10-K405 1 y47098e10-k405.txt THE KNOT, INC. 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 000-28271 ------------------------ THE KNOT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3895178 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
462 BROADWAY 6TH FLOOR NEW YORK, NEW YORK 10013 (212) 219-8555 (ADDRESS, INCLUDING ZIP CODE, AND THE TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 1, 2001 was approximately $5,025,645 (based on the last reported sale price on the Nasdaq National Market on that date). The number of shares outstanding of the registrant's common stock as of March 1, 2001 was 14,700,518. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders, which is to be filed subsequent to the date hereof, are incorporated by reference into Part III. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 THE KNOT, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Business.................................................... 3 ITEM 2. Properties.................................................. 24 ITEM 3. Legal Proceedings........................................... 24 ITEM 4. Submission of Matters to a Vote of Security Holders......... 24 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 25 ITEM 6. Selected Financial Data..................................... 26 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 28 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk........................................................ 36 ITEM 8. Consolidated Financial Statements and Supplementary Data.... 37 ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 60 PART III ITEM 10. Directors and Executive Officers of the Registrant.......... 60 ITEM 11. Executive Compensation...................................... 60 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 60 ITEM 13. Certain Relationships and Related Party Transactions........ 60 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 60
2 3 THIS REPORT CONTAINS PROJECTIONS OR OTHER FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS ARE ONLY PREDICTIONS AND REFLECT OUR CURRENT BELIEFS AND EXPECTATIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS OR FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. PART I ITEM 1. BUSINESS OVERVIEW The Knot is the leading wedding resource providing products and services to couples planning their weddings and future lives together. Our Web site, at www.theknot.com, is the most trafficked wedding destination online and offers comprehensive content, extensive wedding-related shopping, an online wedding gift registry and an active community. The Knot is the premier wedding content provider on America Online (AOL Keywords: Knot and weddings) and MSN. We publish The Knot Wedding Gowns, a national wedding fashion magazine, and, through our subsidiary, Weddingpages, Inc., publish regional wedding magazines in 45 company-owned and franchised markets in the U.S. We also author a series of books on wedding planning and, through another subsidiary, Click Trips, Inc., offer honeymoon booking and other travel services. Our offline presence provides cross-promotional opportunities and assists us in increasing our brand awareness and our overall audience. We are based in New York and have several other offices across the country. INDUSTRY BACKGROUND The Wedding Industry Each year, approximately 2.3 million couples get married in the United States. According to an independent research report, the domestic wedding market generates approximately $50 billion in retail sales annually. Presumed to be a once-in-a-lifetime occasion, a wedding is a major milestone event and, therefore, consumers tend to allocate significant budgets to the wedding and related purchases. According to a 1997 survey of readers of Bride's magazine, the average amount spent on a wedding was $19,104, excluding the honeymoon. Planning a wedding can be a stressful and confusing process. Engaged couples must make numerous decisions and expensive purchases. A typical wedding requires decisions and planning relating to bridal registries, invitations, wedding gowns and wedding party attire, wedding rings, photographers, music, caterers, flowers and honeymoons. In addition to the number of decisions faced by engaged couples, the fixed date and the emotional significance of the event intensify the stress. For the majority of engaged couples, the process of planning a wedding is an entirely new one. They do not know where to find the necessary information and services, how much services or goods should cost or when decisions need to be made. These planning decisions are further complicated because many couples choose to have their weddings in locations other than where they live. Researching and soliciting local wedding services from distant locations without traveling and making an enormous time commitment is extremely difficult. Today's to-be-weds are seeking reliable resources and information to assist in their planning and purchase decisions. Vendors and advertisers highly value to-be-weds as a consumer group. Replenished on an annual basis, wielding substantial budgets and facing a firm deadline, engaged couples are ideal recipients of advertisers' messages and vendors' products and services. According to Modern Bride, during the six 3 4 months prior to and the six months following a wedding, the average couple will make more buying decisions and purchase more products and services than at any other time in their lives. The challenges and obstacles that engaged couples face make them especially receptive to marketing messages. A disproportionate amount of advertising revenues are generated per subscriber by bridal magazines. According to Advertising Age, in 1999 the top three bridal magazines generated an average of $227 in revenues per reader, compared to an average of $86 in revenues per reader in the top three travel magazines and an average of $58 in revenues per reader in the top three women's magazines. The wedding market also represents significant opportunities for the retail industry. According to a 1997 report by Bride's magazine, engaged couples receive gifts from an average of 200 guests, most of whom are spending between $70 and $100. Because items are selected by the engaged couple but paid for by their guests, price sensitivity is minimal and registry products are rarely discounted by retailers. Registry for products in all categories has grown, prompting many national retailers -- previously without registries -- to enter the gift registry market. Weddings also generate substantial revenues for travel services companies. Honeymoon travel generates an estimated $4.5 billion annually. According to a 1997 Bride's survey, over 99% of all newlyweds go on a honeymoon with an average cost of $3,657 per couple. The Internet and the Wedding Industry To-be-weds are seeking a comprehensive resource to assist in their preparation and planning for a wedding. Because of its global reach and capacity to transmit information rapidly, the Internet represents an ideal medium over which to-be-weds can easily access information and communicate with the widely- dispersed providers of local wedding resources. We expect the impact of the Internet on the wedding market to be significant. In 1997, the median age was 26 for first-time brides and 28 for first-time grooms, placing them in the demographic age group, 18 to 34 years, that currently comprises approximately 38% of all Web users. As Internet use continues to increase, engaged couples are more likely to turn to online resources as the first place they look for wedding products, information and registry services. Recognizing this trend, traditional providers of wedding resources have begun to offer their services and products online. Like their offline equivalents, however, these online offerings are single-service/product focused. To-be-weds continue to search for a comprehensive solution to their information, planning and purchasing needs at a single destination. THE KNOT SERVICES We service both the online and offline wedding market. Our services include: Online Services Relevant Wedding Content. We provide creative and up-to-date information and resources to attract users to our sites. Weddings are information-intensive events requiring extensive research, planning and decision-making. Our sites provide future brides and grooms with a searchable database that draws on thousands of articles on wedding planning and numerous interactive wedding planning tools including wedding checklists, a budgeter, a guest list manager and personal wedding Web pages. Our online content is organized in nine channels covering the topics of planning, real weddings, proposals, fashion, beauty, grooms, maids and moms, love and life, and honeymoons. All the channels offer articles, ideas and advice covering a wide range of perspectives, budgets, traditions and ethnicities. We offer a searchable bridal gown database with more than 20,000 gown images from over 200 designers and a searchable bridal accessory database with more than 11,000 bridal accessories, including headpieces, shoes and purses. We offer access to the local wedding market through a database of approximately 17,000 local vendors, such as reception halls, bands and caterers, in over 50 markets nationwide. Our Wedding Photographers Network allows to-be-weds to search for local wedding photographers meeting their specific needs. 4 5 Active Membership and Community Participation. Our online sites generate a high degree of member involvement through chats, message boards and personalized interactive services. To-be-weds actively seek forums to exchange ideas and ask questions during the planning process. We encourage and promote active participation within our online community. The Knot community features include 24-hour chat rooms on both America Online and the Web and allows our members to interact with other couples, as well as our own experts, on wedding planning issues and concerns. For example, our "Ask Carley" area is an interactive service in which wedding etiquette and other questions are answered daily by our experts on wedding planning. This area includes a searchable database that draws from an archive of up-to-date answers to thousands of questions. We also send out several newsletters to our subscribers updating them on new articles, features and upcoming events on our sites and bi-weekly newsletters focused on specific topics, such as registries and accessories. Additionally, our interactive services allow users to prepare and modify their wedding budget and create personalized checklists and Web pages. Convenient, Comprehensive Shopping Experience. We integrate our interactive services and informative content with comprehensive shopping services, which range from wedding gifts and supplies to honeymoons. Our sites place e-commerce offerings on every layer of our site. Placement and selection of these items are based on the information that a couple is seeking. In addition, we have created a shopping portal or "integrated shopping destination" called The Knot Shop. Shopping areas include "Registry," "Home Store," "Gift Center," "Wedding Store," "Attendant Gifts" and "Boutiques." We have developed The Knot Registry, which we believe is the Internet's most comprehensive wedding gift registry. The Knot Registry offers a broad selection of more than 10,000 products and services from more than 500 well-recognized brands. Wedding guests can quickly and easily purchase gifts online or via phone or fax, 24-hours a day. Unlike other online bridal registries which link users to large retailers in exchange for a payment from the retailer, we buy products directly from manufacturers. This enables us to provide our users with a large selection of products from a wide range of categories, while maintaining a high level of customer service. We offer traditional registry categories, such as china, household appliances and electronics, in addition to non-traditional categories, such as outdoor gear, dance lessons, entertainment and travel. Couples also may register for services which are typically not available from traditional bridal registries, such as home mortgage down payments, car loans and leases and investment services such as mutual funds. In April 1999, we entered into a services agreement with QVC. Under this agreement, QVC provides us warehousing, sales, fulfillment and distribution services in connection with The Knot Registry. At the customer's request, a product generally can be shipped within 48-hours of order. Our strategic relationship with QVC also affords us the ability to purchase certain merchandise for The Knot Registry from QVC vendors at a specified premium over QVC's volume discount rate. Our services agreement with QVC expires in December 2003. We have the option to extend the term of the services agreement for an additional l80 days. QVC may terminate our services agreement if we fail to pay any amounts due or otherwise breach the terms of the agreement, or if we are sold or become bankrupt. We will continue to explore other strategic distribution partnerships that will add to our product offerings and further leverage our brand. We offer wedding supplies throughout www.theknot.com, including our "integrated shopping destination" called The Knot Shop, as well as through Bridalink.com. Bridalink.com is our separate online store for wedding supplies which we maintain in order to attract new users and generate additional revenue. We offer over 700 products, including decorated disposable cameras, wedding bubbles and bells, ring pillows, toasting flutes, car decorating kits, table centerpieces, goblets and glasses, garters and unity candles. These highly specialized items are often difficult to find through traditional retail outlets, and the purchase of these items is often left to the last minute. Consumers can place orders online, through a toll-free number, fax or via mail, 24-hours a day. We fulfill all wedding supplies orders from our warehouse located in Redding, California. In January 2001, we began to offer personalization options for many of our wedding supplies such as toasting glasses, cake servers, napkins and wedding attendant gifts and favors. 5 6 Other Online Services. Through Click Trips, Inc., our online travel agency located at www.clicktrips.com, users can plan their wedding travel and honeymoon. Click Trips allows us to advance our brand-building initiative by integrating the travel-related content and commerce platform with our existing wedding-related offerings. Click Trips specializes in destination travel packages to the Caribbean, Bermuda and Mexico. Click Trips closely monitors honeymoon and leisure travel trends and is therefore able to offer a high level of customer service and great knowledge of resorts. Click Trips can reach Knot members through a targeted e-mail program driven by engaged couples' wedding dates. The e-mails, which include discounts and planning advice, reach couples during the time period when they are most likely planning and booking their honeymoon. Offline Services Local Wedding Magazines. In March 2000, we acquired Weddingpages, which publishes local wedding magazines semiannually in 45 company-owned and franchised markets that are supported by a veteran salesforce. Beginning in December 2000, we began to release a redesigned Weddingpages magazine featuring the look and feel of The Knot brand. Weddingpages now combines the editorial expertise of The Knot with up-to-date, region-specific information from Weddingpages, making this publication a must-have wedding planning companion for engaged couples. Through February 2001, the new magazine had been released in 13 major company-owned markets including Washington, D.C., Seattle, Boston, Kansas City and Atlanta. A rollout of additional issues is expected to occur by May 2001 in cities such as New York City, Los Angeles, Philadelphia, St. Louis and Dallas. We also support our offline local efforts through integration with our Web site. We offer detailed online vendor listings throughout the United States and have launched comprehensive online local city guides for more than 16 U.S. cities. We will continue to roll out additional online city guides with localized wedding content on an ongoing basis throughout the coming months. Through our local market expansion, we are able to influence many of the wedding-related decisions and purchases made on the local level. The Knot Wedding Gowns Magazine. We published the second issue of the highly successful The Knot Wedding Gowns magazine in January 2001. This 350-page publication, with over 1,000 dresses from hundreds of the industry's top designers, is organized alphabetically by designer, and each gown image includes essential information that is not found in other bridal magazines -- price range, detailed description and a coordinating URL that directs readers to The Knot Web site for additional dresses by the same designer. Also featured are over a hundred photos of bridesmaid dresses, flower girl dresses, veils, shoes, tuxes and other accessories. Understanding the importance of localized wedding-planning information, we introduced an unprecedented new tool to the magazine -- The Salon Finder. As one of the most comprehensive salon listings on the bridal magazine market, brides can comb through The Salon Finder's 30 pages of organized, detailed salon listings to locate stores in their state that carry the designers they love. We intend to publish Wedding Gowns magazine twice a year. We sell Wedding Gowns magazine through newsstands and bookstores across the nation. The Knot Book Series. The Knot has two book series. Our first book series consists of three books which have been published by Broadway Books, a division of Random House. We developed the content of each book through the interaction between our users and our wedding experts. This "real-world" approach, directed by our editorial team and based on user experience and feedback, distinguishes us from the approach of traditional wedding resources. Each book in this series encourages readers to visit our sites. The first two books in the series published in December 1998 and January 2000, respectively, are detailed wedding-planning resources for to-be-weds, offering the information a bride and groom need to plan their wedding and include worksheets, checklists, etiquette, tips, calendars and answers to frequently-asked questions. Our third and final book in this series, called The Knot Guide to Wedding Vows and Traditions, was published in January 2001. Expanding on the information presented in the first two books, this in-depth 6 7 guide tackles tricky wedding-related topics including toasts, readings, music and personal vows and explains how couples can utilize each to personalize their own ceremony or reception. This book is full of information that brides and grooms from around the world can use to individualize their walk down the aisle by incorporating rituals and traditions that are relevant to a couple's own heritage. Our second book series consists of two books that are being published by Chronicle Books. This book series expands the consumer reach of The Knot to the gift book category. Featuring over 100 color pictures and illustrations, the books will make great gifts for every newly-engaged woman and hopeful brides-to-be. The first book, The Knot Complete Guide to Wedding Dresses, is set to debut in January 2002. It celebrates the evolution of the wedding gown, while providing brides with all the information they need to make the big purchase. The second book will focus on wedding flowers. Benefits to Advertisers, Sponsors and Vendors We provide advertisers, sponsors and vendors with targeted access to couples actively seeking information and advice and making meaningful spending decisions relating to all aspects of their weddings. We offer advertisers, sponsors and vendors an opportunity to establish brand loyalty with first-time purchasers of many products and services. Advertisers and Sponsors. We are able to deliver to advertisers and sponsors significant leads of potential purchasers. Editorial content and advertising are often integrated on our sites. For example, an article about honeymoons might feature an advertisement for a resort. Instead of traditional banners or buttons, our sponsors usually select our custom-developed marketing programs that offer special features, including tools. When a user clicks on an advertisement positioned on our sites, a sponsor's custom-designed window appears which showcases the advertiser's products and services. These windows can provide relevant product and contact information, electronic catalogues of products or hyperlinks to the sponsor's Web site. Companies can also enter into longer term arrangements to exclusively sponsor entire editorial areas or special features. We may also offer sponsors additional online promotional events such as a sweepstakes or targeted e-mail program. With the acquisition of Weddingpages, the further development of The Knot Wedding Gowns magazine and the launch of The Knot Membership Kit, we have expanded the scope of the integrated marketing programs we offer to our advertisers to include many offline features. For example, a program for an online sponsor could also include national or regional print advertising in our local wedding magazines or The Knot Wedding Gowns. A sponsor could also choose to have collateral promotional material distributed to our members in The Knot Membership Kit. Vendors. We provide our vendors with a consumer group that will make more buying decisions than at any other time in their lives. Our easy-to-use shopping sites increasingly promote e-commerce. Vendors' products are attractively displayed with color photographs and descriptions customized for the bridal market. Through our interactive online features, such as chat rooms and message boards, and by utilizing the creative content portions of our sites, we encourage and assist our users in making purchasing decisions. THE KNOT STRATEGY Our objective is to expand our position as the leading wedding resource providing comprehensive wedding planning information, products and services. Key elements of our business strategy include the following: Build Strong Brand Recognition. Building brand recognition is critical to attracting and expanding both our online and offline user base. We have secured the leading position in the online wedding market, and to maintain this focus we will continue to emphasize our editorial and creative content while marketing our magazine and book products offline. We plan to continue building brand recognition by leveraging our membership base and creating innovative and integrated marketing solutions. In March 2000, we launched The Knot Membership Kit, a 7 8 direct marketing tool that is shipped at no charge to our eligible members. The Knot Membership Kit contains Knot-branded collateral designed to help newly-engaged couples plan their wedding and to drive them back to our online sites for additional information. In addition, The Knot Membership Kit contains collateral provided by participating third party advertisers and sponsors in addition to material promoting our own services. The Knot Membership Kit allows us to leverage our comprehensive database of member information and strengthen The Knot brand awareness, while providing a unique advertising opportunity for our advertisers by placing a distinctive product in the hands of engaged couples. We also promote our brand through television and radio appearances by Carley Roney, our Editor-in-Chief and lead wedding expert. During the summer of 2000, The Knot joined NBC's TODAY Show, the #1-rated morning news show, to create an unprecedented 12-week wedding planning series called "Today Ties The Knot." The series featured live, on-air and online planning of one couple's wedding. Throughout the series, Carley Roney, Editor-in-Chief of The Knot, appeared on TODAY to present ideas for each aspect of the couple's wedding. Nearly every detail -- from invitations to the honeymoon -- were determined by votes cast weekly on the Web by TODAY's viewers. In November 2000, we entered into a strategic relationship with Microsoft's MSN Network, which makes The Knot the premier wedding content provider for MSN. Content from The Knot is featured on the Weddings area of MSN WomenCentral. This relationship allows us to feature our content and tools for the over 210 million visitors on MSN each month. The Weddings area includes links to The Knot's interactive planning tools as well as features Knot articles on wedding planning. With the initial releases of the revamped Weddingpages magazines in December 2000 and the launches of our in-depth online city guides, we are aggressively increasing our brand awareness at the local level while focusing on expanding our revenue streams and meeting our customers needs in both content and e-commerce applications. At the same time, we are taking advantage of the cross-promotional opportunities