-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M//S6v8F9SNlY6yzsFjT8rCEC+vPThbFMNgvtufdBPbvMyKTkIN6+WdB9FXi4cBk GN5cx+3r+ygZIrmY9gQGXQ== 0000950117-02-001917.txt : 20020814 0000950117-02-001917.hdr.sgml : 20020814 20020814142344 ACCESSION NUMBER: 0000950117-02-001917 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNOT INC CENTRAL INDEX KEY: 0001062292 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 133895178 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28271 FILM NUMBER: 02734632 BUSINESS ADDRESS: STREET 1: 462 BROADWAY 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2122198555 MAIL ADDRESS: STREET 1: 462 BROADWAY, 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10013 10-Q 1 a33198.txt THE KNOT, INC. FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 000-28271 THE KNOT, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 13-3895178 (State of incorporation) (I.R.S. Employer Identification Number) 462 Broadway, 6th Floor New York, New York 10013 (Address of Principal Executive Officer and Zip Code) (212) 219-8555 (Registrant's Telephone Number, Including Area Code) Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 9, 2002, there were 18,373,327 shares of the registrant's common stock outstanding.
Page Number ------ PART I FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited): Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001....................................................................... 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001..................................................... 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001............................................................ 5 Notes to Condensed Consolidated Financial Statements.................................... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations... 11 Item 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 28 PART II OTHER INFORMATION Item 1: Legal Proceedings....................................................................... 28 Item 4: Submission of Matters to a Vote of Security Holders..................................... 29 Item 6: Exhibits and Report on Form 8-K......................................................... 29
2 Item 1. Financial Statements (Unaudited) THE KNOT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, (Unaudited) 2001* ----------- ------------ Assets Current assets: Cash and cash equivalents .................................................. $ 9,441,030 $ 6,782,051 Restricted cash............................................................. 243,979 184,419 Accounts receivable, net of allowances of $1,495,649 and $1,010,615 at June 30, 2002 and December 31, 2001, respectively...................... 4,742,256 5,011,930 Inventories................................................................. 1,103,570 729,285 Deferred production and marketing costs..................................... 344,640 293,529 Other current assets........................................................ 659,995 778,775 ------------ ------------ Total current assets........................................................... 16,535,470 13,779,989 Property and equipment, net.................................................... 2,401,868 2,923,100 Intangible assets, net......................................................... 8,884,136 8,934,136 Other assets................................................................... 268,007 372,874 ------------ ------------ Total assets................................................................... $ 28,089,481 $ 26,010,099 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses....................................... $ 4,447,633 $ 3,599,195 Short-term borrowings....................................................... - 1,384,470 Deferred revenue............................................................ 5,538,922 4,682,893 Current portion of long-term debt........................................... 264,178 323,709 ------------ ------------ Total current liabilities...................................................... 10,250,733 9,990,267 Long-term debt................................................................. 287,238 372,234 Other liabilities.............................................................. 388,130 327,423 ------------ ------------ Total liabilities.............................................................. 10,926,101 10,689,924 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 100,000,000 shares authorized; 18,337,164 shares and 14,736,053 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively........................ 183,371 147,360 Additional paid-in-capital.................................................. 64,415,401 59,512,193 Deferred compensation....................................................... (125,414) (254,983) Deferred sales and marketing................................................ (326,597) (653,213) Accumulated deficit......................................................... (46,983,381) (43,431,182) ------------ ------------ Total stockholders' equity..................................................... 17,163,380 15,320,175 ------------ ------------ Total liabilities and stockholders' equity..................................... $ 28,089,481 $ 26,010,099 ============ ============
*The condensed consolidated balance sheet as of December 31, 2001 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 THE KNOT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net revenues $ 8,274,063 $ 6,208,541 $14,406,236 $ 11,431,532 Cost of revenues 2,932,525 2,329,682 5,325,160 4,545,043 ----------- ----------- ----------- ------------ Gross profit 5,341,538 3,878,859 9,081,076 6,886,489 Operating expenses: Product and content development 989,893 1,107,365 2,023,662 2,442,641 Sales and marketing 2,959,558 3,760,366 5,574,746 8,165,091 General and administrative 1,941,171 2,397,695 3,978,791 4,701,999 Non-cash compensation 39,234 92,671 93,164 211,621 Non-cash sales and marketing 163,308 163,308 326,616 326,616 Depreciation and amortization 342,634 618,762 684,841 1,301,586 ----------- ----------- ----------- ------------ Total operating expenses 6,435,798 8,140,167 12,681,820 17,149,554 ----------- ----------- ----------- ------------ Loss from operations (1,094,260) (4,261,308) (3,600,744) (10,263,065) Interest income, net 33,216 95,021 48,545 247,631 ----------- ----------- ----------- ------------ Net loss $(1,061,044) $(4,166,287) $(3,552,199) $(10,015,434) =========== =========== =========== ============ Net loss per share - basic and diluted $ (0.06) $ (0.28) $ (0.20) $ (0.68) =========== =========== =========== ============ Weighted average number of shares used in calculating basic and diluted net loss per share 18,337,164 14,708,940 17,443,962 14,700,516 =========== =========== =========== ============
See accompanying notes. 4 THE KNOT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 2002 2001 ---- ---- Operating activities Net loss ............................................................. $(3,552,199) $(10,015,434) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................................... 634,841 642,653 Amortization of intangibles........................................ 50,000 658,933 Amortization of deferred compensation.............................. 93,164 211,621 Amortization of deferred sales and marketing....................... 326,616 326,616 Reserve for returns................................................ 497,128 437,550 Allowance for doubtful accounts.................................... 426,928 971,186 Other non-cash charges............................................. 10,674 86,363 Changes in operating assets and liabilities Restricted cash.................................................... (59,560) (39,931) Accounts receivable................................................ (654,382) 1,177,086 Inventories........................................................ (384,959) 46,294 Deferred production and marketing.................................. (51,111) 569,753 Other current assets............................................... 118,780 297,723 Other assets....................................................... 104,867 (45,083) Accounts payable and accrued expenses.............................. 860,936 (43,544) Deferred revenue................................................... 856,029 (395,879) Other liabilities.................................................. 60,707 66,958 ----------- ------------ Net cash used in operating activities................................. (661,541) (5,047,135) Investing activities Purchases of property and equipment................................... (126,109) (181,098) Acquisition of businesses, net of acquired cash....................... (76,800) (122,805) ----------- ------------ Net cash used in investing activities................................. (202,909) (303,903) Financing activities Proceeds from short-term borrowings................................... - 474,656 Repayment of short-term borrowings.................................... (1,452,196) (448,097) Financing costs....................................................... (33,000) - Proceeds from issuance of common stock................................ 5,008,625 20,539 Proceeds from exercise of stock options............................... - 3,361 ----------- ------------ Net cash provided by financing activities............................. 3,523,429 50,459 Increase (decrease) in cash and cash equivalents...................... 2,658,979 (5,300,579) Cash and cash equivalents at beginning of period...................... 6,782,051 15,859,624 ----------- ------------ Cash and cash equivalents at end of period............................ $ 9,441,030 $ 10,559,045 =========== ============
