
that requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from selling our products.
Any claim of infringement could cause us to incur substantial costs defending
against the claim, even if the claim is invalid, and could distract our
management from our business.
WE DEPEND UPON QVC TO PROVIDE US WAREHOUSING, FULFILLMENT AND DISTRIBUTION
SERVICES, AND SYSTEM FAILURES OR OTHER PROBLEMS AT QVC COULD CAUSE US TO LOSE
CUSTOMERS AND REVENUES.
We have a services agreement with QVC to warehouse, fulfill and arrange for
distribution of approximately 80% of our products. Our agreement with QVC
expires in December 2003. QVC does not have any obligation to renew this
agreement. If QVC's ability to provide us with these services in a timely
fashion or at all is impaired, whether through labor shortage, slow down or
stoppage, deteriorating financial or business condition, system failures or for
any other reason, or if the services agreement is not renewed, we would not be
able, at least temporarily, to sell or ship our products to our customers. We
may be unable to engage alternative warehousing, fulfillment and distribution
services on a timely basis or upon terms favorable to us.
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 12 months. To the extent we require additional funds to
support our operations or the expansion of our business, we may need to sell
additional equity, issue debt or convertible securities or obtain credit
facilities through financial institutions. We cannot assure you that additional
funding, if required, will be available to us in amounts or on terms acceptable
to us. If sufficient funds are not available or are not available on acceptable
terms, our ability to
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fund our expansion, take advantage of acquisition opportunities, develop or
enhance our services or products, or otherwise respond to competitive pressures
would be significantly limited.
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 new and rapidly
evolving. Additionally, both the Internet advertising and online wedding markets
and the wedding magazine publishing markets are intensely competitive, and we
expect such competition to intensify in the future.
We face competition for members, users, readers and advertisers from the
following areas:
- online services or Web sites targeted at brides and grooms as well as the
online sites of retail stores, manufacturers and regional wedding
directories;
- bridal magazines, such as Bride's (part of the Conde Nast family) and
Modern Bride (part of the Primedia family); and
- 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 a significantly greater
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 those 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. We have
experienced, and expect to continue to experience, difficulty in hiring and
retaining highly-skilled employees with appropriate qualifications as a result
of our rapid growth and expansion. If we cannot attract new personnel or retain
and motivate our current personnel, our business may not succeed.
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 communications hardware and some
of our other computer hardware operations are located at Globix Corporation's
facilities in New York, New York. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems. 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
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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 or decreased traffic. 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 providers or subscribers 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 and 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. To date, we have not experienced significant problems with
the services that these third parties provide to us. If our current providers
were to experience prolonged systems failures or delays, we would need to pursue
alternative sources of services. Although alternative sources of these services
are available, we may be unable to secure such services on a timely basis or on
terms favorable to us. As a result, we may experience business disruptions if
these third parties fail to provide reliable software, systems and related
services to us.
WE MAY BE LIABLE IF THIRD PARTIES MISAPPROPRIATE OUR USERS' PERSONAL
INFORMATION.
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal or credit card information, we could be
subject to liability. Our liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims as well as for other misuses of personal information, such as for
unauthorized marketing purposes. These claims could result in costly and
time-consuming litigation which could adversely affect our financial condition.
In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. We could have additional expenses if new regulations regarding the
use of personal information are introduced or if our privacy practices are
investigated.
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER STOCKHOLDERS EXERCISE
SIGNIFICANT CONTROL OVER ALL MATTERS REQUIRING A STOCKHOLDER VOTE.
As of December 31, 2000, our executive officers, directors and stockholders
who each owned greater than 5% of our common stock, and their affiliates, in the
aggregate, beneficially owned approximately 70.6% 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.
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RISKS RELATED TO THE SECURITIES MARKETS
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
We have a large number of shares of common stock outstanding and available
for resale. The market price of our common stock could decline as a result of
sales of a large number of shares of our common stock in the public market or
the perception that such sales could occur.
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, SUBJECT US TO LITIGATION, CAUSE US TO BE UNABLE TO MAINTAIN THE
LISTING OF OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET, AND MAKE OBTAINING
FUTURE EQUITY FINANCING MORE DIFFICULT FOR US.
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. The Nasdaq National Market, where most publicly held Internet
companies are traded, has experienced substantial 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.
Our common stock is currently listed on the Nasdaq National Market. We must
satisfy a number of requirements to maintain our listing on the Nasdaq National
Market, including maintaining a minimum bid price for our common stock of $1.00
per share and maintaining a market value for our publicly-held shares of at
least $5 million. A company fails to satisfy these requirements if its closing
bid price remains below $1.00 per share or if the market value for the
publicly-held shares remain below $5 million, in each case for 30 consecutive
business days. On March 22, 2001, we received a letter from The Nasdaq Stock
Market, Inc. notifying us of our failure to maintain a minimum bid price of
$1.00 over the preceding 30 consecutive trading days as required by Nasdaq's
Marketplace Rule 4450(a)(5). The letter stated that we have until June 20, 2001
to demonstrate compliance with Rule 4450(a)(5) and that, if we are not in
compliance by that date, Nasdaq will notify us that our securities will be
delisted from the Nasdaq National Market. If such event occurs, we may appeal
the decision to a Nasdaq Listing Qualifications Panel. There can be no assurance
that our bid price will comply with the requirements of the Nasdaq National
Market to facilitate continued listing of our common stock on the Nasdaq
National Market. If our common stock loses its Nasdaq National Market status,
our common stock would likely trade on the Nasdaq Over the Counter Bulletin
Board, which is viewed by most investors as a less desirable, less liquid
marketplace. This outcome would be likely to adversely affect the trading price
of our common stock. In addition, further declines in our stock price might harm
our ability to issue, or significantly increase the ownership 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 price would
result in our needing to issue a greater number of shares to raise a given
amount of funding or acquire a given dollar value of goods or services.
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
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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:
- continued growth in the number of users of such services;
- concerns about transaction security;
- continued development of the necessary technological infrastructure;
- development of enabling technologies;
- uncertain and increasing government regulation; and
- 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
infrastructure, power failures, telecommunication outages, network service
outages and disruptions, natural disasters and vandalism and other misconduct.
Outages or delays, could adversely affect online sites, e-mail and the level of
traffic on all sites. We depend on online access providers that provide our
users with access to our services. In the past, users have experienced
difficulties due to systems failures unrelated to our systems. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity or to increased
governmental regulation. Insufficient availability of telecommunications
services to support the Internet or other online services also could result in
slower response times and negatively impact use of the Internet and other online
services generally, and our sites in particular. If the use of the Internet and
other online services fails to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services does not effectively
support growth that may occur or if the Internet and other online services do
not become a viable commercial marketplace, we may not achieve profitability.
WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN THE INTERNET
INDUSTRY AND THIS MAY HARM OUR BUSINESS.
If we are unable, for technological, legal, financial or other reasons, to
adapt in a timely manner to changing market conditions or customer requirements,
we could lose users and market share to our competitors. The Internet and
e-commerce are characterized by rapid technological change. Sudden changes in
user and customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices could render our existing online sites and proprietary
technology and systems obsolete. The emerging nature of products and services in
the online wedding market and their rapid evolution will require that we
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continually improve the performance, features and reliability of our online
services. Our success will depend, in part, on our ability:
- to enhance our existing services;
- to develop and license new services and technology that address the
increasingly sophisticated and varied needs of our prospective customers
and users; and
- to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of online sites and other proprietary technology entails
significant technological and business risks and requires substantial
expenditures and lead time. We may be unable to use new technologies effectively
or adapt our online sites, proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. Updating our
technology internally and licensing new technology from third parties may
require significant additional capital expenditures.
IF WE BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
RELATED TO DOING BUSINESS ONLINE, OUR SPONSORSHIP, ADVERTISING AND MERCHANDISE
REVENUES COULD DECLINE AND OUR BUSINESS AND PROSPECTS COULD SUFFER.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. The governments of states and foreign countries might
attempt to regulate our transmissions or levy sales or other taxes relating to
our activities. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet and Internet advertising
services. In addition, the growth and development of the market for e-commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, which may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet and other online services could cause our sponsorship, advertising
and merchandise revenues to decline and our business and prospects to suffer.
WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR SITES.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
WE MAY INCUR POTENTIAL PRODUCT LIABILITY FOR PRODUCTS SOLD ONLINE.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user, or if consumers
experience problems with honeymoon packages purchased through our sites. To
date, we have had limited experience selling products online and developing
relationships with manufacturers or suppliers of such products. We plan to sell
a range of products targeted specifically at brides and grooms through The Knot
Registry, The Knot Shop, Bridalink.com, Click Trips and other e-commerce sites
that we may acquire in the future. Such a strategy involves numerous risks and
uncertainties. Although our agreements with manufacturers and providers of
travel services 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
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pay significant damages. As a result, any such claims, whether or not
successful, could seriously damage our financial results, reputation and brand
name.
WE MAY INCUR SIGNIFICANT EXPENSES RELATED TO THE SECURITY OF PERSONAL
INFORMATION ONLINE.
The need to transmit securely confidential information online has been a
significant barrier to e-commerce and online communications. Any well-publicized
compromise of security could deter people from using the Internet or other
online services or from using them to conduct transactions that involve
transmitting confidential information. Because our success depends on the
acceptance of online services and e-commerce, we may incur significant costs to
protect against the threat of security breaches or to alleviate problems caused
by such breaches.
ITEM 2. PROPERTIES
We currently lease approximately 20,000 square feet of space at our
headquarters in New York City. The lease expires on March 31, 2012. We lease
approximately 3,100 square feet of space for our customer service center and
merchandising operation in Orange County, California. The lease for this space
expires on August 31, 2002. We also lease approximately 13,500 square feet of
space for warehousing and operations in Redding, California. This lease expires
on January 31, 2003, with an option to extend for an additional two years.
Weddingpages, our subsidiary in Omaha, Nebraska, leases approximately 16,000
square feet and the lease for this space expires on October 15, 2005. Our Click
Trips subsidiary is also located in Omaha, Nebraska. It leases approximately
2,900 square feet of office space. The lease for this space expires on May 31,
2003.
ITEM 3. LEGAL PROCEEDINGS
On August 14, 2000, certain Weddingpages franchisees commenced litigation
in Supreme Court, New York County, New York against us and certain of our
officers, including David Liu, our Chairman and Chief Executive Officer. The
plaintiffs seek to enjoin us from taking actions, primarily relating to the sale
of advertising in certain local markets, which plaintiffs claim will damage the
value of their Weddingpages franchises and money damages in an unspecified
amount. On October 19, 2000, we filed our initial response. On October 27, 2000
the Supreme Court of the State of New York refused to grant preliminary
injunctions sought by certain Weddingpages franchisees. The court ordered that
the parties submit their dispute to a neutral mediator. In February and March
2001, as a result of negotiations among the parties, with the assistance of the
mediator, non-monetary settlements were reached with six of the plaintiffs in
the action. Certain franchisees have not executed the settlement agreement as
negotiated. We had previously made a motion to dismiss the case, which was
stayed pending settlement discussions. It is our intention to reinstate the
motion against those plaintiffs who have refused to execute the settlement
agreement and, in any event, to continue to contest the allegations which, we
believe, are without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National market under the
symbol "KNOT" since our initial public offering on December 2, 1999. The
following table sets forth, for the periods indicated, the high and low sales
prices per share of the common stock as reported on the Nasdaq National Market:
HIGH LOW
------ -----
1999:
Fourth Quarter (from December 2, 1999).................... $21.00 $8.06
2000:
First Quarter............................................. $12.50 $5.00
Second Quarter............................................ $ 7.25 $3.38
Third Quarter............................................. $ 4.88 $2.75
Fourth Quarter............................................ $ 3.34 $0.44
On December 31, 2000, the last reported sale price of the common stock on
the Nasdaq National Market was $0.94. On March 29, 2001, the last reported sale
price of the common stock on the Nasdaq National Market was $0.75.