these offline publications afford our online properties and services. Aggressively Grow Membership. We believe a large and active membership base is critical to our success. Membership enrollment is free. Our members enjoy the use of personal Web pages, message boards, budgeting and planning tools, wedding checklists and gown search. New member enrollment per month has grown from 137,000 in the fourth quarter of 1999 to over 192,000 in the fourth quarter of 2000. Throughout 2000, we were enrolling as members an average of over 2,250 new couples per day. We intend to continue to grow our membership base and increase member usage through our content offerings, interactive services, active community participation and strategic relationships. We recognize the importance of maintaining confidentiality of member information and we have established a privacy policy to protect personal information. Our current privacy policy is set forth on our sites. Our policy is not to tell any third party any member's personal identifying information, but we may share aggregated information about our members with other pre-screened organizations who have specific direct mail product and service offers we think may be of interest to our members. We may share aggregated member information with third parties, such as a member's zip code or gender. In addition, we may use information revealed by members and information built from user behavior to target advertisements, content and e-mail. Provide Full-Service Wedding Resources. We facilitate the wedding planning process by providing what we believe is one of the most comprehensive packages of services, tools and commerce applications, online and offline. By continuing to combine our extensive wedding content and our active community with a full-service shopping solution, we plan to grow our leading market position and expand the services and content we provide. The acquisitions of Weddingpages, Click Trips, Bridalink and Wedding Photographers Network have helped allow us to provide our audience with the most comprehensive wedding services solution. By augmenting the editorial offerings and planning tools with various service offerings, we are able to provide unmatched convenience and utility for our users. Capitalize on Multiple Revenue Opportunities. We intend to leverage the size and favorable demographics of our online community to generate multiple revenue streams. We are focused on providing 8 9 our sponsors and advertisers with targeted access to couples actively seeking information and making purchase decisions. We maximize our advertising revenues with the targeted marketing opportunities offered to both our national advertising sponsors and local wedding vendors by integrated advertising with editorial content on our site and in our magazines. Sponsors benefit from our special feature programs that typically include an exclusive Knot-designed online site as well as site-wide banners and links to the sponsor's Web site. We expect to generate increasing online revenues from The Knot Registry and our convenient gift and supply shops. We will continue to use our content to promote e-commerce opportunities. Additionally, we expect to realize offline revenues from publishing our local magazines, semiannual gown magazine and books series. We will pursue additional revenue opportunities, as appropriate, in connection with the needs of today's engaged and newly married couples. We also intend to extend the relationship we build with our users and provide access to additional products and services relevant to newlyweds and growing families. Continue to Pursue Strategic Alliances. During 2000, we entered into a strategic relationship with Microsoft's MSN Network which provides an efficient distribution and marketing vehicle for The Knot. Also in 2000, we entered into a joint venture with Gerard Bedouk Holding (GBH), the largest wedding media company in Europe, for the purpose of developing and operating a Web site in French that offers wedding resources and services targeted to consumers in France and certain other French speaking territories in Europe. In November 2000, this joint venture launched its first site in France, www.mariee.fr, featuring The Knot's interactive planning tools, extensive bridal gown search and editorial content. GBH publishes a bi-monthly wedding trade magazine and three consumer wedding magazines, Mariee in France and Wedding Dresses in the U.K. and the U.S. GBH also produces two annual wedding shows in Paris. Through our relationship with GBH, we expect The Knot brand will gain broad exposure in French speaking Europe. GBH will promote the joint venture in its consumer and trade publications and bridal shows. We intend to seek other opportunities to form strategic relationships that will enhance our business and increase shareholder value. RELATIONSHIP WITH AOL On July 23, 1999, we entered into an amended anchor tenant agreement with AOL, which extended the term of our existing agreement with AOL through January 6, 2003 and expanded our presence on AOL. Under the terms of the agreement, The Knot is the primary wedding content provider on AOL and several other of AOL's leading brands, including AOL.com, Netscape Netcenter and CompuServe. AOL provides promotions and reserves programming areas for The Knot. Under our original services agreement with AOL, we obtained usage fees from AOL based on the number of customers visiting our AOL site, and we paid AOL commissions on our advertising revenues. Under the new agreement, we now pay AOL a quarterly carriage fee, with no obligation to pay AOL advertising commissions. AOL may terminate the agreement regarding our carriage on specific properties upon 30 days' prior written notice. On May 1, 2000, we entered into an International Anchor Tenant Agreement with AOL, whereby we receive distribution within AOL and its affiliates within international markets. The agreement expires on May 1, 2003 and provides for quarterly carriage fees payable over the term of the agreement. COMPETITION The Internet advertising and online wedding markets are new, rapidly evolving and intensely competitive, and we expect such competition to intensify in the future. We face competition primarily from three separate areas: online sites, magazines and gift registries. There are many wedding-related sites on the Internet developed and maintained by online content providers. Retail stores, manufacturers, wedding magazines and regional wedding directories also have online sites which compete with us. We expect competition to increase because of the business 9 10 opportunities presented by the growth of the Internet and e-commerce. Competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry in our market. Moreover, we face competition for sponsorship and advertising sales from other online content providers and advertisement server companies that provide banner advertisement services that might be considered an alternative marketing solution. We also face competition for our services from bridal magazines. Bride's and Modern Bride are the two dominant bridal publications in terms of revenue and circulation. According to Advertising Age, these two magazines and Bridal Guide, the third leading bridal magazine, generated gross advertising revenues of $229.6 million in 1999. The Knot Registry faces competition from online sources such as registry aggregators. We compete with retail stores offering gift registries, especially from retailers offering specific bridal gift registries. These stores, particularly national department store chains, have strong brand awareness, many years of retailing experience, and most now have online transactional capabilities. Our wedding supplies business also faces competition from online sources and retail stores offering similar products. We believe that the principal competitive factors in the wedding market are brand recognition, convenience, ease of use, information, quality of service and products, member affinity and loyalty, reliability and selection. As to these factors, we believe that we compete favorably. Our dedicated editorial, sales and products staffs concentrate their efforts on producing the most comprehensive wedding resources available. Generally, many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user or membership bases than we have. Therefore, these competitors have a significantly greater ability to attract advertisers and users. In addition, many of these competitors may be able to respond more quickly than we can to new or emerging technologies and changes in Internet user requirements and to devote greater resources than we do to the development, promotion and sale of services. There can be no assurance that our current or potential competitors will not develop products and services comparable or superior to those developed by us or adapt more quickly than we do to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, reduced margins or loss of market share, any of which would materially and adversely affect our business, results of operation and financial condition. INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY Our technology infrastructure provides for continuous availability of our online service. All of the critical components of the system are redundant, allowing us to withstand unexpected component failure and to undergo maintenance or upgrades. Our operation is dependent on the ability to maintain our computer and telecommunications systems in effective working order and to protect our systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. Our system hardware is co-located at Globix Corporation's New York, New York data center. Systems administrators and network managers at Globix monitor our servers, operate our network and execute backups. Our servers have access to auxiliary power during outages. Our systems are copied to backup tapes daily, which are in turn sent to us for offsite storage. Database and Web servers are redundant and operate using clustering technology for effective load-balancing and fault tolerance. Regular capacity planning allows us to quickly upgrade existing hardware and integrate new hardware to react quickly to a rapidly expanding member base and increased traffic to our sites. We generally operate at 99% uptime and no unexpected downtime. Key content management and e-commerce components are designed, developed and deployed by our in-house technology group. We also license commercially available technology when appropriate in lieu of dedicating our own human or financial resources. Current examples include NetGravity, our ad server and MapQuest for geographical mapping applications. 10 11 We employ several layers of security to protect data transmission and prevent unauthorized access. We keep all of our production servers behind firewalls for security purposes and do not allow outside access, at the operating systems level, except via special secure channels. Strict password management and physical security measures are followed. Computer emergency response team alerts are read, and, where appropriate, recommended action is taken to address security risks and vulnerabilities. From time to time, we use the services of third party computer security experts and penetration tests have been performed to help improve security. E-commerce transactions and browser-based administration screens employ secure sockets layer encryption to secure data transmitted between clients and servers. Credit card information captured during e-commerce transactions is never shared with outside parties, and we provide shoppers with a toll-free number to place orders by phone as an alternative to completing a transaction online. GOVERNMENT REGULATION Due to the increasing popularity and use of the Internet and other online services, laws applicable to e-commerce, privacy and the Internet generally are becoming more prevalent. It is possible that a number of new laws and regulations may be adopted regarding the Internet or other online services which will address issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. The nature of such legislation and the manner in which it may be interpreted and enforced cannot be fully determined at this time. Such legislation could subject us and/or our customers to potential liability or restrict our present business practices, which in turn could have an adverse effect on our business, results of operations and financial condition. In addition, the FTC has investigated the privacy practices of several companies that collect information about individuals on the Internet. The adoption of any such laws or regulations might also decrease the rate of growth of Internet use generally, which in turn could decrease the demand for our service or increase our cost of doing business or in some other manner have a material adverse effect on our business, results of operations and financial condition. Specifically, several states have proposed legislation that would limit the use and disclosure of personally identifiable information gathered online about users. To obtain membership on our sites, a user must disclose their name, address, e-mail address and role in the wedding. We do not currently sell any member's personal identifying information to third parties without the member's prior consent. We may share aggregated member information with third parties, such as a member's zip code or gender and may use information revealed by members and information built from user behavior to target advertising, content and e-mail. Because we rely on the collection and use of personal data from our members for targeting advertisements shown on our services, we may be harmed by any laws or regulations that restrict our ability to collect or use this data. Privacy concerns in general may cause visitors to avoid online sites that collect behavioral information and even the perception of security and privacy concerns, whether or not valid, may indirectly inhibit market acceptance of our services. In addition, if our privacy practices are deemed unacceptable by watchdog groups or privacy advocates, such groups may attempt to harm our business by blocking access to our sites or disparaging our reputation and our business, results of operation and financial condition could be materially and adversely affected. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. It is uncertain how such existing laws may apply to or address the unique issues of the Internet and related technologies. For example, because our services are accessible throughout the United States, other jurisdictions may claim that we are required to qualify to do business as a foreign corporation in a particular state. We are qualified to do business in New York, California, Nebraska and Virginia and our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to qualify and could result in our inability to enforce contracts in such 11 12 jurisdictions. Any new legislation or regulation regarding the Internet, or the application of existing laws and regulations to the Internet, could harm us. Additionally, while we only recently have begun to operate outside of the United States, the international regulatory environment relating to the Internet market could have a material and adverse effect on our business, results of operations and financial condition if we continue to expand internationally. In particular, the European Union recently enacted privacy regulations that limit the collection and use of some user information and subject data collectors to a restrictive regulatory regime. The cost of such compliance could be material and we may not be able to comply with the applicable national regulations in a timely or cost-effective manner, if at all. Changes to existing laws or the passage of new laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace that could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs, or could in some other manner have a material adverse effect on our business, results of operations and financial condition. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We regard our copyrights, service marks, trademarks, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection, confidentiality and assignment of invention agreements, and/or license agreements with employees, customers, independent contractors, partners and others to protect our proprietary rights. We strategically pursue the registration of our trademarks and service marks in the United States, and have applied for and obtained registration in the United States for some of our trademarks and service marks, including "THEKNOT". Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available online. We have licensed in the past, and expect to continue to license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our brand is maintained by our licensees, there can be no assurance that our licensees will not take actions that might materially adversely affect the value of our proprietary rights or reputation, which could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that the steps we have taken to protect our proprietary rights will be adequate or that third parties will not infringe or misappropriate our copyrights, trademarks, trade secrets and similar proprietary rights. In addition, there can be no assurance that other parties will not assert claims of infringement of intellectual property against us. Although we believe that our products and services do not infringe upon the intellectual property rights of others and that we have all rights necessary to utilize the intellectual property employed in our business, we may nonetheless be subject to claims alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums on litigation, pay damages, delay product installments, develop non-infringing intellectual property or acquire licenses to intellectual property that is the subject of any such infringement, which licenses may not be available on commercially reasonable terms, if at all. Therefore, such claims could have a material adverse effect on our business, results of operations and financial condition. EMPLOYEES As of December 31, 2000, we had a total of 280 employees, of which 70 were involved in product and content development, 171 were involved in sales and marketing, and 39 were involved in general and administrative functions. None of our employees is represented by a labor union. We have not experienced any work-stoppages and we consider relations with our employees to be good. Competition for qualified personnel in our industry is intense. We believe that we will need to continue to attract, hire and retain qualified personnel to be successful in the future. 12 13 RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Important Factors Regarding Forward-Looking Statements In addition to other information in this Annual Report on Form 10-K and in the documents we are incorporating by reference, the following risk factors should be carefully considered in evaluating our business because such factors currently or may have a significant impact on our business, operating results or financial condition. This Annual Report on Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this Annual Report. RISKS RELATED TO OUR BUSINESS WE HAVE AN UNPROVEN BUSINESS MODEL AND IT IS UNCERTAIN WHETHER ONLINE WEDDING-RELATED SITES CAN GENERATE SUFFICIENT REVENUES TO SURVIVE. Our model for conducting business and generating revenues is new and unproven. Our business model depends in large part on our ability to generate revenue streams from multiple sources through our online sites, including: - Internet sponsorship and advertising fees from third parties; and - online sales of wedding gifts, supplies and honeymoon travel packages It is uncertain whether wedding-related online sites that rely on attracting sponsors and advertisers, as well as people to purchase wedding gifts and supplies, can generate sufficient revenues to survive. For our business to be successful, we must provide users with an acceptable blend of products, information, services and community offerings that will attract wedding consumers to our online sites frequently. In addition, we must provide sponsors, advertisers and vendors the opportunity to reach these wedding consumers. We provide our services to users without charge and we may not be able to generate sufficient revenues to pay for these services. Accordingly, we are not certain that our business model will be successful or that we can sustain revenue growth or be profitable. WE HAVE A HISTORY OF SIGNIFICANT LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE. We have not achieved profitability and expect to continue to incur significant losses and negative cash flow for the foreseeable future. We incurred net losses of $1.5 million for the year ended December 31, 1998, $9.2 million for the year ended December 31, 1999 and $15.8 million for the year ended December 31, 2000. As of December 31, 2000, our accumulated deficit was $28.3 million. We also expect to continue to incur significant operating expenses and capital expenditures and, as a result, we will need to generate significant revenues to achieve and maintain profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. Failure to achieve or maintain profitability may materially and adversely affect our business, results of operations and financial condition and the market price of our common stock. For more information on our losses and the effects of our expenses on our financial performance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE LACK SIGNIFICANT REVENUES AND MAY BE UNABLE TO ADJUST SPENDING QUICKLY ENOUGH TO OFFSET ANY UNEXPECTED REVENUE SHORTFALL. Our revenues for the foreseeable future will remain dependent on online user traffic levels, advertising activity both online and offline and the expansion of our e-commerce activity. In addition, we plan to expand and develop content and to upgrade and enhance our technology and infrastructure to support our growth. We incur a significant percentage of our expenses, such as employee compensation and rent, prior to generating revenues associated with those expenses. Moreover, our expense levels are based, in part, on our expectation of future revenues. We may be unable to adjust spending quickly enough to offset any 13 14 unexpected revenue shortfall. If we have a shortfall in revenues in relation to our growth in expenses, then our results of operations would be materially and adversely affected. For more information on our net revenues and the effects of our expenses on our financial performance, see and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK. Our quarterly revenues and operating results have fluctuated significantly in the past and are expected to continue to fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include: - the level of online usage and traffic on our Web site; - demand for online and offline advertising; - seasonal trends in both online usage and advertising placements; - the addition or loss of advertisers; - the advertising budgeting cycles of specific advertisers; - the number of users that purchase merchandise from us; - the magazine publishing cycle of Weddingpages; - the amount and timing of capital expenditures and other costs relating to the expansion of our operations, including those related to acquisitions; - the introduction of new sites and services by us or our competitors; - changes in our pricing policies or the pricing policies of our competitors; and - general economic conditions; and economic conditions specific to the Internet, electronic commerce, online and offline media. We do not believe that period-to-period comparisons of our operating results are necessarily meaningful and you should not rely upon these comparisons as indicators of our future performance. Due to the foregoing factors, it is possible that our results of operations in one or more future quarters may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock is likely to decline. BECAUSE THE FREQUENCY OF WEDDINGS VARY FROM QUARTER TO QUARTER, OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS. Seasonal and cyclical patterns may affect our revenues. In 1999, 18.2% of weddings occurred in the first quarter, 25.9% occurred in the second quarter, 29.3% occurred in the third quarter and 26.6% occurred in the fourth quarter. Because we launched The Knot Registry in November 1998 and acquired Bridalink in July 1999, we have limited experience generating merchandise revenues. Based upon our limited experience, we believe merchandise revenues generally are lower in the fourth quarter of each year. In addition, we believe that advertising sales in traditional media, such as television and radio, and print generally are lower in the first and third calendar quarters of each year. Historically, we have experienced increases in our traffic during the first and second quarters of the year. As a result of these factors, we may experience fluctuations in our revenues from quarter