See accompanying notes. 5 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying financial information as of December 31, 2001 is derived from audited financial statements, and the financial statements as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly its financial position as of June 30, 2002, the results of operations for the three and six months ended June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and 2001. As a result of a weak national online advertising market in 2001 and through the first six months of 2002, the Company's national online sponsorship and advertising revenue has continued to decline. This revenue decreased to approximately $1.7 million for the year ended December 31, 2001 from approximately $8.8 million for the year ended December 31, 2000. For the six months ended June 30, 2002, national online sponsorship and advertising revenue was $617,000, or $393,000 lower than the corresponding period in 2001. To respond to its liquidity needs, the Company's management completed a number of cost reduction initiatives during 2001 including reductions in staff, the restructuring of its international anchor tenant agreement with AOL, reductions in capital expenditures, as well as additional programs resulting in savings in a number of other operating expense categories, the full annual benefits of which are being realized in 2002. Further, in 2002, the Company has added a number of category specific advertising programs to its customized integrated marketing campaigns to broaden the group of potential national advertisers who can benefit from targeting the Company's audience. The Company has also supplemented its national sales force in New York with independent sales representative agencies in key markets across the United States. Revenues from these programs will initiate in the third quarter of 2002. In addition, in February 2002, the Company raised additional capital of $5.0 million, less related costs, from the sale of common stock to May Bridal Corporation ("May Bridal"), a subsidiary of May Department Stores Company ("May") and also entered into a Media Services Agreement with May (see note 7). We believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months, and our management expects to achieve positive earnings before income taxes, depreciation and amortization and positive cash flow prior to utilizing all of our current funds. This expectation is primarily based on internal estimates of revenue growth, which relate to expected increased advertising, merchandising and publishing revenues as well as continuing emphasis on controlling all operating expenses. However, there can be no assurance that actual costs will not exceed amounts estimated, that actual revenues will equal or exceed estimated amounts, or that we will achieve profitable operations, due to significant uncertainties surrounding our estimates and expectations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of The Knot and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. 6 NET LOSS PER SHARE The Company computes net loss per share in accordance with Statement of Financial Accounting Standards ("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. RESTRICTED CASH Restricted cash as of June 30, 2002 includes money held for letters of credit securing certain inventory purchases and an amount held in escrow with one of the Company's bankcard processing services providers. NET REVENUES BY TYPE Net revenues by type are as follows:
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Type Sponsorship and advertising 1,439,670 $1,118,277 $2,752,889 $ 2,527,573 Merchandise 4,227,301 2,367,699 7,288,587 4,045,921 Publishing and other 2,607,092 2,722,565 4,364,760 4,858,038 ---------- ---------- ---------- ------------ Total $8,274,063 $6,208,541 14,406,236 $11,431,532 ========== ========== ========== ============
For the three months ended June 30, 2002 and 2001, merchandise revenue included outbound shipping and handling charges of approximately $489,000 and $266,000, respectively. For the six months ended June 30, 2002 and 2001, merchandise revenue included outbound shipping and handling charges of approximately $839,000 and $461,000, respectively. COST OF REVENUES Cost of revenues by type are as follows:
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Type Sponsorship and advertising $ 139,298 $ 119,261 $ 301,732 $ 311,123 Merchandise 2,078,649 1,353,886 3,627,292 2,322,846 Publishing and other 714,578 856,535 1,396,136 1,911,074 ---------- ---------- ---------- ---------- Total $2,932,525 $2,329,682 $5,325,160 $4,545,043 ========== ========== ========== ==========
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with three major financial institutions. The Company's customers are primarily concentrated in the United States. The Company performs on-going credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. To date, such losses have been within management's expectations. For the three months ended June 30, 2002 and 2001, no one customer accounted for more than 1% and 2% of net revenues, respectively. For the six months ended June 30, 2002 and 2001, no one customer accounted for more than 1% and 2% of net revenues, respectively. At June 30, 2002 and December 31, 2001, no single customer accounted for more than 4% of accounts receivable. 7 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the guidance of the provisions of SFAS 142. Other intangible assets will continue to be amortized over their respective useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company adopted the provisions of SFAS No. 141 and SFAS No. 142 effective January 1, 2002. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt SFAS No. 143 effective January 1, 2003. The adoption of this new statement is not expected to have a material impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This standard supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The standard retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands on the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company adopted the provisions of SFAS No. 144 effective January 1, 2002. The adoption of this new statement did not have a material impact on the Company's financial statements for the three and six months ended June 30, 2002. 3. INTANGIBLE ASSETS Intangible assets consist of the following:
June 30, December 31, 2002 2001 ---- ---- Goodwill, net.................................... 8,409,136 8,409,136 Covenant not to compete.......................... 700,000 700,000 Less accumulated amortization................. (225,000) (175,000) ---------- ---------- Net 475,000 525,000 ---------- ---------- Total............................................ $8,884,136 $8,934,136 ========== ==========
During the first quarter of 2002, the Company completed an initial goodwill impairment test as of January 1, 2002. The test involved the assessment of the fair market value of the Company as the single reporting unit. No impairment of goodwill was indicated at that time. Under SFAS No. 142, the Company is required to perform goodwill impairment tests on at least an annual basis or more frequently if circumstances dictate. There can be no assurance that future goodwill impairment tests will not result in a charge to income. As of June 30, 2002, the Company had unamortized goodwill of $8.4 million. A reconciliation of reported net loss to net loss adjusted to reflect the impact of the discontinuance of the amortization of goodwill for the three and six months ended June 30, 2001 is as follows: 8
Three months Six months Ended Ended June 30, 2001 June 30, 2001 ------------- ------------- Reported net loss................................. $(4,166,287) $(10,015,434) Goodwill amortization............................. 278,109 608,933 ----------- ------------ Adjusted net loss................................. $(3,888,178) $ (9,406,501) =========== ============ Reported basic and diluted net loss per share..... $ (0.28) $ (0.68) Goodwill amortization............................. $ 0.02 $ 0.04 ----------- ------------ Adjusted basic and diluted net loss per share $ (0.26) $ (0.64) =========== ============
The covenant not to compete is being amortized over the related contractual period of seven years. 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
June 30, December 31, 2002 2001 ---- ---- Accounts payable..................................... $ 873,086 $ 772,695 Distribution and other service fees.................. 1,959,570 1,378,020 Compensation and related benefits.................... 816,684 892,122 Deposits from customers.............................. - 54,404 Other accrued expenses............................... 798,293 501,954 ---------- ---------- Total................................................ $4,447,633 $3,599,195 ========== ==========
5. SHORT-TERM BORROWINGS The Company's subsidiary, Weddingpages, Inc., had a line of credit with a bank that expired February 1, 2002, and the remaining outstanding borrowings under this line of credit of $1,245,668 were repaid. 6. LONG-TERM DEBT Long-term debt as of June 30, 2002 consists of the following: Note due in annual installments of $60,000 through October 2008, based on imputed interest of 8.75%.................................................. $304,527 9.0% equipment installment note, due in monthly installments of $4,566 through December 2002..................................................... 24,429 10.0% equipment installment note, due in monthly installments of $8,131 through August 2003....................................................... 107,260 Termination liability, due in monthly installments of $12,800 through March 2003....................................................... 115,200 -------- Total long-term debt................................................................ 551,416 Less current portion of long-term debt.............................................. 264,178 -------- Long term-debt, excluding current portion........................................... $287,238 ========