HOLDERS
As of March 21, 2001, there were approximately 57 holders of record of our
common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends for the foreseeable
future.
USE OF PROCEEDS FROM IPO
On December 1, 1999, the Securities and Exchange Commission declared
effective our Registration Statement on Form S-1 (Registration No. 333-87345).
Pursuant to this Registration Statement, we completed our initial public
offering of 3,913,000 shares of our common stock. After deducting underwriting
discounts and commissions and other related expenses, net proceeds of the
offering were approximately $34.7 million. As of December 31, 2000, we have used
approximately $26.2 million of the proceeds from our initial public offering for
working capital purposes, capital expenditures and to fund acquisitions and
operating losses. Except for salaries and travel expenses paid in the normal
course of business or distribution and warehousing fees paid to QVC under our
services agreement, none of these expenses were direct or indirect payments to
our directors, officers, general partners or their associates, to persons owning
ten percent or more of any class of our equity securities or to our affiliates.
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ITEM 6. SELECTED FINANCIAL DATA
The selected balance sheet data as of December 31, 2000 and December 31,
1999 and the selected statement of operations data for the years ended December
31, 2000, 1999 and 1998 have been derived from our audited financial statements
included elsewhere herein. The selected balance sheet data as of December 31,
1998, 1997 and 1996 and the statement of operations data for the year ended
December 31, 1997 and the period from May 2, 1996 (inception) through December
31, 1996 have been derived from our audited financial statements not included
herein. Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all previously outstanding preferred stock
into common stock, as if the shares had converted immediately upon their
issuance. You should read these selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our financial statements and the notes to those statements included
elsewhere herein.
PERIOD FROM
MAY 2, 1996
YEAR ENDED DECEMBER 31, (INCEPTION) TO
-------------------------------------------------- DECEMBER 31,
2000(A) 1999 1998 1997 1996
----------- ---------- ---------- ---------- --------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues....................... $ 24,235 $ 5,126 $ 1,040 $ 596 $ 71
Cost of revenues................... 6,689 1,441 131 67 9
----------- ---------- ---------- ---------- ----------
Gross profit....................... 17,546 3,685 909 529 62
Operating expenses:
Product and content
development................... 5,475 2,678 1,031 635 262
Sales and marketing.............. 16,728 5,148 768 503 255
General and administrative....... 8,921 3,629 809 265 242
Non-cash compensation............ 789 1,072 93 -- --
Non-cash sales and marketing..... 653 290 -- -- --
Depreciation and amortization.... 2,195 547 122 22 9
----------- ---------- ---------- ---------- ----------
Total operating expenses........... 34,761 13,364 2,823 1,425 768
----------- ---------- ---------- ---------- ----------
Loss from operations............. (17,215) (9,679) (1,914) (896) (706)
Interest income (expense), net... 1,425 483 15 (199) (46)
----------- ---------- ---------- ---------- ----------
Loss before extraordinary
items......................... (15,790) (9,196) (1,899) (1,095) (752)
Extraordinary items................ -- -- 390 -- --
----------- ---------- ---------- ---------- ----------
Net loss........................... $ (15,790) $ (9,196) $ (1,509) $ (1,095) $ (752)
=========== ========== ========== ========== ==========
Loss per share -- basic and
diluted:
Loss before extraordinary items.... $ (1.08) $ (2.31) $ (0.76) $ (0.67) $ (0.46)
Extraordinary items.............. -- -- 0.16 -- --
----------- ---------- ---------- ---------- ----------
Net loss per share............... $ (1.08) $ (2.31) $ (0.60) $ (0.67) $ (0.46)
=========== ========== ========== ========== ==========
Weighted average number of shares
used in calculating basic and
diluted net loss per share....... 14,603,381 3,982,358 2,497,065 1,625,410 1,625,410
=========== ========== ========== ========== ==========
Pro forma basic and diluted net
loss per share................... $ (1.08) $ (0.96) $ (0.32) $ (0.67) $ (0.46)
=========== ========== ========== ========== ==========
Pro forma weighted average number
of shares used in calculating
basic and diluted net loss per
share............................ 14,603,381 9,628,454 4,780,024 1,625,410 1,625,410
=========== ========== ========== ========== ==========
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DECEMBER 31,
------------------------------------------------
2000(a) 1999 1998 1997 1996
------- ------- ------ ------- -----
(IN THOUSANDS EXCEPT SHARE AND PER SHARE
DATA)
BALANCE SHEET DATA:
Cash and cash equivalents................... $15,860 $40,006 $1,038 $ 305 $ 16
Working capital............................. 16,078 41,137 1,003 194 (84)
Total assets................................ 41,354 45,486 1,950 1,153 194
Convertible preferred stock................. -- -- 3,938 -- --
Total stockholders' equity (deficit)........ 29,391 43,575 1,646 (1,017) (751)
---------------
(a) As described in Note 8 of our financial statements, on March 29, 2000 the
Company acquired Weddingpages, Inc., a Delaware corporation.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 2000.
This information is unaudited, but in the opinion of management, it has been
prepared substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this report and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited consolidated quarterly
results of operations. The consolidated quarterly data should be read in
conjunction with our audited consolidated financial statements and the notes to
such statements appearing elsewhere in this report. The results of operations
for any quarter are not necessarily indicative of the results of operations for
any future period.
THREE MONTHS ENDED
-------------------------------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
2000 2000 2000 2000 1999 1999 1999 1999
------- -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............ $ 7,003 $ 6,656 $ 6,857 $ 3,719 $ 2,491 $ 1,897 $ 544 $ 194
Gross profit............ 5,066 4,916 5,000 2,564 1,954 1,234 356 141
Net loss................ (4,824) (4,249) (3,826) (2,892) (3,188) (2,688) (1,726) (1,594)
Net loss per share --
basic and diluted..... $ (0.33) $ (0.29) $ (0.26) $ (0.20) $ (0.48) $ (0.87) $ (0.56) $ (0.53)
Note: The quarterly financial data presented above reflects the consolidation of
Weddingpages, Inc. which was acquired on March 29, 2000.
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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 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 could differ materially from those anticipated in such forward-looking
statements as a result of certain factors, as more fully described in this
section and elsewhere in this report. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
OVERVIEW
The Knot is the leading wedding resource providing products and services to
couples planning their weddings and future lives together. Our 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 premier wedding content
provider on America Online (AOL Keywords: Knot and weddings) and MSN. We publish
The Knot Wedding Gowns, a national wedding fashion magazine, and, through our
subsidiary, Weddingpages, Inc., publish regional wedding magazines in 45
company-owned and franchised markets in the U.S. We also author a series of
books on wedding planning and through another subsidiary, Click Trips, Inc.,
offer honeymoon booking and other travel services. Our offline presence provides
cross-promotional opportunities and assists us in increasing our brand awareness
and our overall audience. We are based in New York and have several other
offices across the country.
We commenced operations in May 1996 and recorded our first revenues in
September 1996, immediately following the launch of our first online property.
Our Web site was launched in July 1997. We launched The Knot Registry, our
online gift registry, in November 1998 and significantly expanded our registry
product offerings in July 1999. In July 1999, we acquired the assets of
Bridalink.com, an Internet wedding supply store, and the common stock of Click
Trips, Inc., an online travel agency. In August 1999, we acquired the assets of
Wedding Photographers Network, a searchable database of local wedding
photographers. In March 2000, we acquired Weddingpages, the largest publisher of
regional wedding magazines in the nation.
We derive revenues from the sale of online sponsorship, advertising and
production contracts. We also derive revenues from the sale of merchandise, from
publishing and from the sale of travel packages.
Sponsorship revenues are derived principally from contracts currently
ranging up to twenty-four 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.
Advertising revenues are derived principally from short-term contracts that
typically range from one month up to one year. Advertising contracts include
online banner advertisements and online listings for local wedding vendors.
Certain 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.
Production revenues are derived from the development of online sites and
tools. Production revenues are recognized when the development is completed and
the online sites and tools are delivered.
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For the year ended December 31, 2000, our top five advertisers accounted
for 15% of our net revenues. For the year ended December 31, 1999, our top seven
advertisers accounted for 35% of our net revenues. For the year ended December
31, 1998, one advertiser accounted for 19% of our net revenues.
To promote our brand on third-party sites, we produce online sites for
third parties featuring both The Knot and the third party. The cost of
production of these sites is included in our operating expenses. In return, we
receive distribution and exposure to their viewers, outbound links to our sites
and, in some circumstances, offline brand marketing. We do not recognize
revenues with respect to these barter transactions.
Merchandise revenues are derived from the sale of wedding supplies and
products from our gift registry, through our Web sites and through a co-branded
site with QVC, Inc. Merchandise revenues include outbound shipping and handling
charges. Merchandise revenues are recognized when products are shipped to
customers, reduced by discounts as well as an allowance for estimated sales
returns.
Commencing April 1, 2000, publishing revenue includes advertising revenue
derived from the publication of regional wedding magazines by Weddingpages as
well as service fees and royalty fees from producing the Weddingpages magazine
for certain franchisees. These revenues and fees are recognized upon the
publication of the related magazine at which time all material services related
to the magazine have been performed. Additionally, publishing revenues are
derived from sales of magazines 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.
Travel revenues are derived from commissions earned on the sale of travel
packages by our online travel agency, Click Trips, Inc. Such revenues are
recognized when the customer commences travel.
We generated revenues for the year ended December 31, 1998 through usage
fees paid by AOL based on the number of customers visiting our AOL site. Usage
fees were recognized as they were earned based upon user time spent on our AOL
site. On September 30, 1998, we entered into an anchor tenant agreement with AOL
which eliminated usage revenues receivable from, and commissions payable to,
AOL. Under this anchor tenant agreement with AOL, we pay carriage fees to AOL.
We generated $47,000 of commission revenues from AOL for the year ended December
31, 1998, which have been included in sponsorship, advertising and production
revenues. We paid $16,000 in commissions to AOL for the year ended December 31,
1998.
We recorded deferred compensation in 1999 and 1998, net of reversals
related to stock options forfeited, primarily as a result of the issuance of
stock options to employees with exercise prices per share determined for
financial reporting purposes to be below the fair market value per share of our
common stock at the dates of grant. The difference is recorded as a reduction of
stockholders' equity and amortized as non-cash compensation expense on an
accelerated method over the four-year vesting period of the related options.
Extraordinary items for the year ended December 31, 1998 consist of a gain
of $1.1 million, representing the forgiveness of a portion of a note payable to
AOL including interest accrued on this note, and a loss of $719,000,
representing the write-off of unamortized deferred financing costs associated
with such note payable.
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RESULTS OF OPERATIONS
The following table sets forth for the periods presented certain data
from our statement of operations, expressed as a percentage of net
revenues.
PERIOD FROM
MAY 2, 1996
YEAR ENDED DECEMBER 31, (INCEPTION) TO
----------------------------------- DECEMBER 31,
2000 1999 1998 1997 1996
----- ------ ------ ------ --------------
Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................... 27.6 28.1 12.6 11.2 12.8
----- ------ ------ ------ --------
Gross profit............................... 72.4 71.9 87.4 88.8 87.2
Operating expenses:
Product and content development.......... 22.6 52.2 99.1 106.6 371.2
Sales and marketing...................... 69.0 100.4 73.9 84.4 361.2
General and administrative............... 36.8 70.8 77.9 44.4 343.1
Non-cash compensation.................... 3.3 20.9 9.0 -- --
Non-cash sales and marketing............. 2.7 5.7 -- -- --
Depreciation and amortization............ 9.1 10.7 11.7 3.7 12.9
----- ------ ------ ------ --------
Total operating expenses................... 143.5 260.7 271.6 239.1 1,088.4
Loss from operations....................... (71.1) (188.8) (184.2) (150.3) (1,001.2)
Interest income (expense), net............. 5.9 9.4 1.4 (33.4) (64.9)
----- ------ ------ ------ --------
Loss before extraordinary items............ (65.2) (179.4) (182.8) (183.7) (1,066.1)
Extraordinary items........................ -- -- 37.5 -- --
----- ------ ------ ------ --------
Net loss................................... (65.2)% (179.4)% (145.3)% (183.7)% (1,066.1)%
===== ====== ====== ====== ========
Years Ended December 31, 2000 and December 31, 1999
Net Revenues
Net revenues increased to $24.2 million for the year ended December 31,
2000 from $5.1 million for the year ended December 31, 1999.