to quarter. IF SALES TO SPONSORS OR ADVERTISERS FORECASTED IN A PARTICULAR PERIOD ARE DELAYED OR DO NOT OTHERWISE OCCUR, OUR RESULTS OF OPERATIONS FOR A PARTICULAR PERIOD WOULD BE MATERIALLY AND ADVERSELY AFFECTED. The time between the date of initial contact with a potential sponsor or advertiser and the execution of a contract with the sponsor or advertiser is often lengthy, typically ranging from six weeks for smaller 14 15 agreements to nine months for larger agreements, and is subject to delays over which we have little or no control, including: - customers' budgetary constraints; - customers' internal acceptance reviews; - the success and continued internal support of advertisers' and sponsors' own development efforts; and - the possibility of cancellation or delay of projects by advertisers or sponsors. During the sales cycle, we may expend substantial funds and management resources in advance of generating sponsorship or advertising revenues. Accordingly, if sales to advertisers or sponsors forecasted in a particular period are delayed or do not otherwise occur, we would generate less sponsorship and advertising revenues during that period and our results of operations for that period would suffer. OUR FINANCIAL CONDITION AND REVENUES WOULD BE ADVERSELY AFFECTED IF TRAFFIC ON OUR AOL SITE DECREASED OR IF CARRIAGE OF OUR SITES ON AOL WAS DISCONTINUED. AOL has accounted for a significant portion of our online traffic to date. During the year ended December 31, 2000, approximately 16% of our users were customers of AOL's Internet services. If the financial condition and operations of AOL were to deteriorate significantly, or if the traffic on our AOL site were to substantially decrease, our revenues could be adversely affected. In addition, our anchor tenant agreement with AOL expires on January 6, 2003. AOL may extend it for an additional two years, but does not have any obligation to extend or renew the agreement. Through the AOL agreement, we provide content on America Online, AOL.com, AOL Hometown, Netscape and CompuServe. Under the terms of the agreement, AOL may terminate the agreement without cause only with respect to our carriage on AOL Hometown, Netscape, and CompuServe upon 30 days' prior written notice. If the carrying of our sites on AOL is discontinued, we would lose members, sponsors and advertisers and our business, results of operations and financial condition would be materially and adversely affected. WE HAVE A LIMITED OPERATING HISTORY AND EXPECT TO ENCOUNTER DIFFICULTIES FACED BY EARLY STAGE COMPANIES IN THE INTERNET ADVERTISING AND ONLINE WEDDING MARKETS. We commenced operations in May 1996 and recorded our first revenues in September 1996, immediately following the launch of our first online property. Accordingly, we have only a limited operating history and face many of the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, such as the Internet advertising and online wedding markets. These risks include our ability to: - increase the audience on our sites; - broaden awareness of our brand; - strengthen user-loyalty; - offer compelling content; - maintain our leadership in generating traffic; - maintain our current, and develop new, strategic relationships; - attract a large number of advertisers from a variety of industries; - respond effectively to competitive pressures; - generate revenues from the sale of merchandise and e-commerce; 15 16 - continue to develop and upgrade our technology; and - attract, integrate, retain and motivate qualified personnel. As a result of our limited operating history, we do not have meaningful historical financial data for a significant number of periods upon which to forecast our revenues and results of operations. These risks could negatively impact our financial condition if left unaddressed. For more information on the effects of some of these risks, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE KNOT BRAND NAME WHICH WOULD NEGATIVELY IMPACT OUR BUSINESS AND CAUSE OUR SPONSORSHIP AND ADVERTISING REVENUES TO DECLINE. Building recognition of our brand is critical to attracting and expanding our online user base and our offline readership. Because we plan to continue building brand recognition, we may find it necessary to accelerate expenditures on our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness. Our failure to successfully promote and maintain our brand would adversely affect our business and cause us to incur significant expenses in promoting our brand without an associated increase in our net revenues. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT AND ANY FUTURE ACQUISITIONS OR SUCCESSFULLY OPERATE UNDER OUR STRATEGIC PARTNERSHIPS. In March 2000, we acquired Weddingpages, Inc., a publisher of local wedding publications. We may not be able to successfully integrate and expand the Weddingpages business model. In addition, we may still encounter difficulty integrating the personnel, operations, technology and software of this acquired business. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. In the future, we may acquire, or invest in, complementary companies, products or technologies or enter into new strategic partnerships. Acquisitions, investments and partnerships involve numerous risks, including: - difficulties in integrating operations, technologies, products and personnel; - diversion of financial and management resources from existing operations; - risks of entering new markets; - potential loss of key employees; and - inability to generate sufficient revenues to offset acquisition or investment costs. THE COSTS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR STRATEGIC ALLIANCES COULD DILUTE YOUR INVESTMENT OR ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. To pay for an acquisition or to enter into a strategic alliance, we might use equity securities, debt, cash, or a combination of the foregoing. If we use equity securities, our stockholders may experience dilution. In addition, an acquisition may involve non-recurring charges or involve amortization of significant amounts of goodwill. The related increases in expenses could adversely affect our results of operations. Any such acquisitions or strategic alliances may require us to obtain additional equity or debt financing, which may not be available on commercially acceptable terms, if at all. IF THE USE OF THE INTERNET AS AN ADVERTISING AND MARKETING MEDIUM GROWS MORE SLOWLY THAN WE EXPECT OR DIMINISHES, OUR FUTURE REVENUES AND PROSPECTS WOULD BE MATERIALLY AND ADVERSELY AFFECTED. Our future success depends in part on a significant increase in the use of the Internet as an advertising and marketing medium. Sponsorship, advertising and production revenues constituted 45% of our net revenue for the year ended December 31, 2000, 71% of our net revenues for the year ended December 31, 1999 and 82% of our net revenues for the year ended December 31, 1998. The Internet 16 17 advertising market is new and rapidly evolving, and it cannot yet be compared with traditional advertising media to gauge its effectiveness. As a result, demand for and market acceptance of Internet advertising solutions are uncertain. Many of our current and potential customers have little or no experience with Internet advertising and have allocated only a limited portion of their advertising and marketing budgets to Internet activities. The adoption of Internet advertising, particularly by entities that have historically relied upon traditional methods of advertising and marketing, requires the acceptance of a new way of advertising and marketing. These customers may find Internet advertising to be less effective for meeting their business needs than traditional methods of advertising and marketing. Furthermore, there are software programs that limit or prevent advertising from being delivered to a user's computer. Widespread adoption of this software by users would significantly undermine the commercial viability of Internet advertising. WE DEPEND ON A LIMITED NUMBER OF ONLINE SPONSORS AND ADVERTISERS AND THE LOSS OF A NUMBER OF THESE WOULD RESULT IN A DECLINE IN OUR REVENUES. We depend on a limited number of online sponsors and advertisers for a significant part of our net revenues. Although no single sponsor or advertiser accounted for 10% or more of our net revenues, our 7 largest sponsors and advertisers accounted for 18% of our net revenues for the year ended December 31, 2000. Consequently, the loss of any of these online sponsors or advertisers would cause our revenues to decline. We anticipate that our future results of operations will continue to depend to a significant extent upon revenues from a limited number of online sponsors and advertisers. In addition, we anticipate that such online sponsors and advertisers will continue to vary over time. To achieve our long-term goals, we will need to attract additional significant online sponsors and advertisers on an ongoing basis. If we fail to enter into a sufficient number of large contracts during a particular period, our revenues for that period would be adversely affected. For more information on our advertising revenues, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTERNATIONAL OPERATIONS ARE SUBJECT TO ADDITIONAL RISKS. We may decide to further expand internationally. Prior to our recent joint venture, we had no experience in developing localized versions of our sites for international markets and in marketing and selling internationally. Additionally, we have limited information available to evaluate our prospects abroad. International operations and business expansion plans are subject to numerous additional risks, including the impact of foreign government regulations, currency fluctuations, political uncertainties, social instability, differences in business practices or other developments not typical of investments in the United States. There can be no assurance that foreign governments will not adopt regulations or take other actions that would have a direct or indirect adverse impact on our business or market opportunities within such governments' countries. Furthermore, there can be no assurance that the political, cultural and economic climate outside the United States will be favorable to our operations and business strategy. As a result of our recent joint venture, our operations have been exposed to foreign competition. Many of these competitors have substantially greater financial resources than we do and a significant operating history in the jurisdictions in which we are seeking to establish ourselves. There can be no assurance that we will be able to successfully compete in any foreign jurisdiction or against such competitors. IF WE CANNOT PROTECT OUR DOMAIN NAMES, IT WILL IMPAIR OUR ABILITY TO BRAND SUCCESSFULLY THE KNOT. We currently hold various Web domain names, including www.theknot.com. The acquisition and maintenance of domain names generally is regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, 17 18 we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may not successfully carry out our business strategy of establishing a strong brand for The Knot if we cannot prevent others from using similar domain names or trademarks. This could impair our ability to increase market share and revenues. OUR BUSINESS AND PROSPECTS WOULD SUFFER IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS. We rely solely upon copyright, trade secret and trademark law and assignment of invention and confidentiality agreements to protect our proprietary technology, processes, content and other intellectual property to the extent that protection is sought or secured at all. We cannot assure you that any steps we might take will be adequate to protect against infringement and misappropriation of our intellectual property by third parties. Similarly, we cannot assure you that third parties will not be able to independently develop similar or superior technology, processes, content or other intellectual property. The unauthorized reproduction or other misappropriation of our intellectual property rights could enable third parties to benefit from our technology without paying us for it. If this occurs, our business and prospects would be materially and adversely affected. In addition, disputes concerning the ownership or rights to use intellectual property could be costly and time consuming to litigate, may distract management from other tasks of operating the business, and may result in our loss of significant rights and the loss of our ability to operate our business. OUR PRODUCTS AND SERVICES MAY INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES AND ANY INFRINGEMENT COULD REQUIRE US TO INCUR SUBSTANTIAL COSTS AND DISTRACT OUR MANAGEMENT. Although we avoid infringing known proprietary rights of third parties, including licensed content, we may be subject to claims alleging infringement of third-party proprietary rights. If we are subject to claims of infringement or are infringing the rights of third parties, we may not be able to obtain licenses to use those rights on commercially reasonable terms, if at all. In that event, we would need to undertake substantial reengineering to continue our online offerings. Any effort to undertake such reengineering might not be successful. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. WE DEPEND UPON QVC TO PROVIDE US WAREHOUSING, FULFILLMENT AND DISTRIBUTION SERVICES, AND SYSTEM FAILURES OR OTHER PROBLEMS AT QVC COULD CAUSE US TO LOSE CUSTOMERS AND REVENUES. We have a services agreement with QVC to warehouse, fulfill and arrange for distribution of approximately 80% of our products. Our agreement with QVC expires in December 2003. QVC does not have any obligation to renew this agreement. If QVC's ability to provide us with these services in a timely fashion or at all is impaired, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, system failures or for any other reason, or if the services agreement is not renewed, we would not be able, at least temporarily, to sell or ship our products to our customers. We may be unable to engage alternative warehousing, fulfillment and distribution services on a timely basis or upon terms favorable to us. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING NECESSARY TO EXECUTE OUR BUSINESS STRATEGY. We currently believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. To the extent we require additional funds to support our operations or the expansion of our business, we may need to sell additional equity, issue debt or convertible securities or obtain credit facilities through financial institutions. We cannot assure you that additional funding, if required, will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to 18 19 fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. INCREASED COMPETITION IN OUR MARKETS COULD REDUCE OUR MARKET SHARE, THE NUMBER OF OUR ADVERTISERS, OUR ADVERTISING REVENUES AND OUR MARGINS. The Internet advertising and online wedding markets are new and rapidly evolving. Additionally, both the Internet advertising and online wedding markets and the wedding magazine publishing markets are intensely competitive, and we expect such competition to intensify in the future. We face competition for members, users, readers and advertisers from the following areas: - online services or Web sites targeted at brides and grooms as well as the online sites of retail stores, manufacturers and regional wedding directories; - bridal magazines, such as Bride's (part of the Conde Nast family) and Modern Bride (part of the Primedia family); and - online and retail stores offering gift registries, especially from retailers offering specific bridal gift registries. We expect competition to increase because of the business opportunities presented by the growth of the Internet and e-commerce. Our competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user, membership or readership bases than we have and, therefore, have a significantly greater ability to attract advertisers, users and readers. In addition, many of our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in Internet user requirements, as well as devote greater resources than we can to the development, promotion and sale of services. There can be no assurance that our current or potential competitors will not develop products and services comparable or superior to those that we develop or adapt more quickly than we do to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, lower margins or loss of market share. There can be no assurance that we will be able to compete successfully against current and future competitors. OUR POTENTIAL INABILITY TO COMPETE EFFECTIVELY IN OUR INDUSTRY FOR QUALIFIED PERSONNEL COULD HINDER THE SUCCESS OF OUR BUSINESS. Competition for personnel in the Internet and wedding industries is intense. We may be unable to retain those employees who are important to the success of our business. We may also face difficulties attracting, integrating or retaining other highly qualified employees in the future. We have experienced, and expect to continue to experience, difficulty in hiring and retaining highly-skilled employees with appropriate qualifications as a result of our rapid growth and expansion. If we cannot attract new personnel or retain and motivate our current personnel, our business may not succeed. SYSTEMS DISRUPTIONS AND FAILURES COULD CAUSE ADVERTISER OR USER DISSATISFACTION AND COULD REDUCE THE ATTRACTIVENESS OF OUR SITES. The continuing and uninterrupted performance of our computer systems is critical to our success. Our advertisers and sponsors, users and members may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services and content to them. Substantial or repeated system disruption or failures would reduce the attractiveness of our online sites significantly. Substantially all of our communications hardware and some of our other computer hardware operations are located at Globix Corporation's facilities in New York, New York. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems. Computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our online sites. Our business could be materially and adversely affected if our systems were affected by any of these occurrences. We do not 19 20 presently have any secondary "off-site" systems or a formal disaster recovery plan. Our sites must accommodate a high volume of traffic and deliver frequently updated information. Our sites have in the past experienced slower response times or decreased traffic. These types of occurrences in the future could cause users to perceive our sites as not functioning properly and therefore cause them to use another online site or other methods to obtain information or services. In addition, our users depend on Internet service providers, online service providers and other site operators for access to our online sites. Many of them have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system disruptions or failures unrelated to our systems. Although we carry general liability insurance, our insurance may not cover any claims by dissatisfied providers or subscribers or may not be adequate to indemnify us for any liability that may be imposed in the event that a claim were brought against us. Any system disruption or failure, security breach or other damage that interrupts or delays our operations could cause us to lose users, sponsors and advertisers and adversely affect our business and results of operations. WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US. We are dependent on various third parties for software, systems and related services in connection with our hosting and accounting software, data transmission and security systems. Several of the third parties that provide software and services to us have a limited operating history and have relatively new technology. These third parties are dependent on reliable delivery of services from others. To date, we have not experienced significant problems with the services that these third parties provide to us. If our current providers were to experience prolonged systems failures or delays, we would need to pursue alternative sources of services. Although alternative sources of these services are available, we may be unable to secure such services on a timely basis or on terms favorable to us. As a result, we may experience business disruptions if these third parties fail to provide reliable software, systems and related services to us. WE MAY BE LIABLE IF THIRD PARTIES MISAPPROPRIATE OUR USERS' PERSONAL INFORMATION. If third parties were able to penetrate our network security or otherwise misappropriate our users' personal or credit card information, we could be subject to liability. Our liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims as well as for other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in costly and time-consuming litigation which could adversely affect our financial condition. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could have additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER STOCKHOLDERS EXERCISE SIGNIFICANT CONTROL OVER ALL MATTERS REQUIRING A STOCKHOLDER VOTE. As of December 31, 2000, our executive officers, directors and stockholders who each owned greater than 5% of our common stock, and their affiliates, in the aggregate, beneficially owned approximately 70.6% of our outstanding common stock. As a result, these stockholders are able to exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership could also have the effect of delaying or preventing a change in control. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. 20 21 RISKS RELATED TO THE SECURITIES MARKETS FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE. We have a large number of shares of common stock outstanding and available for resale. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the public market or the perception that such sales could occur. OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND IS LIKELY TO EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS IN THE FUTURE THAT COULD REDUCE THE VALUE OF YOUR INVESTMENT, SUBJECT US TO LITIGATION, CAUSE US TO BE UNABLE TO MAINTAIN THE LISTING OF OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET, AND MAKE OBTAINING FUTURE EQUITY FINANCING MORE DIFFICULT FOR US. The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile, with extreme price and volume fluctuations. The Nasdaq National Market, where most publicly held Internet companies are traded, has experienced substantial price and volume fluctuations. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance, and for this or other reasons we could continue to suffer significant declines in the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. Our common stock is currently listed on the Nasdaq National Market. We must satisfy a number of requirements to maintain our listing on the Nasdaq National Market, including maintaining a minimum bid price for our common stock of $1.00 per share and maintaining a market value for our publicly-held shares of at least $5 million. A company fails to satisfy these requirements if its closing bid price remains below $1.00 per share or if the market value for the publicly-held shares remain below $5 million, in each case for 30 consecutive business days. On March 22, 2001, we received a letter from The Nasdaq Stock Market, Inc. notifying us of our failure to maintain a minimum bid price of $1.00 over the preceding 30 consecutive trading days as required by Nasdaq's Marketplace Rule 4450(a)(5). The letter stated that we have until June 20, 2001 to demonstrate compliance with Rule 4450(a)(5) and that, if we are not in compliance by that date, Nasdaq will notify us that our securities will be delisted from the Nasdaq National Market. If such event occurs, we may appeal the decision to a Nasdaq Listing Qualifications Panel. There can be no assurance that our bid price will comply with the requirements of the Nasdaq National Market to facilitate continued listing of our common stock on the Nasdaq National Market. If our common stock loses its Nasdaq National Market status, our common stock would likely trade on the Nasdaq Over the Counter Bulletin Board, which is viewed by most investors as a less desirable, less liquid marketplace. This outcome would be likely to adversely affect the trading price of our common stock. In addition, further declines in our stock price might harm our ability to issue, or significantly increase the ownership dilution to stockholders caused by our issuing equity in financing or other transactions. The price at which we issue shares in such transactions is generally based on the market price of our common stock and a decline in our stock price would result in our needing to issue a greater number of shares to raise a given amount of funding or acquire a given dollar value of goods or services. RISKS RELATED TO THE INTERNET INDUSTRY IF THE USE OF THE INTERNET AND COMMERCIAL ONLINE SERVICES AS MEDIA FOR COMMERCE DOES NOT CONTINUE TO GROW, OUR BUSINESS AND PROSPECTS WOULD BE MATERIALLY AND ADVERSELY AFFECTED. We cannot assure you that a sufficiently broad base of consumers will adopt, and continue to use, the Internet and commercial online services as media for commerce, particularly for purchases of wedding gifts and supplies. Even if consumers adopt the Internet or commercial online services as a media for commerce, we cannot be sure that the necessary infrastructure will be in place to process such transactions. Our long-term viability depends substantially upon the widespread acceptance and the development of the Internet or commercial online services as effective media for consumer commerce and 21 22 for advertising. Use of the Internet or commercial online services to effect retail transactions and to advertise is at an early stage of development. Convincing consumers to purchase wedding gifts and supplies online may be difficult. Demand for recently introduced services and products over the Internet and commercial online services is subject to a high level of uncertainty. Few proven services and products exist. The development of the Internet and commercial online services into a viable commercial marketplace is subject to a number of factors, including: - continued growth in the number of users of such services; - concerns about transaction security; - continued development of the necessary technological infrastructure; - development of enabling technologies; - uncertain and increasing government regulation; and - the development of complementary services and products. If users experience difficulties because of capacity constraints of the infrastructure of the Internet and other commercial online services, potential users may not be able to access our sites and our business and prospects would be harmed. To the extent that the Internet and other online services continue to experience growth in the number of users and frequency of use by consumers resulting in increased bandwidth demands, there can be no assurance that the infrastructure for the Internet and other online services will be able to support the demands placed upon them. The Internet and other online services have experienced outages and delays as a result of damage to portions of their infrastructure, power failures, telecommunication outages, network service outages and disruptions, natural disasters and vandalism and other misconduct. Outages or delays, could adversely affect online sites, e-mail and the level of traffic on all sites. We depend on online access providers that provide our users with access to our services. In the past, users have experienced difficulties due to systems failures unrelated to our systems. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet or other online service activity or to increased governmental regulation. Insufficient availability of telecommunications services to support the Internet or other online services also could result in slower response times and negatively impact use of the Internet and other online services generally, and our sites in particular. If the use of the Internet and other online services fails to grow or grows more slowly than expected, if the infrastructure for the Internet and other online services does not effectively support growth that may occur or if the Internet and other online services do not become a viable commercial marketplace, we may not achieve profitability. WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN THE INTERNET INDUSTRY AND THIS MAY HARM OUR BUSINESS. If we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, we could lose users and market share to our competitors. The Internet and e-commerce are characterized by rapid technological change. Sudden changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices could render our existing online sites and proprietary technology and systems obsolete. The emerging nature of products and services in the online wedding market and their rapid evolution will require that we 22 23 continually improve the performance, features and reliability of our online services. Our success will depend, in part, on our ability: - to enhance our existing services; - to develop and license new services and technology that address the increasingly sophisticated and varied needs of our prospective customers and users; and - to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of online sites and other proprietary technology entails significant technological and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively or adapt our online sites, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. Updating our technology internally and licensing new technology from third parties may require significant additional capital expenditures. IF WE BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATED TO DOING BUSINESS ONLINE, OUR SPONSORSHIP, ADVERTISING AND MERCHANDISE REVENUES COULD DECLINE AND OUR BUSINESS AND PROSPECTS COULD SUFFER. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Laws and regulations may be adopted covering issues such as user privacy, pricing, content, taxation and quality of products and services. Any new legislation could hinder the growth in use of the Internet and other online services generally and decrease the acceptance of the Internet and other online services as media of communications, commerce and advertising. The governments of states and foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet and Internet advertising services. In addition, the growth and development of the market for e-commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, which may impose additional burdens on companies conducting business online. The adoption or modification of laws or regulations relating to the Internet and other online services could cause our sponsorship, advertising and merchandise revenues to decline and our business and prospects to suffer. WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR SITES. We may be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish on our online sites. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We could also be subject to claims based upon the content that is accessible from our online sites through links to other online sites or through content and materials that may be posted by members in chat rooms or bulletin boards. Our insurance, which covers commercial general liability, may not adequately protect us against these types of claims. WE MAY INCUR POTENTIAL PRODUCT LIABILITY FOR PRODUCTS SOLD ONLINE. Consumers may sue us if any of the products that we sell online are defective, fail to perform properly or injure the user, or if consumers experience problems with honeymoon packages purchased through our sites. To date, we have had limited experience selling products online and developing relationships with manufacturers or suppliers of such products. We plan to sell a range of products targeted specifically at brides and grooms through The Knot Registry, The Knot Shop, Bridalink.com, Click Trips and other e-commerce sites that we may acquire in the future. Such a strategy involves numerous risks and uncertainties. Although our agreements with manufacturers and providers of travel services typically contain provisions intended to limit our exposure to liability claims, these limitations may not prevent all potential claims. Liability claims could require us to spend significant time and money in litigation or to 23 24 pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our financial results, reputation and brand name. WE MAY INCUR SIGNIFICANT EXPENSES RELATED TO THE SECURITY OF PERSONAL INFORMATION ONLINE. The need to transmit securely confidential information online has been a significant barrier to e-commerce and online communications. Any well-publicized compromise of security could deter people from using the Internet or other online services or from using them to conduct transactions that involve transmitting confidential information. Because our success depends on the acceptance of online services and e-commerce, we may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. ITEM 2. PROPERTIES We currently lease approximately 20,000 square feet of space at our headquarters in New York City. The lease expires on March 31, 2012. We lease approximately 3,100 square feet of space for our customer service center and merchandising operation in Orange County, California. The lease for this space expires on August 31, 2002. We also lease approximately 13,500 square feet of space for warehousing and operations in Redding, California. This lease expires on January 31, 2003, with an option to extend for an additional two years. Weddingpages, our subsidiary in Omaha, Nebraska, leases approximately 16,000 square feet and the lease for this space expires on October 15, 2005. Our Click Trips subsidiary is also located in Omaha, Nebraska. It leases approximately 2,900 square feet of office space. The lease for this space expires on May 31, 2003. ITEM 3. LEGAL PROCEEDINGS On August 14, 2000, certain Weddingpages franchisees commenced litigation in Supreme Court, New York County, New York against us and certain of our officers, including David Liu, our Chairman and Chief Executive Officer. The plaintiffs seek to enjoin us from taking actions, primarily relating to the sale of advertising in certain local markets, which plaintiffs claim will damage the value of their Weddingpages franchises and money damages in an unspecified amount. On October 19, 2000, we filed our initial response. On October 27, 2000 the Supreme Court of the State of New York refused to grant preliminary injunctions sought by certain Weddingpages franchisees. The court ordered that the parties submit their dispute to a neutral mediator. In February and March 2001, as a result of negotiations among the parties, with the assistance of the mediator, non-monetary settlements were reached with six of the plaintiffs in the action. Certain franchisees have not executed the settlement agreement as negotiated. We had previously made a motion to dismiss the case, which was stayed pending settlement discussions. It is our intention to reinstate the motion against those plaintiffs who have refused to execute the settlement agreement and, in any event, to continue to contest the allegations which, we believe, are without merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 24 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National market under the symbol "KNOT" since our initial public offering on December 2, 1999. The following table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported on the Nasdaq National Market:
HIGH LOW ------ ----- 1999: Fourth Quarter (from December 2, 1999).................... $21.00 $8.06 2000: First Quarter............................................. $12.50 $5.00 Second Quarter............................................ $ 7.25 $3.38 Third Quarter............................................. $ 4.88 $2.75 Fourth Quarter............................................ $ 3.34 $0.44
On December 31, 2000, the last reported sale price of the common stock on the Nasdaq National Market was $0.94. On March 29, 2001, the last reported sale price of the common stock on the Nasdaq National Market was $0.75. HOLDERS As of March 21, 2001, there were approximately 57 holders of record of our common stock. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends for the foreseeable future. USE OF PROCEEDS FROM IPO On December 1, 1999, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (Registration No. 333-87345). Pursuant to this Registration Statement, we completed our initial public offering of 3,913,000 shares of our common stock. After deducting underwriting discounts and commissions and other related expenses, net proceeds of the offering were approximately $34.7 million. As of December 31, 2000, we have used approximately $26.2 million of the proceeds from our initial public offering for working capital purposes, capital expenditures and to fund acquisitions and operating losses. Except for salaries and travel expenses paid in the normal course of business or distribution and warehousing fees paid to QVC under our services agreement, none of these expenses were direct or indirect payments to our directors, officers, general partners or their associates, to persons owning ten percent or more of any class of our equity securities or to our affiliates. 25 26 ITEM 6. SELECTED FINANCIAL DATA The selected balance sheet data as of December 31, 2000 and December 31, 1999 and the selected statement of operations data for the years ended December 31, 2000, 1999 and 1998 have been derived from our audited financial statements included elsewhere herein. The selected balance sheet data as of December 31, 1998, 1997 and 1996 and the statement of operations data for the year ended December 31, 1997 and the period from May 2, 1996 (inception) through December 31, 1996 have been derived from our audited financial statements not included herein. Unaudited pro forma basic and diluted net loss per share have been calculated assuming the conversion of all previously outstanding preferred stock into common stock, as if the shares had converted immediately upon their issuance. You should read these selected financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our financial statements and the notes to those statements included elsewhere herein.
PERIOD FROM MAY 2, 1996 YEAR ENDED DECEMBER 31, (INCEPTION) TO -------------------------------------------------- DECEMBER 31, 2000(A) 1999 1998 1997 1996 ----------- ---------- ---------- ---------- -------------- (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues....................... $ 24,235 $ 5,126 $ 1,040 $ 596 $ 71 Cost of revenues................... 6,689 1,441 131 67 9 ----------- ---------- ---------- ---------- ---------- Gross profit....................... 17,546 3,685 909 529 62 Operating expenses: Product and content development................... 5,475 2,678 1,031 635 262 Sales and marketing.............. 16,728 5,148 768 503 255 General and administrative....... 8,921 3,629 809 265 242 Non-cash compensation............ 789 1,072 93 -- -- Non-cash sales and marketing..... 653 290 -- -- -- Depreciation and amortization.... 2,195 547 122 22 9 ----------- ---------- ---------- ---------- ---------- Total operating expenses........... 34,761 13,364 2,823 1,425 768 ----------- ---------- ---------- ---------- ---------- Loss from operations............. (17,215) (9,679) (1,914) (896) (706) Interest income (expense), net... 1,425 483 15 (199) (46) ----------- ---------- ---------- ---------- ---------- Loss before extraordinary items......................... (15,790) (9,196) (1,899) (1,095) (752) Extraordinary items................ -- -- 390 -- -- ----------- ---------- ---------- ---------- ---------- Net loss........................... $ (15,790) $ (9,196) $ (1,509) $ (1,095) $ (752) =========== ========== ========== ========== ========== Loss per share -- basic and diluted: Loss before extraordinary items.... $ (1.08) $ (2.31) $ (0.76) $ (0.67) $ (0.46) Extraordinary items.............. -- -- 0.16 -- -- ----------- ---------- ---------- ---------- ---------- Net loss per share............... $ (1.08) $ (2.31) $ (0.60) $ (0.67) $ (0.46) =========== ========== ========== ========== ========== Weighted average number of shares used in calculating basic and diluted net loss per share....... 14,603,381 3,982,358 2,497,065 1,625,410 1,625,410 =========== ========== ========== ========== ========== Pro forma basic and diluted net loss per share................... $ (1.08) $ (0.96) $ (0.32) $ (0.67) $ (0.46) =========== ========== ========== ========== ========== Pro forma weighted average number of shares used in calculating basic and diluted net loss per share............................ 14,603,381 9,628,454 4,780,024 1,625,410 1,625,410 =========== ========== ========== ========== ==========
26 27
DECEMBER 31, ------------------------------------------------ 2000(a) 1999 1998 1997 1996 ------- ------- ------ ------- ----- (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) BALANCE SHEET DATA: Cash and cash equivalents................... $15,860 $40,006 $1,038 $ 305 $ 16 Working capital............................. 16,078 41,137 1,003 194 (84) Total assets................................ 41,354 45,486 1,950 1,153 194 Convertible preferred stock................. -- -- 3,938 -- -- Total stockholders' equity (deficit)........ 29,391 43,575 1,646 (1,017) (751)
--------------- (a) As described in Note 8 of our financial statements, on March 29, 2000 the Company acquired Weddingpages, Inc., a Delaware corporation. QUARTERLY RESULTS OF OPERATIONS DATA The following table sets forth certain unaudited consolidated quarterly statement of operations data for the eight quarters ended December 31, 2000. This information is unaudited, but in the opinion of management, it has been prepared substantially on the same basis as the audited consolidated financial statements appearing elsewhere in this report and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited consolidated quarterly results of operations. The consolidated quarterly data should be read in conjunction with our audited consolidated financial statements and the notes to such statements appearing elsewhere in this report. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 2000 2000 2000 2000 1999 1999 1999 1999 ------- -------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues............ $ 7,003 $ 6,656 $ 6,857 $ 3,719 $ 2,491 $ 1,897 $ 544 $ 194 Gross profit............ 5,066 4,916 5,000 2,564 1,954 1,234 356 141 Net loss................ (4,824) (4,249) (3,826) (2,892) (3,188) (2,688) (1,726) (1,594) Net loss per share -- basic and diluted..... $ (0.33) $ (0.29) $ (0.26) $ (0.20) $ (0.48) $ (0.87) $ (0.56) $ (0.53)
Note: The quarterly financial data presented above reflects the consolidation of Weddingpages, Inc. which was acquired on March 29, 2000. 27 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. OVERVIEW The Knot is the leading wedding resource providing products and services to couples planning their weddings and future lives together. Our website, at www.theknot.com, is the most trafficked wedding destination online and offers comprehensive content, extensive wedding-related shopping, an online wedding gift registry and an active community. The Knot is the premier wedding content provider on America Online (AOL Keywords: Knot and weddings) and MSN. We publish The Knot Wedding Gowns, a national wedding fashion magazine, and, through our subsidiary, Weddingpages, Inc., publish regional wedding magazines in 45 company-owned and franchised markets in the U.S. We also author a series of books on wedding planning and through another subsidiary, Click Trips, Inc., offer honeymoon booking and other travel services. Our offline presence provides cross-promotional opportunities and assists us in increasing our brand awareness and our overall audience. We are based in New York and have several other offices across the country. We commenced operations in May 1996 and recorded our first revenues in September 1996, immediately following the launch of our first online property. Our Web site was launched in July 1997. We launched The Knot Registry, our online gift registry, in November 1998 and significantly expanded our registry product offerings in July 1999. In July 1999, we acquired the assets of Bridalink.com, an Internet wedding supply store, and the common stock of Click Trips, Inc., an online travel agency. In August 1999, we acquired the assets of Wedding Photographers Network, a searchable database of local wedding photographers. In March 2000, we acquired Weddingpages, the largest publisher of regional wedding magazines in the nation. We derive revenues from the sale of online sponsorship, advertising and production contracts. We also derive revenues from the sale of merchandise, from publishing and from the sale of travel packages. Sponsorship revenues are derived principally from contracts currently ranging up to twenty-four months. Sponsorships are designed to integrate advertising with specific online editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific online editorial area and can purchase a special feature on our sites. Advertising revenues are derived principally from short-term contracts that typically range from one month up to one year. Advertising contracts include online banner advertisements and online listings for local wedding vendors. Certain sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. To date, we have recognized our sponsorship and advertising revenues over the duration of the contracts on a straight line basis as we have exceeded minimum guaranteed impressions. To the extent that minimum guaranteed impressions are not met, we are generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this were to occur, we would defer and recognize the corresponding revenues over the extended period. Production revenues are derived from the development of online sites and tools. Production revenues are recognized when the development is completed and the online sites and tools are delivered. 28 29 For the year ended December 31, 2000, our top five advertisers accounted for 15% of our net revenues. For the year ended December 31, 1999, our top seven advertisers accounted for 35% of our net revenues. For the year ended December 31, 1998, one advertiser accounted for 19% of our net revenues. To promote our brand on third-party sites, we produce online sites for third parties featuring both The Knot and the third party. The cost of production of these sites is included in our operating expenses. In return, we receive distribution and exposure to their viewers, outbound links to our sites and, in some circumstances, offline brand marketing. We do not recognize revenues with respect to these barter transactions. Merchandise revenues are derived from the sale of wedding supplies and products from our gift registry, through our Web sites and through a co-branded site with QVC, Inc. Merchandise revenues include outbound shipping and handling charges. Merchandise revenues are recognized when products are shipped to customers, reduced by discounts as well as an allowance for estimated sales returns. Commencing April 1, 2000, publishing revenue includes advertising revenue derived from the publication of regional wedding magazines by Weddingpages as well as service fees and royalty fees from producing the Weddingpages magazine for certain franchisees. These revenues and fees are recognized upon the publication of the related magazine at which time all material services related to the magazine have been performed. Additionally, publishing revenues are derived from sales of magazines and from author royalties received related to book publishing contracts. Revenues from the sale of magazines are recognized when the products are shipped, reduced by an allowance for estimated sales returns. Royalties are recognized when all contractual obligations have been met, which typically include the delivery and acceptance of a final manuscript. Travel revenues are derived from commissions earned on the sale of travel packages by our online travel agency, Click Trips, Inc. Such revenues are recognized when the customer commences travel. We generated revenues for the year ended December 31, 1998 through usage fees paid by AOL based on the number of customers visiting our AOL site. Usage fees were recognized as they were earned based upon user time spent on our AOL site. On September 30, 1998, we entered into an anchor tenant agreement with AOL which eliminated usage revenues receivable from, and commissions payable to, AOL. Under this anchor tenant agreement with AOL, we pay carriage fees to AOL. We generated $47,000 of commission revenues from AOL for the year ended December 31, 1998, which have been included in sponsorship, advertising and production revenues. We paid $16,000 in commissions to AOL for the year ended December 31, 1998. We recorded deferred compensation in 1999 and 1998, net of reversals related to stock options forfeited, primarily as a result of the issuance of stock options to employees with exercise prices per share determined for financial reporting purposes to be below the fair market value per share of our common stock at the dates of grant. The difference is recorded as a reduction of stockholders' equity and amortized as non-cash compensation expense on an accelerated method over the four-year vesting period of the related options. Extraordinary items for the year ended December 31, 1998 consist of a gain of $1.1 million, representing the forgiveness of a portion of a note payable to AOL including interest accrued on this note, and a loss of $719,000, representing the write-off of unamortized deferred financing costs associated with such note payable. 29 30 RESULTS OF OPERATIONS The following table sets forth for the periods presented certain data from our statement of operations, expressed as a percentage of net revenues.
