-----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, K58okkX4nCnZpVs88VoyTONo0JcqoJeyJJiv677FRNEZ4EVpGSPtRfYNgfgUFB4r zANXK9ZmVKxPnfXQ2s3ycg== 0000950123-00-005121.txt : 20000517 0000950123-00-005121.hdr.sgml : 20000517 ACCESSION NUMBER: 0000950123-00-005121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: SEC FILE NUMBER: 000-28271 FILM NUMBER: 636479 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 THE KNOT, INC. 1 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, 2000 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 or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
462 BROADWAY, 6TH FLOOR NEW YORK, NEW YORK 10013 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICER AND ZIP CODE) (212) 219-8555 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No |_| As of May 12, 2000, there were 14,591,057 shares of the registrant's common stock outstanding. 2
Page Number ------ PART I FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited): Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999...................................................................... 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999.......................................................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999.......................................................... 5 Notes to Condensed Consolidated Financial Statements................................... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 10 Item 3: Quantitative and Qualitative Disclosures About Market Risk............................. 26 PART II OTHER INFORMATION Item 1: Legal Proceedings...................................................................... 27 Item 2: Changes in Securities and Use of Proceeds.............................................. 27 Item 3: Defaults Upon Senior Securities........................................................ 27 Item 4: Submission of Matters to a Vote of Security Holders.................................... 27 Item 5: Other Information...................................................................... 27 Item 6: Exhibits and Reports on Form 8-K....................................................... 27
2 3 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) THE KNOT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999* (UNAUDITED) ------------ ------------- ASSETS Current assets: Cash and cash equivalents .................................................. $ 27,483,267 $ 40,006,175 Short-term investments ..................................................... 118,514 501,000 Accounts receivable, net of allowance of $912,000 and $133,000, respectively 5,920,894 1,333,158 Inventories ................................................................ 505,108 478,345 Deferred marketing costs ................................................... 2,772,963 - Other current assets ....................................................... 1,110,499 671,519 ------------ ------------ Total current assets ........................................................... 37,911,245 42,990,197 Property and equipment, net .................................................... 2,920,873 1,554,373 Intangible assets, net ......................................................... 8,695,265 541,638 Other assets ................................................................... 398,158 399,792 ------------ ------------ Total assets ................................................................... $ 49,925,541 $ 45,486,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ...................................... $ 3,878,678 $ 1,444,578 Note payable ............................................................... 1,867,862 - Current portion of long term debt .......................................... 75,489 - Deferred revenue ........................................................... 2,469,059 408,934 ------------ ------------ Total current liabilities ...................................................... 8,291,088 1,853,512 Long term debt ................................................................. 420,692 - Other liabilities .............................................................. 91,822 57,093 ------------ ------------ Total liabilities .............................................................. 8,803,602 1,910,605 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 100,000,000 shares authorized; 14,531,342 and 14,510,612 shares issued and outstanding at March 31, 2000 and December 31, 1999, respectively .................. 145,313 145,106 Additional paid-in-capital ................................................. 60,023,776 60,206,664 Deferred compensation ...................................................... (1,805,510) (2,262,974) Deferred sales and marketing ............................................... (1,796,369) (1,959,677) Accumulated deficit ........................................................ (15,445,271) (12,553,724) ------------ ------------ Total stockholders' equity ..................................................... 41,121,939 43,575,395 ------------ ------------ Total liabilities and stockholders' equity ..................................... $ 49,925,541 $ 45,486,000 ============ ============
* The condensed consolidated balance sheet as of December 31, 1999 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 4 THE KNOT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2000 1999 ---- ---- Net revenues .............................................................................. $ 3,719,032 $ 194,431 Cost of revenues............................................................................ 1,154,828 53,220 ------------- ------------- Gross profit ............................................................................... 2,564,204 141,211 Operating expenses: Product and content development......................................................... 945,011 400,367 Sales and marketing..................................................................... 2,830,700 706,347 General and administrative.............................................................. 1,570,484 420,280 Non-cash compensation................................................................... 264,418 128,912 Non-cash sales and marketing............................................................ 163,308 - Depreciation and amortization........................................................... 254,281 69,137 ------------- ------------- Total operating expenses.................................................................... 6,028,202 1,725,043 ------------- ------------- Loss from operations........................................................................ (3,463,998) (1,583,832) Interest income (expense), net.............................................................. 572,451 (9,719) ------------- ------------- Net loss ............................................................................... $ (2,891,547) $ (1,593,551) ============= ============= Net loss per share - basic and diluted...................................................... $ (0.20) $ (0.53) ============= ============= Weighted average number of shares used in calculating basic and diluted net loss per share.................................................... 14,518,954 3,034,104 ============= =============