Sponsorship, advertising and production revenues increased to $11.0 million
for the year ended December 31, 2000, as compared to $3.6 million for the year
ended December 31, 1999. Additional sponsorship and production contracts
contributed $6.0 million of the increase for the year ended December 31, 2000.
Local vendor advertising programs, launched in July 1999, contributed $1.4
million of the increase for the year ended December 31, 2000. Sponsorship,
advertising and production revenues accounted for approximately 45% and 71% of
our net revenues for the year ended December 31, 2000 and December 31, 1999,
respectively.
Merchandise revenues increased to $4.5 million for the year ended December
31, 2000, as compared to $1.1 million for the year ended December 31, 1999. The
increase was primarily due to an increase in the sales of wedding supplies
through Bridalink.com and The Knot Shop of $2.4 million for the year ended
December 31, 2000, as compared to the year ended December 31, 1999. The sale of
wedding supplies initiated in July 1999 as a result of the acquisition of
Bridalink.com. Sales from The Knot Registry increased $922,000 for the year
ended December 31, 2000, as compared to the corresponding period in 1999.
Merchandise revenues accounted for approximately 18% and 22% of our net revenues
for the years ended December 31, 2000 and December 31, 1999, respectively.
Publishing, travel and other revenues increased to $8.8 million for the
year ended December 31, 2000, as compared to $364,000 for the corresponding
period in 1999. The increase is primarily attributable to advertising revenue
derived from the publication of regional wedding magazines by Weddingpages, as
well
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as service fees and royalty fees from producing the Weddingpages magazine for
certain franchisees. These revenues and fees commenced in April 2000 with the
acquisition of Weddingpages. Publishing, travel and other revenues accounted for
36% and 7% of our net revenues for the years ended December 31, 2000 and
December 31, 1999, respectively.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the production costs of our regional wedding magazines
and Wedding Gowns magazine, payroll and related expenses for our personnel who
are responsible for the production of customized online sites and tools and
costs of Internet and hosting services. Cost of revenues increased to $6.7
million for the year ended December 31, 2000 from $1.4 million for the year
ended December 31, 1999. Cost of revenues related to the production of regional
wedding magazines, which commenced in April 2000, amounted to $2.5 million for
the year ended December 31, 2000. Cost of revenues from the sale of wedding
supplies was $2.1 million for the year ended December 31, 2000, as compared to
$467,000 for the year ended December 31, 1999 as a result of increased sales.
The sale of wedding supplies initiated in July 1999. Cost of revenues from the
sale of merchandise through The Knot Registry increased by $689,000 in the year
ended December 31, 2000, as compared to the corresponding period in 1999, also
primarily due to increased sales. As a percentage of our net revenues, cost of
revenues was 28% for the years ended December 31, 2000 and December 31, 1999.
Product and Content Development
Product and content development expenses consist of payroll and related
expenses for creative, editorial and information technology personnel and
expenses for third-party software developers and contract programmers.
Product and content development expenses increased to $5.5 million for the
year ended December 31, 2000 from $2.7 million for the year ended December 31,
1999. The increase was primarily attributable to a $2.3 million increase
resulting from the hiring of additional staff to enhance the content and
functionality of our sites. In addition, for the year ended December 31, 2000
there was an increase of $608,000 in product and content expenses, primarily
personnel costs, associated with our Weddingpages subsidiary.
As a percentage of our net revenues, product and content development
expenses decreased to 23% for the year ended December 31, 2000 from 52% for the
year ended December 31, 1999. This decrease was primarily a result of the
substantial growth in sponsorship, advertising, production and merchandise
revenue and lower costs associated with the publishing revenue contributed by
Weddingpages during the year ended December 31, 2000.
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 expenditures for our AOL anchor tenant agreements,
advertising and promotional activities and fulfillment and distribution of
merchandise.
Sales and marketing expenses increased to $16.7 million for the year ended
December 31, 2000 from $5.1 million for the year ended December 31, 1999. The
increase was primarily due to a $7.6 million increase in personnel and related
costs associated with additional sales, marketing and customer service staff and
higher commissions as a result of increased revenues. The increase in personnel
and related costs includes $4.6 million in expenses related to the local sales
force of our subsidiary, Weddingpages. Additionally, there was a $2.2 million
increase in promotion expenses, the majority of which related to costs
associated with our membership kits and a $725,000 increase in fees associated
with our anchor tenant agreements with America Online for the year ended
December 31, 2000.
As a percentage of our net revenues, sales and marketing expenses decreased
to 69% for the year ended December 31, 2000 from 100% for the year ended
December 31, 1999. This decrease was primarily
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a result of the substantial growth in sponsorship, advertising, production and
merchandise revenue and lower costs associated with the publishing revenue
contributed by Weddingpages during the year ended December 31, 2000.
General and Administrative
General and administrative expenses consist primarily of payroll and
related expenses for our executive management, finance and administrative
personnel, professional fees, facilities costs, bad debts and insurance
expenses.
General and administrative expenses increased to $8.9 million for the year
ended December 31, 2000 from $3.6 million for the year ended December 31, 1999.
There was an increase of $1.6 million for the year ended December 31, 2000 for
professional fees and insurance. Bad debt expense increased by $1.0 million and
personnel and related costs increased by $993,000, including $536,000 and
$434,000, respectively, for costs associated with Weddingpages, as compared to
the corresponding period in 1999.
As a percentage of our net revenues, general and administrative expenses
decreased to 37% for the year ended December 31, 2000 from 71% for the year
ended December 31, 1999. This decrease was primarily a result of the substantial
growth in sponsorship, advertising, production and merchandise revenue and lower
costs associated with the publishing revenue contributed by Weddingpages during
the year ended December 31, 2000.
Non-Cash Compensation
We recorded no deferred compensation during the year ended December 31,
2000. Amortization of deferred compensation decreased to $789,000 for the year
ended December 31, 2000 from $1.1 million for the year ended December 31, 1999.
As a percentage of our net revenues, amortization of deferred compensation
decreased to 3% for the year ended December 31, 2000 from 21% of our net
revenues for the year ended December 31, 1999.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing of $2.3 million related to the
issuance of a warrant to AOL in connection with our amended anchor tenant
agreement in July 1999, which is being amortized on a straight line basis over
the term of the agreement. Amortization of deferred sales and marketing
increased to $653,000 for the year ended December 31, 2000 from $290,000 for the
year ended December 31, 1999. As a percentage of net revenues, amortization of
deferred sales and marketing decreased to 3% for the year ended December 31,
2000 from 6% for the year ended December 31, 1999.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and amortization of intangible assets
related to acquisitions.
Depreciation and amortization expenses increased to $2.2 million for the
year ended December 31, 2000 from $547,000 for the year ended December 31, 1999.
This increase was primarily attributable to an increase in amortization of
intangible assets related to acquisitions of $887,000, and a $761,000 increase
in depreciation resulting from an increase in property and equipment purchases
and leasehold improvements. As a percentage of net revenues, depreciation and
amortization expense decreased to 9% for the year ended December 31, 2000 from
11% for the year ended December 31, 1999.
Interest Income/Expense
Interest income net of interest expense increased to $1.4 million for the
year ended December 31, 2000 from $483,000 for the year ended December 31, 1999.
The increase is primarily the result of the investment of the net proceeds from
our initial public offering of common stock.
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Years Ended December 31, 1999 and December 31, 1998
Net Revenues
Net revenues increased to $5.1 million for the year ended December 31, 1999
from $1.0 million for the year ended December 31, 1998. Sponsorship, advertising
and production revenues increased to $3.6 million for the year ended December
31, 1999 from $853,000 for the year ended December 31, 1998, primarily due to a
$2.0 million increase in revenues generated from additional sponsorship and
production contracts and a $742,000 increase in revenues from the launch of
local vendor advertising programs in July 1999. As a percentage of net revenues,
sponsorship, advertising and production revenues accounted for approximately 71%
and 82% for the years ended December 31, 1999 and December 31, 1998,
respectively.
Merchandise revenues amounted to $1.1 million for the year ended December
31, 1999, resulting primarily from a $688,000 increase in the sale of wedding
supplies through Bridalink.com acquired in July 1999 and a $411,000 increase in
sales related to The Knot Registry. There was $17,000 in The Knot Registry
merchandise revenues for the year ended December 31, 1998. As a percentage of
net revenues, merchandise revenues accounted for 22% and 2% for the years ended
December 31, 1999 and December 31, 1998, respectively.
Publishing revenues increased to $217,000 for the year ended December 31,
1999 from $143,000 for the year ended December 31, 1998. The increase in
publishing revenues was due to sales of our gown guide which was published at
the end of June 1999, partially offset by lower book publishing revenues. As a
percentage of net revenues, publishing revenues accounted for 4% and 14% for the
years ended December 31, 1999 and December 31, 1998, respectively.
Travel revenues accounted for $143,000 or 3% of our net revenues for the
year ended December 31, 1999, resulting from the acquisition of Click Trips,
Inc. in July 1999. There were no travel revenues in 1998.
Cost of Revenues
Cost of revenues increased to $1.4 million for the year ended December 31,
1999 from $131,000 for the year ended December 31, 1998. The increase was
primarily due to an increase in the sale of merchandise through Bridalink.com of
$460,000 and through The Knot Registry of $327,000. As a percentage of our net
revenues, cost of revenues increased to 28% for the year ended December 31, 1999
from 13% for the year ended December 31, 1998.
Product and Content Development
Product and content development expenses increased to $2.7 million for the
year ended December 31, 1999 from $1.0 million for the year ended December 31,
1998. The increase was primarily attributable to a $1.6 million increase
resulting from hiring additional staff to enhance the content and functionality
of our sites, partially offset by a $192,000 decrease in third-party programming
and content licensing fees. As a percentage of our net revenues, product and
content development expenses decreased to 52% for the year ended December 31,
1999 from 99% for the year ended December 31, 1998.
Sales and Marketing
Sales and marketing expenses increased to $5.1 million for the year ended
December 31, 1999 from $768,000 for the year ended December 31, 1998. The
increase was primarily due to a $1.0 million increase in carriage fees paid
under our anchor tenant agreement with AOL which went into effect on January 1,
1999, a $978,000 increase in commissions and expenses related to our increased
sponsorship, advertising and production revenues and to the launch of our local
advertising sales efforts, a $894,000 increase in personnel costs related to the
hiring of additional sales, marketing and customer service personnel and a
$600,000 increase in promotion expense. As a percentage of our net revenues,
sales and marketing expenses increased to 100% for the year ended December 31,
1999 from 74% for the year ended December 31, 1998.
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General and Administrative
General and administrative expenses increased to $3.6 million for the year
ended December 31, 1999 from $809,000 for the year ended December 31, 1998. The
increase was primarily due to a $1.4 million increase in personnel costs and a
$384,000 increase in professional fees. As a percentage of our net revenues,
general and administrative expenses decreased to 71% for the year ended December
31, 1999 from 78% for the year ended December 31, 1998.
Non-Cash Compensation
We recorded $2.9 million of deferred compensation, net of reversals of
stock options forfeited, during the year ended December 31, 1999 and $480,000 of
deferred compensation, including amounts related to unvested common stock in
connection with an acquisition, for the year ended December 31, 1998.
Amortization of deferred compensation increased to $1.1 million or 21% of net
revenues for the year ended December 31, 1999 from $93,000 or 9% of net revenues
for the year ended December 31, 1998.