Maturities of long-term obligations for the five years ending June 30, 2007 are as follows: 2003, $264,178; 9 2004, $52,337; 2005, $39,446; 2006, $42,898; 2007, $46,651 and $105,906 thereafter. 7. INVESTMENT BY MAY DEPARTMENT STORES COMPANY On February 19, 2002, the Company entered into a Common Stock Purchase Agreement (the "Agreement") with May Bridal, pursuant to which the Company sold 3,575,747 shares of its common stock to May Bridal for $5,000,000 in cash. The Agreement provides that if the Company proposes to sell, transfer or otherwise issue any common or preferred stock or other interest convertible into common stock ("equity interests") to any third party (other than shares previously reserved or certain shares which shall be reserved for future issuance pursuant to Stock Incentive Plans approved by the Board of Directors or stockholders of the Company) and which transaction would dilute May Bridal's interest in the common stock or voting power of the Company prior to such transaction by more than one percentage point, then the Company shall offer May Bridal the right to acquire a similar equity interest, on the same terms and conditions as offered to the third party, in such amount as to preserve its percentage interest in the common stock and voting power of the Company. If the Company proposes to acquire any equity interest from a third party, which transaction would result in May Bridal's interest in the common stock or voting power of the Company exceeding 20%, then the Company shall offer to acquire equity interests from May Bridal on the same terms as offered to the third party, to permit May Bridal to own less than 20% of the common stock or voting power of the Company after the transaction. In addition, so long as May Bridal owns more than 15% of the common stock or voting power of the Company, May Bridal shall have the right to designate one member of the Board of Directors of the Company and to nominate and submit such person for election by the stockholders of the Company. On February 19, 2002, the Company entered into a Media Services Agreement with May pursuant to which the Company and May will develop an integrated marketing program to promote and support May department store companies, which offer wedding registry services. The Media Services Agreement has an initial term of three years, which may be extended under certain conditions, and may be renewed by May for up to three additional one-year terms. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements relating to future events and the future performance of The Knot based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Overview The Knot is the leading wedding resource providing products and services to couples planning their weddings and future lives together. Our Web site, at www.theknot.com, is the most trafficked wedding destination online and offers comprehensive content, extensive wedding-related shopping, an online wedding gift registry and an active community. The Knot is the premier wedding content provider on America Online (AOL Keywords: Knot and weddings) and MSN. Our national wedding magazine, The Knot Wedding Gowns, is currently being redesigned with expanded editorial covering every major wedding planning decision. We are changing the name of this publication to The Knot Weddings effective with the August 2002 issue. Through our subsidiary Weddingpages, Inc., we publish regional wedding magazines in over 20 company-owned and franchised markets in the United States. We also author a book series on wedding planning and a gift-book series on wedding gowns and wedding flowers. Through a strategic services and marketing agreement with a travel agency partner, we offer honeymoon booking and other travel services. We are based in New York and have several other offices across the country. We derive revenues from the sale of online sponsorship and advertising contracts and from the sale of merchandise. We also derive revenue from publishing and commissions from the sale of travel packages. Online 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. Online advertising revenues are derived principally from short-term contracts that typically range from one month up to one year. These contracts include online banner advertisements, direct e-mail marketing and online listings in the local area of our Web site for local wedding vendors. Certain online sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. To date, we have recognized our sponsorship and advertising revenues over the duration of the contracts on a straight line basis, as we have exceeded minimum guaranteed impressions. To the extent that minimum guaranteed impressions are not met, we are generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this were to occur, we would defer and recognize the corresponding revenues over the extended period. For the quarter ended June 30, 2002, our top seven advertisers accounted for 3% of our net revenues. For the quarter ended June 30, 2001, our top seven advertisers accounted for 6% of our net revenues. For the six months ended June 30, 2002, our top seven advertisers accounted for 4% of our net revenues. For the six months ended June 30, 2001, our top seven advertisers accounted for 7% 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 and outbound links to our sites. We do not recognize revenues with respect to these barter transactions. Merchandise revenues include the selling price of wedding supplies and products from our gift registry sold by us through our Web sites and, prior to July 2001, through a co-branded site with QVC, Inc., as well as related outbound shipping and handling charges. Merchandise revenues also include commissions earned in connection with the sale of products from our gift registry under agreements with strategic partners. Merchandise revenues are 11 recognized when products are shipped to customers, reduced by discounts as well as an allowance for estimated sales returns. Publishing revenue includes print advertising revenue derived from the publication of The Knot Wedding Gowns magazine and the publication of regional WEDDINGPAGES magazines by Weddingpages, Inc., as well as service fees and royalty fees from the publication of the WEDDINGPAGES magazine by 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 the sale of magazines on newsstands, in bookstores and online and from author royalties received related to book publishing contracts. Revenues from the sale of magazines are recognized when the products are shipped, reduced by an allowance for estimated sales returns. Royalties are recognized when all contractual obligations have been met, which typically include the delivery and acceptance of a final manuscript. Commissions earned on the sale of travel packages are recognized when the customer commences travel. Results of Operations Net Revenues Net revenues were $8.3 million and $14.4 million for the three and six months ended June 30, 2002, compared to $6.2 million and $11.4 million for the corresponding periods in 2001. Sponsorship and advertising revenues increased to $1.4 million and $2.8 million for the three and six months ended June 30, 2002, respectively, as compared to $1.1 million and $2.5 million for the corresponding periods in 2001. Revenue from local vendor online advertising programs increased by $388,000 and $618,000 for the three and six months ended June 30, 2002, respectively, or by approximately 50% and 40% when compared to the corresponding periods in 2001, as a result of additional contracts sold. These increases more than offset declines in national online sponsorship and advertising for both periods due to a reduction in the number and average value of national sponsorship and advertising contracts as a result of an overall downturn in the national online advertising sector. Sponsorship and advertising revenues amounted to 17% of our net revenues for the quarter ended June 30, 2002 and 18% for the three months ended June 30, 2001. For the six months ended June 30, 2002 and 2001, sponsorship and advertising revenues amounted to 19% and 22% of our net revenues, respectively. Merchandise revenues increased to $4.2 million and $7.3 million for the three and six months ended June 30, 2002, respectively, as compared to $2.4 million and $4.0 million for the corresponding periods in 2001. These increases were primarily due to increases in the sales of wedding supplies through our Web sites of $1.8 million and $3.1 million, respectively, or by approximately 90% in each period as a result of the expansion of product and service offerings, an increase in the average order size and increased traffic. Merchandise revenues amounted to 51% for the quarter ended June 30, 2002 and 38% for the quarter ended June 30, 2001. For the six months ended June 30, 2002 and 2001, merchandise revenue was 51% and 35% of our net revenues, respectively. Publishing and other revenues decreased to $2.6 million and $4.4 million for the three and six months ended June 30, 2002, as compared to $2.7 million and $4.9 million for the corresponding periods in 2001. For the three month period, an increase in print advertising derived from the Weddingpages operation of approximately $578,000 due to the timing of publication of WEDDINGPAGES magazines in certain markets was more than offset by a decrease in print revenue of approximately $365,000 associated with a reduction in the number of magazines published in local markets in 2002 as a result of market consolidation, principally in Florida, and, in part, by a reduction in franchise service fees and royalties of approximately $300,000. For the six month period, the decrease in revenue from 2001 of approximately $500,000 reflects the impact of the consolidation of the Florida market and the reduction in franchise service fees and royalties offset, in part, by additional revenue from The Knot Wedding Gowns magazine of $271,000 due to a larger number of print advertising contracts sold. Publishing and other revenue amounted to 32% for the quarter ended June 30, 2002 and 44% for the quarter ended June 30, 2001. For the six months ended June 30, 2002 and 2001, publishing revenue was 30% and 43% of our net revenues, respectively. 