See accompanying notes. 4 5 THE KNOT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ---- ---- OPERATING ACTIVITIES Net loss .................................................................. $ (2,891,547) $ (1,593,551) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................................. 170,632 32,016 Amortization of goodwill................................................... 83,649 37,121 Amortization of deferred compensation...................................... 264,418 128,912 Amortization of deferred sales and marketing............................... 163,308 - Allowance for doubtful accounts............................................ 25,000 45,875 Changes in operating assets and liabilities: Accounts receivable........................................................ (1,154,938) (116,975) Inventories................................................................ (26,763) (30,257) Other current assets....................................................... (143,470) (101,671) Other assets............................................................... 1,634 (50) Accounts payable and accrued expenses...................................... 1,155,257 98,411 Deferred revenue........................................................... 178,088 131,056 Other liabilities.......................................................... 34,729 - ------------- ------------ Net cash used in operating activities.......................................... (2,140,003) (1,369,113) INVESTING ACTIVITIES Purchases of property and equipment............................................ (1,079,922) (190,730) Maturity of short term investments............................................. 501,000 - Acquisition of businesses, net of acquired cash................................ (9,299,260) - ------------- ------------ Net cash used in investing activities.......................................... (9,878,182) (190,730) FINANCING ACTIVITIES Proceeds from short term borrowings............................................ - 750,000 Financing costs................................................................ (515,088) - Proceeds from exercise of stock options........................................ 10,365 - ------------- ------------ Net cash (used in) provided by financing activities............................ (504,723) 750,000 Decrease in cash and cash equivalents.......................................... (12,522,908) (809,843) Cash and cash equivalents at beginning of period............................... 40,006,175 1,037,589 ------------- ------------ Cash and cash equivalents at end of period..................................... $ 27,483,267 $ 227,746 ============= ============
See accompanying notes. 5 6 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The information presented as of March 31, 2000 and for the three month period ended March 31, 2000 and 1999, is unaudited, but, in the opinion of management of The Knot, Inc. ("Company"), contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the financial position as of March 31, 2000, the consolidated results of its operations for the three month period ended March 31, 2000 and 1999 and its cash flows for the three month period ended March 31, 2000 and 1999. The financial statements included herein have been prepared in accordance with generally accepted accounting principles. All information includes adjustments to historical results (consisting only of normal recurring entries) necessary for a fair presentation and, in our opinion, have been prepared on the same basis as the audited financial statements. Certain historical financial information has been reclassified to conform with current presentation. These financial statements should be read in conjunction with the Company's audited financial statements and accompanying notes for the year ended December 31, 1999 included in the Company's Form 10-K as filed with the Securities and Exchange Commission. 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. DEFERRED REVENUE AND DEFERRED MARKET COSTS Amounts billed and related costs from producing the Weddingpages book are deferred until publication, at which time all material services relating to the book have been substantially performed. NET REVENUES BY TYPE Net revenues by type are as follows:
THREE MONTHS ENDED MARCH 31, ----------------------------- 2000 1999 ---- ---- TYPE Sponsorship, advertising and production..................................... $ 2,574,757 $ 129,749 Merchandise................................................................. 887,168 11,199 Publishing, travel and other................................................ 257,107 53,483 ------------ ------------- Total....................................................................... $ 3,719,032 $ 194,431 ============ =============
For the three months ended March 31, 2000 and 1999, merchandise revenue included outbound shipping and handling charges of approximately $78,000 and $1,000, respectively. 6 7 NET LOSS PER SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share." Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share adjusts basic loss per share for the effects of convertible securities, stock options and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. There were no dilutive securities in any of the periods presented herein. 7 8 3. ACQUISITIONS Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of February 1, 2000, by and among the Company, Knot Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company ("Buyer") and Weddingpages, Inc., a Delaware corporation ("Weddingpages"), Buyer merged with and into Weddingpages on March 29, 2000, with Weddingpages as the surviving Corporation (the "Merger.") The Merger was affected through the conversion of each share of common stock and Class A common stock of Weddingpages (each, a "Common Stock") outstanding immediately prior to the consummation of the Merger into the right to receive in cash an amount equal to $1.78. Of that $1.78 per share, $0.10 per share is held in an escrow account pursuant to the terms of an escrow arrangement described in the Merger Agreement. The amount retained in the escrow account is subject to certain deductions in the event of third party claims against certain indemnified parties. The aggregate purchase price of $10.1 million consisted of approximately $9.2 million for the common stock and related common stock options of Weddingpages, inclusive of $700,000 paid to the former Chief Executive Officer of Weddingpages in consideration for the execution of a non-compete agreement and approximately $876,000 of other costs associated with the acquisition. The difference between the purchase price and the fair value of the acquired assets in Weddingpages was recorded as intangible assets and will be amortized over the periods of expected benefit, which are estimated to range from seven to ten years. The intangible assets were calculated as shown below:
Cash paid for acquisition $ 9,188,000 Acquisition costs 876,000 ------------------------ Purchase price $ 10,064,000 Fair value of net tangible assets acquired 1,827,000 ------------------------ Intangible assets $ 8,237,000 ========================
Unaudited pro forma data for the Company for the three months ended March 31, 2000 and for the year ended December 31, 1999 given effect to the acquisition of Weddingpages, as if it had occurred on January 1, 1999, are shown below. The pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of future consolidated results of the Company.
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ in thousands, except per share data Net revenue $ 4,426 $ 16,053 Net loss $ (3,669) $ (9,383) Net loss per share $ (0.25) $ (2.36)
4. NOTE PAYABLE The Company has a $2,500,000 line of credit with a bank that expires December 2000 and bears an interest rate equal to prime plus 0.5%. There was an outstanding balance of $1,825,000 and $1,625,000 as of March 31, 2000 and December 31, 1999, respectively. 8 9 5. LONG TERM DEBT Long-term debt as of March 31, 2000: Market purchase note due in annual installments of $60,000 through October 2008, based on imputed interest of 8.75% .................................................. $363,400 9.0% equipment installment note, due in monthly installments of $4,566 through December 2002, secured by short-term investments of $34,504 ................................................ 132,781 -------- Total long-term debt .......................................................... $496,181 Less current portion of long-term debt ................................................... 75,489 Long-term debt, excluding current portion ................................................ $420,692 -------- Maturities of long-term obligations for the five years ending March 31, 2005 are as follows: 2001, $75,489; 2002, $80,120; 2003, $81,002; 2004, $37,069; 2005, $40,009 and $182,492 thereafter.