Non-Cash Sales and Marketing
We recorded $2.3 million of deferred sales and marketing during the year
ended December 31, 1999, related to the issuance of the warrant to AOL in
connection with our amended anchor tenant agreement in July 1999. Amortization
of deferred sales and marketing was $290,000 or 6% of net revenues for the year
ended December 31, 1999.
Depreciation and Amortization
Depreciation and amortization expenses increased to $547,000 for the year
ended December 31, 1999 from $122,000 for the year ended December 31, 1998. This
increase was primarily due to a $245,000 increase in depreciation due to the
increase in property and equipment purchases and an additional $180,000 of
amortization of goodwill related to acquisitions. As a percentage of net
revenues, depreciation and amortization expense decreased to 11% for the year
ended December 31, 1999 from 12% for the year ended December 31, 1998.
Interest Income (Expense)
Interest income net of interest expense increased to $483,000 for the year
ended December 31, 1999 from $15,000 for the year ended December 31, 1998 as a
result of the investment of cash received from the issuance of our Series B
preferred stock and the net proceeds from our initial public offering of common
stock.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, our cash and cash equivalents amounted to $15.9
million. We currently invest primarily in short-term debt instruments that are
highly liquid, of high-quality investment grade, and have maturities of less
than three months with the intent to make such funds readily available for
operating purposes.
Net cash used in operating activities was $11.7 million for the year ended
December 31, 2000. This resulted primarily from the loss for the period, as
adjusted for depreciation and amortization of $3.6 million, increases in
accounts receivable of $5.1 million, and increases in inventories of $388,000,
partially offset by increases in deferred revenue of $2.8 million and accounts
payable and accrued expenses of $1.5 million. Net cash used in operating
activities was $8.7 million for the year ended December 31, 1999 due primarily
to the net loss for the period, as adjusted for depreciation and amortization of
$1.9 million, an increase in accounts receivable of $1.0 million, inventories of
$355,000 and other current and long-term assets of $970,000, partially offset by
increases in accounts payable and accrued expenses of $378,000 and deferred
revenue of $308,000. Net cash used in operating activities was $1.7 million for
the year ended
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December 31, 1998, primarily as a result of the net loss for the periods,
adjusted for depreciation and amortization.
Net cash used in investing activities was $12.1 million for the year ended
December 31, 2000, primarily due to cash paid for the acquisition of
Weddingpages of $9.6 million and purchases of property and equipment of
approximately $2.9 million partially offset by the maturity of short-term
investments of $620,000. Net cash used in investing activities was $2.5 million
for the year ended December 31, 1999, primarily as a result of purchases of
property and equipment of $1.6 million, investments in available-for-sale
securities of $501,000, and cash paid for business acquisitions of $335,000. Net
cash used in investing activities was $305,000 for the year ended December 31,
1998, primarily due to purchases of property and equipment and cash paid for a
business acquisition.
Net cash used in financing activities was $365,000 for the year ended
December 31, 2000, primarily due to the payment of expenses related to our
initial public offering, partially offset by proceeds from the issuance of
common stock and the exercise of stock options. Net cash provided by financing
activities was $50.0 million for the year ended December 31, 1999, primarily
from the completion of our initial public offering which resulted in net
proceeds to us of $34.7 million, and proceeds from the issuance of convertible
preferred stock of $14.9 million. Net cash provided by financing activities was
$2.8 million for the year ended December 31, 1998, primarily from the issuance
of preferred stock.
Our subsidiary, Weddingpages, has a line of credit with a bank that expires
May 1, 2001 and has available borrowings under the agreement up to the lesser of
$2,500,000 or 70% of eligible receivables, as defined. As of December 31, 2000,
there were $1,650,000 of borrowings outstanding under the agreement. The line of
credit bears an interest rate at one-half percent over the bank's prime lending
rate.
As of December 31, 2000, we had no material commitments for capital
expenditures.
As of December 31, 2000, we had commitments under non-cancelable operating
leases amounting to $6.7 million, of which $735,000 will be due on or before
December 31, 2001.
As of December 31, 2000, we had commitments under an amended anchor tenant
agreement with AOL and an additional anchor tenant agreement with AOL
International in the amount of $5.3 million of which approximately $2.3 million
will be due on or before December 31, 2001.
On March 29, 2000, we completed our acquisition of Weddingpages through the
merger of a wholly-owned subsidiary of ours with and into Weddingpages, with
Weddingpages surviving the merger. Under the terms of the agreement, the merger
was affected through the conversion of each share of common stock and class A
common stock of Weddingpages outstanding into $1.78 for an aggregate purchase
price, including related costs, of approximately $10.0 million. We used a
portion of the proceeds received from our initial public offering to consummate
the acquisition.
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 12 months. We intend to continue to pursue strategic
relationships, investments in complimentary businesses, expansion of our sales
and marketing programs and the aggressive building of brand recognition. We
cannot assure you that additional funding, if required, will be available to us
in amounts or on terms acceptable to us. If sufficient funds are not available
or are not available on acceptable terms, our ability to fund our expansion,
take advantage of strategic opportunities, develop or enhance our services or
products, or otherwise respond to competitive pressures would be significantly
limited. Those limitations would materially and adversely affect our business,
results of operations and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which we are
required to adopt effective January 1, 2001. The adoption of the new Statement
will not have a material effect on our financial statements.
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In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In 2000, we adopted SAB 101, which did not have a material effect on our
financial position or results of operations.
ITEM 7A. 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, cash equivalents and short-term investments of
approximately $15.9 million as of December 31, 2000. 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 foreign
currency exchange risk.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. 39
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 40
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... 41
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2000, 1999 and 1998...... 42
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 43
Notes to Consolidated Financial Statements.................. 44
Schedule II -- Valuation and Qualifying Accounts............ 60
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
The Knot, Inc.
We have audited the accompanying consolidated balance sheets of The Knot,
Inc. (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2000 and 1999, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
New York, New York
February 8, 2001, except for Note 13,
as to which the date is March 16, 2001
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THE KNOT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,859,624 $ 40,006,175
Short-term investments.................................... -- 501,000
Accounts receivable, net of allowances of $865,457 and
$133,000 at December 31, 2000 and December 31, 1999,
respectively........................................... 8,361,672 1,333,158
Inventories............................................... 866,541 478,345
Deferred production and marketing costs................... 1,129,307 --
Other current assets...................................... 930,952 671,519
------------ ------------
Total current assets........................................ 27,148,096 42,990,197
Property and equipment, net................................. 3,886,021 1,554,373
Intangible assets, net...................................... 9,886,636 541,638
Other assets................................................ 433,272 399,792
------------ ------------
Total assets................................................ $ 41,354,025 $ 45,486,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 3,903,658 $ 1,444,578
Short term borrowings..................................... 1,650,000 --
Deferred revenue.......................................... 5,209,359 408,934
Current portion of long-term debt......................... 306,613 --
------------ ------------
Total current liabilities................................... 11,069,630 1,853,512
Long term debt.............................................. 697,789 --
Other liabilities........................................... 196,008 57,093
------------ ------------
Total liabilities........................................... 11,963,427 1,910,605
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares,
authorized; 14,676,253 shares and 14,510,612 shares
issued and outstanding at December 31, 2000 and 1999,
respectively........................................... 146,762 145,106
Additional paid-in capital................................ 59,657,388 60,206,664
Deferred compensation..................................... (763,074) (2,262,974)
Deferred sales and marketing.............................. (1,306,445) (1,959,677)
Accumulated deficit....................................... (28,344,033) (12,553,724)
------------ ------------
Total stockholders' equity.................................. 29,390,598 43,575,395
------------ ------------
Total liabilities and stockholders' equity.................. $ 41,354,025 $ 45,486,000
============ ============
See accompanying notes.
39
40
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
Net revenues....................................... $ 24,234,905 $ 5,125,887 $ 1,039,584
Cost of revenues................................... 6,689,077 1,441,311 131,214
------------ ----------- -----------
Gross profit....................................... 17,545,828 3,684,576 908,370
Operating expenses:
Product and content development.................. 5,475,180 2,677,769 1,030,323
Sales and marketing.............................. 16,728,500 5,148,040 768,250
General and administrative....................... 8,920,887 3,629,204 809,385
Non-cash compensation............................ 788,609 1,071,740 93,046
Non-cash sales and marketing..................... 653,232 290,323 --
Depreciation and amortization.................... 2,194,991 547,019 121,718
------------ ----------- -----------
Total operating expenses........................... 34,761,399 13,364,095 2,822,722
------------ ----------- -----------
Loss from operations............................... (17,215,571) (9,679,519) (1,914,352)
Interest income, net............................... 1,425,262 482,848 14,968
------------ ----------- -----------
Loss before extraordinary items.................... (15,790,309) (9,196,671) (1,899,384)
Extraordinary items................................ -- -- 390,111
------------ ----------- -----------
Net loss........................................... $(15,790,309) $(9,196,671) $(1,509,273)
============ =========== ===========
Loss per share -- basic and diluted:
Loss before extraordinary items.................. $ (1.08) $ (2.31) $ (0.76)
Extraordinary items.............................. -- -- 0.16
------------ ----------- -----------
Net loss......................................... $ (1.08) $ (2.31) $ (0.60)
============ =========== ===========
Weighted average number of shares used in
calculating basic and diluted net loss per
share............................................ 14,603,381 3,982,358 2,497,065
============ =========== ===========
See accompanying notes.