12 Cost of Revenues Cost of revenues consists primarily of the cost of merchandise sold, including outbound shipping costs, the costs related to the production of regional WEDDINGPAGES magazines and The Knot Wedding Gowns magazine, payroll and related expenses for our personnel who are responsible for the production of online and offline media and costs of Internet and hosting services. Cost of revenues increased to $2.9 million and $5.3 million for the three and six months ended June 30, 2002, respectively, from $2.3 million and $4.5 million for the corresponding periods in 2001. Cost of revenues from the sale of merchandise increased by $725,000 and $1.3 million for the three and six month periods ended June 30, 2002, respectively, as compared to the corresponding periods in 2001, as a result of increased sales of wedding supplies. These increases were offset, in part, by improved margins primarily with respect to merchandise and publishing revenues. Our margins on the sale of wedding supplies have improved as a result of sourcing products at lower costs and the introduction of higher margin products. Publishing margins have improved as a result of higher effective rates for print advertising in our regional WEDDINGPAGES magazines. As a percentage of our net revenues, cost of revenues decreased to 35% for the quarter ended June 30, 2002, from 38% for the quarter ended June 30, 2001. For the six month periods, cost of revenues decreased to 37% of net revenue in 2002 from 40% in the prior year. Product and Content Development Product and content development expenses consist primarily of payroll and related expenses for editorial, creative and information technology personnel. Product and content development expenses decreased to $990,000 and $2.0 million for the three and six months ended June 30, 2002, respectively, as compared to $1.1 million and $2.4 million for the corresponding periods in 2001. These decreases were primarily the result of cost reduction initiatives which reduced personnel and related expenses. As a percentage of our net revenues, product and content development expenses decreased to 12% and 14% for the three and six months ended June 30, 2002, respectively, from 18% and 21% for the corresponding periods in 2001. Sales and Marketing Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service and public relations personnel, as well as the costs for AOL anchor tenant agreements, advertising and promotional activities and fulfillment and distribution of merchandise. Sales and marketing expenses decreased to $3.0 million and $5.6 million for the three and six months ended June 30, 2002, respectively, as compared to $3.8 million and $8.2 million for the corresponding periods in 2001. These decreases are the result of various cost reduction initiatives which reduced personnel and related expenses, promotional materials and commission expense by $347,000, $401,000 and $204,000, respectively, for the three month period and by $831,000, $611,000 and $380,000, respectively, for the six month period. In addition, for the six month period, there was a reduction in fees of $823,000 under our International Anchor Tenant Agreement with AOL. This agreement was amended effective March 31, 2001 to limit to France the international markets which we receive distribution from AOL. To effect this amendment with AOL, we incurred a one-time restructuring fee in the first quarter of 2001. As a percentage of our net revenues, sales and marketing expenses decreased to 36% and 39% for the three and six months ended June 30, 2002, respectively, from 61% and 71% for the corresponding periods in 2001. General and Administrative General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, legal and accounting fees, facilities costs and insurance expenses. General and administrative expenses decreased to $1.9 million and $4.0 million for the three and six months ended June 30, 2002, respectively, as compared to $2.4 million and $4.7 million for the corresponding periods in 2001. These decreases were primarily due to reduced bad debt expense of $297,000 and $544,000 for the three and six month periods, respectively, as well as cost reduction initiatives which reduced personnel and related expenses by $68,000 and $113,000 for the respective three and six month periods. As a percentage of our net revenues, general 13 and administrative expenses decreased to 23% and 28% for the three and six months ended June 30, 2002, respectively, as compared to 39% and 41% for the corresponding periods in 2001. Non-Cash Compensation We recorded no deferred compensation during the three and six months ended June 30, 2002. Amortization of deferred compensation decreased to $39,000 and $93,000 for the three and six months ended June 30, 2002, respectively, as compared to $93,000 and $212,000 for the corresponding periods in 2001. Non-Cash Sales and Marketing We recorded deferred sales and marketing costs of $2.3 million related to the issuance of a warrant to AOL in connection with our amended anchor tenant agreement in July 1999. Amortization of deferred sales and marketing was $163,000 in each of the three month periods ended June 30, 2002 and 2001 and $327,000 in each of the six month periods ended June 30, 2002 and 2001. Depreciation and Amortization Depreciation and amortization expenses consist of depreciation and amortization of property and equipment and capitalized software and amortization of goodwill and other intangible assets related to acquisitions. Depreciation and amortization expenses decreased to $343,000 and $685,000 for the three and six month periods ended June 30, 2002, respectively, as compared to $619,000 and $1.3 million for the corresponding periods in 2001. These decreases were primarily due to the implementation of SFAS No. 142, effective January 1, 2002, resulting in goodwill no longer being amortized. For the three and six months ended June 30, 2001, we recorded goodwill amortization of $278,000 and $609,000, respectively. We perform goodwill impairment tests on at least an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to income. Interest Income Interest income net of interest expense decreased to $33,000 and $49,000 for the three and six months ended June 30, 2002, respectively, as compared to $95,000 and $248,000 for the corresponding periods in 2001. These decreases were primarily the result of lower amounts of cash and cash equivalents available for investment and lower interest rates. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an on-going basis. We evaluate these estimates including those related to the allowance for doubtful accounts, returns, inventory reserves, impairment of intangible assets including goodwill, deferred taxes and contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining that allowance, we evaluate a number of factors, including the credit risk of customers, historical trends and other relevant information. If the financial condition of our customers were to deteriorate, additional allowances may be required. We have acquired businesses and invest in technologies and intangible assets in areas within our strategic focus, some of which have highly volatile fair values and uncertain profit potential. In our assessment of impairment of goodwill as of January 1, 2002, we made estimates of fair value using several approaches. In our ongoing assessment of impairment of goodwill and other intangible assets, we consider whether events or changes in circumstances such as significant declines in revenues, earnings or material adverse changes in the business climate, indicate that the carrying value of the assets may be impaired. As of June 30, 2002, no impairment has occurred. Future adverse changes in market conditions or poor operating results of strategic investments could result in losses or 14 an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. Liquidity and Capital Resources As of June 30, 2002, our cash and cash equivalents amounted to $9.4 million. We currently invest primarily in short-term debt instruments that are highly liquid, of high-quality investment grade, and have maturities of less than three months with the intent to make such funds readily available for operating purposes. Net cash used in operating activities was $662,000 for the six months ended June 30, 2002. This resulted primarily from the loss for the period, as adjusted for depreciation and amortization and other non-cash charges of $2.0 million and increases in accounts receivable of $654,000 and inventory of $385,000, partially offset by increases in accounts payable and accrued expenses of $861,000 and deferred revenue of $856,000. Net cash used in operating activities was $5.0 million for the six months ended June 30, 2001. This