9 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 based on our current expectations, assumptions, estimates and projections about the Company and our industry. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this report. The Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. OVERVIEW The Knot is the leading online wedding destination on the World Wide Web and the primary wedding content provider on America Online and several other of AOL's leading brands, including AOL.com, Netscape Netcenter and CompuServe. We combine comprehensive content and an online community with wedding-related commerce. Our online sites provide full-service offerings targeted at the planning needs of today's brides and grooms. We believe that our sites enable our users to overcome the many challenges of the wedding planning process by providing a one-stop solution. In addition, we provide advertisers and vendors with targeted access to couples actively seeking information and making meaningful buying decisions relating to all aspects of their weddings. We also service the wedding market through a series of books and a semiannual magazine called Wedding Gowns. During February 2000, we launched the premiere issue of Wedding Gowns for Spring 2000, which is being sold on newsstands across the nation. These traditional forms of media provide cross-promotional opportunities and assist us in increasing our brand awareness and our online audience. The Knot commenced operations in May 1996 and recorded our first revenues in September 1996, immediately following the launch of our first online property. Our Web site was launched in July 1997. We launched The Knot Registry, our online gift registry, in November 1998 and significantly expanded our registry product offerings in July 1999. In July 1999, we acquired the assets of Bridalink.com, an Internet wedding supply store and the common stock of Click Trips, Inc., an online travel agency. Also in July 1999, we entered into a strategic alliance with Weddingpages, Inc. In August 1999, we acquired the assets of Wedding Photographers Network, a searchable database of local wedding photographers. In March 2000, we announced our first international alliance with H. Stern, a major international jeweler and specialty retailer to create a new 50/50 joint venture to be named The Knot Brazil. The new company will launch a Portuguese-language wedding Web site and gift registry in Brazil, where H. Stern's headquarters is based, targeting the country's annual to-be-wed market of over one million couples. Also in March 2000, we completed our acquisition of Weddingpages, Inc. Weddingpages, Inc. is a publisher of regional wedding magazines serving engaged couples and wedding professionals in over 50 major U.S. markets. To further emphasize its local dominance, Weddingpages belongs to many industry associations and attends over 3,000 local and national bridal shows annually. Through Weddingpages, we will develop integrated marketing programs for local advertisers combining our online and offline resources to provide them with extensive exposure to brides and grooms nationwide. We derive revenues from the sale of sponsorship, advertising and production contracts. We also derive revenues from the sale of merchandise, from publishing and from the sale of travel packages. Sponsorship revenues are derived principally from contracts currently ranging up to thirty-six months. Sponsorships are designed to integrate advertising with specific editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific editorial area and can purchase a special feature on our sites. Advertising revenues are derived principally from short-term contracts that typically range from one month up to one year. Advertising contracts include banner advertisements and listings for local wedding vendors. 10 11 Sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. To date, we have recognized our sponsorship and advertising revenues over the duration of the contracts on a straight line basis as we have exceeded minimum guaranteed impressions. To the extent that minimum guaranteed impressions are not met, we are generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this were to occur, we would defer and recognize the corresponding revenues over the extended period. Production revenues are derived from the development of online sites and tools. Production revenues are recognized when the development is completed and the online sites and tools are delivered. To promote our brand on third-party sites, we produce online sites for third parties featuring both The Knot and the third party. The cost of production of these sites is included in our operating expenses. In return, we receive distribution and exposure to their viewers, outbound links to our sites and, in some circumstances, offline brand marketing. We do not recognize revenues with respect to these barter transactions. Sponsorship, advertising and production revenues amounted to 69% of our net revenues for the quarter ended March 31, 2000 and 67% for the quarter ended March 31, 1999. For the quarters ended March 31, 2000 and 1999, our top seven advertisers accounted for 45% and 66% of our net revenues, respectively. Our large advertisers generally differed from period to period. We expect that our large advertisers will continue to differ over time. Merchandise revenues are derived from the sales of merchandise through Bridalink.com, The Knot Shop and The Knot Registry. Merchandise revenues include outbound shipping and handling charges. Merchandise revenues are recognized when products are shipped to customers, reduced by an allowance for estimated sales returns. Merchandise revenues amounted to 24% of our net revenues for the quarter ended March 31, 2000 and 6% of our net revenues for the quarter ended March 31, 1999. Publishing revenues are derived from author royalties paid to us related to our book publishing contract and from sales of books published by us such as our gown guide, or sales of our gown magazine. Royalties are recognized when we have met all contractual obligations, which typically include the delivery and acceptance of a final manuscript. Revenues from the sale of books and magazines are recognized when the products are shipped, reduced by an allowance for estimated sales returns. Travel revenues are derived from commissions earned on the sale of travel packages by our online travel agency, Click Trips, Inc., which we acquired on July 31, 1999. These revenues are recognized when the customer commences travel. Publishing, travel and other revenues accounted for 7% and 27% for the quarters ended March 31, 2000 and 1999, respectively. Commencing in the quarter ended June 30, 2000, publishing revenue will include advertising revenue derived from the publication of regional wedding magazines by Weddingpages as well as service fees and royalty fees from producing the Weddingpages magazine for certain franchisees. These revenues and fees are recognized upon the publication of the magazine at which time all material services related to the magazine have been performed. We record deferred compensation, net of reversals related to stock options forfeited, primarily as a result of the issuance of stock options to employees with exercise prices per share determined for financial reporting purposes to be below the fair market value per share of our common stock at the dates of grant. The difference is recorded as a reduction of stockholders' equity and amortized as non-cash compensation expense on an accelerated method over the four-year vesting period of the related options. RESULTS OF OPERATIONS Three Months Ended March 31, 2000 and 1999 Net Revenues Net revenues increased to $3.7 million for the quarter ended March 31, 2000 from $194,000 for the quarter ended March 31, 1999. Sponsorship, advertising and production revenues increased to $2.6 million for the quarter ended March 31, 2000 from $130,000 for the quarter ended March 31, 1999, primarily due to a $2.0 million increase 11 12 in revenues generated from additional sponsorship and production contracts and a $458,000 increase in revenues from local vendor advertising programs. Merchandise revenues amounted to $887,000 for the quarter ended March 31, 2000, resulting primarily from a $683,000 increase in the sale of wedding supplies through Bridalink.com and The Knot Shop and a $193,000 increase in sales related to The Knot Registry. There was $11,000 in The Knot Registry merchandise revenues for the quarter ended March 31, 1999. Publishing, travel and other revenues increased to $257,000 for the quarter ended March 31, 2000 from $53,000 for the quarter ended March 31, 1999. The increase is primarily attributable to sales of our gown magazine which was shipped to newsstands at the end of February 2000 and travel commissions earned by Click Trips. Cost of Revenues Cost of revenues consists of the cost of merchandise sold, including outbound shipping costs, payroll and related expenses for our personnel who are responsible for the production of customized online