40
41
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
------------------------- ---------------------- PAID-IN DEFERRED SALES AND
SHARES AMOUNT SHARES PAR VALUE CAPITAL COMPENSATION MARKETING
---------- ------------ ---------- --------- ----------- ------------ -----------
Balance at December 31, 1997...... -- -- 1,625,410 16,254 814,779 -- --
Issuance of common stock in
connection with acquisition...... -- -- 162,540 1,626 169,775 -- --
Deferred compensation related to
unvested common stock in
connection with acquisition...... -- -- -- -- 186,916 (186,916) --
Issuance of common stock.......... -- -- 1,068,122 10,681 (10,681) -- --
Sale of Series A Convertible
Preferred Stock, net of costs.... 2,560,000 3,000,320 -- -- (217,378) -- --
Conversion of note payable........ 800,000 937,600 -- -- -- -- --
Issuance of common stock.......... -- -- 178,031 1,780 185,153 -- --
Deferred compensation related to
the issuance of stock options.... -- -- -- -- 293,150 (293,150) --
Amortization of deferred
compensation..................... -- -- -- -- -- 93,046 --
Net loss for the year ended
December 31, 1998................ -- -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- ----------- -----------
Balance at December 31, 1998...... 3,360,000 3,937,920 3,034,103 30,341 1,421,714 (387,020) --
Issuance of common stock.......... -- -- 44,505 445 (445) -- --
Sale of Series B Convertible
Preferred Stock, net of costs.... 4,000,000 15,000,000 -- -- (127,509) -- --
Issuance of warrant in connection
with sale of Series B Convertible
Preferred Stock.................. -- (1,037,000) -- -- 1,037,000 -- --
Issuance of common stock in
connection with acquisitions..... -- -- 15,000 150 114,850 -- --
Issuance of stock options in
connection with acquisitions..... -- -- -- -- 55,000 -- --
Issuance of warrant in connection
with sales and marketing
agreement........................ -- -- -- -- 2,250,000 -- (2,250,000)
Issuance of common stock in
connection with exercise of
vested stock options............. -- -- 144,004 1,440 43,753 -- --
Deferred compensation related to
the issuance of stock options.... -- -- -- -- 3,045,838 (3,045,838) --
Amortization of deferred
compensation..................... -- -- -- -- -- 1,071,740 --
Amortization of deferred sales and
marketing........................ -- -- -- -- -- -- 290,323
Conversion of preferred stock into
common stock in connection with
initial public offering.......... (7,360,000) (17,900,920) 7,360,000 73,600 17,827,320 -- --
Common stock issued in connection
with initial public offering, net
of costs of $4,453,583........... -- -- 3,913,000 39,130 34,637,287 -- --
Reversal of deferred compensation
related to stock options
forfeited........................ -- -- -- -- (98,144) 98,144 --
Net loss for the year ended
December 31, 1999................ -- -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- ----------- -----------
Balance at December 31, 1999...... -- $ -- 14,510,612 $145,106 $60,206,664 $(2,262,974) $(1,959,677)
---------- ------------ ---------- -------- ----------- ----------- -----------
Issuance of common stock in
connection with exercise of
vested stock options............. -- -- 89,295 893 57,899 -- --
Issuance of common stock in
connection with employee stock
purchase plan.................... -- -- 31,842 318 104,561 -- --
Issuance of common stock.......... -- -- 44,504 445 (445) -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 788,609 --
Amortization of deferred sales and
marketing........................ -- -- -- -- -- -- 653,232
Reversal of deferred compensation
related to common stock and
common stock options forfeited... -- -- -- -- (711,291) 711,291 --
Net loss for the year ended
December 31, 2000................ -- -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- ----------- -----------
Balance at December 31, 2000...... -- $ -- 14,676,253 $146,762 $59,657,388 $ (763,074) $(1,306,445)
---------- ------------ ---------- -------- ----------- ----------- -----------
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ -------------
Balance at December 31, 1997...... (1,847,780) (1,016,747)
Issuance of common stock in
connection with acquisition...... -- 171,401
Deferred compensation related to
unvested common stock in
connection with acquisition...... -- --
Issuance of common stock.......... -- --
Sale of Series A Convertible
Preferred Stock, net of costs.... -- 2,782,942
Conversion of note payable........ -- 937,600
Issuance of common stock.......... -- 186,933
Deferred compensation related to
the issuance of stock options.... -- --
Amortization of deferred
compensation..................... -- 93,046
Net loss for the year ended
December 31, 1998................ (1,509,273) (1,509,273)
------------ -----------
Balance at December 31, 1998...... (3,357,053) 1,645,902
Issuance of common stock.......... -- --
Sale of Series B Convertible
Preferred Stock, net of costs.... -- 14,872,491
Issuance of warrant in connection
with sale of Series B Convertible
Preferred Stock.................. -- --
Issuance of common stock in
connection with acquisitions..... -- 115,000
Issuance of stock options in
connection with acquisitions..... -- 55,000
Issuance of warrant in connection
with sales and marketing
agreement........................ -- --
Issuance of common stock in
connection with exercise of
vested stock options............. -- 45,193
Deferred compensation related to
the issuance of stock options.... -- --
Amortization of deferred
compensation..................... -- 1,071,740
Amortization of deferred sales and
marketing........................ -- 290,323
Conversion of preferred stock into
common stock in connection with
initial public offering.......... -- --
Common stock issued in connection
with initial public offering, net
of costs of $4,453,583........... -- 34,676,417
Reversal of deferred compensation
related to stock options
forfeited........................ -- --
Net loss for the year ended
December 31, 1999................ (9,196,671) (9,196,671)
------------ -----------
Balance at December 31, 1999...... $(12,553,724) $43,575,395
------------ -----------
Issuance of common stock in
connection with exercise of
vested stock options............. -- 58,792
Issuance of common stock in
connection with employee stock
purchase plan.................... -- 104,879
Issuance of common stock.......... -- --
Amortization of deferred
compensation..................... -- 788,609
Amortization of deferred sales and
marketing........................ -- 653,232
Reversal of deferred compensation
related to common stock and
common stock options forfeited... -- --
Net loss for the year ended
December 31, 2000................ (15,790,309) (15,790,309)
------------ -----------
Balance at December 31, 2000...... $(28,344,033) $29,390,598
------------ -----------
See accompanying notes.
41
42
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
OPERATING ACTIVITIES
Net loss before extraordinary items......................... $(15,790,309) $(9,196,671) $(1,899,384)
Adjustments to reconcile net loss before extraordinary items
to net cash used in operating activities:
Depreciation and amortization............................. 1,073,468 312,456 67,429
Amortization of intangibles............................... 1,121,523 234,563 54,289
Amortization of deferred compensation..................... 788,609 1,071,740 93,046
Amortization of deferred sales and marketing.............. 653,232 290,323 --
Reserve for returns....................................... 376,979 35,400 --
Allowance for doubtful accounts and loan receivable....... 1,075,274 183,000 --
Other non-cash charges.................................... -- -- 57,916
Changes in operating assets and liabilities
(Net of the effects of acquisitions):
Accounts receivable..................................... (5,126,799) (1,006,558) (150,065)
Inventories............................................. (388,196) (355,262) (28,741)
Deferred production and marketing expenses.............. 79,964 -- --
Other current assets.................................... 36,078 (639,139) (29,959)
Other assets............................................ (18,924) (330,499) (61,144)
Accounts payable and accrued expenses................... 1,524,802 377,682 120,709
Deferred revenue........................................ 2,797,477 307,895 11,675
Other liabilities....................................... 138,915 38,293 18,800
------------ ----------- -----------
Net cash used in operating activities....................... (11,657,907) (8,676,777) (1,745,429)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (2,875,915) (1,577,775) (255,299)
Maturity of investment...................................... 619,514 -- --
Loan receivable............................................. -- (50,000) --
Purchases of short-term investment.......................... -- (501,000) --
Acquisition of businesses, net of cash acquired............. (9,866,845) (335,051) (50,000)
------------ ----------- -----------
Net cash used in investing activities....................... (12,123,246) (2,463,826) (305,299)
FINANCING ACTIVITIES
Proceeds from short term borrowings......................... 775,189 750,000 --
Repayment of short term borrowings.......................... (789,170) (750,000) --
Financing costs............................................. (515,088) (4,066,004) (217,378)
Proceeds from issuance of common stock...................... 104,879 39,130,000 --
Proceeds from exercise of stock options..................... 58,792 45,193 --
Proceeds from issuance of convertible preferred stock....... -- 15,000,000 3,000,320
------------ ----------- -----------
Net cash provided by/(used in) financing activities......... (365,398) 50,109,189 2,782,942
------------ ----------- -----------
Increase/(Decrease) in cash and cash equivalents............ (24,146,551) 38,968,586 732,214
Cash and cash equivalents at beginning of period............ 40,006,175 1,037,589 305,375
------------ ----------- -----------
Cash and cash equivalents at end of period.................. $ 15,859,624 $40,006,175 $ 1,037,589
============ =========== ===========
SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Accrued costs for business acquisitions..................... $ 495,600 $ -- $ --
Forgiveness of accounts receivable in connection with a
business acquisition...................................... 101,748 -- --
Issuance of common stock in connection with
recapitalization.......................................... -- -- 10,681
Issuance of common stock in connection with acquisition..... -- -- 358,334
Accrued financing costs..................................... -- 515,000 --
Conversion of loan payable into preferred stock............. -- -- 937,600
------------ ----------- -----------
Total noncash investing and financing activities............ $ 597,348 $ 515,000 $ 1,306,615
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 184,332 $ 23,898 $ --
See accompanying notes.
42
43
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION AND NATURE OF OPERATIONS
The Knot, Inc. (the "Company") was incorporated in the state of Delaware on
May 2, 1996.
The Company is the leading wedding resource providing products and services
to couples planning their wedding and future lives together and is the premier
wedding content provider on America Online and MSN. The Knot publishes a
national wedding fashion magazine and, through its subsidiary, Weddingpages,
Inc. ("Weddingpages"), publishes regional wedding magazines in 45 Company-owned
and franchised markets in the U.S. The Company also authors a series of books on
wedding planning and through another subsidiary of the Company, Click Trips,
Inc. ("Click Trips"), offers honeymoon booking and other travel services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
Preparing financial statements 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments. The carrying amounts of outstanding borrowings approximate fair
value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
were approximately $15,338,000 and $38,519,000 at December 31, 2000 and 1999,
respectively. The market value of the Company's cash equivalents approximates
their cost plus accrued interest.
SHORT TERM INVESTMENTS
Short-term investments include highly liquid investments with original
maturities in excess of three months but less than one year. Such short-term
investments are classified as available-for-sale and, accordingly, are carried
at cost, which approximates market value. There were no short term investments
at December 31, 2000 and $501,000 at December 31, 1999.
INVENTORY
Inventory consists of finished goods. Inventory costs are determined
principally by using the average cost method and are stated at the lower of such
cost or net realizable value.
43
44
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED PRODUCTION AND MARKETING COSTS
Deferred production and marketing costs include certain magazine production
and commission costs which are deferred and expensed upon publication as well as
certain costs related to Company membership kits which are expensed as the kits
are distributed.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the related lease agreement.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances such as significant
declines in revenues, earnings or cash flows or material adverse changes in the
business climate, indicate that the carrying amount of an asset may be impaired.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future estimated undiscounted net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. To date, no
impairment has occurred.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and a covenant not to compete which
are being amortized over periods ranging from three to ten years using the
straight-line method. Accumulated amortization of intangible assets approximates
$1,410,000 and $289,000 at December 31, 2000 and 1999, respectively.
INCOME TAXES
The Company accounts for income taxes on the liability method as required
by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the future tax consequence attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax liabilities of a change
in tax rates is recognized in results of operations in the period that includes
the enactment date.
NET REVENUES BY TYPE
Net revenues by type:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ---------- ----------
Sponsorship, advertising and production....... $10,969,146 $3,634,478 $ 853,240
Merchandise................................... 4,464,807 1,127,776 17,487
Publishing, travel and other.................. 8,800,952 363,633 168,857
----------- ---------- ----------
Total......................................... $24,234,905 $5,125,887 $1,039,584
=========== ========== ==========
44
45
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended December 31, 2000, 1999 and 1998, merchandise revenue
included outbound shipping and handling charges of approximately $490,000,
$135,000 and $2,000, respectively.
REVENUE RECOGNITION
Sponsorship, Advertising and Production
Sponsorship revenues are derived principally from contracts currently
ranging up to twenty-four 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 editorial area and
can purchase a special feature on our sites.
Advertising revenues are derived principally from short-term contracts that
typically range from one month up to one year. Advertising contracts include
banner advertisements and online listings for local wedding vendors.
Certain sponsorship and advertising contracts provide for the delivery of a
minimum number of impressions. Impressions are the featuring of a sponsor's
advertisement, banner, link or other form of content on our sites. To date, the
Company has recognized its sponsorship and advertising revenues over the
duration of the contracts on a straight line basis as it has exceeded minimum
guaranteed impressions. To the extent that minimum guaranteed impressions are
not met, the Company is generally obligated to extend the period of the contract
until the guaranteed impressions are achieved. If this were to occur, the
Company would defer and recognize the corresponding revenues over the extended
period.
Production revenues are derived from the development of online sites and
tools. Production revenues are recognized when the development is completed and
the online sites and tools are delivered.
To promote its brand on third-party sites, the Company produces online
sites for third parties featuring both The Knot and the third party. The cost of
production of these sites is included in operating expenses. In return, the
Company receives distribution and exposure to their viewers, outbound links to
its sites and, in some circumstances, offline brand marketing. The Company does
not recognize revenues with respect to these barter transactions.
Merchandise
Merchandise revenues are derived from the sale of wedding supplies and
products from the Company's gift registry through the Company's websites and
through a co-branded site with QVC, Inc. Merchandise revenues are recognized
when products are shipped to customers, reduced by discounts as well as an
allowance for estimated sales returns.
Publishing
Commencing April 1, 2000, publishing revenue includes advertising revenue
derived from the publication of regional wedding magazines by Weddingpages as
well as service fees and royalty fees from producing the Weddingpages magazine
for certain franchisees. These revenues and fees are recognized upon the
publication of the related magazine at which time all material services related
to the magazine have been performed. Additionally, publishing revenues are
derived from sales of magazines 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.