PERIOD FROM MAY 2, 1996 YEAR ENDED DECEMBER 31, (INCEPTION) TO ----------------------------------- DECEMBER 31, 2000 1999 1998 1997 1996 ----- ------ ------ ------ -------------- Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........................... 27.6 28.1 12.6 11.2 12.8 ----- ------ ------ ------ -------- Gross profit............................... 72.4 71.9 87.4 88.8 87.2 Operating expenses: Product and content development.......... 22.6 52.2 99.1 106.6 371.2 Sales and marketing...................... 69.0 100.4 73.9 84.4 361.2 General and administrative............... 36.8 70.8 77.9 44.4 343.1 Non-cash compensation.................... 3.3 20.9 9.0 -- -- Non-cash sales and marketing............. 2.7 5.7 -- -- -- Depreciation and amortization............ 9.1 10.7 11.7 3.7 12.9 ----- ------ ------ ------ -------- Total operating expenses................... 143.5 260.7 271.6 239.1 1,088.4 Loss from operations....................... (71.1) (188.8) (184.2) (150.3) (1,001.2) Interest income (expense), net............. 5.9 9.4 1.4 (33.4) (64.9) ----- ------ ------ ------ -------- Loss before extraordinary items............ (65.2) (179.4) (182.8) (183.7) (1,066.1) Extraordinary items........................ -- -- 37.5 -- -- ----- ------ ------ ------ -------- Net loss................................... (65.2)% (179.4)% (145.3)% (183.7)% (1,066.1)% ===== ====== ====== ====== ========
Years Ended December 31, 2000 and December 31, 1999 Net Revenues Net revenues increased to $24.2 million for the year ended December 31, 2000 from $5.1 million for the year ended December 31, 1999. Sponsorship, advertising and production revenues increased to $11.0 million for the year ended December 31, 2000, as compared to $3.6 million for the year ended December 31, 1999. Additional sponsorship and production contracts contributed $6.0 million of the increase for the year ended December 31, 2000. Local vendor advertising programs, launched in July 1999, contributed $1.4 million of the increase for the year ended December 31, 2000. Sponsorship, advertising and production revenues accounted for approximately 45% and 71% of our net revenues for the year ended December 31, 2000 and December 31, 1999, respectively. Merchandise revenues increased to $4.5 million for the year ended December 31, 2000, as compared to $1.1 million for the year ended December 31, 1999. The increase was primarily due to an increase in the sales of wedding supplies through Bridalink.com and The Knot Shop of $2.4 million for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The sale of wedding supplies initiated in July 1999 as a result of the acquisition of Bridalink.com. Sales from The Knot Registry increased $922,000 for the year ended December 31, 2000, as compared to the corresponding period in 1999. Merchandise revenues accounted for approximately 18% and 22% of our net revenues for the years ended December 31, 2000 and December 31, 1999, respectively. Publishing, travel and other revenues increased to $8.8 million for the year ended December 31, 2000, as compared to $364,000 for the corresponding period in 1999. The increase is primarily attributable to advertising revenue derived from the publication of regional wedding magazines by Weddingpages, as well 30 31 as service fees and royalty fees from producing the Weddingpages magazine for certain franchisees. These revenues and fees commenced in April 2000 with the acquisition of Weddingpages. Publishing, travel and other revenues accounted for 36% and 7% of our net revenues for the years ended December 31, 2000 and December 31, 1999, respectively. Cost of Revenues Cost of revenues consists of the cost of merchandise sold, including outbound shipping costs, the production costs of our regional wedding magazines and Wedding Gowns magazine, payroll and related expenses for our personnel who are responsible for the production of customized online sites and tools and costs of Internet and hosting services. Cost of revenues increased to $6.7 million for the year ended December 31, 2000 from $1.4 million for the year ended December 31, 1999. Cost of revenues related to the production of regional wedding magazines, which commenced in April 2000, amounted to $2.5 million for the year ended December 31, 2000. Cost of revenues from the sale of wedding supplies was $2.1 million for the year ended December 31, 2000, as compared to $467,000 for the year ended December 31, 1999 as a result of increased sales. The sale of wedding supplies initiated in July 1999. Cost of revenues from the sale of merchandise through The Knot Registry increased by $689,000 in the year ended December 31, 2000, as compared to the corresponding period in 1999, also primarily due to increased sales. As a percentage of our net revenues, cost of revenues was 28% for the years ended December 31, 2000 and December 31, 1999. Product and Content Development Product and content development expenses consist of payroll and related expenses for creative, editorial and information technology personnel and expenses for third-party software developers and contract programmers. Product and content development expenses increased to $5.5 million for the year ended December 31, 2000 from $2.7 million for the year ended December 31, 1999. The increase was primarily attributable to a $2.3 million increase resulting from the hiring of additional staff to enhance the content and functionality of our sites. In addition, for the year ended December 31, 2000 there was an increase of $608,000 in product and content expenses, primarily personnel costs, associated with our Weddingpages subsidiary. As a percentage of our net revenues, product and content development expenses decreased to 23% for the year ended December 31, 2000 from 52% for the year ended December 31, 1999. This decrease was primarily a result of the substantial growth in sponsorship, advertising, production and merchandise revenue and lower costs associated with the publishing revenue contributed by Weddingpages during the year ended December 31, 2000. Sales and Marketing Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service and public relations personnel, as well as expenditures for our AOL anchor tenant agreements, advertising and promotional activities and fulfillment and distribution of merchandise. Sales and marketing expenses increased to $16.7 million for the year ended December 31, 2000 from $5.1 million for the year ended December 31, 1999. The increase was primarily due to a $7.6 million increase in personnel and related costs associated with additional sales, marketing and customer service staff and higher commissions as a result of increased revenues. The increase in personnel and related costs includes $4.6 million in expenses related to the local sales force of our subsidiary, Weddingpages. Additionally, there was a $2.2 million increase in promotion expenses, the majority of which related to costs associated with our membership kits and a $725,000 increase in fees associated with our anchor tenant agreements with America Online for the year ended December 31, 2000. As a percentage of our net revenues, sales and marketing expenses decreased to 69% for the year ended December 31, 2000 from 100% for the year ended December 31, 1999. This decrease was primarily 31 32 a result of the substantial growth in sponsorship, advertising, production and merchandise revenue and lower costs associated with the publishing revenue contributed by Weddingpages during the year ended December 31, 2000. General and Administrative General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, professional fees, facilities costs, bad debts and insurance expenses. General and administrative expenses increased to $8.9 million for the year ended December 31, 2000 from $3.6 million for the year ended December 31, 1999. There was an increase of $1.6 million for the year ended December 31, 2000 for professional fees and insurance. Bad debt expense increased by $1.0 million and personnel and related costs increased by $993,000, including $536,000 and $434,000, respectively, for costs associated with Weddingpages, as compared to the corresponding period in 1999. As a percentage of our net revenues, general and administrative expenses decreased to 37% for the year ended December 31, 2000 from 71% for the year ended December 31, 1999. This decrease was primarily a result of the substantial growth in sponsorship, advertising, production and merchandise revenue and lower costs associated with the publishing revenue contributed by Weddingpages during the year ended December 31, 2000. Non-Cash Compensation We recorded no deferred compensation during the year ended December 31, 2000. Amortization of deferred compensation decreased to $789,000 for the year ended December 31, 2000 from $1.1 million for the year ended December 31, 1999. As a percentage of our net revenues, amortization of deferred compensation decreased to 3% for the year ended December 31, 2000 from 21% of our net revenues for the year ended December 31, 1999. Non-Cash Sales and Marketing We recorded deferred sales and marketing of $2.3 million related to the issuance of a warrant to AOL in connection with our amended anchor tenant agreement in July 1999, which is being amortized on a straight line basis over the term of the agreement. Amortization of deferred sales and marketing increased to $653,000 for the year ended December 31, 2000 from $290,000 for the year ended December 31, 1999. As a percentage of net revenues, amortization of deferred sales and marketing decreased to 3% for the year ended December 31, 2000 from 6% for the year ended December 31, 1999. Depreciation and Amortization Depreciation and amortization expenses consist of depreciation and amortization of property and equipment and amortization of intangible assets related to acquisitions. Depreciation and amortization expenses increased to $2.2 million for the year ended December 31, 2000 from $547,000 for the year ended December 31, 1999. This increase was primarily attributable to an increase in amortization of intangible assets related to acquisitions of $887,000, and a $761,000 increase in depreciation resulting from an increase in property and equipment purchases and leasehold improvements. As a percentage of net revenues, depreciation and amortization expense decreased to 9% for the year ended December 31, 2000 from 11% for the year ended December 31, 1999. Interest Income/Expense Interest income net of interest expense increased to $1.4 million for the year ended December 31, 2000 from $483,000 for the year ended December 31, 1999. The increase is primarily the result of the investment of the net proceeds from our initial public offering of common stock. 32 33 Years Ended December 31, 1999 and December 31, 1998 Net Revenues Net revenues increased to $5.1 million for the year ended December 31, 1999 from $1.0 million for the year ended December 31, 1998. Sponsorship, advertising and production revenues increased to $3.6 million for the year ended December 31, 1999 from $853,000 for the year ended December 31, 1998, primarily due to a $2.0 million increase in revenues generated from additional sponsorship and production contracts and a $742,000 increase in revenues from the launch of local vendor advertising programs in July 1999. As a percentage of net revenues, sponsorship, advertising and production revenues accounted for approximately 71% and 82% for the years ended December 31, 1999 and December 31, 1998, respectively. Merchandise revenues amounted to $1.1 million for the year ended December 31, 1999, resulting primarily from a $688,000 increase in the sale of wedding supplies through Bridalink.com acquired in July 1999 and a $411,000 increase in sales related to The Knot Registry. There was $17,000 in The Knot Registry merchandise revenues for the year ended December 31, 1998. As a percentage of net revenues, merchandise revenues accounted for 22% and 2% for the years ended December 31, 1999 and December 31, 1998, respectively. Publishing revenues increased to $217,000 for the year ended December 31, 1999 from $143,000 for the year ended December 31, 1998. The increase in publishing revenues was due to sales of our gown guide which was published at the end of June 1999, partially offset by lower book publishing revenues. As a percentage of net revenues, publishing revenues accounted for 4% and 14% for the years ended December 31, 1999 and December 31, 1998, respectively. Travel revenues accounted for $143,000 or 3% of our net revenues for the year ended December 31, 1999, resulting from the acquisition of Click Trips, Inc. in July 1999. There were no travel revenues in 1998. Cost of Revenues Cost of revenues increased to $1.4 million for the year ended December 31, 1999 from $131,000 for the year ended December 31, 1998. The increase was primarily due to an increase in the sale of merchandise through Bridalink.com of $460,000 and through The Knot Registry of $327,000. As a percentage of our net revenues, cost of revenues increased to 28% for the year ended December 31, 1999 from 13% for the year ended December 31, 1998. Product and Content Development Product and content development expenses increased to $2.7 million for the year ended December 31, 1999 from $1.0 million for the year ended December 31, 1998. The increase was primarily attributable to a $1.6 million increase resulting from hiring additional staff to enhance the content and functionality of our sites, partially offset by a $192,000 decrease in third-party programming and content licensing fees. As a percentage of our net revenues, product and content development expenses decreased to 52% for the year ended December 31, 1999 from 99% for the year ended December 31, 1998. Sales and Marketing Sales and marketing expenses increased to $5.1 million for the year ended December 31, 1999 from $768,000 for the year ended December 31, 1998. The increase was primarily due to a $1.0 million increase in carriage fees paid under our anchor tenant agreement with AOL which went into effect on January 1, 1999, a $978,000 increase in commissions and expenses related to our increased sponsorship, advertising and production revenues and to the launch of our local advertising sales efforts, a $894,000 increase in personnel costs related to the hiring of additional sales, marketing and customer service personnel and a $600,000 increase in promotion expense. As a percentage of our net revenues, sales and marketing expenses increased to 100% for the year ended December 31, 1999 from 74% for the year ended December 31, 1998. 33 34 General and Administrative General and administrative expenses increased to $3.6 million for the year ended December 31, 1999 from $809,000 for the year ended December 31, 1998. The increase was primarily due to a $1.4 million increase in personnel costs and a $384,000 increase in professional fees. As a percentage of our net revenues, general and administrative expenses decreased to 71% for the year ended December 31, 1999 from 78% for the year ended December 31, 1998. Non-Cash Compensation We recorded $2.9 million of deferred compensation, net of reversals of stock options forfeited, during the year ended December 31, 1999 and $480,000 of deferred compensation, including amounts related to unvested common stock in connection with an acquisition, for the year ended December 31, 1998. Amortization of deferred compensation increased to $1.1 million or 21% of net revenues for the year ended December 31, 1999 from $93,000 or 9% of net revenues for the year ended December 31, 1998. Non-Cash Sales and Marketing We recorded $2.3 million of deferred sales and marketing during the year ended December 31, 1999, related to the issuance of the warrant to AOL in connection with our amended anchor tenant agreement in July 1999. Amortization of deferred sales and marketing was $290,000 or 6% of net revenues for the year ended December 31, 1999. Depreciation and Amortization Depreciation and amortization expenses increased to $547,000 for the year ended December 31, 1999 from $122,000 for the year ended December 31, 1998. This increase was primarily due to a $245,000 increase in depreciation due to the increase in property and equipment purchases and an additional $180,000 of amortization of goodwill related to acquisitions. As a percentage of net revenues, depreciation and amortization expense decreased to 11% for the year ended December 31, 1999 from 12% for the year ended December 31, 1998. Interest Income (Expense) Interest income net of interest expense increased to $483,000 for the year ended December 31, 1999 from $15,000 for the year ended December 31, 1998 as a result of the investment of cash received from the issuance of our Series B preferred stock and the net proceeds from our initial public offering of common stock. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, our cash and cash equivalents amounted to $15.9 million. We currently invest primarily in short-term debt instruments that are highly liquid, of high-quality investment grade, and have maturities of less than three months with the intent to make such funds readily available for operating purposes. Net cash used in operating activities was $11.7 million for the year ended December 31, 2000. This resulted primarily from the loss for the period, as adjusted for depreciation and amortization of $3.6 million, increases in accounts receivable of $5.1 million, and increases in inventories of $388,000, partially offset by increases in deferred revenue of $2.8 million and accounts payable and accrued expenses of $1.5 million. Net cash used in operating activities was $8.7 million for the year ended December 31, 1999 due primarily to the net loss for the period, as adjusted for depreciation and amortization of $1.9 million, an increase in accounts receivable of $1.0 million, inventories of $355,000 and other current and long-term assets of $970,000, partially offset by increases in accounts payable and accrued expenses of $378,000 and deferred revenue of $308,000. Net cash used in operating activities was $1.7 million for the year ended 34 35 December 31, 1998, primarily as a result of the net loss for the periods, adjusted for depreciation and amortization. Net cash used in investing activities was $12.1 million for the year ended December 31, 2000, primarily due to cash paid for the acquisition of Weddingpages of $9.6 million and purchases of property and equipment of approximately $2.9 million partially offset by the maturity of short-term investments of $620,000. Net cash used in investing activities was $2.5 million for the year ended December 31, 1999, primarily as a result of purchases of property and equipment of $1.6 million, investments in available-for-sale securities of $501,000, and cash paid for business acquisitions of $335,000. Net cash used in investing activities was $305,000 for the year ended December 31, 1998, primarily due to purchases of property and equipment and cash paid for a business acquisition. Net cash used in financing activities was $365,000 for the year ended December 31, 2000, primarily due to the payment of expenses related to our initial public offering, partially offset by proceeds from the issuance of common stock and the exercise of stock options. Net cash provided by financing activities was $50.0 million for the year ended December 31, 1999, primarily from the completion of our initial public offering which resulted in net proceeds to us of $34.7 million, and proceeds from the issuance of convertible preferred stock of $14.9 million. Net cash provided by financing activities was $2.8 million for the year ended December 31, 1998, primarily from the issuance of preferred stock. Our subsidiary, Weddingpages, has a line of credit with a bank that expires May 1, 2001 and has available borrowings under the agreement up to the lesser of $2,500,000 or 70% of eligible receivables, as defined. As of December 31, 2000, there were $1,650,000 of borrowings outstanding under the agreement. The line of credit bears an interest rate at one-half percent over the bank's prime lending rate. As of December 31, 2000, we had no material commitments for capital expenditures. As of December 31, 2000, we had commitments under non-cancelable operating leases amounting to $6.7 million, of which $735,000 will be due on or before December 31, 2001. As of December 31, 2000, we had commitments under an amended anchor tenant agreement with AOL and an additional anchor tenant agreement with AOL International in the amount of $5.3 million of which approximately $2.3 million will be due on or before December 31, 2001. On March 29, 2000, we completed our acquisition of Weddingpages through the merger of a wholly-owned subsidiary of ours with and into Weddingpages, with Weddingpages surviving the merger. Under the terms of the agreement, the merger was affected through the conversion of each share of common stock and class A common stock of Weddingpages outstanding into $1.78 for an aggregate purchase price, including related costs, of approximately $10.0 million. We used a portion of the proceeds received from our initial public offering to consummate the acquisition. We currently believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. We intend to continue to pursue strategic relationships, investments in complimentary businesses, expansion of our sales and marketing programs and the aggressive building of brand recognition. We cannot assure you that additional funding, if required, will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of strategic opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. Those limitations would materially and adversely affect our business, results of operations and financial condition. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which we are required to adopt effective January 1, 2001. The adoption of the new Statement will not have a material effect on our financial statements. 35 36 In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In 2000, we adopted SAB 101, which did not have a material effect on our financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact the financial position, result of operations, or cash flows of the company due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. We are exposed to some market risk through interest rates related to the investment of our current cash, cash equivalents and short-term investments of approximately $15.9 million as of December 31, 2000. These funds are generally invested in highly liquid debt instruments with short-term maturities. As such instruments mature and the funds are re-invested, we are exposed to changes in market interest rates. This risk is not considered material and we manage such risk by continuing to evaluate the best investment rates available for short-term high quality investments. We have no activities related to derivative financial instruments or derivative commodity instruments, and we are not currently subject to foreign currency exchange risk. 36 37 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a)(1) CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. 39 Consolidated Balance Sheets as of December 31, 2000 and 1999...................................................... 40 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.......................... 41 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2000, 1999 and 1998...... 42 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.......................... 43 Notes to Consolidated Financial Statements.................. 44 Schedule II -- Valuation and Qualifying Accounts............ 60
