-----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, DS3MHbweupmcHhCYFU0yLYEDfVGeZIZvnlDneojfU2weRd2DIGL0rwgUwSe2B+ro yvuC//wKvHqq9/NzwhsQJg== 0000950117-03-002068.txt : 20030513 0000950117-03-002068.hdr.sgml : 20030513 20030513164905 ACCESSION NUMBER: 0000950117-03-002068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030513 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: 03696097 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 a35273.txt THE KNOT, INC. U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 000-28271 THE KNOT, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 13-3895178 (State of incorporation) (I.R.S. Employer Identification Number) 462 Broadway, 6th Floor New York, New York 10013 (Address of Principal Executive Officer and Zip Code) (212) 219-8555 (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes [ ] No [X] As of May 9, 2003, there were 18,404,036 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 March 31, 2003 and December 31, 2002....................................................................... 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002........................................................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002........................................................... 5 Notes to Condensed Consolidated Financial Statements.................................... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations... 11 Item 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 26 Item 4: Controls and Procedures................................................................. 26 PART II OTHER INFORMATION Item 1: Legal Proceedings....................................................................... 27 Item 6: Exhibits and Reports on Form 8-K........................................................ 27
2 Item 1. Financial Statements (Unaudited) THE KNOT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2003 2002* (Unaudited) ----------- ------------ Assets Current assets: Cash and cash equivalents .................................................. $ 9,412,927 $ 9,305,670 Restricted cash............................................................. 252,852 251,871 Accounts receivable, net of allowances of $1,283,991 and $960,223 at March 31, 2003 and December 31, 2002, respectively..................... 3,771,429 4,791,458 Inventories................................................................. 1,493,290 1,291,866 Deferred production and marketing costs..................................... 205,766 443,502 Other current assets........................................................ 741,432 556,358 ----------- ------------ Total current assets........................................................... 15,877,696 16,640,725 Property and equipment, net.................................................... 1,973,554 1,948,481 Intangible assets, net......................................................... 8,809,136 8,834,136 Other assets................................................................... 346,537 351,570 ------------ ------------ Total assets................................................................... $ 27,006,923 $ 27,774,912 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses....................................... $ 4,883,319 $ 5,112,586 Deferred revenue............................................................ 5,489,133 5,827,432 Current portion of long-term debt........................................... 76,268 137,674 ------------ ------------ Total current liabilities...................................................... 10,448,720 11,077,692 Long-term debt................................................................. 234,901 234,901 Other liabilities.............................................................. 473,566 445,088 ------------ ------------ Total liabilities.............................................................. 11,157,187 11,757,681 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 100,000,000 shares authorized; 18,404,036 shares and 18,373,327 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively....................... 184,040 183,733 Additional paid-in-capital.................................................. 64,399,692 64,399,894 Deferred compensation....................................................... (27,045) (54,835) Accumulated deficit......................................................... (48,706,951) (48,511,561) ------------- ------------- Total stockholders' equity..................................................... 15,849,736 16,017,231 ------------ ------------ Total liabilities and stockholders' equity..................................... $ 27,006,923 $ 27,774,912 ============ ============
*The condensed consolidated balance sheet as of December 31, 2002 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 THE KNOT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 2003 2002 ---- ---- Net revenues....................................................... $ 8,665,640 $ 6,132,173 Cost of revenues................................................... 2,930,924 2,392,635 ----------- ----------- Gross profit....................................................... 5,734,716 3,739,538 Operating expenses: Product and content development................................. 1,072,063 1,033,769 Sales and marketing............................................. 2,861,506 2,615,188 General and administrative...................................... 1,738,866 2,037,620 Non-cash compensation........................................... 20,386 53,930 Non-cash sales and marketing.................................... - 163,308 Depreciation and amortization................................... 253,155 342,207 ----------- ----------- Total operating expenses........................................... 5,945,976 6,246,022 ----------- ----------- Loss from operations............................................... (211,260) (2,506,484) Interest income, net............................................... 15,870 15,329 ----------- ----------- Net loss........................................................... $ (195,390) $(2,491,155) =========== =========== Net loss per share - basic and diluted............................. $ (0.01) $ (0.15) =========== =========== Weighted average number of shares used in calculating basic and diluted net loss per share............................ 18,394,233 16,540,836 =========== ===========
See accompanying notes. 4 THE KNOT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2003 2002 ---- ---- Operating activities Net loss ............................................................. $ (195,390) $(2,491,155) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................................... 228,155 317,207 Amortization of intangibles........................................ 25,000 25,000 Amortization of deferred compensation.............................. 20,386 53,930 Amortization of deferred sales and marketing....................... - 163,308 Reserve for returns................................................ 678,584 391,829 Allowance for doubtful accounts.................................... 26,851 290,951 Other non-cash charges............................................. 5,968 3,973 Changes in operating assets and liabilities........................... Restricted cash.................................................... (981) (100,084) Accounts receivable................................................ 314,594 44,849 Inventories........................................................ (201,424) (84,881) Deferred production and marketing.................................. 237,736 186,901 Other current assets............................................... (185,074) 46,431 Other assets....................................................... 5,033 21,500 Accounts payable and accrued expenses.............................. (257,873) (76,624) Deferred revenue................................................... (338,299) 567,157 Other liabilities.................................................. 28,478 32,229 ----------- ----------- Net cash provided by (used in) operating activities................... 391,744 (607,479) Investing activities Purchases of property and equipment................................... (230,590) (49,059) Acquisition of businesses, net of acquired cash....................... (38,400) (38,400) ----------- ----------- Net cash used in investing activities................................. (268,990) (87,459) Financing activities Repayment of current portion of long term borrowings.................. (23,006) (1,417,930) Financing costs....................................................... - (33,000) Proceeds from issuance of common stock................................ - 5,008,625 Proceeds from exercise of stock options............................... 7,509 - ----------- ----------- Net cash provided by (used in) financing activities................... (15,497) 3,557,695 Increase in cash and cash equivalents................................. 107,257 2,862,757 Cash and cash equivalents at beginning of period...................... 9,305,670 6,782,051 ----------- ----------- Cash and cash equivalents at end of period............................ $ 9,412,927 $ 9,644,808 =========== ===========