45
46
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Travel
Travel revenues are derived from commissions earned on the sale of travel
packages by the Company's online travel agency, Click Trips, Inc. Such revenues
are recognized when the customer commences travel.
Deferred Revenue
Deferred revenue represents payments received or billings in excess of
revenue recognized related to sponsorship, advertising, production and print
advertising contracts as well as advances received against future royalties to
be earned related to book publishing contracts.
COST OF REVENUES
Cost of revenues primarily consists of the cost of merchandise sold,
production costs of magazines, outbound shipping costs, payroll and related
expenses for personnel who are responsible for the production of customized
online sites and tools and costs of Internet and hosting services.
Cost of revenues by type:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- --------
Sponsorship, advertising and production......... $ 766,244 $ 513,552 $110,718
Merchandise..................................... 3,104,168 813,609 20,496
Publishing, travel and other.................... 2,818,665 114,150 --
---------- ---------- --------
Total........................................... $6,689,077 $1,441,311 $131,214
========== ========== ========
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense totaled
approximately $247,000, $142,000, and $46,000, for the years ended December 31,
2000, 1999, and 1998, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with three
major financial institutions. The Company's customers are primarily concentrated
in the United States. The Company performs on-going credit evaluations,
generally does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. To date, such losses have been within management's
expectations.
For the years ended December 31, 2000 and 1999, no single customer
accounted for more than 10% of net revenues or accounts receivable. For the year
ended December 31, 1998, one advertiser accounted for 19% of our net revenues.
At December 31, 2000, no single customer accounted for more than 10% of
accounts receivable. At December 31, 1999, one advertiser accounted for 13% of
accounts receivable.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and
46
47
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related interpretations and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation."
STOCK SPLITS
On January 17, 1997 and April 27, 1998, the Company effected a 1,000 for 1
and a 16.2541 for 1 stock split, respectively. All share amounts have been
retroactively restated to reflect these events in the accompanying financial
statements.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Basic net loss per share is computed by dividing net loss
by the weighted average number of common shares outstanding during the period.
Diluted net loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive financial
instruments, only in the periods in which such effect is dilutive. There were no
dilutive securities in any of the periods presented herein.
SEGMENT INFORMATION
The Company operates in one segment.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Since the Company's comprehensive net
loss is equal to its net loss for all periods presented, the adoption of this
standard has had no impact on the Company's financial statements.
SOFTWARE DEVELOPMENT COSTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP is effective for fiscal years beginning
after December 15, 1998. The Company adopted the provisions of SOP 98-1 during
the year ended December 31, 1999 with no material effect.
All projects are being amortized over their estimated useful lives, which
has been determined by management to be three years. Amortization on the
projects begins when the software is ready for its intended use.
RECLASSIFICATION
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
47
48
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Construction in progress.................................... $ -- $ 202,510
Leasehold improvements...................................... 1,361,131 107,309
Software.................................................... 898,284 592,372
Furniture and fixtures...................................... 228,910 33,627
Computer and office equipment............................... 2,804,967 1,023,789
---------- ----------
$5,293,292 $1,959,607
Less accumulated depreciation and amortization.............. 1,407,271 405,234
---------- ----------
$3,886,021 $1,554,373
========== ==========
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Accounts payable............................................ $ 852,814 $ 188,757
Accrued IPO costs........................................... -- 515,000
Deposits from customers..................................... 194,958 350,637
Other accrued expenses...................................... 2,855,886 390,184
---------- ----------
$3,903,658 $1,444,578
========== ==========
5. SHORT TERM BORROWINGS
The Company's subsidiary, Weddingpages, has a line of credit with a bank
that expires May 1, 2001 and has available borrowings under the agreement up to
the lesser of $2,500,000 or 70% of eligible receivables, as defined. As of
December 31, 2000, there were $1,650,000 of borrowings outstanding under the
agreement. The line of credit bears an interest rate at one-half percent over
the bank's prime lending rate.
6. LONG TERM DEBT
Long-term debt as of December 31, 2000 consists of obligations assumed as a
result of the acquisition of Weddingpages (See Note 8). There was no long term
debt as of December 31, 1999.
48
49
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long term debt as of December 31, 2000:
Note due in annual installments of $60,000 through October
2008, based on imputed interest of 8.75%.................. $ 335,197
9.0% equipment installment note, due in monthly installments
of $4,566 through December 2002........................... 96,885
10.0% equipment installment note, due in monthly
installments of $8,131 through August 2003................ 226,720
Consulting agreement, due in monthly installments of $12,800
through March 2003........................................ 345,600
----------
Total long-term debt........................................ 1,004,402
Less current portion of long-term debt...................... 306,613
----------
Long term debt, excluding current portion................... $ 697,789
==========
Maturities of long-term obligations for the five years ending December 31,
2005 are as follows: 2001, $306,613; 2002, $325,555; 2003, $137,333; 2004,
$39,446; 2005, $42,898 and $152,557 thereafter.
7. RELATED PARTY TRANSACTIONS
AOL
During 1996, AOL advanced $700,000 to the Company to fund the development
of the Company's online property located on AOL. During 1996, the Company
entered into an Interactive Services Agreement with AOL whereby AOL agreed to
carry the Company's content for a period of three years. As a result of this
agreement, AOL paid the Company a usage fee based on hours of viewership of the
Company's site on AOL. AOL received a commission equal to a percentage of the
Company's advertising revenues, as defined, that were derived from its site.
This agreement was amended in 1998 eliminating usage fees paid to the Company
and eliminating commissions paid to AOL.
The Company paid commissions to AOL of approximately $16,000 for the year
ended December 31, 1998. The Company earned usage fees from AOL of approximately
$47,000 for the year ended December 31, 1998.
On January 17, 1997, the Company and AOL entered into a Note and Warrant
Purchase Agreement, whereby the Company issued to AOL a Secured Promissory Note
(the "AOL Note") and a Stock Subscription Warrant (the "AOL Warrant") to
purchase 3,250,820 shares of the Company's Series A Convertible Preferred Stock.
The AOL Warrant was valued at approximately $830,000, based on its estimated
fair value. Such value was recorded as deferred financing costs and was
amortized on a straight line basis over the life of the AOL Warrant.
The Company borrowed a total of $1,850,000 under the AOL Note, inclusive of
the $700,000 advanced in 1996. The AOL Note bore interest at 6.54% per annum and
was payable January 16, 2007.
On April 28, 1998, AOL exchanged the note payable of $2,047,018, which
included accrued interest of $197,018, and the AOL Warrant for 800,000 shares of
Series A Convertible Preferred Stock (see Note 9) valued at $937,600. At the
date of exchange, AOL was solely a creditor of the Company, since the AOL
Warrant was worthless. In accordance with SFAS No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings" this transaction was accounted
for as a troubled debt restructuring and an extraordinary gain on the
extinguishment of debt was recognized.
On September 30, 1998, the Company entered into an Anchor Tenant Agreement
with AOL (the "AOL Agreement"), whereby the Company received distribution within
the AOL service. Beginning
49
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THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 1999, the Company was obligated to pay carriage fees throughout the
term of the AOL Agreement. This agreement superseded any prior agreements
between the Company and AOL.
In July 1999, the Company entered into an amended and restated Anchor
Tenant Agreement with AOL ("Restated AOL Agreement") which superseded the AOL
Agreement. The Restated AOL Agreement expires on January 6, 2003 and provides
for a quarterly carriage fee payable over the remaining term of the Restated AOL
Agreement. At December 31, 2000, the Company is obligated to pay carriage fees
to AOL in the amount of $300,000 per quarter through December 31, 2002.
Pursuant to the Restated AOL Agreement, the Company issued a warrant to
purchase 366,667 shares of the Company's common stock at $7.20 per share,
subject to certain anti-dilution provisions. The warrant is immediately
exercisable and expires in July 2007. The Company valued this warrant at
approximately $2,250,000, by using the Black-Scholes option pricing model with
an expected volatility factor of 55%, risk free interest rate of 5%, no dividend
yield, and a 2-year life, which is being recognized as non-cash sales and
marketing expense on a straight-line basis over the term of the agreement.
On May 1, 2000, the Company entered into an International Anchor Tenant
Agreement with AOL, whereby the Company received distribution within AOL and its
affiliates within certain international markets. The agreement expires on May 1,
2003 and provides for quarterly carriage fees payable over the term of the
agreement in the amount of $215,000 per quarter through February 1, 2001,
increasing to $287,500 per quarter through February 1, 2002, and increasing to
$372,500 per quarter through February 1, 2003.
The Company paid aggregate carriage fees to AOL in the amount of $1,845,000
and $1,000,000 for the years ended December 31, 2000 and 1999, respectively.
QVC, INC. ("QVC")
On April 13, 1999, the Company sold 4,000,000 shares of Series B
Convertible Preferred Stock ("Series B") for $15,000,000 to QVC. In connection
with the sale of Series B Convertible Preferred Stock, the Company issued a
warrant to QVC to purchase 1,700,000 shares of common stock at $5.00 per share
subject to certain anti-dilution provisions. The warrant became exercisable upon
the closing of the Company's initial public offering. At issuance, the fair
value of the warrant was calculated to be approximately $1,037,000 by using the
Black-Scholes option pricing model with an expected volatility factor of 55%,
risk free interest rate of 5%, no dividend yield, and a 2-year life.
In April 1999, the Company entered into a services agreement with QVC (the
"Services Agreement"), whereby QVC provides warehousing, fulfillment and
distribution, and billing services with respect to the Company's gift registry
products. Additionally, the Services Agreement, which expires December 2, 2003,
provides for the Company to purchase certain merchandise through QVC at amounts
in excess of QVC's cost. The fees for such services were negotiated on an arm's
length basis. The Company also has an agreement with QVC to sell merchandise
through a co-branded site accessible from within QVC's online site.
At December 31, 2000 and 1999, the Company had recorded a receivable due
from QVC of approximately $134,000 and $44,000, respectively.
For the years ended December 31, 2000 and 1999, the Company purchased
merchandise and incurred warehousing, fulfillment, distribution and billing
costs under the agreements with QVC in the aggregate amounts of $515,000 and
$172,000 respectively.
50
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THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PURCHASE TRANSACTIONS
2000 PURCHASE TRANSACTIONS
Weddingpages
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated
as of February 1, 2000, by and among the Company, Knot Acquisition Corporation,
a Delaware corporation and wholly-owned subsidiary of the Company ("Buyer"), and
Weddingpages, Buyer merged with and into Weddingpages on March 29, 2000, with
Weddingpages as the surviving Corporation (the "Merger").
The purchase price of $10.0 million consisted of approximately $9.2 million
for the common stock and outstanding common stock options of Weddingpages,
inclusive of $700,000 payable to the former Chief Executive Officer of
Weddingpages in consideration for the execution of a non-compete agreement and
approximately $775,000 of other costs associated with the acquisition.
Approximately $527,000 of the purchase price is held in an escrow account and is
subject to certain deductions in the event of third party claims against
indemnified parties. The excess of the purchase price over the fair value of net
tangible and intangible assets and liabilities acquired of $9.3 million was
recorded as goodwill.
Results of operations for Weddingpages have been included with those of the
Company subsequent to March 29, 2000. Unaudited pro forma data for the Company
for the year ended December 31, 2000 and 1999 which gives effect to the
acquisition of Weddingpages as if it had occurred on January 1, 1999, are shown
below. The pro forma data does not necessarily reflect the actual results that
would have been achieved, nor is it necessarily indicative of future
consolidated results of the Company.
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999
------------ -----------
Net revenue.............................................. $ 25,589,000 $16,053,000
Net loss................................................. $(16,671,330) $(9,383,000)
Net loss per share....................................... $ (1.14) $ (2.36)
In August 2000, Weddingpages purchased a former franchise market for
$140,000 in cash, the forgiveness of a receivable from the franchisee of
$102,000 and an additional obligation to pay $150,000 in cash in July 2001. In
December 2000, Weddingpages purchased another former franchise market for
$100,000 in cash. The aggregate purchase price for these acquisitions of
$492,000 was recorded as goodwill.