37 38 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders of The Knot, Inc. We have audited the accompanying consolidated balance sheets of The Knot, Inc. (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP New York, New York February 8, 2001, except for Note 13, as to which the date is March 16, 2001 38 39 THE KNOT, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 15,859,624 $ 40,006,175 Short-term investments.................................... -- 501,000 Accounts receivable, net of allowances of $865,457 and $133,000 at December 31, 2000 and December 31, 1999, respectively........................................... 8,361,672 1,333,158 Inventories............................................... 866,541 478,345 Deferred production and marketing costs................... 1,129,307 -- Other current assets...................................... 930,952 671,519 ------------ ------------ Total current assets........................................ 27,148,096 42,990,197 Property and equipment, net................................. 3,886,021 1,554,373 Intangible assets, net...................................... 9,886,636 541,638 Other assets................................................ 433,272 399,792 ------------ ------------ Total assets................................................ $ 41,354,025 $ 45,486,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 3,903,658 $ 1,444,578 Short term borrowings..................................... 1,650,000 -- Deferred revenue.......................................... 5,209,359 408,934 Current portion of long-term debt......................... 306,613 -- ------------ ------------ Total current liabilities................................... 11,069,630 1,853,512 Long term debt.............................................. 697,789 -- Other liabilities........................................... 196,008 57,093 ------------ ------------ Total liabilities........................................... 11,963,427 1,910,605 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 100,000,000 shares, authorized; 14,676,253 shares and 14,510,612 shares issued and outstanding at December 31, 2000 and 1999, respectively........................................... 146,762 145,106 Additional paid-in capital................................ 59,657,388 60,206,664 Deferred compensation..................................... (763,074) (2,262,974) Deferred sales and marketing.............................. (1,306,445) (1,959,677) Accumulated deficit....................................... (28,344,033) (12,553,724) ------------ ------------ Total stockholders' equity.................................. 29,390,598 43,575,395 ------------ ------------ Total liabilities and stockholders' equity.................. $ 41,354,025 $ 45,486,000 ============ ============
See accompanying notes. 39 40 THE KNOT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ------------ ----------- ----------- Net revenues....................................... $ 24,234,905 $ 5,125,887 $ 1,039,584 Cost of revenues................................... 6,689,077 1,441,311 131,214 ------------ ----------- ----------- Gross profit....................................... 17,545,828 3,684,576 908,370 Operating expenses: Product and content development.................. 5,475,180 2,677,769 1,030,323 Sales and marketing.............................. 16,728,500 5,148,040 768,250 General and administrative....................... 8,920,887 3,629,204 809,385 Non-cash compensation............................ 788,609 1,071,740 93,046 Non-cash sales and marketing..................... 653,232 290,323 -- Depreciation and amortization.................... 2,194,991 547,019 121,718 ------------ ----------- ----------- Total operating expenses........................... 34,761,399 13,364,095 2,822,722 ------------ ----------- ----------- Loss from operations............................... (17,215,571) (9,679,519) (1,914,352) Interest income, net............................... 1,425,262 482,848 14,968 ------------ ----------- ----------- Loss before extraordinary items.................... (15,790,309) (9,196,671) (1,899,384) Extraordinary items................................ -- -- 390,111 ------------ ----------- ----------- Net loss........................................... $(15,790,309) $(9,196,671) $(1,509,273) ============ =========== =========== Loss per share -- basic and diluted: Loss before extraordinary items.................. $ (1.08) $ (2.31) $ (0.76) Extraordinary items.............................. -- -- 0.16 ------------ ----------- ----------- Net loss......................................... $ (1.08) $ (2.31) $ (0.60) ============ =========== =========== Weighted average number of shares used in calculating basic and diluted net loss per share............................................ 14,603,381 3,982,358 2,497,065 ============ =========== ===========
See accompanying notes. 40 41 THE KNOT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED ------------------------- ---------------------- PAID-IN DEFERRED SALES AND SHARES AMOUNT SHARES PAR VALUE CAPITAL COMPENSATION MARKETING ---------- ------------ ---------- --------- ----------- ------------ ----------- Balance at December 31, 1997...... -- -- 1,625,410 16,254 814,779 -- -- Issuance of common stock in connection with acquisition...... -- -- 162,540 1,626 169,775 -- -- Deferred compensation related to unvested common stock in connection with acquisition...... -- -- -- -- 186,916 (186,916) -- Issuance of common stock.......... -- -- 1,068,122 10,681 (10,681) -- -- Sale of Series A Convertible Preferred Stock, net of costs.... 2,560,000 3,000,320 -- -- (217,378) -- -- Conversion of note payable........ 800,000 937,600 -- -- -- -- -- Issuance of common stock.......... -- -- 178,031 1,780 185,153 -- -- Deferred compensation related to the issuance of stock options.... -- -- -- -- 293,150 (293,150) -- Amortization of deferred compensation..................... -- -- -- -- -- 93,046 -- Net loss for the year ended December 31, 1998................ -- -- -- -- -- -- -- ---------- ------------ ---------- -------- ----------- ----------- ----------- Balance at December 31, 1998...... 3,360,000 3,937,920 3,034,103 30,341 1,421,714 (387,020) -- Issuance of common stock.......... -- -- 44,505 445 (445) -- -- Sale of Series B Convertible Preferred Stock, net of costs.... 4,000,000 15,000,000 -- -- (127,509) -- -- Issuance of warrant in connection with sale of Series B Convertible Preferred Stock.................. -- (1,037,000) -- -- 1,037,000 -- -- Issuance of common stock in connection with acquisitions..... -- -- 15,000 150 114,850 -- -- Issuance of stock options in connection with acquisitions..... -- -- -- -- 55,000 -- -- Issuance of warrant in connection with sales and marketing agreement........................ -- -- -- -- 2,250,000 -- (2,250,000) Issuance of common stock in connection with exercise of vested stock options............. -- -- 144,004 1,440 43,753 -- -- Deferred compensation related to the issuance of stock options.... -- -- -- -- 3,045,838 (3,045,838) -- Amortization of deferred compensation..................... -- -- -- -- -- 1,071,740 -- Amortization of deferred sales and marketing........................ -- -- -- -- -- -- 290,323 Conversion of preferred stock into common stock in connection with initial public offering.......... (7,360,000) (17,900,920) 7,360,000 73,600 17,827,320 -- -- Common stock issued in connection with initial public offering, net of costs of $4,453,583........... -- -- 3,913,000 39,130 34,637,287 -- -- Reversal of deferred compensation related to stock options forfeited........................ -- -- -- -- (98,144) 98,144 -- Net loss for the year ended December 31, 1999................ -- -- -- -- -- -- -- ---------- ------------ ---------- -------- ----------- ----------- ----------- Balance at December 31, 1999...... -- $ -- 14,510,612 $145,106 $60,206,664 $(2,262,974) $(1,959,677) ---------- ------------ ---------- -------- ----------- ----------- ----------- Issuance of common stock in connection with exercise of vested stock options............. -- -- 89,295 893 57,899 -- -- Issuance of common stock in connection with employee stock purchase plan.................... -- -- 31,842 318 104,561 -- -- Issuance of common stock.......... -- -- 44,504 445 (445) -- -- Amortization of deferred compensation..................... -- -- -- -- -- 788,609 -- Amortization of deferred sales and marketing........................ -- -- -- -- -- -- 653,232 Reversal of deferred compensation related to common stock and common stock options forfeited... -- -- -- -- (711,291) 711,291 -- Net loss for the year ended December 31, 2000................ -- -- -- -- -- -- -- ---------- ------------ ---------- -------- ----------- ----------- ----------- Balance at December 31, 2000...... -- $ -- 14,676,253 $146,762 $59,657,388 $ (763,074) $(1,306,445) ---------- ------------ ---------- -------- ----------- ----------- ----------- TOTAL STOCKHOLDERS' ACCUMULATED EQUITY DEFICIT (DEFICIT) ------------ ------------- Balance at December 31, 1997...... (1,847,780) (1,016,747) Issuance of common stock in connection with acquisition...... -- 171,401 Deferred compensation related to unvested common stock in connection with acquisition...... -- -- Issuance of common stock.......... -- -- Sale of Series A Convertible Preferred Stock, net of costs.... -- 2,782,942 Conversion of note payable........ -- 937,600 Issuance of common stock.......... -- 186,933 Deferred compensation related to the issuance of stock options.... -- -- Amortization of deferred compensation..................... -- 93,046 Net loss for the year ended December 31, 1998................ (1,509,273) (1,509,273) ------------ ----------- Balance at December 31, 1998...... (3,357,053) 1,645,902 Issuance of common stock.......... -- -- Sale of Series B Convertible Preferred Stock, net of costs.... -- 14,872,491 Issuance of warrant in connection with sale of Series B Convertible Preferred Stock.................. -- -- Issuance of common stock in connection with acquisitions..... -- 115,000 Issuance of stock options in connection with acquisitions..... -- 55,000 Issuance of warrant in connection with sales and marketing agreement........................ -- -- Issuance of common stock in connection with exercise of vested stock options............. -- 45,193 Deferred compensation related to the issuance of stock options.... -- -- Amortization of deferred compensation..................... -- 1,071,740 Amortization of deferred sales and marketing........................ -- 290,323 Conversion of preferred stock into common stock in connection with initial public offering.......... -- -- Common stock issued in connection with initial public offering, net of costs of $4,453,583........... -- 34,676,417 Reversal of deferred compensation related to stock options forfeited........................ -- -- Net loss for the year ended December 31, 1999................ (9,196,671) (9,196,671) ------------ ----------- Balance at December 31, 1999...... $(12,553,724) $43,575,395 ------------ ----------- Issuance of common stock in connection with exercise of vested stock options............. -- 58,792 Issuance of common stock in connection with employee stock purchase plan.................... -- 104,879 Issuance of common stock.......... -- -- Amortization of deferred compensation..................... -- 788,609 Amortization of deferred sales and marketing........................ -- 653,232 Reversal of deferred compensation related to common stock and common stock options forfeited... -- -- Net loss for the year ended December 31, 2000................ (15,790,309) (15,790,309) ------------ ----------- Balance at December 31, 2000...... $(28,344,033) $29,390,598 ------------ -----------
See accompanying notes. 41 42 THE KNOT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ------------ ----------- ----------- OPERATING ACTIVITIES Net loss before extraordinary items......................... $(15,790,309) $(9,196,671) $(1,899,384) Adjustments to reconcile net loss before extraordinary items to net cash used in operating activities: Depreciation and amortization............................. 1,073,468 312,456 67,429 Amortization of intangibles............................... 1,121,523 234,563 54,289 Amortization of deferred compensation..................... 788,609 1,071,740 93,046 Amortization of deferred sales and marketing.............. 653,232 290,323 -- Reserve for returns....................................... 376,979 35,400 -- Allowance for doubtful accounts and loan receivable....... 1,075,274 183,000 -- Other non-cash charges.................................... -- -- 57,916 Changes in operating assets and liabilities (Net of the effects of acquisitions): Accounts receivable..................................... (5,126,799) (1,006,558) (150,065) Inventories............................................. (388,196) (355,262) (28,741) Deferred production and marketing expenses.............. 79,964 -- -- Other current assets.................................... 36,078 (639,139) (29,959) Other assets............................................ (18,924) (330,499) (61,144) Accounts payable and accrued expenses................... 1,524,802 377,682 120,709 Deferred revenue........................................ 2,797,477 307,895 11,675 Other liabilities....................................... 138,915 38,293 18,800 ------------ ----------- ----------- Net cash used in operating activities....................... (11,657,907) (8,676,777) (1,745,429) INVESTING ACTIVITIES Purchases of property and equipment......................... (2,875,915) (1,577,775) (255,299) Maturity of investment...................................... 619,514 -- -- Loan receivable............................................. -- (50,000) -- Purchases of short-term investment.......................... -- (501,000) -- Acquisition of businesses, net of cash acquired............. (9,866,845) (335,051) (50,000) ------------ ----------- ----------- Net cash used in investing activities....................... (12,123,246) (2,463,826) (305,299) FINANCING ACTIVITIES Proceeds from short term borrowings......................... 775,189 750,000 -- Repayment of short term borrowings.......................... (789,170) (750,000) -- Financing costs............................................. (515,088) (4,066,004) (217,378) Proceeds from issuance of common stock...................... 104,879 39,130,000 -- Proceeds from exercise of stock options..................... 58,792 45,193 -- Proceeds from issuance of convertible preferred stock....... -- 15,000,000 3,000,320 ------------ ----------- ----------- Net cash provided by/(used in) financing activities......... (365,398) 50,109,189 2,782,942 ------------ ----------- ----------- Increase/(Decrease) in cash and cash equivalents............ (24,146,551) 38,968,586 732,214 Cash and cash equivalents at beginning of period............ 40,006,175 1,037,589 305,375 ------------ ----------- ----------- Cash and cash equivalents at end of period.................. $ 15,859,624 $40,006,175 $ 1,037,589 ============ =========== =========== SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES Accrued costs for business acquisitions..................... $ 495,600 $ -- $ -- Forgiveness of accounts receivable in connection with a business acquisition...................................... 101,748 -- -- Issuance of common stock in connection with recapitalization.......................................... -- -- 10,681 Issuance of common stock in connection with acquisition..... -- -- 358,334 Accrued financing costs..................................... -- 515,000 -- Conversion of loan payable into preferred stock............. -- -- 937,600 ------------ ----------- ----------- Total noncash investing and financing activities............ $ 597,348 $ 515,000 $ 1,306,615 ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest...................................... $ 184,332 $ 23,898 $ --
See accompanying notes. 42 43 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. ORGANIZATION AND NATURE OF OPERATIONS The Knot, Inc. (the "Company") was incorporated in the state of Delaware on May 2, 1996. The Company is the leading wedding resource providing products and services to couples planning their wedding and future lives together and is the premier wedding content provider on America Online and MSN. The Knot publishes a national wedding fashion magazine and, through its subsidiary, Weddingpages, Inc. ("Weddingpages"), publishes regional wedding magazines in 45 Company-owned and franchised markets in the U.S. The Company also authors a series of books on wedding planning and through another subsidiary of the Company, Click Trips, Inc. ("Click Trips"), offers honeymoon booking and other travel services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPALS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of outstanding borrowings approximate fair value. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents were approximately $15,338,000 and $38,519,000 at December 31, 2000 and 1999, respectively. The market value of the Company's cash equivalents approximates their cost plus accrued interest. SHORT TERM INVESTMENTS Short-term investments include highly liquid investments with original maturities in excess of three months but less than one year. Such short-term investments are classified as available-for-sale and, accordingly, are carried at cost, which approximates market value. There were no short term investments at December 31, 2000 and $501,000 at December 31, 1999. INVENTORY Inventory consists of finished goods. Inventory costs are determined principally by using the average cost method and are stated at the lower of such cost or net realizable value. 43 44 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEFERRED PRODUCTION AND MARKETING COSTS Deferred production and marketing costs include certain magazine production and commission costs which are deferred and expensed upon publication as well as certain costs related to Company membership kits which are expensed as the kits are distributed. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets which range from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease agreement. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets, including goodwill, for impairment whenever events or changes in circumstances such as significant declines in revenues, earnings or cash flows or material adverse changes in the business climate, indicate that the carrying amount of an asset may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future estimated undiscounted net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. To date, no impairment has occurred. INTANGIBLE ASSETS Intangible assets consist of goodwill and a covenant not to compete which are being amortized over periods ranging from three to ten years using the straight-line method. Accumulated amortization of intangible assets approximates $1,410,000 and $289,000 at December 31, 2000 and 1999, respectively. INCOME TAXES The Company accounts for income taxes on the liability method as required by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax liabilities of a change in tax rates is recognized in results of operations in the period that includes the enactment date. NET REVENUES BY TYPE Net revenues by type:
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 ----------- ---------- ---------- Sponsorship, advertising and production....... $10,969,146 $3,634,478 $ 853,240 Merchandise................................... 4,464,807 1,127,776 17,487 Publishing, travel and other.................. 8,800,952 363,633 168,857 ----------- ---------- ---------- Total......................................... $24,234,905 $5,125,887 $1,039,584 =========== ========== ==========