See accompanying notes. 5 THE KNOT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying financial information as of December 31, 2002 is derived from audited financial statements. The financial statements as of March 31, 2003 and for the three months ended March 31, 2003 and 2002 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly its financial position as of March 31, 2003, the results of operations for the three months ended March 31, 2003 and 2002 and cash flows for the three months ended March 31, 2003 and 2002. As a result of a weak national online advertising market in 2001 and early 2002, the Company's national online sponsorship and advertising revenue decreased from approximately $8.8 million for the year ended December 31, 2000 to approximately $1.7 million and $1.9 million for the years ended December 31, 2001 and 2002, respectively. To respond to its liquidity needs, the Company's management completed a number of cost reduction initiatives during 2001 including reductions in staff, the restructuring of its international anchor tenant agreement with America Online ("AOL"), reductions in capital expenditures, as well as additional programs resulting in savings in a number of other operating expense categories, the full annual benefits of which were realized in 2002. Operating expenses before depreciation and amortization and other non-cash charges decreased from approximately $27.1 million in 2001 to $22.4 million in 2002. Further, in 2002, the Company added a number of category specific advertising programs to broaden the group of potential national advertisers who can benefit from targeting its audience. These programs commenced in the third quarter of 2002 and are expected to contribute to further growth in national online advertising revenue in 2003. The Company has also increased the number of markets and advertising programs available to local vendors and has expanded the product and service offerings available to consumers of wedding supplies. In addition, in February 2002, the Company raised additional capital of $5.0 million, less related costs, from the sale of common stock to May Bridal Corporation ("May Bridal"), an affiliate of May Department Stores Company ("May") and also entered into a Media Services Agreement with May. As a result of these initiatives, the Company believes that its current cash and cash equivalents will be sufficient to fund its working capital and capital expenditure requirements for at least the next twelve months. This expectation is primarily based on internal estimates of revenue growth, which relate to expected increased advertising, merchandising and publishing revenues as well as continuing emphasis on controlling all operating expenses. However, there can be no assurance that actual costs will not exceed amounts estimated, that actual revenues will equal or exceed estimated amounts, or that the Company will achieve profitable operations, due to significant uncertainties surrounding its estimates and expectations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of The Knot and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. NET LOSS PER SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share." Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share adjusts basic loss per share for the effects of convertible securities, stock 6 options and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. There were no dilutive securities in any of the periods presented herein. SEGMENT INFORMATION The Company operates in one segment. RESTRICTED CASH Restricted cash as of March 31, 2003 and December 31, 2002 includes money held for letters of credit securing certain inventory purchases and an amount held in escrow with one of the Company's bankcard processing services providers. NET REVENUES BY TYPE Net revenues by type are as follows:
Three Months Ended March 31, 2003 2002 ---- ---- Sponsorship and advertising............................ $2,859,238 $1,313,219 Merchandise............................................ 3,777,231 3,061,286 Publishing and other................................... 2,029,171 1,757,668 ---------- ---------- Total.................................................. $8,665,640 $6,132,173 ========== ==========
For the three months ended March 31, 2003 and 2002, merchandise revenue included outbound shipping and handling charges of approximately $435,000 and $351,000, respectively. COST OF REVENUES Cost of revenues by type are as follows:
Three Months Ended March 31, 2003 2002 ---- ---- Sponsorship and advertising............................ $ 90,601 $ 162,435 Merchandise............................................ 1,889,685 1,548,643 Publishing and other................................... 950,638 681,557 ---------- ---------- Total.................................................. $2,930,924 $2,392,635 ========== ==========
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with three major financial institutions. The Company's customers are primarily concentrated in the United States. The Company performs on-going credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. To date, such losses have been within management's expectations. For the three months ended March 31, 2003 and 2002, no customer accounted for more than 2% of net revenues. At March 31, 2003 and December 31, 2002, no single customer accounted for more than 3% of accounts receivable. STOCK-BASED COMPENSATION Stock-based compensation is accounted for by using the intrinsic value-based method in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and the Company complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the Company only records compensation expense for any stock options granted with an exercise price that is less than the fair market value of the underlying stock at the date of grant. The Company does not record compensation expense for rights to purchase shares under its Employee Stock Purchase Plan 7 ("ESPP") because it satisfies certain conditions under APB 25. The following table details the effect on net income and earnings per share had stock-based compensation expense been recorded based on the fair value method under SFAS No. 123, as amended.
Three Months Ended March 31, 2003 2002 ---- ---- Net loss, as reported .......................... $ (195,390) $ (2,491,155) Add: Total stock-based employee compensation expense included in reported net loss............................. 20,386 53,930 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards........ $ (59,425) $ (147,775) -------------- ------------ Net loss, pro forma $ (234,429) $ (2,585,000) ============== ============ Basic and diluted net loss per share, as reported $ (0.01) $ (0.15) ============== ============ Basic and diluted net loss per share, pro forma $ (0.01) $ (0.16) ============== ============
The fair value for options and ESPP rights granted have been estimated on the date of grant using the minimum value method option pricing model from inception through December 1, 1999, the day prior to the Company's initial public offering of its common stock, and using the Black-Scholes pricing model thereafter. For purposes of pro forma disclosures, the estimated fair value of stock-based employee compensation is amortized to expense over the related vesting period and valuation allowances are included for net deferred tax assets. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations. This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted SFAS No. 143 effective January 1, 2003. The adoption of this new statement did not have a material impact on the Company's financial statements. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard addresses issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that currently are accounted for pursuant to the guidance that the Emerging Issues Task Force set forth in Issue No. 94-3. The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease, (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred- compensation contract and (3) costs to consolidate facilities or relocate employees. SFAS No. 146 is required to be effective for exit or disposal activities initiated after December 31, 2002 and does not affect the recognition of costs under the Company's current activities. Adoption of this standard may impact the timing of the recognition of costs associated with future exit or disposal activities, depending upon the actions initiated. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("Interpretation"). This Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. In November 2002, the Emerging Issues Task Force (EITF") reached a consensus opinion on EITF 00-21 "Revenue Arrangements with Multiple Deliverables." This Issue addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue 00-21 will be effective 8 for revenue arrangements entered into for fiscal quarters beginning after June 15, 2003, or the Company may elect to report the change in accounting as a cumulative-effect adjustment. The Company is reviewing EITF 00-21 and has not yet determined the impact this Issue will have on its operating results or financial position. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for fiscal years and interim periods ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148. SFAS No. 148 did not require the Company to change to the fair value method of accounting for stock-based compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" which requires the consolidation of variable interest entities, as defined. This interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003, must be consolidated effective July 1, 2003. The Company has not created any variable interest entities. 3. INVENTORY Inventory consists of the following:
March 31, December 31, 2003 2002 ---- ---- Raw materials............................................ $ 88,315 $ 91,556 Finished goods........................................... 1,404,975 1,200,310 ---------- ---------- $1,493,290 $1,291,866 ========== ==========
4. INTANGIBLE ASSETS Intangible assets consist of the following:
March 31, December 31, 2003 2002 ---- ---- Goodwill, net........................................... $8,409,136 $8,409,136 Covenant not to compete................................. 700,000 700,000 Less accumulated amortization....................... (300,000) (275,000) ---------- ---------- Net..................................................... 400,000 425,000 ---------- ---------- Total................................................... $8,809,136 $8,834,136 ========== ==========
The Company completed its most recent goodwill impairment test as of October 1, 2002. The test involved the assessment of the fair market value of the Company as the single reporting unit. No impairment of goodwill was indicated at that time. Under SFAS No. 142, the Company is required to perform goodwill impairment tests on at least an annual basis or more frequently if circumstances dictate. There can be no assurance that future goodwill impairment tests will not result in a charge to income. The covenant not to compete is being amortized over the related contractual period of seven years. Estimated annual amortization expense of the covenant not to compete is $100,000 in each of fiscal years 2003 through 2006 and $25,000 in fiscal 2007. 9 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
March 31, December 31, 2003 2002 ---- ---- Accounts payable......................................... $ 983,613 $ 768,329 Distribution and other service fees...................... 2,593,001 2,574,024 Compensation and related benefits........................ 540,913 1,020,916 Other accrued expenses................................... 765,792 749,317 ---------- ---------- Total.................................................... $4,883,319 $5,112,586 ========== ==========
6. LONG-TERM DEBT Long-term debt as of March 31, 2003 consists of the following: Note due in annual installments of $60,000 through October 2008, based on imputed interest of 8.75%............................................... $271,173 10.0% equipment installment note, due in monthly installments of $8,131 through August 2003.................................................... 39,996 -------- Total long-term debt............................................................. 311,169 Less current portion of long-term debt........................................... 76,268 -------- Long term-debt, excluding current portion........................................ $234,901 ========
Maturities of long-term obligations for the five years ending March 31, 2008 are as follows: 2004, $76,268; 2005, $39,446; 2006, $42,898; 2007, $46,651 and 2008, $50,733 and $55,173 thereafter. Interest expense for the three months ended March 31, 2003 and 2002 was $12,000 and $21,000, respectively. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements relating to future events and the future performance of The Knot based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Overview The Knot is the leading wedding resource providing products and services to couples planning their weddings and future lives together. Our Web site, at www.theknot.com, is the most trafficked wedding destination online and offers comprehensive content, extensive wedding-related shopping, an online wedding gift registry and an active community. The Knot is the leading wedding content provider on America Online (AOL Keywords: Knot and weddings) and MSN. We publish The Knot Magazine, which features editorial content covering every major wedding planning decision and is distributed to newsstands and bookstores across the nation. Through our subsidiary, Weddingpages, Inc., we publish regional wedding magazines in 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. We are based in New York and have several other offices across the country. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an on-going basis. We evaluate these estimates including those related to revenue recognition, allowances for doubtful accounts and returns, inventory reserves, impairment of intangible assets including goodwill and deferred taxes. Actual results may differ from these estimates under different assumptions or conditions. Revenue Recognition We derive revenues from the sale of online sponsorship and advertising contracts, from the sale of merchandise and from the publication of magazines. Online sponsorship revenues are derived principally from longer-term contracts currently ranging up to thirty-six months. Sponsorships are designed to integrate advertising with specific online editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific online editorial area and can purchase a special feature on our sites. These programs commonly include banner advertisements and direct e-mail marketing. Online advertising revenues are derived principally from short-term contracts that typically range from one month up to one year. These contracts may include online banner advertisements, placement in our online search tools, direct e-mail marketing and online listings in the local area of our Web site for local wedding vendors. Local vendors may also purchase online listings through fixed term or open-ended subscriptions. Certain online sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. To date, we have recognized our sponsorship and advertising revenues over the duration of the contracts on a straight-line basis, as we have exceeded minimum guaranteed impressions. To the extent that minimum guaranteed impressions are not met, we are generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this were to occur, we would defer and recognize the corresponding revenues over the extended period. For the three months ended March 31, 2003, our top seven advertisers accounted for 6% of our net revenues. 11 For the three months ended March 31, 2002, our top seven advertisers accounted for 5% of our net revenues. Merchandise revenues include the selling price of wedding supplies and products from our gift registry sold by us through our web sites as well as related outbound shipping and handling charges. Merchandise revenues also include commissions earned in connection with the sale of products from our gift registry under agreements with certain strategic partners. Merchandise revenues are recognized when products are shipped to customers, reduced by discounts as well as an allowance for estimated sales returns. Publishing revenue includes print advertising revenue derived from the publication of The Knot Weddings magazine and the publication of regional WEDDINGPAGES magazines by our subsidiary Weddingpages, Inc., as well as service fees and royalty fees from the publication of the WEDDINGPAGES magazine by franchisees and fees from the license of the Weddingpages' name for use in publication by certain former franchisees. These revenues and fees are recognized upon the publication of the related magazines, at which time all material services related to the magazine have been performed, or as fees are earned under the terms of license agreements. Additionally, publishing revenues are derived from the sale of magazines on newsstands, in bookstores and online and from author royalties received related to book publishing contracts. Revenues from the sale of magazines are recognized when the products are shipped, reduced by an allowance for estimated sales returns. Royalties are recognized when all contractual obligations have been met, which typically include the delivery and acceptance of a final manuscript. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. As of March 31, 2003 and December 31, 2002, our allowance for doubtful accounts amounted to $744,000 and $774,000, respectively. In determining these allowances, we evaluate a number of factors, including the credit risk of customers, historical trends and other relevant information. If the financial condition of our customers were to deteriorate, additional allowances may be required. Inventory In order to record our inventory at its lower of cost or market, we assess the ultimate realizability of our inventory, which requires us to make judgments as to future demand and compare that with current inventory levels. We record a provision to adjust our inventory balance based upon that assessment. As our merchandise revenues grow, the investment in inventory will likely increase. It is possible that we may need to further increase our inventory provisions in the future. Goodwill As of March 31, 2003, we had recorded goodwill and other intangible assets of $8,809,000. In our most recent assessment of impairment of goodwill as of October 1, 2002, we made estimates of fair value using several approaches. In our ongoing assessment of impairment of goodwill and other intangible assets, we consider whether events or changes in circumstances such as significant declines in revenues, earnings or material adverse changes in the business climate, indicate that the carrying value of assets may be impaired. As of March 31, 2003, no impairment has occurred. Future adverse changes in market conditions or poor operating results of strategic investments could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. Deferred Taxes A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount for which recovery is probable. As of March 31, 2003, we have established a full valuation allowance of $19.3 million against our net deferred tax assets because of our history of operating losses. Depending on the amount and timing of taxable income we may ultimately generate in the future, as well as other factors, we could recognize no benefit from our deferred tax assets, in accordance with our current estimate, or we could recognize some or all of their full value. 12 Results of Operations Net Revenues Net revenues increased to $8.7 million for the three months ended March 31, 2003 from $6.1 million for the three months ended March 31, 2002. Sponsorship and advertising revenues increased to $2.9 million for the three months ended March 31, 2003, as compared to $1.3 million for the three months ended March 31, 2002. Revenue from local vendor online advertising programs increased by $820,000 or approximately 83% primarily as a result of additional contracts sold which was due, in part, to expansion in the number of local markets serviced and in the number of programs offered. In addition, there was an increase of approximately $726,000 in national online sponsorship and advertising revenue due to a larger number of contracts sold including contracts related to our category specific programs. Sponsorship and advertising revenues amounted to 33% of our net revenues for the three months ended March 31, 2003 and 21% of our net revenues for the three months ended March 31, 2002. Merchandise revenues increased to $3.8 million for the three months ended March 31, 2003, as compared to $3.1 million for the three months ended March 31, 2002. This increase was primarily due to an increase in sales of wedding supplies through our websites of $775,000, or by approximately 28% as a result of the expansion of product and service offerings and increased membership and traffic. Merchandise revenues amounted to 43% of our net revenues for the three months ended March 31, 2003 and 50% of our net revenues for the three months ended March 31, 2002. Publishing and other revenues increased to $2.0 million for the three months ended March 31, 2003, as compared to $1.8 million for the three months ended March 31, 2002. The increase in revenue was primarily derived from The Knot Magazine through the sale of a larger number of print advertising contracts and an increase in the number of copies sold as a result of increased circulation. Publishing and other revenues amounted to 23% of our net revenues for the three months ended March 31, 2003 and 29% of our net revenues for the three months ended March 31, 2002. Cost of Revenues Cost of revenues consists of the cost of merchandise sold, including outbound shipping costs, the costs related to the production of regional magazines and our national magazine, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of Internet and hosting services. Cost of revenues increased to $2.9 million for the three months ended March 31, 2003, from $2.4 million for the three months ended March 31, 2002. Cost of revenues from the sale of merchandise increased by $341,000 primarily as a result of increased sales of wedding supplies. In addition, cost of revenues for The Knot Magazine increased by $293,000 as a result of a larger number of copies printed due to increased distribution for the February 2003 issue. As a percentage of our net revenues, cost of revenues decreased to 34% for the three months ended March 31, 2003, from 39% for the three months ended March 31, 2002 primarily due to a larger mix of higher margin sponsorship and advertising revenues. The improvement resulting from the change in our revenue mix was offset, in part, by a reduced publishing margin due to the investment associated with the increased number of copies distributed of The Knot Magazine which we expect to recover from further growth in print advertising in future issues of this publication. Product and Content Development Product and content development expenses consist primarily of payroll and related expenses for editorial, creative and information technology personnel. Product and content development expenses increased to $1.1 million for the three months ended March 31, 2003 from $1.0 million for the three months ended December 31, 2002. This increase resulted from small increases in personnel and related expenses and in a number of other expense categories. As a percentage of our net revenues, product and content development expenses decreased to 12% for the three months ended March 31, 2003 from 17% for the three months ended March 31, 2002. 13 Sales and Marketing Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service and public relations personnel, as well as the costs for advertising and promotional activities and fulfillment and distribution of merchandise. Sales and marketing expenses increased to $2.9 million for the three months ended March 31, 2003 from $2.6 million for the three months ended March 31, 2002. The increase was the result of higher personnel and related costs of $133,000 to support the growth of our wedding supplies operation, higher commissions of $185,000 as a result of increased advertising revenue and an increase of approximately $196,000 in promotion, fulfillment and other costs related to the increased distribution of The Knot Magazine. These increases were partially offset by the elimination of $300,000 of quarterly distribution fees under our anchor tenant agreement with AOL. As a percentage of our net revenues, sales and marketing expenses decreased to 33% for the three months ended March 31, 2003 from 43% for the three months ended March 31, 2002. General and Administrative General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, legal and accounting fees, facilities costs, insurance and bad debts expenses. General and administrative expenses decreased to $1.7 million for the three months ended March 31, 2003 from $2.0 million for the three months ended March 31, 2002. This decrease was primarily due to reduced bad debt expense of $264,000 as a result of improved collections from local vendors due, in part, to a higher proportion of payments made through credit cards, as well as improved collections from national advertisers and franchisees. As a percentage of our net revenues, general and administrative expenses decreased to 20% for the three months ended March 31, 2003 from 33% for the three months ended March 31, 2002. Non-Cash Compensation We recorded no deferred compensation during the three months ended March 31, 2003. Amortization of deferred compensation for this period decreased to $20,000 from $54,000 for the three months ended March 31, 2002. Non-Cash Sales and Marketing We recorded deferred sales and marketing of $2.3 million related to the issuance of a warrant to AOL in connection with our amended anchor tenant agreement in July 1999. Deferred sales and marketing was fully amortized as of December 31, 2002. Depreciation and Amortization Depreciation and amortization expenses consist of depreciation and amortization of property and equipment and capitalized software and amortization of intangible assets related to acquisitions. Depreciation and amortization expenses decreased to $253,000 for the three months ended March 31, 2003, from $342,000 for the three months ended March 31, 2002. The decrease was primarily due to a reduction in capital expenditures in fiscal 2002 and 2001. Interest Income Interest income, net of interest expense, was $16,000 for the three months ended March 31, 2003, which approximated the amount in the corresponding period for 2002. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations. This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement of tangible long-lived assets and the associated 14 asset retirement costs. We adopted SFAS No. 143 effective January 1, 2003. The adoption of this new statement did not have a material impact on our financial statements. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard addresses issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that currently are accounted for pursuant to the guidance that the Emerging Issues Task Force set forth in Issue No. 94-3. The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease, (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred- compensation contract and (3) costs to consolidate facilities or relocate employees. SFAS No. 146 is required to be effective for exit or disposal activities initiated after December 31, 2002 and does not affect the recognition of costs under our current activities. Adoption of this standard may impact the timing of the recognition of costs associated with future exit or disposal activities, depending upon the actions initiated. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("Interpretation"). This Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. In November 2002, the Emerging Issues Task Force (EITF") reached a consensus opinion on EITF 00-21 "Revenue Arrangements with Multiple Deliverables." This Issue addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue 00-21 will be effective for revenue arrangements entered into for fiscal quarters beginning after June 15, 2003, or we may elect to report the change in accounting as a cumulative-effect adjustment. We are reviewing EITF 00-21 and have not yet determined the impact this Issue will have on our operating results or financial position. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for fiscal years and interim periods ending after December 15, 2002. We have adopted the disclosure provisions of SFAS No. 148. SFAS No. 148 did not require us to change to the fair value method of accounting for stock-based compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" which requires the consolidation of variable interest entities, as defined. This interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003, must be consolidated effective July 1, 2003. We have not created any variable interest entities. Liquidity and Capital Resources As of March 31, 2003, 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 provided by operating activities was $392,000 for the three months ended March 31, 2003. Depreciation and amortization, reserve for returns and other non-cash charges exceeded the loss for the period by $790,000 and accounts receivable and deferred production and marketing costs decreased by $315,000 and $238,000, respectively. These sources of cash were partially offset by increases in inventory and other current assets of $201,000 and $185,000, respectively, and by decreases in accounts payable and accrued expenses of $258,000 and deferred 15 revenue of $338,000. Effective October 1, 2002, local vendors are no longer pre-billed for their full contractual amounts via statements but are invoiced for individual amounts due in accordance with our standard payment terms. The impact of this billing modification reduced accounts receivable and deferred revenue in equal amounts of approximately $1.2 million from December 31, 2002 through March 31, 2003. Net cash used in operating activities was $607,000 for the three months ended March 31, 2002. This resulted primarily from the loss for the period, as adjusted for depreciation and amortization and other non-cash charges of $1.2 million, partially offset by a decrease in deferred production and marketing expense of $187,000 and an increase in deferred revenue of $567,000. Net cash used in investing activities was $269,000 for the three months ended March 31, 2003 primarily due to purchases of property and equipment. Net cash used in investing activities was $87,000 for the three months ended March 31, 2002, primarily due to purchases of property and equipment of $49,000 and cash paid of $38,000 with respect to a termination liability resulting from the acquisition of Weddingpages. Net cash used in financing activities was $15,000 for the three months ended March 31, 2003 primarily due to repayments of the current portion of long-term debt. Net cash provided by financing activities was $3,558,000 for the three months ended March 31, 2002, primarily due to proceeds from May Bridal Corporation in connection with the issuance of 3,575,747 shares of our common stock for $5,000,000, less related costs, partially offset by the repayment of the outstanding balance under Weddingpages' line of credit agreement on February 22, 2002 of $1,245,668. As of March 31, 2003, we had no material commitments for capital expenditures. As of March 31, 2003, we had commitments under non-cancelable operating leases amounting to approximately $6.3 million, of which $793,000 will be due on or before March 31, 2004, an aggregate of $2.4 million will be due in the three years ended March 31, 2007, and $3.2 million will be due thereafter. These commitments include amounts under an operational lease, signed in October 2002, for a new building being constructed to house our expanding operations in Redding, California. The term of this lease is five years commencing upon completion of construction, which is currently anticipated to occur in June 2003. As a result of a weak national online advertising market in 2001 and early 2002, our national online sponsorship and advertising revenue decreased from approximately $8.8 million for the year ended December 31, 2000, to approximately $1.7 million and $1.9 million for the years ended December 31, 2001 and 2002, respectively. To respond to our liquidity needs, we completed a number of cost reduction initiatives during 2001, including reductions in staff, the restructuring of our international anchor tenant agreement with AOL, reductions in capital expenditures, as well as additional programs resulting in savings in a number of operating expense categories, the full annual benefits of which were realized in 2002. Operating expenses before depreciation and amortization and other non-cash charges decreased from approximately $27.1 million in 2001 to $22.4 million in 2002. Further, in 2002, we added a number of category specific advertising programs to broaden the group of potential national advertisers who can benefit from targeting our audience. These programs commenced in the third quarter of 2002 and are expected to contribute to further growth in national online advertising revenue in 2003. We have also increased the number of markets and advertising programs available to local vendors and have expanded the product and service offerings available to consumers of wedding supplies. In addition, as discussed above, in February 2002, we raised additional capital of $5.0 million, less related costs, from the sale of common stock to May Bridal Corporation ("May Bridal"), a subsidiary of May Department Stores Company ("May") and also entered into a Media Services Agreement with May. As a result of these initiatives, we believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. This expectation is primarily based on internal estimates of revenue growth, which relate to expected increased advertising, merchandising and publishing revenues as well as continuing emphasis on controlling all operating expenses. However, there can be no assurance that actual costs will not exceed amounts estimated, that actual revenues will equal or exceed estimated amounts, or that we will achieve profitable operations, due to significant uncertainties surrounding our estimates and expectations. 16 RISK FACTORS THAT MAY AFFECT FUTURE RESULTS In addition to other information in this Quarterly Report on Form 10-Q, the following risk factors should be carefully considered in evaluating our business because such factors currently or may have a significant impact on our business, operating results or financial condition. This Quarterly Report on Form 10-Q may contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this Quarterly Report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Risks Related to Our Business We have an unproven business model, and it is uncertain whether online wedding-related sites can generate sufficient revenues to survive. Our model for conducting business and generating revenues is unproven. Our business model depends in large part on our ability to generate revenue streams from multiple sources through our online sites, including online sponsorship and advertising fees from third parties and online sales of wedding gifts and supplies. It is uncertain whether wedding-related online sites that rely on attracting sponsors and advertisers, as well as people to purchase wedding gifts and supplies, can generate sufficient revenues to survive. For our business to be successful, we must provide users with an acceptable blend of products, information, services and community offerings that will attract wedding consumers to our online sites frequently. In addition, we must provide sponsors, advertisers and vendors the opportunity to reach these wedding consumers. We provide our services to users without charge, and we may not be able to generate sufficient revenues to pay for these services. Moreover, we face many of the risks and difficulties frequently encountered in new and rapidly evolving markets, including the online advertising and e-commerce markets. These risks include our ability to: o increase the audience on our sites; o broaden awareness of our brand; o strengthen user-loyalty; o offer compelling content; o maintain our leadership in generating traffic; o maintain our current, and develop new, strategic relationships; o attract a large number of advertisers from a variety of industries; o respond effectively to competitive pressures; o continue to develop and upgrade our technology; and o attract, integrate, retain and motivate qualified personnel. These risks could negatively impact our financial condition if left unaddressed. Accordingly, we are not certain that our business model will be successful or that we can sustain revenue growth or be profitable. For more information on the effects of some of these risks, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." 