1999 AND PRIOR PURCHASE TRANSACTIONS
Casenhiser Clothing Company, Inc. d/b/a Bridal Search
On April 2, 1998, the Company acquired all of the assets of Bridal Search
for $50,000 in cash and 162,540 shares of the Company's common stock valued at
$1.05 per share for financial reporting purposes. In addition, the Company was
required to issue up to 356,046 additional shares to Bridal Search upon the
achievement of future performance criteria, of which 178,031 shares were issued
in connection with the launch of the Company's registry in November 1998 at a
value of $1.05 per share. The remaining 178,015 shares were issuable upon the
attainment of certain revenue based goals. In August 1999, the Company entered
into a Settlement and Release Agreement whereby Bridal Search agreed to forego
its rights to receive the remaining 178,015 shares related to revenue based
goals in exchange for a payment of $150,000. Such amount, representing
contingent purchase price, was recorded as additional goodwill. The purchase
price, net of tangible assets acquired, principally fixed assets of
approximately $4,000, was recorded as goodwill.
51
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THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the agreement, the former owners of Bridal Search were also entitled
to receive an additional 178,015 shares of the Company's common stock,
contingent upon their employment by the Company and which vested over four
years. The value of these shares of $186,916 was recorded as deferred
compensation. The former owners of Bridal Search terminated their employment
with the Company in 2000 prior to which 89,008 shares had vested pursuant to the
agreement. Deferred compensation expense related to the unvested shares of
approximately $90,000 was reversed which reduced capital surplus.
Bridalink.com
In July 1999, the Company acquired all of the assets of Bridalink.com for
approximately $124,000 in cash and the issuance of 10,000 immediately vested
stock options to purchase common stock at an exercise price of $1.50 per share.
The common stock was valued at $7.00 per share for financial reporting purposes.
Bridalink.com operates an online wedding supplies business. The purchase price,
including legal fees, of $191,000, net of tangible assets acquired, principally
inventory and fixed assets of $124,000 was recorded as goodwill.
Click Trips
In July 1999, the Company acquired all of the capital stock of Click Trips
for 5,000 shares of common stock. The common stock was valued at $7.00 per share
for financial reporting purposes. Click Trips operates an online travel agency.
The purchase price, including legal fees, of $67,000, net of tangible assets
acquired, principally fixed assets of approximately $16,000, was recorded as
goodwill.
Wedding Photographers Network
In August 1999, the Company acquired all of the assets of Wedding
Photographers Network ("WPN"), a division of The Denis Reggie Company, for
10,000 shares of the Company's common stock. The common stock was valued at
$8.00 per share for financial reporting purposes. WPN offers a search engine to
obtain a listing of professional wedding photographers in various local areas.
The purchase price of $159,000 which includes legal fees, and liabilities
assumed of approximately $38,000, was recorded as goodwill.
Unaudited pro forma data for the Company for the years ended December 31,
1999 and 1998 giving effect to the acquisitions of Bridal Search, Bridalink.com,
Click Trips and Wedding Photographers Network as if these acquisitions had
occurred at the beginning of each period presented are shown below. The pro
forma data does not necessarily reflect the actual results that would have been
achieved, nor is it necessarily indicative of future consolidated results of the
Company.
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -----------
Net revenue............................................... $ 6,155,000 $ 1,698,000
Loss before extraordinary item............................ $(9,326,000) $(2,174,000)
Net loss.................................................. $(9,326,000) $(1,784,000)
Basic and diluted net loss per share...................... $ (2.34) $ (0.70)
9. JOINT VENTURE
Gerard Bedouk Holding ("GBH")
In November 2000, the Company entered into a joint venture with Gerard
Bedouk Holding ("GBH"), the largest wedding media company in Europe, for the
purpose of developing and operating a web site in French that offers wedding
resources and services targeted to consumers in France and certain
52
53
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other French speaking territories in Europe. The Company licenses certain of its
proprietary technology and know-how to the joint venture and contributed several
support services during the development of the web site in exchange for a 49%
interest in the joint venture. The web site, www.mariee.fr was launched in
November 2000.
As of December 31, 2000, the Company had recorded a receivable from the
joint venture of approximately $61,000 for reimbursable expenses paid by the
Company.
10. CAPITAL STOCK
In conjunction with the Company's Initial Public Offering, the stockholders
of the Company approved an Amended and Restated Articles of Incorporation which
provides for 105,000,000 authorized shares of capital stock consisting of
100,000,000 shares of common stock each having a par value of $.01 per share and
5,000,000 shares of preferred stock, each having a par value of $.001.
PREFERRED STOCK
On April 28, 1998, the Company sold 2,560,000 shares of Series A
Convertible Preferred Stock ("Series A") for $3,000,320. Simultaneously, the AOL
Note in the amount of $2,047,018, which included accrued interest of $197,018
and the AOL Warrant were exchanged for 800,000 shares of Series A Convertible
Preferred Stock valued at $937,600 (See Note 7).
On April 13, 1999, the Company sold 4,000,000 shares of Series B
Convertible Preferred Stock ("Series B") for $15,000,000 to QVC (see Note 7).
All shares of Series A and Series B Convertible Preferred Stock converted
into common stock on a one-for-one basis at the closing of the Company's Initial
Public Offering.
Currently, the Board of Directors is authorized, without further
stockholder approval, to issue from time to time up to an aggregate of 5,000,000
shares of preferred stock in one or more series and to fix or alter the
designations, preferences, rights, and any qualifications, limitations or
restrictions, of the shares of each series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designation of
series.
COMMON STOCK
From inception through April 24, 1998, all outstanding common shares of the
Company were owned by Element Studios, Inc. ("Element"), formerly MW
Entertainment, Inc. On April 24, 1998, in connection with a recapitalization of
the Company prior to the sale of Series A Preferred Stock, Element was
dissolved. The outstanding common shares of the Company owned by Element were
distributed equally to the four founders of Element. On April 28, 1998, the
Company issued an additional 1,068,122 common shares to the founders. Following
the recapitalization, each founder was the holder of 673,383 common shares.
In conjunction with the Series A issuance, the founders entered into
Vesting Agreements, whereby each founder granted the Company the right to
repurchase 505,037 shares of common stock for $.01, if the founder is no longer
employed by the Company. The amount of shares subject to the Vesting Agreements
are reduced ratably over thirty six months. Common shares subject to repurchase
are held in escrow and amounted to 56,115 per founder at December 31, 2000.
In December 1999, the Company completed its initial public offering for the
sale of 3,913,000 shares of common stock (including the exercise of the
underwriter's overallotment of 413,000 shares of common
53
54
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock). The Company received proceeds of approximately $34.7 million net of
underwriting discounts and expenses associated with the offering.
At December 31, 2000, the Company had reserved the following shares of
common stock for future issuance:
Options under the 1999 Stock Incentive Plan................. 3,618,772
Options under the 2000 Stock Incentive Plan................. 435,000
Common stock warrants....................................... 2,066,667
Shares under the Employee Stock Purchase Plan............... 268,158
Options related to the acquisition of Bridalink.com......... 10,000
---------
Total common stock reserved for future issuance............. 6,398,597
=========
11. STOCK PLANS
1999 STOCK INCENTIVE PLAN (THE "1999 PLAN")
The 1999 Plan was adopted by the Board of Directors and approved by the
stockholders in November 1999, as a successor plan to the Company's 1997 Long
Term Incentive Plan (the "1997 Plan"). All options under the 1997 Plan have been
incorporated into the 1999 Plan and no further option grants will be made under
the 1997 Plan. The 1999 Plan became effective upon completion of the Company's
initial public offering of its common stock.
Under the terms of the 1999 Plan, 3,849,868 shares of common stock of the
Company have been reserved for incentive stock options, nonqualified stock
options (incentive and nonqualified stock options are collectively referred to
as "Options"), stock issuances, or any combination thereof. Awards may be
granted to such non-employee directors, officers, employees and consultants of
the Company as the Compensation Committee of the Board of Directors shall in its
discretion select. Only employees of the Company are eligible to receive grants
of incentive stock options. The shares reserved under the 1999 Plan will
automatically increase on the first trading day in January each calendar year,
beginning with calendar year 2001, by an amount equal to two percent (2%) of the
total number of shares of the Company's common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will this
annual increase exceed 1,000,000 shares (or such other lesser number determined
by the Board of Directors). Generally, options are granted at the fair market
value of the stock on the date of grant which was determined by the Board of
Directors prior to the completion of the Company's initial public offering of
its stock. Options vest up to a four year period and have terms not to exceed 10
years.
2000 NON-OFFICER STOCK INCENTIVE PLAN (THE "2000 PLAN")
The 2000 Plan was approved by the Board of Directors in June 2000. Under
the terms of the 2000 Plan, 435,000 shares of common stock of the Company have
been reserved for nonqualified stock options, stock issuances or any combination
thereof. Awards may be granted to employees (other than officers or directors of
the Company) and consultants and other independent advisors who provide services
to the Company. Options are granted at the fair market value of the stock on the
date of grant. Generally, options vest over a four year period and have terms
not to exceed 10 years.
54
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THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents a summary of the Company's stock option activity
and related information:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE FAIR VALUE
SHARES PRICE OF GRANTS
--------- -------- ----------
Balance at December 31, 1997......................... 98,825 0.01
Options granted, exercise price less than market
price.............................................. 568,000 0.50 0.63
Options granted, exercise price equal to market
price.............................................. 15,000 0.50 0.10
Options canceled..................................... (8,810) 0.01
--------- -----
Options outstanding at December 31, 1998............. 673,015 $0.93
--------- -----
Options granted, exercise price less than market
price.............................................. 881,500 1.09 3.12
Options granted, exercise price equal to market
price.............................................. 84,100 9.17 2.71
Options granted, exercise price exceeds market
price.............................................. 201,050 9.00 0.93
Options exercised.................................... (141,801) 0.32
Options canceled..................................... (78,958) 0.82
--------- -----
Options outstanding at December 31, 1999............. 1,618,906 $2.30
--------- -----
Options granted, exercise price equal to market
price.............................................. 2,091,750 3.17 1.86
Options exercised.................................... (89,295) 0.66
Options canceled..................................... (619,700) 3.91
--------- -----
Options outstanding at December 31, 2000............. 3,001,661 $2.61
--------- -----
The fair value of each option granted has been estimated on the date of
grant using the minimum value method option pricing model from inception through
December 1, 1999 and using the Black-Scholes option pricing model thereafter,
with the following assumptions:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
------------- ------- -------
Expected option lives............................. 4 years 4 years 4 years
Risk-free interest rate........................... 5.13% - 6.66% 5.76% 4.64%
Expected volatility............................... 72.6% 98% N/A
Dividend yield.................................... 0% 0% 0%
Had compensation for the Plan been determined consistent with the
provisions of SFAS No. 123, the effect on the Company's net loss before
extraordinary items and basic and diluted net loss before extraordinary items
per share would have been changed to the following pro forma amounts:
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
Net loss before extraordinary items, as
reported..................................... $(15,790,309) $(9,196,671) $(1,899,384)
Net loss before extraordinary items, pro
forma........................................ (16,436,418) (9,289,638) (1,988,488)
Basic and diluted loss before extraordinary
items per share, as reported................. (1.08) (2.31) (0.76)
Basic and diluted loss per share, pro forma.... (1.13) (2.33) (0.80)
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period.