44 45 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For the years ended December 31, 2000, 1999 and 1998, merchandise revenue included outbound shipping and handling charges of approximately $490,000, $135,000 and $2,000, respectively. REVENUE RECOGNITION Sponsorship, Advertising and Production Sponsorship revenues are derived principally from contracts currently ranging up to twenty-four months. Sponsorships are designed to integrate advertising with specific online editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific editorial area and can purchase a special feature on our sites. Advertising revenues are derived principally from short-term contracts that typically range from one month up to one year. Advertising contracts include banner advertisements and online listings for local wedding vendors. Certain sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. To date, the Company has recognized its sponsorship and advertising revenues over the duration of the contracts on a straight line basis as it has exceeded minimum guaranteed impressions. To the extent that minimum guaranteed impressions are not met, the Company is generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this were to occur, the Company would defer and recognize the corresponding revenues over the extended period. Production revenues are derived from the development of online sites and tools. Production revenues are recognized when the development is completed and the online sites and tools are delivered. To promote its brand on third-party sites, the Company produces online sites for third parties featuring both The Knot and the third party. The cost of production of these sites is included in operating expenses. In return, the Company receives distribution and exposure to their viewers, outbound links to its sites and, in some circumstances, offline brand marketing. The Company does not recognize revenues with respect to these barter transactions. Merchandise Merchandise revenues are derived from the sale of wedding supplies and products from the Company's gift registry through the Company's websites and through a co-branded site with QVC, Inc. Merchandise revenues are recognized when products are shipped to customers, reduced by discounts as well as an allowance for estimated sales returns. Publishing Commencing April 1, 2000, publishing revenue includes advertising revenue derived from the publication of regional wedding magazines by Weddingpages as well as service fees and royalty fees from producing the Weddingpages magazine for certain franchisees. These revenues and fees are recognized upon the publication of the related magazine at which time all material services related to the magazine have been performed. Additionally, publishing revenues are derived from sales of magazines and from author royalties received related to book publishing contracts. Revenues from the sale of magazines are recognized when the products are shipped, reduced by an allowance for estimated sales returns. Royalties are recognized when all contractual obligations have been met, which typically include the delivery and acceptance of a final manuscript. 45 46 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Travel Travel revenues are derived from commissions earned on the sale of travel packages by the Company's online travel agency, Click Trips, Inc. Such revenues are recognized when the customer commences travel. Deferred Revenue Deferred revenue represents payments received or billings in excess of revenue recognized related to sponsorship, advertising, production and print advertising contracts as well as advances received against future royalties to be earned related to book publishing contracts. COST OF REVENUES Cost of revenues primarily consists of the cost of merchandise sold, production costs of magazines, outbound shipping costs, payroll and related expenses for personnel who are responsible for the production of customized online sites and tools and costs of Internet and hosting services. Cost of revenues by type:
YEAR ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ---------- ---------- -------- Sponsorship, advertising and production......... $ 766,244 $ 513,552 $110,718 Merchandise..................................... 3,104,168 813,609 20,496 Publishing, travel and other.................... 2,818,665 114,150 -- ---------- ---------- -------- Total........................................... $6,689,077 $1,441,311 $131,214 ========== ========== ========
ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense totaled approximately $247,000, $142,000, and $46,000, for the years ended December 31, 2000, 1999, and 1998, respectively. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with three major financial institutions. The Company's customers are primarily concentrated in the United States. The Company performs on-going credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. To date, such losses have been within management's expectations. For the years ended December 31, 2000 and 1999, no single customer accounted for more than 10% of net revenues or accounts receivable. For the year ended December 31, 1998, one advertiser accounted for 19% of our net revenues. At December 31, 2000, no single customer accounted for more than 10% of accounts receivable. At December 31, 1999, one advertiser accounted for 13% of accounts receivable. STOCK-BASED COMPENSATION The Company accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and 46 47 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) related interpretations and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." STOCK SPLITS On January 17, 1997 and April 27, 1998, the Company effected a 1,000 for 1 and a 16.2541 for 1 stock split, respectively. All share amounts have been retroactively restated to reflect these events in the accompanying financial statements. NET LOSS PER SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share." Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share adjusts basic loss per share for the effects of convertible securities, stock options and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. There were no dilutive securities in any of the periods presented herein. SEGMENT INFORMATION The Company operates in one segment. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. Since the Company's comprehensive net loss is equal to its net loss for all periods presented, the adoption of this standard has had no impact on the Company's financial statements. SOFTWARE DEVELOPMENT COSTS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP is effective for fiscal years beginning after December 15, 1998. The Company adopted the provisions of SOP 98-1 during the year ended December 31, 1999 with no material effect. All projects are being amortized over their estimated useful lives, which has been determined by management to be three years. Amortization on the projects begins when the software is ready for its intended use. RECLASSIFICATION Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the current year presentation. 47 48 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------------ 2000 1999 ---------- ---------- Construction in progress.................................... $ -- $ 202,510 Leasehold improvements...................................... 1,361,131 107,309 Software.................................................... 898,284 592,372 Furniture and fixtures...................................... 228,910 33,627 Computer and office equipment............................... 2,804,967 1,023,789 ---------- ---------- $5,293,292 $1,959,607 Less accumulated depreciation and amortization.............. 1,407,271 405,234 ---------- ---------- $3,886,021 $1,554,373 ========== ==========
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consists of the following:
DECEMBER 31, ------------------------ 2000 1999 ---------- ---------- Accounts payable............................................ $ 852,814 $ 188,757 Accrued IPO costs........................................... -- 515,000 Deposits from customers..................................... 194,958 350,637 Other accrued expenses...................................... 2,855,886 390,184 ---------- ---------- $3,903,658 $1,444,578 ========== ==========
5. SHORT TERM BORROWINGS The Company's subsidiary, Weddingpages, has a line of credit with a bank that expires May 1, 2001 and has available borrowings under the agreement up to the lesser of $2,500,000 or 70% of eligible receivables, as defined. As of December 31, 2000, there were $1,650,000 of borrowings outstanding under the agreement. The line of credit bears an interest rate at one-half percent over the bank's prime lending rate. 6. LONG TERM DEBT Long-term debt as of December 31, 2000 consists of obligations assumed as a result of the acquisition of Weddingpages (See Note 8). There was no long term debt as of December 31, 1999. 48 49 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long term debt as of December 31, 2000:
Note due in annual installments of $60,000 through October 2008, based on imputed interest of 8.75%.................. $ 335,197 9.0% equipment installment note, due in monthly installments of $4,566 through December 2002........................... 96,885 10.0% equipment installment note, due in monthly installments of $8,131 through August 2003................ 226,720 Consulting agreement, due in monthly installments of $12,800 through March 2003........................................ 345,600 ---------- Total long-term debt........................................ 1,004,402 Less current portion of long-term debt...................... 306,613 ---------- Long term debt, excluding current portion................... $ 697,789 ==========
Maturities of long-term obligations for the five years ending December 31, 2005 are as follows: 2001, $306,613; 2002, $325,555; 2003, $137,333; 2004, $39,446; 2005, $42,898 and $152,557 thereafter. 7. RELATED PARTY TRANSACTIONS AOL During 1996, AOL advanced $700,000 to the Company to fund the development of the Company's online property located on AOL. During 1996, the Company entered into an Interactive Services Agreement with AOL whereby AOL agreed to carry the Company's content for a period of three years. As a result of this agreement, AOL paid the Company a usage fee based on hours of viewership of the Company's site on AOL. AOL received a commission equal to a percentage of the Company's advertising revenues, as defined, that were derived from its site. This agreement was amended in 1998 eliminating usage fees paid to the Company and eliminating commissions paid to AOL. The Company paid commissions to AOL of approximately $16,000 for the year ended December 31, 1998. The Company earned usage fees from AOL of approximately $47,000 for the year ended December 31, 1998. On January 17, 1997, the Company and AOL entered into a Note and Warrant Purchase Agreement, whereby the Company issued to AOL a Secured Promissory Note (the "AOL Note") and a Stock Subscription Warrant (the "AOL Warrant") to purchase 3,250,820 shares of the Company's Series A Convertible Preferred Stock. The AOL Warrant was valued at approximately $830,000, based on its estimated fair value. Such value was recorded as deferred financing costs and was amortized on a straight line basis over the life of the AOL Warrant. The Company borrowed a total of $1,850,000 under the AOL Note, inclusive of the $700,000 advanced in 1996. The AOL Note bore interest at 6.54% per annum and was payable January 16, 2007. On April 28, 1998, AOL exchanged the note payable of $2,047,018, which included accrued interest of $197,018, and the AOL Warrant for 800,000 shares of Series A Convertible Preferred Stock (see Note 9) valued at $937,600. At the date of exchange, AOL was solely a creditor of the Company, since the AOL Warrant was worthless. In accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings" this transaction was accounted for as a troubled debt restructuring and an extraordinary gain on the extinguishment of debt was recognized. On September 30, 1998, the Company entered into an Anchor Tenant Agreement with AOL (the "AOL Agreement"), whereby the Company received distribution within the AOL service. Beginning 49 50 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) January 1, 1999, the Company was obligated to pay carriage fees throughout the term of the AOL Agreement. This agreement superseded any prior agreements between the Company and AOL. In July 1999, the Company entered into an amended and restated Anchor Tenant Agreement with AOL ("Restated AOL Agreement") which superseded the AOL Agreement. The Restated AOL Agreement expires on January 6, 2003 and provides for a quarterly carriage fee payable over the remaining term of the Restated AOL Agreement. At December 31, 2000, the Company is obligated to pay carriage fees to AOL in the amount of $300,000 per quarter through December 31, 2002. Pursuant to the Restated AOL Agreement, the Company issued a warrant to purchase 366,667 shares of the Company's common stock at $7.20 per share, subject to certain anti-dilution provisions. The warrant is immediately exercisable and expires in July 2007. The Company valued this warrant at approximately $2,250,000, by using the Black-Scholes option pricing model with an expected volatility factor of 55%, risk free interest rate of 5%, no dividend yield, and a 2-year life, which is being recognized as non-cash sales and marketing expense on a straight-line basis over the term of the agreement. On May 1, 2000, the Company entered into an International Anchor Tenant Agreement with AOL, whereby the Company received distribution within AOL and its affiliates within certain international markets. The agreement expires on May 1, 2003 and provides for quarterly carriage fees payable over the term of the agreement in the amount of $215,000 per quarter through February 1, 2001, increasing to $287,500 per quarter through February 1, 2002, and increasing to $372,500 per quarter through February 1, 2003. The Company paid aggregate carriage fees to AOL in the amount of $1,845,000 and $1,000,000 for the years ended December 31, 2000 and 1999, respectively. QVC, INC. ("QVC") On April 13, 1999, the Company sold 4,000,000 shares of Series B Convertible Preferred Stock ("Series B") for $15,000,000 to QVC. In connection with the sale of Series B Convertible Preferred Stock, the Company issued a warrant to QVC to purchase 1,700,000 shares of common stock at $5.00 per share subject to certain anti-dilution provisions. The warrant became exercisable upon the closing of the Company's initial public offering. At issuance, the fair value of the warrant was calculated to be approximately $1,037,000 by using the Black-Scholes option pricing model with an expected volatility factor of 55%, risk free interest rate of 5%, no dividend yield, and a 2-year life. In April 1999, the Company entered into a services agreement with QVC (the "Services Agreement"), whereby QVC provides warehousing, fulfillment and distribution, and billing services with respect to the Company's gift registry products. Additionally, the Services Agreement, which expires December 2, 2003, provides for the Company to purchase certain merchandise through QVC at amounts in excess of QVC's cost. The fees for such services were negotiated on an arm's length basis. The Company also has an agreement with QVC to sell merchandise through a co-branded site accessible from within QVC's online site. At December 31, 2000 and 1999, the Company had recorded a receivable due from QVC of approximately $134,000 and $44,000, respectively. For the years ended December 31, 2000 and 1999, the Company purchased merchandise and incurred warehousing, fulfillment, distribution and billing costs under the agreements with QVC in the aggregate amounts of $515,000 and $172,000 respectively. 50 51 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. PURCHASE TRANSACTIONS 2000 PURCHASE TRANSACTIONS Weddingpages Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of February 1, 2000, by and among the Company, Knot Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company ("Buyer"), and Weddingpages, Buyer merged with and into Weddingpages on March 29, 2000, with Weddingpages as the surviving Corporation (the "Merger"). The purchase price of $10.0 million consisted of approximately $9.2 million for the common stock and outstanding common stock options of Weddingpages, inclusive of $700,000 payable to the former Chief Executive Officer of Weddingpages in consideration for the execution of a non-compete agreement and approximately $775,000 of other costs associated with the acquisition. Approximately $527,000 of the purchase price is held in an escrow account and is subject to certain deductions in the event of third party claims against indemnified parties. The excess of the purchase price over the fair value of net tangible and intangible assets and liabilities acquired of $9.3 million was recorded as goodwill. Results of operations for Weddingpages have been included with those of the Company subsequent to March 29, 2000. Unaudited pro forma data for the Company for the year ended December 31, 2000 and 1999 which gives effect to the acquisition of Weddingpages as if it had occurred on January 1, 1999, are shown below. The pro forma data does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of future consolidated results of the Company.
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 ------------ ----------- Net revenue.............................................. $ 25,589,000 $16,053,000 Net loss................................................. $(16,671,330) $(9,383,000) Net loss per share....................................... $ (1.14) $ (2.36)
In August 2000, Weddingpages purchased a former franchise market for $140,000 in cash, the forgiveness of a receivable from the franchisee of $102,000 and an additional obligation to pay $150,000 in cash in July 2001. In December 2000, Weddingpages purchased another former franchise market for $100,000 in cash. The aggregate purchase price for these acquisitions of $492,000 was recorded as goodwill. 1999 AND PRIOR PURCHASE TRANSACTIONS Casenhiser Clothing Company, Inc. d/b/a Bridal Search On April 2, 1998, the Company acquired all of the assets of Bridal Search for $50,000 in cash and 162,540 shares of the Company's common stock valued at $1.05 per share for financial reporting purposes. In addition, the Company was required to issue up to 356,046 additional shares to Bridal Search upon the achievement of future performance criteria, of which 178,031 shares were issued in connection with the launch of the Company's registry in November 1998 at a value of $1.05 per share. The remaining 178,015 shares were issuable upon the attainment of certain revenue based goals. In August 1999, the Company entered into a Settlement and Release Agreement whereby Bridal Search agreed to forego its rights to receive the remaining 178,015 shares related to revenue based goals in exchange for a payment of $150,000. Such amount, representing contingent purchase price, was recorded as additional goodwill. The purchase price, net of tangible assets acquired, principally fixed assets of approximately $4,000, was recorded as goodwill. 51 52 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the agreement, the former owners of Bridal Search were also entitled to receive an additional 178,015 shares of the Company's common stock, contingent upon their employment by the Company and which vested over four years. The value of these shares of $186,916 was recorded as deferred compensation. The former owners of Bridal Search terminated their employment with the Company in 2000 prior to which 89,008 shares had vested pursuant to the agreement. Deferred compensation expense related to the unvested shares of approximately $90,000 was reversed which reduced capital surplus. Bridalink.com In July 1999, the Company acquired all of the assets of Bridalink.com for approximately $124,000 in cash and the issuance of 10,000 immediately vested stock options to purchase common stock at an exercise price of $1.50 per share. The common stock was valued at $7.00 per share for financial reporting purposes. Bridalink.com operates an online wedding supplies business. The purchase price, including legal fees, of $191,000, net of tangible assets acquired, principally inventory and fixed assets of $124,000 was recorded as goodwill. Click Trips In July 1999, the Company acquired all of the capital stock of Click Trips for 5,000 shares of common stock. The common stock was valued at $7.00 per share for financial reporting purposes. Click Trips operates an online travel agency. The purchase price, including legal fees, of $67,000, net of tangible assets acquired, principally fixed assets of approximately $16,000, was recorded as goodwill. Wedding Photographers Network In August 1999, the Company acquired all of the assets of Wedding Photographers Network ("WPN"), a division of The Denis Reggie Company, for 10,000 shares of the Company's common stock. The common stock was valued at $8.00 per share for financial reporting purposes. WPN offers a search engine to obtain a listing of professional wedding photographers in various local areas. The purchase price of $159,000 which includes legal fees, and liabilities assumed of approximately $38,000, was recorded as goodwill. Unaudited pro forma data for the Company for the years ended December 31, 1999 and 1998 giving effect to the acquisitions of Bridal Search, Bridalink.com, Click Trips and Wedding Photographers Network as if these acquisitions had occurred at the beginning of each period presented are shown below. The pro forma data does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of future consolidated results of the Company.
YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- Net revenue............................................... $ 6,155,000 $ 1,698,000 Loss before extraordinary item............................ $(9,326,000) $(2,174,000) Net loss.................................................. $(9,326,000) $(1,784,000) Basic and diluted net loss per share...................... $ (2.34) $ (0.70)
9. JOINT VENTURE Gerard Bedouk Holding ("GBH") In November 2000, the Company entered into a joint venture with Gerard Bedouk Holding ("GBH"), the largest wedding media company in Europe, for the purpose of developing and operating a web site in French that offers wedding resources and services targeted to consumers in France and certain 52 53 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) other French speaking territories in Europe. The Company licenses certain of its proprietary technology and know-how to the joint venture and contributed several support services during the development of the web site in exchange for a 49% interest in the joint venture. The web site, www.mariee.fr was launched in November 2000. As of December 31, 2000, the Company had recorded a receivable from the joint venture of approximately $61,000 for reimbursable expenses paid by the Company. 10. CAPITAL STOCK In conjunction with the Company's Initial Public Offering, the stockholders of the Company approved an Amended and Restated Articles of Incorporation which provides for 105,000,000 authorized shares of capital stock consisting of 100,000,000 shares of common stock each having a par value of $.01 per share and 5,000,000 shares of preferred stock, each having a par value of $.001. PREFERRED STOCK On April 28, 1998, the Company sold 2,560,000 shares of Series A Convertible Preferred Stock ("Series A") for $3,000,320. Simultaneously, the AOL Note in the amount of $2,047,018, which included accrued interest of $197,018 and the AOL Warrant were exchanged for 800,000 shares of Series A Convertible Preferred Stock valued at $937,600 (See Note 7). On April 13, 1999, the Company sold 4,000,000 shares of Series B Convertible Preferred Stock ("Series B") for $15,000,000 to QVC (see Note 7). All shares of Series A and Series B Convertible Preferred Stock converted into common stock on a one-for-one basis at the closing of the Company's Initial Public Offering. Currently, the Board of Directors is authorized, without further stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights, and any qualifications, limitations or restrictions, of the shares of each series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designation of series. COMMON STOCK From inception through April 24, 1998, all outstanding common shares of the Company were owned by Element Studios, Inc. ("Element"), formerly MW Entertainment, Inc. On April 24, 1998, in connection with a recapitalization of the Company prior to the sale of Series A Preferred Stock, Element was dissolved. The outstanding common shares of the Company owned by Element were distributed equally to the four founders of Element. On April 28, 1998, the Company issued an additional 1,068,122 common shares to the founders. Following the recapitalization, each founder was the holder of 673,383 common shares. In conjunction with the Series A issuance, the founders entered into Vesting Agreements, whereby each founder granted the Company the right to repurchase 505,037 shares of common stock for $.01, if the founder is no longer employed by the Company. The amount of shares subject to the Vesting Agreements are reduced ratably over thirty six months. Common shares subject to repurchase are held in escrow and amounted to 56,115 per founder at December 31, 2000. In December 1999, the Company completed its initial public offering for the sale of 3,913,000 shares of common stock (including the exercise of the underwriter's overallotment of 413,000 shares of common 53 54 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock). The Company received proceeds of approximately $34.7 million net of underwriting discounts and expenses associated with the offering. At December 31, 2000, the Company had reserved the following shares of common stock for future issuance:
Options under the 1999 Stock Incentive Plan................. 3,618,772 Options under the 2000 Stock Incentive Plan................. 435,000 Common stock warrants....................................... 2,066,667 Shares under the Employee Stock Purchase Plan............... 268,158 Options related to the acquisition of Bridalink.com......... 10,000 --------- Total common stock reserved for future issuance............. 6,398,597 =========
11. STOCK PLANS 1999 STOCK INCENTIVE PLAN (THE "1999 PLAN") The 1999 Plan was adopted by the Board of Directors and approved by the stockholders in November 1999, as a successor plan to the Company's 1997 Long Term Incentive Plan (the "1997 Plan"). All options under the 1997 Plan have been incorporated into the 1999 Plan and no further option grants will be made under the 1997 Plan. The 1999 Plan became effective upon completion of the Company's initial public offering of its common stock. Under the terms of the 1999 Plan, 3,849,868 shares of common stock of the Company have been reserved for incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as "Options"), stock issuances, or any combination thereof. Awards may be granted to such non-employee directors, officers, employees and consultants of the Company as the Compensation Committee of the Board of Directors shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options. The shares reserved under the 1999 Plan will automatically increase on the first trading day in January each calendar year, beginning with calendar year 2001, by an amount equal to two percent (2%) of the total number of shares of the Company's common stock outstanding on the last trading day of December in the prior calendar year, but in no event will this annual increase exceed 1,000,000 shares (or such other lesser number determined by the Board of Directors). Generally, options are granted at the fair market value of the stock on the date of grant which was determined by the Board of Directors prior to the completion of the Company's initial public offering of its stock. Options vest up to a four year period and have terms not to exceed 10 years. 2000 NON-OFFICER STOCK INCENTIVE PLAN (THE "2000 PLAN") The 2000 Plan was approved by the Board of Directors in June 2000. Under the terms of the 2000 Plan, 435,000 shares of common stock of the Company have been reserved for nonqualified stock options, stock issuances or any combination thereof. Awards may be granted to employees (other than officers or directors of the Company) and consultants and other independent advisors who provide services to the Company. Options are granted at the fair market value of the stock on the date of grant. Generally, options vest over a four year period and have terms not to exceed 10 years. 54 55 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents a summary of the Company's stock option activity and related information:
WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE FAIR VALUE SHARES PRICE OF GRANTS --------- -------- ---------- Balance at December 31, 1997......................... 98,825 0.01 Options granted, exercise price less than market price.............................................. 568,000 0.50 0.63 Options granted, exercise price equal to market price.............................................. 15,000 0.50 0.10 Options canceled..................................... (8,810) 0.01 --------- ----- Options outstanding at December 31, 1998............. 673,015 $0.93 --------- ----- Options granted, exercise price less than market price.............................................. 881,500 1.09 3.12 Options granted, exercise price equal to market price.............................................. 84,100 9.17 2.71 Options granted, exercise price exceeds market price.............................................. 201,050 9.00 0.93 Options exercised.................................... (141,801) 0.32 Options canceled..................................... (78,958) 0.82 --------- ----- Options outstanding at December 31, 1999............. 1,618,906 $2.30 --------- ----- Options granted, exercise price equal to market price.............................................. 2,091,750 3.17 1.86 Options exercised.................................... (89,295) 0.66 Options canceled..................................... (619,700) 3.91 --------- ----- Options outstanding at December 31, 2000............. 3,001,661 $2.61 --------- -----
The fair value of each option granted has been estimated on the date of grant using the minimum value method option pricing model from inception through December 1, 1999 and using the Black-Scholes option pricing model thereafter, with the following assumptions:
YEAR ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 ------------- ------- ------- Expected option lives............................. 4 years 4 years 4 years Risk-free interest rate........................... 5.13% - 6.66% 5.76% 4.64% Expected volatility............................... 72.6% 98% N/A Dividend yield.................................... 0% 0% 0%
Had compensation for the Plan been determined consistent with the provisions of SFAS No. 123, the effect on the Company's net loss before extraordinary items and basic and diluted net loss before extraordinary items per share would have been changed to the following pro forma amounts:
YEAR ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ------------ ----------- ----------- Net loss before extraordinary items, as reported..................................... $(15,790,309) $(9,196,671) $(1,899,384) Net loss before extraordinary items, pro forma........................................ (16,436,418) (9,289,638) (1,988,488) Basic and diluted loss before extraordinary items per share, as reported................. (1.08) (2.31) (0.76) Basic and diluted loss per share, pro forma.... (1.13) (2.33) (0.80)
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. 55 56 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about options outstanding at December 31, 2000:
OPTIONS OUTSTANDING ----------------------------------------------- WEIGHTED OPTIONS EXERCISABLE NUMBER AVERAGE ------------------------------- OUTSTANDING REMAINING WEIGHTED NUMBER WEIGHTED AS OF CONTRACTUAL LIFE AVERAGE EXERCISABLE AS AVERAGE RANGE OF EXERCISE PRICE 12/31/00 (IN YEARS) EXERCISE PRICE OF 12/31/00 EXERCISE PRICE ----------------------- ----------- ---------------- -------------- -------------- -------------- $0.01 to $1.00............. 1,216,753 8.74 $0.68 371,104 $0.50 $1.28 to $4.12............. 1,562,782 9.24 3.25 203,189 2.25 $7.00 to $14.06............ 222,126 8.73 8.73 79,839 9.02 --------- ---- ----- ------- ----- 3,001,661 9.00 $2.61 654,132 $2.08 ========= ==== ===== ======= =====
DEFERRED COMPENSATION During the years 1999 and 1998, the Company granted options with exercise prices that were subsequently determined to be less than the value for financial reporting purposes on the date of grant. As a result, the Company has recorded deferred compensation of approximately $2,948,000 and $293,000 during 1999 and 1998, respectively, net of reversals of stock options forfeited. These amounts are recognized as noncash compensation expense on an accelerated basis over the vesting period of the options. EMPLOYEE STOCK PURCHASE PLAN (THE "ESPP") The non-compensatory ESPP was adopted by the Board of Directors and approved by the stockholders in November 1999 and became effective upon completion of the Company's initial public offering of its common stock. Under the ESPP, employees of the Company who elect to participate are granted the opportunity to purchase common stock at a 15 percent discount from the market value, as defined, of such stock. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from his or her salary an amount between 1 percent and 15 percent of compensation. The Compensation Committee of the Board of Directors administers the ESPP. 300,000 shares of common stock of the Company have been reserved for issuance under the ESPP. The shares reserved will automatically increase on the first trading day in January of each calendar year, beginning in calendar year 2001, by the lesser of the (i) the number of shares of common stock issued under the ESPP in the immediately preceding calendar year, (ii) 300,000 shares or (iii) such other lesser amount approved by the Board of Directors. As of December 31, 2000, 31,842 shares of common stock were issued under the ESPP. 56 57 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities consist of the following:
DECEMBER 31, --------------------------- 2000 1999 ------------ ----------- Deferred tax assets: Net operating loss carryforwards....................... $ 10,470,000 $ 5,062,600 Accrued expenses....................................... 427,000 -- Deferred revenue....................................... -- 5,800 Bad debt............................................... 194,000 84,500 Reserve for returns.................................... 20,000 -- Inventory reserve...................................... 12,000 -- Deferred rent.......................................... 86,000 -- Depreciation and amortization.......................... 554,000 125,100 ------------ ----------- Total deferred tax assets................................ 11,763,000 5,278,000 Deferred tax liabilities: Capitalized software costs............................. (295,000) (203,200) ------------ ----------- Net deferred tax assets.................................. 11,468,000 5,074,800 Valuation allowance...................................... (11,468,000) (5,074,800) ------------ ----------- Total net deferred tax assets............................ $ -- $ -- ============ ===========
Net deferred tax assets have been fully offset by a valuation allowance due to the uncertainty of realizing such benefit. At December 31, 2000, the Company had net operating loss carryforwards of approximately $23 million for federal tax purposes which are set to expire in years 2011 through 2020. The reconciliation of income tax expense computed at the U.S. federal statutory rate to income tax expense for the years ended December 31, 2000, 1999 and 1998 are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ---------- ---------- -------- Benefit at federal statutory rate (35%)......... (5,526,000) (3,219,000) (528,000) Expenses not deductible for U.S. tax purposes... 821,000 512,000 60,000 Losses for which no benefit has been provided... 4,705,000 2,707,000 468,000
57 58 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office facilities and certain warehouse space under noncancelable operating lease agreements which expire at various dates through 2012. Future minimum lease payments under noncancelable operating leases are as follows:
Year ending December 31: 2001..................................................... $ 735,000 2002..................................................... 681,000 2003..................................................... 583,000 2004..................................................... 609,000 2005..................................................... 579,000 Thereafter............................................... 3,470,000 ---------- Total.................................................... $6,657,000 ==========
Rent expense for the years ended December 31, 2000, 1999, and 1998 amounted to approximately $713,000, $308,000 and $183,000, respectively. There was no sublease income for the year ended December 31, 2000. For the years ended December 31, 1999 and 1998, sublease income amounted to $39,000 and $97,000, respectively. LEGAL On August 14, 2000, certain Weddingpages franchisees commenced litigation against the Company and certain of the Company's officers. The plaintiffs seek to enjoin the Company from taking actions, primarily relating to the sale of advertising in certain local markets, which plaintiffs claim will damage the value of their Weddingpages franchises and money damages in an unspecified amount. On October 19, 2000, the Company filed its initial response. On October 27, 2000 the Supreme Court of the State of New York refused to grant preliminary injunctions sought by certain Weddingpages franchisees. The court ordered that the parties submit their dispute to a neutral mediator. In February and March 2001, as a result of negotiations among the parties, with the assistance of the mediator, non-monetary settlements were reached with six of the plaintiffs in the action. Certain franchisees have not executed the settlement agreement as negotiated. The Company had previously made a motion to dismiss the case, which was stayed pending settlement discussions. It is the Company's intention to reinstate the motion against those plaintiffs who have refused to execute the settlement agreement and, in any event, to continue to contest the allegations which, the Company believes, are without merit. 58 59 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WRITE-OFFS, BALANCE CHARGED TO CHARGED TO NET OF BALANCE AT BEGINNING COSTS AND OTHER RECOVERIES & END OF OF YEAR EXPENSES ACCOUNTS ACTUAL RETURNS YEAR --------- ---------- ---------- -------------- ---------- YEAR ENDED DECEMBER 31, 2000 Allowance for Doubtful Accounts...................... $133,000 $1,075,274 $-- $386,311 $821,963 Allowance for Loan Receivable... $ 53,000 $ -- $-- $ 53,000 $ -- Allowance for Returns........... $ 5,606 $ 376,979 $-- $339,091 $ 43,494 Inventory Reserve............... $ 25,000 $ 37,000 $-- $ 7,000 $ 55,000 YEAR ENDED DECEMBER 31, 1999 Allowance for Doubtful Accounts...................... $ -- $ 133,000 $-- $ -- $133,000 Allowance for Loan Receivable... $ -- $ 53,000 $-- $ -- $ 53,000 Inventory Reserve............... $ -- $ 25,000 $-- $ -- $ 25,000
59 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. See Index to Consolidated Financial Statements and Supplementary Data on page 38. 2. Financial Statement Schedules. See Index to Consolidated Financial Statements and Supplementary Data on page 38. (b) Reports on Form 8-K None. 60 61 (c) Exhibits
NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Merger, dated as of February 1, 2000, by and among the Registrant and Weddingpages, Inc. (Incorporated by reference to Registrant's Current Report on Form 8-K filed with the S.E.C. on February 11, 2000) 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration number 333-87345) (the "Form S-1") 3.2 Amended and Restated Bylaws (Incorporated by reference to the Form S-1) 4.1 Specimen Common Stock certificate (Incorporated by reference to the Form S-1) 4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights of holders of common stock of the Registrant 4.3 Common Stock Warrant Certificate of QVC Interactive Holdings, Inc. (Incorporated by reference to the Form S-1) 4.4 Warrant Agreement of America Online, Inc. (Incorporated by reference to the Form S-1) 10.1 Employment Agreement between The Knot, Inc. and David Liu (Incorporated by reference to the Form S-1) 10.2 Employment Agreement between The Knot, Inc. and Carley Roney (Incorporated by reference to the Form S-1) 10.3 Employment Agreement between The Knot, Inc. and Richard Szefc (Incorporated by reference to the Form S-1) 10.4 Employment Agreement between The Knot, Inc. and Sandra Stiles (Incorporated by reference to the Form S-1) 10.5 2000 Non-Officer Stock Incentive Plan (Incorporated by reference to Registrant's Registration Statement on Form S-8 (Registration number 333-41960)) 10.6 1999 Stock Incentive Plan (Incorporated by reference to the Form S-1) 10.7 Employee Stock Purchase Plan (Incorporated by reference to the Form S-1) 10.8 Third Amended and Restated Investor Rights Agreement (Incorporated by reference to the Form S-1) 10.9+ Services Agreement between The Knot, Inc. and QVC, Inc. (Incorporated by reference to the Form S-1) 10.10+ Amended and Restated Anchor Tenant Agreement between The Knot, Inc. and America Online, Inc. (Incorporated by reference to the Form S-1) 10.11 Form of Indemnification Agreement (Incorporated by reference to the Form S-1) 21.1 Subsidiaries 23.1 Consent of Ernst & Young LLP
--------------- + Confidential treatment has been granted for certain portions omitted from this Exhibit pursuant to Rule 406 promulgated under the Securities Act. Confidential portions of this Exhibit have been separately filed with the Securities and Exchange Commission. 61 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, The Knot, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, State of New York, on this 30th day of March, 2001. THE KNOT, INC. By: /s/ DAVID LIU ------------------------------------ David Liu President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2001.
SIGNATURE TITLE(S) --------- -------- /s/ DAVID LIU President, Chief Executive Officer and ----------------------------------------------------- Chairman of the Board of Directors David Liu (principal executive officer) /s/ RICHARD SZEFC Chief Financial Officer, Treasurer and ----------------------------------------------------- Secretary (principal financial and Richard Szefc accounting officer) /s/ SANDRA STILES Director ----------------------------------------------------- Sandra Stiles /s/ JOHN LINK Director ----------------------------------------------------- John Link /s/ ALEXANDER LYNCH Director ----------------------------------------------------- Alexander Lynch /s/ ANN WINBLAD Director ----------------------------------------------------- Ann Winblad
62 63 EXHIBIT INDEX
NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Merger, dated as of February 1, 2000, by and among the Registrant and Weddingpages, Inc. (Incorporated by reference to Registrant's Current Report on Form 8-K filed with the S.E.C. on February 11, 2000) 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration number 333-87345) (the "Form S-1") 3.2 Amended and Restated Bylaws (Incorporated by reference to the Form S-1) 4.1 Specimen Common Stock certificate (Incorporated by reference to the Form S-1) 4.2 See Exhibits 3.1 and 3.2 for provisions defining the rights of holders of common stock of the Registrant 4.3 Common Stock Warrant Certificate of QVC Interactive Holdings, Inc. (Incorporated by reference to the Form S-1) 4.4 Warrant Agreement of America Online, Inc. (Incorporated by reference to the Form S-1) 10.1 Employment Agreement between The Knot, Inc. and David Liu (Incorporated by reference to the Form S-1) 10.2 Employment Agreement between The Knot, Inc. and Carley Roney (Incorporated by reference to the Form S-1) 10.3 Employment Agreement between The Knot, Inc. and Richard Szefc (Incorporated by reference to the Form S-1) 10.4 Employment Agreement between The Knot, Inc. and Sandra Stiles (Incorporated by reference to the Form S-1) 10.5 2000 Non-Officer Stock Incentive Plan (Incorporated by reference to Registrant's Registration Statement on Form S-8 (Registration number 333-41960)) 10.6 1999 Stock Incentive Plan (Incorporated by reference to the Form S-1) 10.7 Employee Stock Purchase Plan (Incorporated by reference to the Form S-1) 10.8 Third Amended and Restated Investor Rights Agreement (Incorporated by reference to the Form S-1) 10.9+ Services Agreement between The Knot, Inc. and QVC, Inc. (Incorporated by reference to the Form S-1) 10.10+ Amended and Restated Anchor Tenant Agreement between The Knot, Inc. and America Online, Inc. (Incorporated by reference to the Form S-1) 10.11 Form of Indemnification Agreement (Incorporated by reference to the Form S-1) 21.1 Subsidiaries 23.1 Consent of Ernst & Young LLP
--------------- + Confidential treatment has been granted for certain portions omitted from this Exhibit pursuant to Rule 406 promulgated under the Securities Act. Confidential portions of this Exhibit have been separately filed with the Securities and Exchange Commission. 63