sites and tools, and costs of Internet and hosting services. Cost of revenues increased to $1.2 million for the quarter ended March 31, 2000 from $53,000 for the quarter ended March 31, 1999. The increase was primarily due to an increase in the sale of merchandise through Bridalink.com and The Knot Shop of $470,000 and through The Knot Registry of $173,000, the cost of publishing our gown magazine and an increase in the cost of producing online sites and tools. As a percentage of our net revenues, cost of revenues increased to 31% for the quarter ended March 31, 2000 from 27% for the quarter ended March 31, 1999. Product and Content Development Product and content development expenses consist of payroll and related expenses for creative personnel, information technology and expenses for third-party software developers and contract programmers. Product and content development expenses increased to $945,000 for the quarter ended March 31, 2000 from $400,000 for the quarter ended March 31, 1999. The increase was primarily attributable to a $485,000 increase resulting from hiring additional staff to enhance the content and functionality of our sites. As a percentage of our net revenues, product and content development expenses decreased to 25% for the quarter ended March 31, 2000 from 206% for the quarter ended March 31, 1999. We believe that significant investments in product and content development are required to remain competitive and, therefore, expect that our product and content development expenses will continue to increase in absolute dollars for the foreseeable future. Sales and Marketing Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service and public relations personnel, as well as expenditures for our AOL anchor tenant agreement, sales commissions, advertising and promotional activities and fulfillment and distribution of merchandise. Sales and marketing expenses increased to $2.8 million for the quarter ended March 31, 2000 from $706,000 for the quarter ended March 31, 1999. The increase was primarily due to a $595,000 increase in personnel costs related to the hiring of additional sales, marketing and customer service personnel, a $563,000 increase in commissions and expenses related to our increased sponsorship, advertising and production revenues and to the launch of our local advertising sales efforts, and a $455,000 increase in promotion expense. As a percentage of our net revenues, sales and marketing expenses decreased to 76% for the quarter ended March 31, 2000 from 363% for the quarter ended March 31, 1999. We believe that significant investments in sales and marketing personnel and programs are required to remain competitive and to build our brand both online and offline and, therefore, that our sales and marketing expenses will continue to increase in absolute dollars for the foreseeable future. 12 13 General and Administrative General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, legal and accounting fees, facilities costs and insurance expenses. General and administrative expenses increased to $1.6 million for the quarter ended March 31, 2000 from $420,000 for the quarter ended March 31, 1999. The increase was primarily due to a $462,000 increase in personnel costs, a $140,000 increase in expenses related to the build out of our facilities, and a $213,000 increase in professional fees and insurance. As a percentage of our net revenues, general and administrative expenses decreased to 42% for the quarter ended March 31, 2000 from 216% for the quarter ended March 31, 1999. We expect our general and administrative expenses to increase in absolute dollars for the foreseeable future as we continue to hire personnel and incur expenses to build our administrative infrastructure to support the growth of our business and our operations as a public company. Non-Cash Compensation We recorded no deferred compensation during the quarter ended March 31, 2000 and $1.4 million of deferred compensation for the quarter ended March 31, 1999. Amortization of deferred compensation increased to $264,000 million for the quarter ended March 31, 2000 from $129,000 for the quarter ended March 31, 1999. Non-Cash Sales and Marketing We recorded deferred sales and marketing of $2.3 million, related to the issuance of a warrant to AOL in connection with our amended anchor tenant agreement in July 1999. Amortization of deferred sales and marketing was $163,000 or 4% of net revenues for the quarter ended March 31, 2000. Depreciation and Amortization Depreciation and amortization expenses consist of depreciation and amortization of property and equipment and amortization of intangible assets related to acquisitions. Depreciation and amortization expenses increased to $254,000 for the quarter ended March 31, 2000 from $69,000 for the quarter ended March 31, 1999. This increase was primarily due to a $96,000 increase in depreciation as a result of an increase in property and equipment purchases and leasehold improvements, an additional $46,000 of amortization of intangible assets related to acquisitions, and an increase in amortization of capitalized software of $43,000. As a percentage of net revenues, depreciation and amortization expense decreased to 7% for the quarter ended March 31, 2000 from 36% for the quarter ended March 31, 1999. Interest Income (Expense) Interest income net of interest expense increased to $572,000 for the quarter ended March 31, 2000, as compared to $10,000 of interest expense for the quarter ended March 31, 1999, as a result of the investment of the net proceeds from our initial public offering of common stock. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2000, our cash and cash equivalents amounted to $27.5 million. We currently invest primarily in short-term debt instruments that are highly liquid, of high-quality investment grade, and have maturities of less than three months with the intent to make such funds readily available for operating purposes. Net cash used in operating activities was $2.1 million for the quarter ended March 31, 2000. This resulted primarily from the loss for the period as adjusted for depreciation and amortization of $682,000, increases in accounts receivable of $1.2 million, and increases in other current and long-term assets of $142,000, partially offset by increases in accounts payable and accrued expenses of $1.2 million, deferred revenue of $178,000 and other liabilities of $35,000. Net cash 13 14 used in operating activities was $1.4 million for the quarter ended March 31, 1999 due primarily to the net loss for the quarter, as adjusted for depreciation and amortization. Net cash used in investing activities was $9.9 million for the quarter ended March 31, 2000, primarily due to cash paid for the acquisition of Weddingpages of $9.2 million and an increase in purchases of property and equipment of approximately $1.1 million partially offset by the maturity of short-term investments of $501,000. Net cash used in investing activities was $191,000 for the quarter ended March 31, 1999 as a result of purchases of property and equipment. Net cash used in financing activities was $505,000 for the quarter ended March 31, 2000, primarily due to the payment of expenses related to our initial public offering partially offset by proceeds from the exercise of stock options. Net cash provided by financing activities was $750,000 for the quarter ended March 31, 1999, due to the proceeds from short term borrowings. Although we have no material commitments for capital expenditures, our capital expenditures have increased $890,000 to $1.1 million for the quarter ended March 31, 2000 compared to the same period in 1999, consistent with the growth of operations and staffing. We anticipate these increases in capital expenditures will continue for the foreseeable future as a result of increased growth. As of March 31, 2000, we had commitments under non-cancelable operating leases amounting to $6.3 million, of which $506,000 will be due on or before March 31, 2001. As of March 31, 2000, we had a commitment under our amended anchor tenant agreement with AOL in the amount of $3.3 million of which approximately $1.2 million will be due on or before March 31, 2001. On March 29, 2000, we completed our acquisition of Weddingpages through the merger of a wholly-owned subsidiary of ours with and into Weddingpages, with Weddingpages surviving the merger. Under the terms of the agreement, the merger was affected through the conversion of each share of common stock and class A common stock of Weddingpages outstanding into $1.78 for an aggregate purchase price, including related costs, of approximately $10.1 million. We used a portion of the proceeds received from our initial public offering to consummate the acquisition. We currently believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. We intend to continue to pursue acquisitions of, or investments in, complimentary businesses, services and technologies, expand our sales and marketing programs and conduct more aggressive brand promotions. We cannot assure you that additional funding, if required, will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. Those limitations would materially and adversely affect our business, results of operations and financial condition. SUBSEQUENT EVENTS On May 1, 2000 the Company entered into an International Anchor Tenant Agreement with America Online, Inc. ("AOL"), whereby the Company received distribution within AOL and its Affiliates within International Markets. The agreement expires on May 1, 2003 and provides for quarterly carriage fees payable over the term of the agreement in the amount of $215,000 per quarter through February 1, 2001, increasing to $287,500 per quarter through February 1, 2002 and increasing to $372,500 per quarter through February 1, 2003. 