resulted primarily from the loss for the period, as adjusted for depreciation and amortization and other non-cash charges of $3.3 million and a decrease in deferred revenue of $396,000, partially offset by decreases in accounts receivable of $1.2 million and decreases in deferred production and marketing expenses of $570,000. Net cash used in investing activities was $203,000 for the six months ended June 30, 2002, primarily due to purchases of property and equipment of $126,000 and cash paid of $77,000 with respect to a termination liability resulting from the acquisition of Weddingpages. Net cash used in investing activities was $304,000 for the six months ended June 30, 2001, primarily due to cash paid by Weddingpages for the acquisition of former franchise markets of $196,000, purchases of property and equipment of $181,000, cash paid of $77,000 with respect to a termination liability resulting from the acquisition of Weddingpages, less an amount of $150,000 received from escrow in May 2001 in satisfaction of certain claims against the sellers of Weddingpages. Net cash provided by financing activities was $3.5 million for the six months ended June 30, 2002, primarily due to proceeds from May Bridal Corporation in connection with the issuance of 3,575,747 shares of our common stock for $5,000,000, less related costs, partially offset by debt repayments, primarily the outstanding balance under Weddingpages' expired line of credit agreement of $1,245,000. Net cash provided by financing activities was $50,000 for the six months ended June 30, 2001, primarily due to the net proceeds from short term borrowings and proceeds from the issuance of common stock. As of June 30, 2002, we had no material commitments for capital expenditures. As of June 30, 2002, we had commitments under non-cancelable operating leases amounting to approximately $5.5 million, of which $575,000 will be due on or before June 30, 2003, an aggregate of $1.7 million will be due in the three years ended June 30, 2006, and $3.2 million will be due thereafter. As of June 30, 2002, in addition to amounts accrued, we had commitments under an amended anchor tenant agreement with AOL in the amount of $600,000, all of which will be due on or before October 1, 2002. As a result of a weak national online advertising market in 2001 and through the first six months of 2002, the Company's national online sponsorship and advertising revenue has continued to decline. This revenue decreased to approximately $1.7 million for the year ended December 31, 2001 from approximately $8.8 million for the year ended December 31, 2000. For the six months ended June 30, 2002, national online sponsorship and advertising revenue was $617,000, or $393,000 lower than the corresponding period in 2001. To respond to its liquidity needs, the Company's management completed a number of cost reduction initiatives during 2001 including reductions in staff, the restructuring of its international anchor tenant agreement with AOL, reductions in capital expenditures, as well as additional programs resulting in savings in a number of other operating expense categories, the full annual benefits of which are being realized in 2002. Further, in 2002, the Company has added a number of category specific advertising programs to its customized integrated marketing campaigns to broaden the group of potential national advertisers who can benefit from targeting the Company's audience. The Company has also supplemented its national sales force in New York with independent sales representative agencies in key markets across the United States. Revenues from these programs will initiate in the third quarter of 2002. In addition, as described above, in February 2002, the Company raised additional capital of $5.0 million, less related costs, from the sale of common stock to May Bridal and also entered into a Media Services Agreement with May. 15 We believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months, and our management expects to achieve positive earnings before income taxes, depreciation and amortization and positive cash flow prior to utilizing all of our current funds. This expectation is primarily based on internal estimates of revenue growth, which relate to expected increased advertising, merchandising and publishing revenues as well as continuing emphasis on controlling all operating expenses. However, there can be no assurance that actual costs will not exceed amounts estimated, that actual revenues will equal or exceed estimated amounts, or that we will achieve profitable operations, due to significant uncertainties surrounding our estimates and expectations. 16 RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Important Factors Regarding Forward-Looking Statements In addition to other information in this Quarterly Report on Form 10-Q, the following risk factors should be carefully considered in evaluating our business because such factors currently or may have a significant impact on our business, operating results or financial condition. This Quarterly Report on Form 10-Q 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 Quarterly Report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Risks Related to Our Business We have an unproven business model, and it is uncertain whether online wedding-related sites can generate sufficient revenues to survive. Our model for conducting business and generating revenues is unproven. Our business model depends in large part on our ability to generate revenue streams from multiple sources through our online sites, including: o online sponsorship and advertising fees from third parties; and o online sales of wedding gifts and supplies. It is uncertain whether wedding-related online sites that rely on attracting sponsors and advertisers, as well as people to purchase wedding gifts and supplies, can generate sufficient revenues to survive. For our business to be successful, we must provide users with an acceptable blend of products, information, services and community offerings that will attract wedding consumers to our online sites frequently. In addition, we must provide sponsors, advertisers and vendors the opportunity to reach these wedding consumers. We provide our services to users without charge, and we may not be able to generate sufficient revenues to pay for these services. 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 may continue to incur significant losses for the foreseeable future. We have not achieved profitability and have continued to incur significant losses and negative cash flow. We incurred net losses of $9.2 million for the year ended December 31, 1999, $15.8 million for the year ended December 31, 2000, $15.1 million for the year ended December 31, 2001 and $3.6 million for the six months ended June 30, 2002. As of June 30, 2002, our accumulated deficit was $47.0 million. We also expect to continue to incur significant operating expenses and, as a result, we will need to generate significant revenues to achieve and maintain profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. Failure to achieve or maintain profitability may materially and adversely affect our business, results of operations and financial condition and the market price of our common stock. For more information on our losses and the effects of our expenses on our financial performance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." We lack significant revenues and may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Our revenues for the foreseeable future will remain dependent on online user traffic levels, advertising activity both online and offline and the expansion of our e-commerce activity. In addition, we plan to expand and develop content and to continue to upgrade and enhance our technology and infrastructure. We incur a significant percentage of our expenses, such as employee compensation 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 17 unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenues or if operating expenses exceed our expectations or cannot be adjusted accordingly, then our results of operations would be materially and adversely affected. For more information on our net revenues and the effects of our expenses on our financial performance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our quarterly revenues and operating results are subject to significant fluctuation, and these fluctuations may adversely affect the trading price of our common stock. Our quarterly revenues and operating results have fluctuated significantly in the past and are expected to continue to fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include: o the level of online usage and traffic on our Web site; o demand for online and offline advertising; o seasonal trends in online usage, advertising placements and demand for merchandise; o the addition or loss of advertisers; o the advertising budgeting cycles of specific advertisers; o the number of users that purchase merchandise from us; o the magazine publishing cycle of WEDDINGPAGES; o the amount and timing of capital expenditures and other costs relating to the expansion of our operations, including those related to acquisitions; o the introduction of new sites and services by us or our competitors; o changes in our pricing policies or the pricing policies of our competitors; and o general economic conditions, as well as economic conditions specific to the Internet, electronic commerce, and 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 investors and/or securities analysts. In such event, the trading price of our common stock is likely to decline. Because the frequency of weddings vary from quarter to quarter, our operating results may fluctuate due to seasonal factors. Seasonal and cyclical patterns may affect our revenues. In 2000, according to the National Center of Health Statistics, 20% of weddings in the United States occurred in the first quarter, 26% occurred in the second quarter, 30% occurred in the third quarter and 24% 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. 