55
56
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
NUMBER AVERAGE -------------------------------
OUTSTANDING REMAINING WEIGHTED NUMBER WEIGHTED
AS OF CONTRACTUAL LIFE AVERAGE EXERCISABLE AS AVERAGE
RANGE OF EXERCISE PRICE 12/31/00 (IN YEARS) EXERCISE PRICE OF 12/31/00 EXERCISE PRICE
----------------------- ----------- ---------------- -------------- -------------- --------------
$0.01 to $1.00............. 1,216,753 8.74 $0.68 371,104 $0.50
$1.28 to $4.12............. 1,562,782 9.24 3.25 203,189 2.25
$7.00 to $14.06............ 222,126 8.73 8.73 79,839 9.02
--------- ---- ----- ------- -----
3,001,661 9.00 $2.61 654,132 $2.08
========= ==== ===== ======= =====
DEFERRED COMPENSATION
During the years 1999 and 1998, the Company granted options with exercise
prices that were subsequently determined to be less than the value for financial
reporting purposes on the date of grant. As a result, the Company has recorded
deferred compensation of approximately $2,948,000 and $293,000 during 1999 and
1998, respectively, net of reversals of stock options forfeited. These amounts
are recognized as noncash compensation expense on an accelerated basis over the
vesting period of the options.
EMPLOYEE STOCK PURCHASE PLAN (THE "ESPP")
The non-compensatory ESPP was adopted by the Board of Directors and
approved by the stockholders in November 1999 and became effective upon
completion of the Company's initial public offering of its common stock. Under
the ESPP, employees of the Company who elect to participate are granted the
opportunity to purchase common stock at a 15 percent discount from the market
value, as defined, of such stock. The ESPP permits an enrolled employee to make
contributions to purchase shares of common stock by having withheld from his or
her salary an amount between 1 percent and 15 percent of compensation. The
Compensation Committee of the Board of Directors administers the ESPP. 300,000
shares of common stock of the Company have been reserved for issuance under the
ESPP. The shares reserved will automatically increase on the first trading day
in January of each calendar year, beginning in calendar year 2001, by the lesser
of the (i) the number of shares of common stock issued under the ESPP in the
immediately preceding calendar year, (ii) 300,000 shares or (iii) such other
lesser amount approved by the Board of Directors.
As of December 31, 2000, 31,842 shares of common stock were issued under
the ESPP.
56
57
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
DECEMBER 31,
---------------------------
2000 1999
------------ -----------
Deferred tax assets:
Net operating loss carryforwards....................... $ 10,470,000 $ 5,062,600
Accrued expenses....................................... 427,000 --
Deferred revenue....................................... -- 5,800
Bad debt............................................... 194,000 84,500
Reserve for returns.................................... 20,000 --
Inventory reserve...................................... 12,000 --
Deferred rent.......................................... 86,000 --
Depreciation and amortization.......................... 554,000 125,100
------------ -----------
Total deferred tax assets................................ 11,763,000 5,278,000
Deferred tax liabilities:
Capitalized software costs............................. (295,000) (203,200)
------------ -----------
Net deferred tax assets.................................. 11,468,000 5,074,800
Valuation allowance...................................... (11,468,000) (5,074,800)
------------ -----------
Total net deferred tax assets............................ $ -- $ --
============ ===========
Net deferred tax assets have been fully offset by a valuation allowance due
to the uncertainty of realizing such benefit.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $23 million for federal tax purposes which are set to expire in
years 2011 through 2020.
The reconciliation of income tax expense computed at the U.S. federal
statutory rate to income tax expense for the years ended December 31, 2000, 1999
and 1998 are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- --------
Benefit at federal statutory rate (35%)......... (5,526,000) (3,219,000) (528,000)
Expenses not deductible for U.S. tax purposes... 821,000 512,000 60,000
Losses for which no benefit has been provided... 4,705,000 2,707,000 468,000
57
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THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office facilities and certain warehouse space under
noncancelable operating lease agreements which expire at various dates through
2012. Future minimum lease payments under noncancelable operating leases are as
follows:
Year ending December 31:
2001..................................................... $ 735,000
2002..................................................... 681,000
2003..................................................... 583,000
2004..................................................... 609,000
2005..................................................... 579,000
Thereafter............................................... 3,470,000
----------
Total.................................................... $6,657,000
==========
Rent expense for the years ended December 31, 2000, 1999, and 1998 amounted
to approximately $713,000, $308,000 and $183,000, respectively.
There was no sublease income for the year ended December 31, 2000. For the
years ended December 31, 1999 and 1998, sublease income amounted to $39,000 and
$97,000, respectively.
LEGAL
On August 14, 2000, certain Weddingpages franchisees commenced litigation
against the Company and certain of the Company's officers. The plaintiffs seek
to enjoin the Company from taking actions, primarily relating to the sale of
advertising in certain local markets, which plaintiffs claim will damage the
value of their Weddingpages franchises and money damages in an unspecified
amount. On October 19, 2000, the Company filed its initial response. On October
27, 2000 the Supreme Court of the State of New York refused to grant preliminary
injunctions sought by certain Weddingpages franchisees. The court ordered that
the parties submit their dispute to a neutral mediator. In February and March
2001, as a result of negotiations among the parties, with the assistance of the
mediator, non-monetary settlements were reached with six of the plaintiffs in
the action. Certain franchisees have not executed the settlement agreement as
negotiated. The Company had previously made a motion to dismiss the case, which
was stayed pending settlement discussions. It is the Company's intention to
reinstate the motion against those plaintiffs who have refused to execute the
settlement agreement and, in any event, to continue to contest the allegations
which, the Company believes, are without merit.
58
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SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WRITE-OFFS,
BALANCE CHARGED TO CHARGED TO NET OF BALANCE AT
BEGINNING COSTS AND OTHER RECOVERIES & END OF
OF YEAR EXPENSES ACCOUNTS ACTUAL RETURNS YEAR
--------- ---------- ---------- -------------- ----------
YEAR ENDED DECEMBER 31, 2000
Allowance for Doubtful
Accounts...................... $133,000 $1,075,274 $-- $386,311 $821,963
Allowance for Loan Receivable... $ 53,000 $ -- $-- $ 53,000 $ --
Allowance for Returns........... $ 5,606 $ 376,979 $-- $339,091 $ 43,494
Inventory Reserve............... $ 25,000 $ 37,000 $-- $ 7,000 $ 55,000
YEAR ENDED DECEMBER 31, 1999
Allowance for Doubtful
Accounts...................... $ -- $ 133,000 $-- $ -- $133,000
Allowance for Loan Receivable... $ -- $ 53,000 $-- $ -- $ 53,000
Inventory Reserve............... $ -- $ 25,000 $-- $ -- $ 25,000
59
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the information in our proxy statement for
the 2001 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information in our proxy statement for
the 2001 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information in our proxy statement for
the 2001 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information in our proxy statement for
the 2001 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See Index to Consolidated Financial Statements and Supplementary Data
on page 38.
2. Financial Statement Schedules.
See Index to Consolidated Financial Statements and Supplementary Data
on page 38.
(b) Reports on Form 8-K
None.
60
61
(c) Exhibits
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger, dated as of February 1, 2000,
by and among the Registrant and Weddingpages, Inc.
(Incorporated by reference to Registrant's Current Report on
Form 8-K filed with the S.E.C. on February 11, 2000)
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration number 333-87345) (the
"Form S-1")
3.2 Amended and Restated Bylaws (Incorporated by reference to
the Form S-1)
4.1 Specimen Common Stock certificate (Incorporated by reference
to the Form S-1)
4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights
of holders of common stock of the Registrant
4.3 Common Stock Warrant Certificate of QVC Interactive
Holdings, Inc. (Incorporated by reference to the Form S-1)
4.4 Warrant Agreement of America Online, Inc. (Incorporated by
reference to the Form S-1)
10.1 Employment Agreement between The Knot, Inc. and David Liu
(Incorporated by reference to the Form S-1)
10.2 Employment Agreement between The Knot, Inc. and Carley Roney
(Incorporated by reference to the Form S-1)
10.3 Employment Agreement between The Knot, Inc. and Richard
Szefc (Incorporated by reference to the Form S-1)
10.4 Employment Agreement between The Knot, Inc. and Sandra
Stiles (Incorporated by reference to the Form S-1)
10.5 2000 Non-Officer Stock Incentive Plan (Incorporated by
reference to Registrant's Registration Statement on Form S-8
(Registration number 333-41960))
10.6 1999 Stock Incentive Plan (Incorporated by reference to the
Form S-1)
10.7 Employee Stock Purchase Plan (Incorporated by reference to
the Form S-1)
10.8 Third Amended and Restated Investor Rights Agreement
(Incorporated by reference to the Form S-1)
10.9+ Services Agreement between The Knot, Inc. and QVC, Inc.
(Incorporated by reference to the Form S-1)
10.10+ Amended and Restated Anchor Tenant Agreement between The
Knot, Inc. and America Online, Inc. (Incorporated by
reference to the Form S-1)
10.11 Form of Indemnification Agreement (Incorporated by reference
to the Form S-1)
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
---------------
+ Confidential treatment has been granted for certain portions omitted from this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
Confidential portions of this Exhibit have been separately filed with the
Securities and Exchange Commission.
61
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, The Knot, Inc. has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York, State of New York, on this 30th day of March, 2001.
THE KNOT, INC.
By: /s/ DAVID LIU
------------------------------------
David Liu
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 2001.
SIGNATURE TITLE(S)
--------- --------
/s/ DAVID LIU President, Chief Executive Officer and
----------------------------------------------------- Chairman of the Board of Directors
David Liu (principal executive officer)
/s/ RICHARD SZEFC Chief Financial Officer, Treasurer and
----------------------------------------------------- Secretary (principal financial and
Richard Szefc accounting officer)
/s/ SANDRA STILES Director
-----------------------------------------------------
Sandra Stiles
/s/ JOHN LINK Director
-----------------------------------------------------
John Link
/s/ ALEXANDER LYNCH Director
-----------------------------------------------------
Alexander Lynch
/s/ ANN WINBLAD Director
-----------------------------------------------------
Ann Winblad
62
63
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger, dated as of February 1, 2000,
by and among the Registrant and Weddingpages, Inc.
(Incorporated by reference to Registrant's Current Report on
Form 8-K filed with the S.E.C. on February 11, 2000)
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration number 333-87345) (the
"Form S-1")
3.2 Amended and Restated Bylaws (Incorporated by reference to
the Form S-1)
4.1 Specimen Common Stock certificate (Incorporated by reference
to the Form S-1)
4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights
of holders of common stock of the Registrant
4.3 Common Stock Warrant Certificate of QVC Interactive
Holdings, Inc. (Incorporated by reference to the Form S-1)
4.4 Warrant Agreement of America Online, Inc. (Incorporated by
reference to the Form S-1)
10.1 Employment Agreement between The Knot, Inc. and David Liu
(Incorporated by reference to the Form S-1)
10.2 Employment Agreement between The Knot, Inc. and Carley Roney
(Incorporated by reference to the Form S-1)
10.3 Employment Agreement between The Knot, Inc. and Richard
Szefc (Incorporated by reference to the Form S-1)
10.4 Employment Agreement between The Knot, Inc. and Sandra
Stiles (Incorporated by reference to the Form S-1)
10.5 2000 Non-Officer Stock Incentive Plan (Incorporated by
reference to Registrant's Registration Statement on Form S-8
(Registration number 333-41960))
10.6 1999 Stock Incentive Plan (Incorporated by reference to the
Form S-1)
10.7 Employee Stock Purchase Plan (Incorporated by reference to
the Form S-1)
10.8 Third Amended and Restated Investor Rights Agreement
(Incorporated by reference to the Form S-1)
10.9+ Services Agreement between The Knot, Inc. and QVC, Inc.
(Incorporated by reference to the Form S-1)
10.10+ Amended and Restated Anchor Tenant Agreement between The
Knot, Inc. and America Online, Inc. (Incorporated by
reference to the Form S-1)
10.11 Form of Indemnification Agreement (Incorporated by reference
to the Form S-1)
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
---------------
+ Confidential treatment has been granted for certain portions omitted from this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
Confidential portions of this Exhibit have been separately filed with the
Securities and Exchange Commission.
63