14 15 RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Important Factors Regarding Forward-Looking Statements In addition to other information in this Quarterly Report on Form 10-Q and in the documents we are incorporating by reference, the following risk factors should be carefully considered in evaluating our business because such factors currently have a significant impact or may have a significant impact on our business, operating results or financial condition. This Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this Form 10-Q. RISKS RELATED TO OUR BUSINESS WE HAVE AN UNPROVEN BUSINESS MODEL AND IT IS UNCERTAIN WHETHER ONLINE WEDDING-RELATED SITES CAN GENERATE SUFFICIENT REVENUES TO SURVIVE. Our model for conducting business and generating revenues is new and unproven. Our business model depends upon our ability to generate revenue streams from multiple sources through our online sites, including: - - Internet sponsorship and advertising fees from third parties; and - - online sales of wedding gifts and supplies. It is uncertain whether wedding-related online sites that rely on attracting sponsors and advertisers, as well as people to purchase wedding gifts and supplies, can generate sufficient revenues to survive. For our business to be successful, we must provide users with an acceptable blend of products, information, services and community offerings that will attract wedding consumers to our online sites frequently. In addition, we must provide sponsors, advertisers and vendors the opportunity to reach these wedding consumers. We provide our services to users without charge and we may not be able to generate sufficient revenues to pay for these services. Accordingly, we are not certain that our business model will be successful or that we can sustain revenue growth or be profitable. WE HAVE A LIMITED OPERATING HISTORY AND EXPECT TO ENCOUNTER DIFFICULTIES FACED BY EARLY STAGE COMPANIES IN THE INTERNET ADVERTISING AND ONLINE WEDDING MARKETS. We commenced operations in May 1996 and recorded our first revenues in September 1996, immediately following the launch of our first online property. Accordingly, we have only a limited operating history with which you can evaluate our business and prospects. An investor in our common stock must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, such as the Internet advertising and online wedding markets. These risks include our ability to: - - increase the audience on our sites; - - broaden awareness of our brand; - - strengthen user-loyalty; - - offer compelling content; - - maintain our leadership in generating traffic; - - maintain our current, and develop new, strategic relationships; - - attract a large number of advertisers from a variety of industries; 15 16 - - respond effectively to competitive pressures; - - generate revenues from the sale of merchandise and e-commerce; - - integrate our recent acquisitions into our existing operations; - - continue to develop and upgrade our technology; and - - attract, integrate, retain and motivate qualified personnel. As a result of our limited operating history, we do not have historical financial data for a significant number of periods upon which to forecast our revenues and results of operations. These risks could negatively impact our financial condition if left unaddressed. For more information on the effects of some of these risks, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE HAVE A HISTORY OF SIGNIFICANT LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE. We have not achieved profitability and expect to continue to incur significant losses and negative cash flow for the foreseeable future. We incurred net losses of $752,000 for the period from May 2, 1996 (inception) through December 31, 1996, $1.1 million for the year ended December 31, 1997, $1.5 million for the year ended December 31, 1998, $9.2 million for the year ended December 31, 1999 and $2.9 million for the quarter ended March 31, 2000. As of March 31, 2000, our accumulated deficit was $15.4 million. We also expect to continue to incur significant operating expenses and capital expenditures and, as a result, we will need to generate significant revenues to achieve and maintain profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. Failure to achieve or maintain profitability may materially and adversely affect 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 user traffic levels and advertising activity on our sites and the expansion of our e-commerce activity. In addition, we plan to expand and develop content and to upgrade and enhance our technology and infrastructure to support our growth. We incur a significant percentage of our expenses, such as employee compensation and rent, prior to generating revenues associated with those expenses. Moreover, our expense levels are based, in part, on our expectation of future revenues. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenues in relation to our growth in expenses, then our results of operations would be materially and adversely affected. For more information on our net revenues and the effects of our expenses on our financial performance, see "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK. Our quarterly revenues and operating results have fluctuated significantly in the past and are expected to continue to fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include: - - the level of online usage; - - the level of traffic on our online sites; 16 17 - - demand for online advertising; - - seasonal trends in both online usage and advertising placements; - - the addition or loss of advertisers; - - the advertising budgeting cycles of specific advertisers; - - the number of users that purchase merchandise from us; - - the amount and timing of capital expenditures and other costs relating to the expansion of our operations, including those related to acquisitions; - - the introduction of new sites and services by us or our competitors; - - changes in our pricing policies or the pricing policies of our competitors; - - general economic conditions; and - - economic conditions specific to the Internet, electronic commerce and online media. We do not believe that period-to-period comparisons of our operating results are necessarily meaningful and you should not rely upon these comparisons as indicators of our future performance. Due to the foregoing factors, it is possible that our results of operations in one or more future quarters may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock is likely to decline. OUR FINANCIAL CONDITION AND REVENUES WOULD BE ADVERSELY AFFECTED IF TRAFFIC ON OUR AOL SITE DECREASED OR IF CARRIAGE OF OUR SITES ON AOL WAS DISCONTINUED. AOL has accounted for a significant portion of our online traffic to date. During the first quarter of 2000, approximately 17% of our users were customers of AOL's Internet services. If the financial condition and operations of AOL were to deteriorate significantly, or if the traffic on our AOL site were to substantially decrease, our revenues could be adversely affected. In addition, our anchor tenant agreement with AOL expires on January 6, 2003. AOL may extend it for an additional two years, but does not have any obligation to extend or renew the agreement. Through the AOL agreement, we provide content on America Online, AOL.com, AOL Hometown, Netscape and CompuServe. Under the terms of the agreement, AOL may terminate the agreement without cause only with respect to our carriage on AOL Hometown, Netscape, and CompuServe upon 30 days' prior written notice. If the carrying of our sites on AOL is discontinued, we would lose members, sponsors and advertisers and our business, results of operations and financial condition would be materially and adversely affected. BECAUSE WEDDINGS OCCUR MORE FREQUENTLY IN THE SECOND AND THIRD QUARTERS OF THE CALENDAR YEAR, OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS. Seasonal and cyclical patterns may affect our revenues. In 1998, 20% of weddings occurred in the first quarter, 26% occurred in the second quarter, 30% occurred in the third quarter and 24% occurred in the fourth quarter. Because we launched The Knot Registry in November 1998 and acquired Bridalink in July 1999, we have limited experience generating merchandise revenues. Therefore, we have been unable to determine whether our merchandise revenues are affected by seasonal fluctuations in the number of weddings. In addition, we believe that advertising sales in traditional media, such as television and radio, 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. 