17 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 incurred significant losses. We incurred net losses of $15.1 million for the year ended December 31, 2001, $5.1 million for the year ended December 31, 2002 and approximately $195,000 for the three months ended March 31, 2003. As of March 31, 2003, our accumulated deficit was $48.7 million. We 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, prior to generating revenues associated with those expenses. Moreover, our expense levels are based, in part, on our expectation of future revenues. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenues or if operating expenses exceed our expectations or cannot be adjusted accordingly, then our results of operations would be materially and adversely affected. For more information on our net revenues and the effects of our expenses on our financial performance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." If sales to sponsors or advertisers forecasted in a particular period are delayed or do not otherwise occur, our results of operations for a particular period would be materially and adversely affected. The time between the date of initial contact with a potential sponsor or advertiser and the execution of a contract with the sponsor or advertiser is often lengthy, typically ranging from six weeks for smaller agreements and longer for larger agreements, and is subject to delays over which we have little or no control, including: o the occurrence of extraordinary events, such as the attacks on September 11, 2001; o customers' budgetary constraints; o customers' internal acceptance reviews; o the success and continued internal support of advertisers' and sponsors' own development efforts; and o the possibility of cancellation or delay of projects by advertisers or sponsors. During the sales cycle, we may expend substantial funds and management resources in advance of generating sponsorship or advertising revenues. Accordingly, if sales to advertisers or sponsors forecasted in a particular period are delayed or do not otherwise occur, we would generate less sponsorship and advertising revenues during that period, and our results of operations may be adversely affected. Our quarterly revenues and operating results are subject to significant fluctuation, and these fluctuations may adversely affect the trading price of our common stock. Our quarterly revenues and operating results have fluctuated significantly in the past and are expected to continue to fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include: o the level of online usage and traffic on our Web sites; 18 o seasonal demand for online and offline advertising and e-commerce; o the addition or loss of advertisers; o the advertising budgeting cycles of specific advertisers; o the regional magazine publishing cycle; o the amount and timing of capital expenditures and other costs relating to the expansion of our operations, including those related to acquisitions; o the introduction of new sites and services by us or our competitors; o changes in our pricing policies or the pricing policies of our competitors; and o general economic conditions, as well as economic conditions specific to the Internet, online and offline media and electronic commerce. We do not believe that period-to-period comparisons of our operating results are necessarily meaningful and you should not rely upon these comparisons as indicators of our future performance. Due to the foregoing factors, it is also possible that our results of operations in one or more future quarters may fall below the expectations of investors and/or securities analysts. In such event, the trading price of our common stock is likely to decline. Because the frequency of weddings vary from quarter to quarter, our operating results may fluctuate due to seasonality. Seasonal and cyclical patterns may affect our revenues. In 2001, according to the National Center of Health Statistics, 19% of weddings in the United States occurred in the first quarter, 28% occurred in the second quarter, 29% occurred in the third quarter and 24% occurred in the fourth quarter. We have limited experience generating merchandise revenues. Based upon our limited experience, we believe merchandise revenues generally are lower in the fourth quarter of each year. In addition, we believe that advertising sales in traditional media, such as television and radio, and print generally are lower in the first and third calendar quarters of each year. Historically, we have experienced increases in our traffic during the first and second quarters of the year. As a result of these factors, we may experience fluctuations in our revenues from quarter to quarter. We depend on our strategic relationships with other Web sites. We depend on establishing and maintaining distribution relationships with high-traffic Web sites such as AOL, MSN and Yahoo! for a portion of our traffic. There is intense competition for placements on these sites, and we may not be able to continue to enter into such relationships on commercially reasonable terms, if at all. Even if we enter into distribution relationships with these Web sites, they themselves may not attract a significant number of users. Therefore, our sites may not receive additional users from these relationships. Moreover, we may be required to pay significant fees to establish and maintain these relationships. Our business, results of operations and financial condition could be materially and adversely affected if we do not establish and maintain strategic relationships on commercially reasonable terms or if any of our strategic relationships do not result in increased use of our Web sites. The market for Internet advertising is still developing, and if the Internet fails to gain further acceptance as a media for advertising, we would experience slower revenue growth than expected or a decrease in revenue and would incur greater than expected losses. Our future success depends, in part, on a significant increase in the use of the Internet as an advertising and marketing medium. Sponsorship and advertising revenues constituted 20% of our net revenues for the year ended December 31, 2001, 23% of our net revenues for the year ended December 31, 2002 and 33% of our net revenues for the three months ended March 31, 2003. Our national online sponsorship and advertising revenue was approximately $1.7 million for the year ended December 31, 2001, $1.9 million for the year ended December 31, 2002 and $1.1 million for the three months ended March 31, 2003. The Internet advertising market is still developing, and it cannot yet be compared with traditional advertising media to gauge its effectiveness. As a result, demand for and market 19 acceptance of Internet advertising solutions are uncertain. Many of our current and potential customers have little or no experience with Internet advertising and have allocated only a limited portion of their advertising and marketing budgets to Internet activities. The adoption of Internet advertising, particularly by entities that have historically relied upon traditional methods of advertising and marketing, requires the acceptance of a new way of advertising and marketing. These customers may find Internet advertising to be less effective for meeting their business needs than traditional methods of advertising and marketing. Furthermore, there are software programs that limit or prevent advertising from being delivered to a user's computer. Widespread adoption of this software by users would significantly undermine the commercial viability of Internet advertising. We may be unable to continue to build awareness of The Knot brand name which would negatively impact our business and cause our revenues to decline. Building recognition of our brand is critical to attracting and expanding our online user base and our offline readership. Because we plan to continue building brand recognition, we may find it necessary to accelerate expenditures on our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness. Our failure to successfully promote and maintain our brand would adversely affect our business and cause us to incur significant expenses in promoting our brand without an associated increase in our net revenues. Our business could be adversely affected if we are not able to successfully integrate any future acquisitions or successfully operate under our strategic partnerships. In the future, we may acquire, or invest in, complementary companies, products or technologies or enter into new strategic partnerships. Acquisitions, investments and partnerships involve numerous risks, including: o difficulties in integrating operations, technologies, products and personnel; o diversion of financial and management resources from existing operations; o risks of entering new markets; o potential loss of key employees; and o inability to generate sufficient revenues to offset acquisition or investment costs. The costs associated with potential acquisitions or strategic alliances could dilute your investment or adversely affect our results of operations. To pay for an acquisition or to enter into a strategic alliance, we might use equity securities, debt, cash, or a combination of the foregoing. If we use equity securities, our stockholders may experience dilution. In addition, an acquisition may involve non-recurring charges, including writedowns of significant amounts of goodwill. The related increases in expenses could adversely affect our results of operations. Any such acquisitions or strategic alliances may require us to obtain additional equity or debt financing, which may not be available on commercially acceptable terms, if at all. If we cannot protect our domain names, it will impair our ability to successfully brand The Knot. We currently hold various Web domain names, including www.theknot.com. The acquisition and maintenance of domain names generally is regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may not successfully carry out our business strategy of establishing a strong brand for The Knot if we cannot prevent others from using similar domain names or trademarks. This could impair our ability to increase market share and revenues. 