18 If sales to sponsors or advertisers forecasted in a particular period are delayed or do not otherwise occur, our results of operations for a particular period would be materially and adversely affected. The time between the date of initial contact with a potential sponsor or advertiser and the execution of a contract with the sponsor or advertiser is often lengthy, typically ranging from six weeks for smaller agreements to nine months for larger agreements, and is subject to delays over which we have little or no control, including: o the occurrence of extraordinary events, such as the attacks on September 11, 2001; o customers' budgetary constraints; o customers' internal acceptance reviews; o the success and continued internal support of advertisers' and sponsors' own development efforts; and o the possibility of cancellation or delay of projects by advertisers or sponsors. During the sales cycle, we may expend substantial funds and management resources in advance of generating sponsorship or advertising revenues. Accordingly, if sales to advertisers or sponsors forecasted in a particular period are delayed or do not otherwise occur, we would generate less sponsorship and advertising revenues during that period and our results of operations 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 three months ended June 30, 2002, approximately 17% 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, Netscape and CompuServe. Under the terms of the agreement, AOL may terminate the agreement without cause only with respect to our carriage on 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 may face difficulties encountered in the new and rapidly evolving markets in which we operate. We face many of the risks and difficulties frequently encountered in new and rapidly evolving markets, including the online advertising and e-commerce markets. These risks include our ability to: o increase the audience on our sites; o broaden awareness of our brand; o strengthen user-loyalty; o offer compelling content; o maintain our leadership in generating traffic; o maintain our current, and develop new, strategic relationships; o attract a large number of advertisers from a variety of industries; 19 o respond effectively to competitive pressures; o generate revenues from the sale of merchandise and e-commerce; o continue to develop and upgrade our technology; and o attract, integrate, retain and motivate qualified personnel. These risks could negatively impact our financial condition if left unaddressed. 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 revenues to decline. Building recognition of our brand is critical to attracting and expanding our online user base and our offline readership. Because we plan to continue building brand recognition, we may find it necessary to accelerate expenditures on our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness. Our failure to successfully promote and maintain our brand would adversely affect our business and cause us to incur significant expenses in promoting our brand without an associated increase in our net revenues. Our business could be adversely affected if we are not able to successfully integrate any future acquisitions or successfully operate under our strategic partnerships. In the future, we may acquire, or invest in, complementary companies, products or technologies or enter into new strategic partnerships similar to our relationship with May Department Stores Company. Acquisitions, investments and partnerships involve numerous risks, including: o difficulties in integrating operations, technologies, products and personnel; o diversion of financial and management resources from existing operations; o risks of entering new markets; o potential loss of key employees; and o inability to generate sufficient revenues to offset acquisition or investment costs. The costs associated with potential acquisitions or strategic alliances could dilute your investment or adversely affect our results of operations. To pay for an acquisition or to enter into a strategic alliance, we might use equity securities, debt, cash, or a combination of the foregoing. If we use equity securities, our stockholders may experience dilution. In addition, an acquisition may involve non-recurring charges, including writedowns of significant amounts of goodwill. The related increases in expenses could adversely affect our results of operations. Any such acquisitions or strategic alliances may require us to obtain additional equity or debt financing, which may not be available on commercially acceptable terms, if at all. The market for Internet advertising is still developing, and if the Internet fails to gain further acceptance as a media for advertising, we would experience slower revenue growth than expected or a decrease in revenue and would incur greater than expected losses. Our future success depends in part on a significant increase in the use of the Internet as an advertising and marketing medium. Sponsorship and advertising revenues constituted 19% of our net revenues for the six months ended June 30, 2002, 20% of our net revenues for the year ended December 31, 2001 and 45% of our net revenues for the year ended December 31, 2000. Our national online sponsorship and advertising revenue has declined from approximately $1.0 million for the six months ended June 30, 2001 to approximately $617,000 for the six months 20 ended June 30, 2002. The Internet advertising market is still developing, and it cannot yet be compared with traditional advertising media to gauge its effectiveness. As a result, demand for and market acceptance of Internet advertising solutions are uncertain. Many of our current and potential customers have little or no experience with Internet advertising and have allocated only a limited portion of their advertising and marketing budgets to Internet activities. The adoption of Internet advertising, particularly by entities that have historically relied upon traditional methods of advertising and marketing, requires the acceptance of a new way of advertising and marketing. These customers may find Internet advertising to be less effective for meeting their business needs than traditional methods of advertising and marketing. Furthermore, there are software programs that limit or prevent advertising from being delivered to a user's computer. Widespread adoption of this software by users would significantly undermine the commercial viability of Internet advertising. We depend on our online sponsors and advertisers, and the loss of a number of these would result in a decline in our revenues. We depend on our online sponsors and advertisers for a significant part of our net revenues. Although no single sponsor or advertiser accounted for 5% or more of our net revenues, our eight largest sponsors and advertisers accounted for 6% of our net revenues for the year ended December 31, 2001 and our seven largest sponsors and advertisers accounted for 4% of our net revenues for the six months ended June 30, 2002. 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 joint venture in France, 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 joint venture in France, 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 successfully brand The Knot. We currently hold various Web domain names, including www.theknot.com. The acquisition and maintenance of domain names generally is regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may not successfully carry out our 21 business strategy of establishing a strong brand for The Knot if we cannot prevent others from using similar domain names or trademarks. This could impair our ability to increase market share and revenues. Our business and prospects would suffer if we are unable to protect and enforce our intellectual property rights. We rely upon copyright, trade secret and trademark law, assignment of invention and confidentiality agreements and license agreements to protect our proprietary technology, processes, content and other intellectual property to the extent that protection is sought or secured at all. The steps we might take may not be adequate to protect against infringement and misappropriation of our intellectual property by third parties. Similarly, third parties may be able to independently develop similar or superior technology, processes, content or other intellectual property. The unauthorized reproduction or other misappropriation of our intellectual property rights could enable third parties to benefit from our technology without paying us for it. If this occurs, our business and prospects would be materially and adversely affected. In addition, disputes concerning the ownership or rights to use intellectual property could be costly and time consuming to litigate, may distract management from other tasks of operating the business, and may result in our loss of significant rights and the loss of our ability to operate our business. Our products and services may infringe on intellectual property rights of third parties and any infringement could require us to incur substantial costs and distract our management. Although we avoid knowingly infringing intellectual rights of third parties, including licensed content, we may be subject to claims alleging infringement of third-party proprietary rights. If we are subject to claims of infringement or are infringing the rights of third parties, we may not be able to obtain licenses to use those rights on commercially reasonable terms, if at all. In that event, we would need to undertake substantial reengineering to continue our online offerings. Any 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 53% of our products, excluding products sold through our retail partners. Our agreement with QVC expires in December 2003. QVC does not have any obligation to renew this agreement. If QVC's ability to provide us with these services in a timely fashion or at all is impaired, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, system failures or for any other reason, or if the services agreement is not renewed, we would not be able, at least temporarily, to sell or ship 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 twelve months. Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to achieve profitable operations and/or raise additional financing through public or private equity financings, or other arrangements with corporate sources, or other sources of financing to fund operations. However, there is no assurance that we will achieve profitable operations or that additional funding, if required, will be available to us in amounts or on terms acceptable to us. Increased competition in our markets could reduce our market share, the number of our advertisers, our advertising revenues and our margins. The Internet advertising and online wedding markets are still developing. Additionally, both the Internet advertising and online wedding markets and the wedding magazine publishing markets are intensely competitive, and we expect such competition to intensify in the future. 22 We face competition for members, users, readers and advertisers from the following areas: o online services or Web sites targeted at brides and grooms as well as the online sites of retail stores, manufacturers and regional wedding directories; o bridal magazines, such as Bride's and Modern Bride (both part of the Conde Nast family); and o online and retail stores offering gift registries, especially from retailers offering specific bridal gift registries. We expect competition to increase because of the business opportunities presented by the growth of the Internet and e-commerce. Our competition may also intensify as a result of industry consolidation and a lack of 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 employees who are important to the success of our business. We may also face difficulties attracting, integrating or retaining other highly qualified employees in the future. If we cannot attract new personnel or retain and motivate our current personnel, our business may not succeed. Terrorism and the uncertainty of war may have a material adverse effect on our operating results. Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate, our operations and profitability and your investment. Further terrorist attacks against the United States or U.S. businesses may occur. The potential near-term and long-term effect these attacks may have for our customers, the market for our common stock, the markets for our services and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. 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, acts of terrorism 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 presently have any secondary "off-site" systems or a formal disaster recovery plan. Our sites must accommodate a high volume of traffic and deliver frequently updated information. Our sites have in the past experienced slower response times. These types of occurrences in the future could cause users to perceive our sites as not functioning properly and therefore cause them to use another online site or other methods to 23 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. If our current providers were to experience prolonged systems failures or delays, we would need to pursue alternative sources of services. Although alternative sources of these services are available, we may be unable to secure such services on a timely basis or on terms favorable to us. As a result, we may experience business disruptions if these third parties fail to provide reliable software, systems and related services to us. We may be liable if third parties misappropriate our users' personal information. If third parties were able to penetrate our network security or otherwise misappropriate our users' personal or credit card information, we could be subject to liability. Our liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims as well as for other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in costly and time-consuming litigation which could adversely affect our financial condition. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could have additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. Our executive officers, directors and 5% or greater stockholders exercise significant control over all matters requiring a stockholder vote. As of June 30, 2002, our executive officers and directors and stockholders who each owned greater than 5% of our common stock, and their affiliates, in the aggregate, beneficially owned approximately 76% of our outstanding common stock. As a result, these stockholders are able to exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership could also have the effect of delaying or preventing a change in control. Anti-takeover provisions in our charter documents and Delaware law may make it difficult for a third party to acquire us. Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Risks Related to the Securities Markets 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. The delisting of our common stock from the Nasdaq National Market has resulted, and could continue to result, 24 in a limited public market for our common stock and larger spreads in the bid and ask prices for shares of our common stock and could result in lower prices for shares of our common stock and make obtaining future equity financing more difficult. On August 23, 2001, our common stock was delisted from the Nasdaq National Market. Our common stock is currently available for quotation on the OTC Bulletin Board. Selling our common stock has become, and may continue to be, more difficult because smaller quantities of shares are bought and sold on the OTC Bulletin Board, transactions could be delayed and news media coverage of us has been reduced. These factors have resulted, and could continue to result, in larger spreads in the bid and ask prices for shares of our common stock and could result in lower prices for shares of our common stock. The delisting of our common stock from the Nasdaq National Market and any further declines in our stock price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and significantly increase the dilution to stockholders caused by our issuing equity in financing or other transactions. The price at which we issue shares in such transactions is generally based on the market price of our common stock, and a decline in our stock prices could result in the need for us to issue a greater number of shares to raise a given amount of funding or acquire a given dollar value of goods or services. Our stock price has been highly volatile and is likely to experience extreme price and volume fluctuations in the future that could reduce the value of your investment and subject us to litigation. The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile, with extreme price and volume fluctuations. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance, and for this or other reasons we could continue to suffer significant declines in the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. Risks Related to the Internet Industry If the use of the Internet and commercial online services as media for commerce does not continue to grow, our business and prospects would be materially and adversely affected. We cannot assure you that a sufficiently broad base of consumers will adopt, and continue to use, the Internet and commercial online services as media for commerce, particularly for purchases of wedding gifts and supplies. Even if consumers adopt the Internet or commercial online services as a media for commerce, we cannot be sure that the necessary infrastructure will be in place to process such transactions. Our long-term viability depends substantially upon the widespread acceptance and the development of the Internet or commercial online services as effective media for consumer commerce and for advertising. Use of the Internet or commercial online services to effect retail transactions and to advertise is at an early stage of development. Convincing consumers to purchase wedding gifts and supplies online may be difficult. Demand for recently introduced services and products over the Internet and commercial online services is subject to a high level of uncertainty. Few proven services and products exist. The development of the Internet and commercial online services into a viable commercial marketplace is subject to a number of factors, including: o continued growth in the number of users of such services; o concerns about transaction security; o continued development of the necessary technological infrastructure; o development of enabling technologies; o uncertain and increasing government regulation; and 25 o the development of complementary services and products. If users experience difficulties because of capacity constraints of the infrastructure of the Internet and other commercial online services, potential users may not be able to access our sites and our business and prospects would be harmed. To the extent that the Internet and other online services continue to experience growth in the number of users and frequency of use by consumers resulting in increased bandwidth demands, there can be no assurance that the infrastructure for the Internet and other online services will be able to support the demands placed upon them. The Internet and other online services have experienced outages and delays as a result of damage to portions of their infrastructure, power failures, telecommunication outages, network service outages and disruptions, natural disasters and vandalism and other misconduct. Outages or delays, could adversely affect online sites, e-mail and the level of traffic on all sites. We depend on online access providers that provide our users with access to our services. In the past, users have experienced difficulties due to systems failures unrelated to our systems. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet or other online service activity or to increased governmental regulation. Insufficient availability of telecommunications services to support the Internet or other online services also could result in slower response times and negatively impact use of the Internet and other online services generally, and our sites in particular. If the use of the Internet and other online services fails to grow or grows more slowly than expected, if the infrastructure for the Internet and other online services does not effectively support growth that may occur or if the Internet and other online services do not become a viable commercial marketplace, we may not achieve profitability. We may be unable to respond to the rapid technological change in the Internet industry and this may harm our business. If we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, we could lose users and market share to our competitors. The Internet and e-commerce are characterized by rapid technological change. Sudden changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices could render our existing online sites and proprietary technology and systems obsolete. The emerging nature of products and services in the online wedding market and their rapid evolution will require that we continually improve the performance, features and reliability of our online services. Our success will depend, in part, on our ability: o to enhance our existing services; o to develop and license new services and technology that address the increasingly sophisticated and varied needs of our prospective customers and users; and o to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of online sites and other proprietary technology entails significant technological and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively or adapt our online sites, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. Updating our technology internally and licensing new technology from third parties may require significant additional capital expenditures. If we become subject to burdensome government regulation and legal uncertainties related to doing business online, our sponsorship, advertising and merchandise revenues could decline and our business and prospects could suffer. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Laws and regulations may be adopted covering issues such as user privacy, pricing, content, taxation and quality of products and services. Any new legislation could hinder the growth in use of the Internet and other online services generally and decrease the acceptance of the Internet and other online services as 26 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. To date, we have had limited experience selling products online and developing relationships with manufacturers or suppliers of such products. We sell a range of products targeted specifically at brides and grooms through The Knot Registry, The Knot Shop, Bridalink.com 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 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. 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact the financial position, result of operations, or cash flows of the company due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. We are exposed to some market risk through interest rates related to the investment of our current cash and cash equivalents of approximately $9.4 million as of June 30, 2002. 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. PART II. OTHER INFORMATION Item 1. Legal Proceedings On August 14, 2000, certain Weddingpages franchisees commenced litigation in the Supreme Court, New York County, New York against The Knot and certain officers, including David Liu, the Chairman and Chief Executive Officer. The plaintiffs sought (1) to enjoin The Knot 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 (2) money damages in an unspecified amount. On October 19, 2000, The Knot 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, March and April 2001, as a result of negotiations among the parties, with the assistance of the mediator, non-monetary settlements were reached with seven of the plaintiffs in the action. Six franchisees have not executed the settlement agreement as negotiated. Five of those franchisees have since sought a temporary restraining order and a preliminary injunction to keep The Knot from, among other things, soliciting Internet advertisement sales within those franchisees' Weddingpages franchise territories. On May 31, 2001, the Court denied the franchisees' motion for a temporary restraining order. On July 2, 2001, the Court heard arguments on the franchisees' motion for a preliminary injunction. At the same time, the Court heard arguments on Weddingpages' cross-motion to compel arbitration and on the Knot's cross-motion to stay litigation pending arbitration. On August 22, 2001, the Court denied the remaining franchisees' request for injunctive relief against The Knot, effectively ordered the franchisees to arbitrate their claims against Weddingpages, and stayed the action against The Knot pending the completion of such arbitration. In denying the remaining franchisees' motion for injunctive relief, the Court agreed with The Knot's legal arguments in every material respect. Most significantly, in a three-page opinion, the Court held that the franchisees would be unlikely to succeed on the merits of their claims against The Knot. Despite the Court's order, the franchisees failed to take any action to initiate arbitration of their dispute with Weddingpages. Thus, on January 25, 2002, Weddingpages commenced arbitration by filing a Demand for Arbitration before the American Arbitration Association. On April 17, 2002, the franchisees filed a motion to lift the stay in favor of The Knot and for a preliminary injunction enjoining The Knot from directly soliciting the franchisees' customers for The Knot's Internet Web site. On May 23, 2002, The Knot and Weddingpages settled with three of the five remaining franchisees with no admission of liability, damages or payments being made to the franchisees. The settlement was stipulated to on the record in court and "So Ordered" by the judge, and is believed by the Knot to be final and binding on the parties. The franchisees have not yet signed the written settlement agreement due to a few minor issues which we believe will be resolved shortly. To the extent that the remaining two plaintiffs proceed with their case, we will continue to vigorously exercise our rights and oppose the franchisees' overreaching claims. 28 Item 4. Submission of Matters to a Vote of Security Holders We held our 2002 Annual Meeting of Stockholders on May 15, 2002. At that meeting, our stockholders approved the following proposals: (i) election of David Liu as a director whose term expires in 2005 and (ii) ratification of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2002. There were 16,676,137 votes cast for, and 20,135 votes cast against, in connection with the election of David Liu as a director. The remainder of our board of directors remains as previously reported. There were 16,667,069 votes cast for, 9,110 votes cast against and 20,093 abstentions in connection with the ratification of Ernst & Young LLP as independent auditors. Item 6. Exhibits and Report on Form 8-K a) Exhibits 99.1 Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, As Adopted Pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, As Adopted Pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002. b) Report on Form 8-K None. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2002 THE KNOT, INC. By: /s/ Richard Szefc ---------------------------------------------------- Richard Szefc Chief Financial Officer (Principal Financial Officer and Duly Authorized Signatory) 30 Exhibit Index Exhibit Number Description - -------------- ----------- 99.1 Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, As Adopted Pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, As Adopted Pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002. 31 EX-99 3 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of The Knot, Inc. (the "Company") for the period ended June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David Liu, Chairman and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David Liu -------------------------------------- David Liu Chairman and Chief Executive Officer Date: August 14, 2002 EX-99 4 ex99-2.txt EXHIBIT 99.2 Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of The Knot, Inc. (the "Company") for the period ended June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard Szefc, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard Szefc ------------------------- Richard Szefc Chief Financial Officer Date: August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----