17 18 WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE KNOT BRAND NAME WHICH WOULD NEGATIVELY IMPACT OUR BUSINESS AND CAUSE OUR SPONSORSHIP AND ADVERTISING REVENUES TO DECLINE. Building recognition of our brand is critical to attracting and expanding our online user base. 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. IF WE CANNOT PROTECT OUR DOMAIN NAMES, IT WILL IMPAIR OUR ABILITY TO BRAND SUCCESSFULLY THE KNOT. We currently hold various Web domain names, including www.theknot.com. The acquisition and maintenance of domain names generally is regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may not successfully carry out our business strategy of establishing a strong brand for The Knot if we cannot prevent others from using similar domain names or trademarks. This could impair our ability to increase market share and revenues. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT AND ANY FUTURE ACQUISITIONS. In March 2000, we acquired Weddingpages, Inc., a publisher of local wedding publications. We may encounter difficulty integrating the personnel, operations, technology and software of this acquired business. In addition, one or more of the key personnel of the acquired business may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. In the future, we may acquire, or invest in, complementary companies, products or technologies. Acquisitions and investments involve numerous risks, including: - - difficulties in integrating operations, technologies, products and personnel; - - diversion of financial and management resources from existing operations; - - risks of entering new markets; - - potential loss of key employees; and - - inability to generate sufficient revenues to offset acquisition or investment costs. THE COSTS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR STRATEGIC ALLIANCES COULD DILUTE YOUR INVESTMENT OR ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. To pay for an acquisition or to enter into a strategic alliance, we might use equity securities, debt, cash, or a combination of the foregoing. If we use equity securities, our stockholders may experience dilution. In addition, an acquisition may involve non-recurring charges or involve amortization of significant amounts of goodwill. The related increases in expenses could adversely affect our results of operations. Any such acquisitions or strategic alliances may require us to obtain additional equity or debt financing, which may not be available on commercially acceptable terms, if at all. 18 19 IF THE USE OF THE INTERNET AS AN ADVERTISING AND MARKETING MEDIUM FAILS TO DEVELOP OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR FUTURE REVENUES AND PROSPECTS WOULD BE MATERIALLY AND ADVERSELY AFFECTED. Our future success depends in part on a significant increase in the use of the Internet as an advertising and marketing medium. Sponsorship, advertising and production revenues constituted 69% of our net revenue for the quarter ended March 31, 2000, 71% of our net revenues for the year ended December 31, 1999 and 82% of our net revenues for the year ended December 31, 1998. The Internet advertising market is new and rapidly evolving, and it cannot yet be compared with traditional advertising media to gauge its effectiveness. As a result, demand for and market acceptance of Internet advertising solutions are uncertain. Many of our current and potential customers have little or no experience with Internet advertising and have allocated only a limited portion of their advertising and marketing budgets to Internet activities. The adoption of Internet advertising, particularly by entities that have historically relied upon traditional methods of advertising and marketing, requires the acceptance of a new way of advertising and marketing. These customers may find Internet advertising to be less effective for meeting their business needs than traditional methods of advertising and marketing. Furthermore, there are software programs that limit or prevent advertising from being delivered to a user's computer. Widespread adoption of this software by users would significantly undermine the commercial viability of Internet advertising. WE HAVE A SMALL NUMBER OF SPONSORS AND ADVERTISERS AND THE LOSS OF A NUMBER OF THESE WOULD RESULT IN A DECLINE IN OUR REVENUES. We derive sponsorship revenues from contracts ranging up to three years and advertising revenues principally from short-term advertising contracts. We depend on a limited number of sponsors and advertisers for a significant part of our net revenues. Consequently, the loss of any of these sponsors or advertisers would cause our revenues to decline. For the quarter ended March 31, 2000, Mondera accounted for approximately 11% of our net revenue. For the year ended December 31, 1999, no single sponsor or advertiser accounted for 10% or more of our net revenues. We anticipate that our future results of operations will continue to depend to a significant extent upon revenues from a small number of sponsors and advertisers. In addition, we anticipate that such sponsors and advertisers will continue to vary over time. To achieve our long-term goals, we will need to attract additional significant sponsors and advertisers on an ongoing basis. If we fail to enter into a sufficient number of large contracts during a particular period, our revenues for that period would be adversely affected. For more information on our advertising revenues, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR BUSINESS AND PROSPECTS WOULD SUFFER IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS. We rely solely upon copyright, trade secret and trademark law and assignment of invention and confidentiality agreements to protect our proprietary technology, processes, content and other intellectual property to the extent that protection is sought or secured at all. We cannot assure you that any steps we might take will be adequate to protect against infringement and misappropriation of our intellectual property by third parties. Similarly, we cannot assure you that third parties will not be able to independently develop similar or superior technology, processes, content or other intellectual property. The unauthorized reproduction or other misappropriation of our intellectual property rights could enable third parties to benefit from our technology without paying us for it. If this occurs, our business and prospects would be materially and adversely affected. In addition, disputes concerning the ownership or rights to use intellectual property could be costly and time consuming to litigate, may distract management from other tasks of operating the business, and may result in our loss of significant rights and the loss of our ability to operate our business. 19 20 OUR PRODUCTS AND SERVICES MAY INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES AND ANY INFRINGEMENT COULD REQUIRE US TO INCUR SUBSTANTIAL COSTS AND DISTRACT OUR MANAGEMENT. Although we avoid infringing known proprietary rights of third parties, including licensed content, we may be subject to claims alleging infringement of third-party proprietary rights. If we are subject to claims of infringement or are infringing the rights of third parties, we may not be able to obtain licenses to use those rights on commercially reasonable terms, if at all. In that event, we would need to undertake substantial reengineering to continue our online offerings. Any effort to undertake such reengineering might not be successful. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. WE DEPEND UPON QVC TO PROVIDE US WAREHOUSING, FULFILLMENT AND DISTRIBUTION SERVICES, AND SYSTEM FAILURES OR OTHER PROBLEMS AT QVC COULD CAUSE US TO LOSE CUSTOMERS AND REVENUES. We have a services agreement with QVC to warehouse, fulfill and arrange for distribution of approximately 97% of our products. Our agreement with QVC expires in December, 2003. QVC does not have any obligation to renew this agreement. If QVC's ability to provide us with these services in a timely fashion or at all is impaired, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, system failures or for any other reason, or if the services agreement is not renewed, we would not be able, at least temporarily, to sell or ship our products to our customers. We may be unable to engage alternative warehousing, fulfillment and distribution services on a timely basis or upon terms favorable to us. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING NECESSARY TO EXECUTE OUR BUSINESS STRATEGY. We currently believe that the net proceeds from our initial public offering, together with our current cash and cash equivalents, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. To the extent we require additional funds to support our operations or the expansion of our business, we may need to sell additional equity, issue debt or convertible securities or obtain credit facilities through financial institutions. We cannot assure you that additional funding, if required, will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. INCREASED COMPETITION IN OUR MARKETS COULD REDUCE OUR MARKET SHARE, THE NUMBER OF OUR ADVERTISERS, OUR ADVERTISING REVENUES AND OUR MARGINS. The Internet advertising and online wedding markets are new, rapidly evolving and intensely competitive, and we expect such competition to intensify in the future. We face competition for members, users and advertisers from the following areas: - - online services or Web sites targeted at brides and grooms as well as the online sites of retail stores, manufacturers and regional wedding directories; - - bridal magazines, such as Bride's and Modern Bride; and - - online and retail stores offering gift registries, especially from retailers offering specific bridal gift registries. 20 21 We expect competition to increase because of the business opportunities presented by the growth of the Internet and e-commerce. Our competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user or membership bases than we have and, therefore, have a significantly greater ability to attract advertisers and users. 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. In addition, if we expand internationally, we may face additional competition. There can be no assurance that we will be able to compete successfully against current and future competitors. IF SALES TO SPONSORS OR ADVERTISERS FORECASTED IN A PARTICULAR PERIOD ARE DELAYED OR DO NOT OTHERWISE OCCUR, OUR RESULTS OF OPERATIONS FOR A PARTICULAR PERIOD WOULD BE MATERIALLY AND ADVERSELY AFFECTED. The time between the date of initial contact with a potential sponsor or advertiser and the execution of a contract with the sponsor or advertiser is often lengthy, typically ranging from six weeks for smaller agreements to six months for larger agreements, and is subject to delays over which we have little or no control, including: - - customers' budgetary constraints; - - customers' internal acceptance reviews; - - the success and continued internal support of advertisers' and sponsors' own development efforts; and - - the possibility of cancellation or delay of projects by advertisers or sponsors. During the sales cycle, we may expend substantial funds and management resources in advance of generating sponsorship or advertising revenues. Accordingly, if sales to advertisers or sponsors forecasted in a particular period are delayed or do not otherwise occur, we would generate less sponsorship and advertising revenues during that period and our results of operations for that period would suffer. OUR POTENTIAL INABILITY TO COMPETE EFFECTIVELY IN OUR INDUSTRY FOR QUALIFIED PERSONNEL COULD HINDER THE SUCCESS OF OUR BUSINESS. Competition for personnel in the Internet and wedding industries is intense. We may be unable to retain those employees who are important to the success of our business. We may also face difficulties attracting, integrating or retaining other highly qualified employees in the future. We have experienced, and expect to continue to experience, difficulty in hiring and retaining highly-skilled employees with appropriate qualifications as a result of our rapid growth and expansion. If we cannot attract new personnel or retain and motivate our current personnel, our business may succeed. SYSTEMS DISRUPTIONS AND FAILURES COULD CAUSE ADVERTISER OR USER DISSATISFACTION AND COULD REDUCE THE ATTRACTIVENESS OF OUR SITES. The continuing and uninterrupted performance of our computer systems is critical to our success. Our advertisers and sponsors, users and members may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services and content to them. Substantial or repeated system disruption or failures would reduce the attractiveness of our online sites significantly. Substantially all of our communications hardware and some of our other computer hardware operations are located at Exodus Communications' facilities in Jersey City, New Jersey. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems. Computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect 21 22 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 or decreased traffic. These types of occurrences in the future could cause users to perceive our sites as not functioning properly and therefore cause them to use another online site or other methods to obtain information or services. In addition, our users depend on Internet service providers, online service providers and other site operators for access to our online sites. Many of them have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system disruptions or failures unrelated to our systems. Although we carry general liability insurance, our insurance may not cover any claims by dissatisfied providers or subscribers or may not be adequate to indemnify us for any liability that may be imposed in the event that a claim were brought against us. Any system disruption or failure, security breach or other damage that interrupts or delays our operations could cause us to lose users, sponsors and advertisers and adversely affect our business and results of operations. WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US. We are dependent on various third parties for software, systems and related services in connection with our hosting and accounting software, data transmission and security systems. Several of the third parties that provide software and services to us have a limited operating history and have relatively new technology. These third parties are dependent on reliable delivery of services from others. To date, we have not experienced significant problems with the services that these third parties provide to us. If our current providers were to experience prolonged systems failures or delays, we would need to pursue alternative sources of services. Although alternative sources of these services are available, we may be unable to secure such services on a timely basis or on terms favorable to us. As a result, we may experience business disruptions if these third parties fail to provide reliable software, systems and related services to us. WE MAY BE LIABLE IF THIRD PARTIES MISAPPROPRIATE OUR USERS' PERSONAL INFORMATION. If third parties were able to penetrate our network security or otherwise misappropriate our users' personal or credit card information, we could be subject to liability. Our liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims as well as for other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in costly and time-consuming litigation which could adversely affect our financial condition. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could have additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER STOCKHOLDERS EXERCISE SIGNIFICANT CONTROL OVER ALL MATTERS REQUIRING A STOCKHOLDER VOTE. As of March 31, 2000, our executive officers, directors and stockholders who each owned greater than 5% of the common stock, and their affiliates, in the aggregate, beneficially owned approximately 62% 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. FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE. We have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the public market or the perception that such sales could occur. 22 23 OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS AND ANY VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US. Fluctuations in market price and volume are particularly common among securities of Internet and other technology companies. The market price of our common stock may fluctuate significantly in response to the following factors, some of which are beyond our control: - - variations in quarterly operating results; - - changes in market valuations of Internet and other technology companies; - - our announcements of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - - failure to complete significant sponsorship, advertising and merchandise sales; - - additions or departures of key personnel; - - future sales of common stock; and - - changes in financial estimates by securities analysts. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its common stock. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. WE MAY SPEND THE NET PROCEEDS OF OUR INITIAL PUBLIC OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE. The net proceeds of our initial public offering are not allocated for specific uses. Our management has broad discretion to spend the net proceeds from our initial public offering in ways with which investors may not agree. The failure of our management to apply these funds effectively would result in unfavorable returns, which could cause the price of our common stock to decline. 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 OUR 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. 