20 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 43% of our products, excluding products sold through our retail partners. Our agreement with QVC expires in December 2003. QVC does not have any obligation to renew this agreement. If QVC's ability to provide us with these services in a timely fashion or at all is impaired, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, system failures or for any other reason, or if the services agreement is not renewed, we would not be able, at least temporarily, to sell or ship certain of our products to our customers. We may be unable to engage alternative warehousing, fulfillment and distribution services on a timely basis or upon terms favorable to us. Increased competition in our markets could reduce our market share, the number of our advertisers, our advertising revenues and our margins. The Internet advertising and online wedding markets are still developing. Additionally, both the Internet advertising and online wedding markets and the wedding magazine publishing markets are intensely competitive, and we expect competition to intensify in the future. We face competition for members, users, readers and advertisers from the following areas: o online services or Web sites targeted at brides and grooms as well as the online sites of retail stores, manufacturers and regional wedding directories; o bridal magazines, such as Bride's and Modern Bride (both part of the Conde Nast family); and o online and retail stores offering gift registries, especially from retailers offering specific bridal gift registries. We expect competition to increase because of the business opportunities presented by the growth of the Internet and e-commerce. Our competition may also intensify as a result of industry consolidation and a lack of 21 substantial barriers to entry. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user, membership or readership bases than we have and, therefore, have significant ability to attract advertisers, users and readers. In addition, many of our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in Internet user requirements, as well as devote greater resources than we can to the development, promotion and sale of services. There can be no assurance that our current or potential competitors will not develop products and services comparable or superior to those that we develop or adapt more quickly than we do to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, lower margins or loss of market share. There can be no assurance that we will be able to compete successfully against current and future competitors. Our potential inability to compete effectively in our industry for qualified personnel could hinder the success of our business. Competition for personnel in the Internet and wedding industries is intense. We may be unable to retain employees who are important to the success of our business. We may also face difficulties attracting, integrating or retaining other highly qualified employees in the future. If we cannot attract new personnel or retain and motivate our current personnel, our business may not succeed. Terrorism and the uncertainty of war may have a material adverse effect on our operating results. Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate or our operating results. Further terrorist attacks against the United States or U.S. businesses may occur. The potential near-term and long-term effect these attacks may have for our customers, the market for our common stock, the markets for our services and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business. We may not be able to obtain additional financing necessary to execute our business strategy. We currently believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to 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. Systems disruptions and failures could cause advertiser or user dissatisfaction and could reduce the attractiveness of our sites. The continuing and uninterrupted performance of our computer systems is critical to our success. Our advertisers and sponsors, users and members may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services and content to them. Substantial or repeated system disruption or failures would reduce the attractiveness of our online sites significantly. Substantially all of our systems hardware required to run our sites are located at Globix Corporation's facilities in New York, New York. Globix emerged from bankruptcy protection in April 2002. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, acts of terrorism and similar events could damage these systems. Our operations depend on the ability of Globix to protect its own systems and our systems in its data center against damage from fire, power loss, water damage, telecommunications failure, vandalism and similar unexpected adverse events. Although Globix provides comprehensive facilities management services, Globix does not guarantee that our Internet access will be uninterrupted, error-free or secure. In addition, computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our online sites. Our business could be materially and adversely affected if our systems were affected by any of these occurrences. We do not presently have any secondary "off-site" systems or a formal disaster recovery plan. Our sites must accommodate a high volume of traffic and deliver frequently updated information. Our sites have in the past experienced slower response times. These types of occurrences in the future 22 could cause users to perceive our sites as not functioning properly and therefore cause them to use another online site or other methods to obtain information or services. In addition, our users depend on Internet service providers, online service providers and other site operators for access to our online sites. Many of them have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system disruptions or failures unrelated to our systems. Although we carry general liability insurance, our insurance may not cover any claims by dissatisfied advertisers or customers or may not be adequate to indemnify us for any liability that may be imposed in the event that a claim were brought against us. Any system disruption or failure, security breach or other damage that interrupts or delays our operations could cause us to lose users, sponsors and advertisers and adversely affect our business and results of operations. We may not be able to deliver various services if third parties fail to provide reliable software, systems and related services to us. We are dependent on various third parties for software, systems and related services in connection with our hosting, placement of advertising, accounting software, data transmission and security systems. Several of the third parties that provide software and services to us have a limited operating history and have relatively new technology. These third parties are dependent on reliable delivery of services from others. If our current providers were to experience prolonged systems failures or delays, we would need to pursue alternative sources of services. Although alternative sources of these services are available, we may be unable to secure such services on a timely basis or on terms favorable to us. As a result, we may experience business disruptions if these third parties fail to provide reliable software, systems and related services to us. We may be liable if third parties misappropriate our users' personal information. If third parties were able to penetrate our network security or otherwise misappropriate our users' personal or credit card information, we could be subject to liability. Our liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims as well as for other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in costly and time-consuming litigation which could adversely affect our financial condition. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could have additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. Our executive officers, directors and 5% or greater stockholders exercise significant control over all matters requiring a stockholder vote. As of March 31, 2003, our executive officers and directors and stockholders who each owned greater than 5% of our common stock, and their affiliates, in the aggregate, beneficially owned approximately 78% of our outstanding common stock. As a result, these stockholders are able to exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership could also have the effect of delaying or preventing a change in control. Anti-takeover provisions in our charter documents and Delaware law may make it difficult for a third party to acquire us. Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Risks Related to the Securities Markets The delisting of our common stock from the Nasdaq National Market has resulted, and could continue to result, in a limited public market for our common stock and larger spreads in the bid and ask prices for shares of our common stock and could result in lower prices for shares of our common stock and make obtaining future equity financing more difficult. On August 23, 2001, our common stock was delisted from the Nasdaq National Market. Our common stock 23 is currently available for quotation on the OTC Bulletin Board. Selling our common stock has become, and may continue to be, more difficult because smaller quantities of shares are bought and sold on the OTC Bulletin Board, transactions could be delayed and news media coverage of us has been reduced. These factors have resulted, and could continue to result, in larger spreads in the bid and ask prices for shares of our common stock and could result in lower prices for shares of our common stock. The delisting of our common stock from the Nasdaq National Market and any further declines in our stock price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and significantly increase the dilution to stockholders caused by our issuing equity in financing or other transactions. The price at which we issue shares in such transactions is generally based on the market price of our common stock, and a decline in our stock prices could result in the need for us to issue a greater number of shares to raise a given amount of funding or acquire a given dollar value of goods or services. Our stock price has been highly volatile and is likely to experience extreme price and volume fluctuations in the future that could reduce the value of your investment and subject us to litigation. The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile, with extreme price and volume fluctuations. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance, and for this or other reasons, we could continue to suffer significant declines in the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. Risks Related to the Internet Industry If the use of the Internet and commercial online services as media for commerce does not continue to grow, our business and prospects would be materially and adversely affected. We cannot assure you that a sufficiently broad base of consumers will adopt, and continue to use, the Internet and commercial online services as media for commerce, particularly for purchases of wedding gifts and supplies. Even if consumers adopt the Internet or commercial online services as a media for commerce, we cannot be sure that the necessary infrastructure will be in place to process such transactions. Our long-term viability depends substantially upon the widespread acceptance and the development of the Internet or commercial online services as effective media for consumer commerce and for advertising. Use of the Internet or commercial online services to effect retail transactions and to advertise is at an early stage of development. Convincing consumers to purchase wedding gifts and supplies online may be difficult. Demand for recently introduced services and products over the Internet and commercial online services is subject to a high level of uncertainty. Few proven services and products exist. The development of the Internet and commercial online services into a viable commercial marketplace is subject to a number of factors, including: o continued growth in the number of users of such services; o concerns about transaction security; o continued development of the necessary technological infrastructure; o consistent quality of service; o availability of cost-effective, high speed service; o uncertain and increasing government regulation; and o the development of complementary services and products. 24 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 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 three years to determine 25 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 or other e-commerce sites that we may acquire in the future. Such a strategy involves numerous risks and uncertainties. Although our agreements with manufacturers typically contain provisions intended to limit our exposure to liability claims, these limitations may not prevent all potential claims. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our financial results, reputation and brand name. We may incur significant expenses related to the security of personal information online. The need to transmit securely confidential information online has been a significant barrier to e-commerce and online communications. Any well-publicized compromise of security could deter people from using the Internet or other online services or from using them to conduct transactions that involve transmitting confidential information. Because our success depends on the acceptance of online services and e-commerce, we may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact the financial position, result of operations, or cash flows of the company due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. We are exposed to some market risk through interest rates related to the investment of our current cash and cash equivalents of approximately $9.4 million as of March 31, 2003. These funds are generally invested in highly liquid debt instruments with short-term maturities. As such instruments mature and the funds are re-invested, we are exposed to changes in market interest rates. This risk is not considered material and we manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments. We have no activities related to derivative financial instruments or derivative commodity instruments, and we are not currently subject to any significant foreign currency exchange risk. Item 4. Controls and Procedures Based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days of the filing of this quarterly report, the Chief Executive Officer and the Chief Financial Officer have concluded that such controls and procedures are effective. 26 There were no significant changes in the Company's internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is engaged in legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations and financial position. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 99.1 Certification of Chairman and Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) Reports on Form 8-K We filed a current report on Form 8-K, item 5, dated January 6, 2003 and filed on January 9, 2003, reporting that we entered into the First Amendment to the Amended and Restated Anchor Tenant Agreement with America Online, Inc. We filed a current report on Form 8-K, item 5, dated February 25, 2003 and filed on February 26, 2003, reporting that we issued a press release announcing our financial results as of and for the quarter and year ended December 31, 2002. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 13, 2003 THE KNOT, INC. By: /s/ Richard Szefc ------------------------------------------ Richard Szefc Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 28 CERTIFICATIONS I, DAVID LIU, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Knot, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 By: /s/ DAVID LIU ---------------------------------------- Name: David Liu Title: Chairman and Chief Executive Officer (principal executive officer) 29 I, RICHARD SZEFC, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Knot, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 By: /s/ RICHARD SZEFC -------------------------------------------- Name: Richard Szefc Title: Chief Financial Officer, Treasurer and Secretary (principal financial officer) 30 EXHIBIT INDEX Number Description - ------ ----------- 99.1 Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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 March 31, 2003, 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. Section 1350, as adopted pursuant to Section 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: May 13, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 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 March 31, 2003, 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. Section 1350, as adopted pursuant to Section 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: May 13, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----