23 24 Demand for recently introduced services and products over the Internet and commercial online services is subject to a high level of uncertainty. Few proven services and products exist. The development of the Internet and commercial online services into a viable commercial marketplace is subject to a number of factors, including: - - continued growth in the number of users of such services; - - concerns about transaction security; - - continued development of the necessary technological infrastructure; - - development of enabling technologies; - - uncertain and increasing government regulation; and - - the development of complementary services and products. If users experience difficulties because of capacity constraints of the infrastructure of the Internet and other commercial online services, potential users may not be able to access our sites and our business and prospects would be harmed. To the extent that the Internet and other online services continue to experience growth in the number of users and frequency of use by consumers resulting in increased bandwidth demands, there can be no assurance that the infrastructure for the Internet and other online services will be able to support the demands placed upon them. The Internet and other online services have experienced outages and delays as a result of damage to portions of their infrastructure, power failures, telecommunication outages, network service outages and disruptions, natural disasters and vandalism and other misconduct. Outages or delays, could adversely affect online sites, e-mail and the level of traffic on all sites. We also 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 OUR 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: - - to enhance our existing services; - - to develop and license new services and technology that address the increasingly sophisticated and varied needs of our prospective customers and users; and - - to respond to technological advances and emerging industry standards and practices on a cost-effective and timely 24 25 basis. The development of online sites and other proprietary technology entails significant technological and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively or adapt our online sites, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. Updating our technology internally and licensing new technology from third parties may require significant additional capital expenditures. IF WE BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATED TO DOING BUSINESS ONLINE, OUR SPONSORSHIP, ADVERTISING AND MERCHANDISE REVENUES COULD DECLINE AND OUR BUSINESS AND PROSPECTS COULD SUFFER. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Laws and regulations may be adopted covering issues such as user privacy, pricing, content, taxation and quality of products and services. Any new legislation could hinder the growth in use of the Internet and other online services generally and decrease the acceptance of the Internet and other online services as media of communications, commerce and advertising. The governments of states and foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet and Internet advertising services. In addition, the growth and development of the market for e-commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, which may impose additional burdens on companies conducting business online. The adoption or modification of laws or regulations relating to the Internet and other online services could cause our sponsorship, advertising and merchandise revenues to decline and our business and prospects to suffer. WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR SITES. We may be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish on our online sites. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We could also be subject to claims based upon the content that is accessible from our online sites through links to other online sites or through content and materials that may be posted by members in chat rooms or bulletin boards. Our insurance, which covers commercial general liability, may not adequately protect us against these types of claims. WE MAY INCUR POTENTIAL PRODUCT LIABILITY FOR PRODUCTS SOLD ONLINE. Consumers may sue us if any of the products that we sell online are defective, fail to perform properly or injure the user, or if consumers experience problems with honeymoon packages purchased through our sites. To date, we have had limited experience selling products online and developing relationships with manufacturers or suppliers of such products. We plan to sell a range of products targeted specifically at brides and grooms through The Knot Registry, The Knot Shop, Bridalink.com, Click Trips and other e-commerce sites that we may acquire in the future. Such a strategy involves numerous risks and uncertainties. Although our agreements with manufacturers and providers of travel services typically contain provisions intended to limit our exposure to liability claims, these limitations may not prevent all potential claims. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our financial results, reputation and brand name. WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER RISKS IF WE DECIDE TO FURTHER EXPAND INTERNATIONALLY. We may decide to further expand internationally. To date, we have no experience in developing localized versions of our sites for international markets and in marketing and selling internationally. If we decide to further expand internationally and we cannot overcome these challenges, our business will suffer. There are additional risks related to doing business in international markets, such as changes in regulatory requirements, tariffs and other trade 25 26 barriers, fluctuations in currency exchange rates, and adverse tax consequences. In addition, there are likely to be different consumer preferences and requirements in such markets. Furthermore, we may face difficulties in staffing and managing any foreign operations. We cannot assure you that one or more of these factors would not harm any future international operations. 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, cash equivalents and short-term investments of approximately $27.6 million as of March 31, 2000. These funds are generally invested in highly liquid debt instruments with short-term maturities. As such instruments mature and the funds are re-invested, we are exposed to changes in market interest rates. This risk is not considered material and we manage such risk by continuing to evaluate the best investment rates available for short-term high quality investments. We have no activities related to derivative financial instruments or derivative commodity instruments, and we are not currently subject to foreign currency exchange risk. 26 27 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) None. (d) Use of Proceeds. On December 1, 1999, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (Registration No. 333-87345). Pursuant to this Registration Statement, we completed our initial public offering of 3,500,000 shares of our common stock at an initial public offering price of $10.00 per share on December 7, 1999. On December 31, 1999, an additional 413,000 shares of common stock subject to the underwriters' over-allotment option were offered at $10.00 per share. The aggregate gross proceeds of the shares offered and sold was $39.1 million. After deducting approximately $2.7 million in underwriting discounts and commissions and $1.7 million in other related expenses, net proceeds of the offering were approximately $34.7 million. We have used approximately $14.4 million of the proceeds from our initial public offering for acquisitions, working capital purposes, capital expenditures and to fund operating losses. Except for salaries and travel expenses paid in the normal course of business or distribution and warehousing fees paid to QVC under our service agreement, none of these expenses were direct or indirect payments to our directors, officers, general partners or their associates, to persons owning ten percent or more of any class of our equity securities or to our affiliates. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) The following exhibits are filed as part of this report: 27.1 Financial Data Schedule (b) Reports on Form 8-K. We filed a Current Report on Form 8-K on February 11, 2000, announcing the execution of an Agreement and Plan of Merger with Weddingpages, pursuant to which it was agreed that we would acquire Weddingpages.
27 28 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 15, 2000 THE KNOT, INC. By: /S/ RICHARD SZEFC ----------------------------------------- Richard Szefc Chief Financial Officer (Principal Financial Officer and Duly Authorized Signatory) 28 29 EXHIBIT INDEX NUMBER DESCRIPTION - ------ ------------ 27.1 Financial Data Schedule 29 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 27,483,267 118,514 6,832,894 912,000 505,108 37,911,245 3,476,740 555,867 49,925,541 8,291,088 0 0 0 145,313 40,976,626 49,925,541 0 3,719,032 1,154,828 6,028,202 0 0 0 (3,463,998) 0 (3,463,998) 0 0 0 (2,891,547) (0.20) (0.20)
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