-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FW5CtiFA3MRXHfK/NipzhestNrXPFe4baRs9oKVaajazXxmrryuUPa0AFZ3+DZ0j mckUFSIV2dvK081Ie2BxKQ== 0000950123-99-009958.txt : 19991111 0000950123-99-009958.hdr.sgml : 19991111 ACCESSION NUMBER: 0000950123-99-009958 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19991110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNOT INC CENTRAL INDEX KEY: 0001062292 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 133895178 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-87345 FILM NUMBER: 99745467 BUSINESS ADDRESS: STREET 1: 462 BROADWAY 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2122198555 MAIL ADDRESS: STREET 1: 462 BROADWAY, 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10013 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1999 REGISTRATION NO. 333-87345 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE KNOT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7375 13-3895178 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) CLASSIFICATION CODE NUMBER)
------------------------ 462 BROADWAY 6TH FLOOR NEW YORK, NY 10013 TELEPHONE: (212) 219-8555 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DAVID LIU CHIEF EXECUTIVE OFFICER THE KNOT, INC. 462 BROADWAY 6TH FLOOR NEW YORK, NY 10013 (212) 219-8555 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) ------------------------ COPIES TO: ALEXANDER D. LYNCH, ESQ. JOHN M. HESSION, ESQ. BRIAN B. MARGOLIS, ESQ. JOCELYN M. AREL, ESQ. BROBECK, PHLEGER & HARRISON LLP TESTA, HURWITZ & THIBEAULT, LLP 1633 BROADWAY, 47TH FLOOR 125 HIGH STREET NEW YORK, NY 10019 BOSTON, MA 02110 (212) 581-1600 (617) 248-7000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------- If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------------ REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1999 3,500,000 SHARES [THE KNOT LOGO] COMMON STOCK ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $8.00 and $10.00 per share. We intend to apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol "KNOT." The underwriters have an option to purchase a maximum of 525,000 additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS THE KNOT -------------------- -------------------- -------------------- Per Share....................................... $ $ $ Total........................................... $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST SALOMON SMITH BARNEY The date of this prospectus is , 1999. 3 INSIDE FRONT COVER: - Background: photo of bride and groom. - Bottom half of page contains centered text reading: "How do I get her ring size?"; "Where do I seat my father's 2nd wife's children?"; "How can I find a photographer from 1,500 miles away?"; "Can my brother be my bridesmaid?"; "How can we combine Jewish and Scottish traditions?"; When do we send out the invitations?"; "Is anyone else having cold feet?"; "What if we want fishing rods instead of flatware?"; "Have any exotic honeymoons for under $3,000?"; "How do you tie a bow tie?"; "How do we tell guests where we're registered?"; and "How do I make this feeling last forever?" - At bottom of page: "the knot, the new word in weddings; advice. ideas. relief. shopping." GATEFOLD: - Title text reading "the new word in weddings . . . the knot" (across top of both pages of gatefold). - Centered on gatefold is The Knot's home page screen shot displaying a link to The Knot's Ultimate Checklist, links to The Knot's areas, links to The Knot Registry, links to "This Week's Features", links to planning tools, and a link to The Knot Shop. - Surrounding The Knot's home page screen are overlays of photos of brides, grooms, friends and family. - Right side of gatefold lists services and information provided by The Knot Web site. Text reads: "Online and Offline All The Time", "Inspiring Ideas", "Up-to-date Etiquette", "Online/800# Gift Registry", "Personal Planning Tools", "Nationwide Vendor Listings", "Active Chat Rooms", "Wedding Supply Shopping", "Honeymoon Travel Agent", "Thousands of Editorial Articles", "15,000 Gown Pictures", "10,000 Gown Gifts", and "395,000 Registered Couples". - Bottom right hand corner contains The Knot's Web site address and the words "open all night". 4 ------------------ TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.................. 1 RISK FACTORS........................ 5 FORWARD-LOOKING STATEMENTS.......... 19 USE OF PROCEEDS..................... 20 DIVIDEND POLICY..................... 20 CAPITALIZATION...................... 21 DILUTION............................ 22 SELECTED FINANCIAL DATA............. 23 UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS........... 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 26 BUSINESS............................ 39 MANAGEMENT.......................... 57 CERTAIN TRANSACTIONS................ 69 PRINCIPAL STOCKHOLDERS.............. 71 DESCRIPTION OF CAPITAL STOCK........ 73 SHARES ELIGIBLE FOR FUTURE SALE..... 76 UNDERWRITING........................ 78 NOTICE TO CANADIAN RESIDENTS........ 81 LEGAL MATTERS....................... 83 EXPERTS............................. 83 WHERE YOU CAN FIND ADDITIONAL INFORMATION....................... 83 INDEX TO FINANCIAL STATEMENTS....... F-1
------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND IN CONNECTION WITH UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. i 5 PROSPECTUS SUMMARY Because this is only a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus, including "Risk Factors" and the financial statements and the notes to the financial statements, before deciding to invest in our common stock. Information contained on our online sites does not constitute part of this prospectus. References in this prospectus to "The Knot," "we," "our" and "us" refer to The Knot, Inc. THE KNOT, INC. OUR BUSINESS The Knot is the leading online destination targeting the wedding market. Weddings are major milestone events and consumers tend to allocate significant budgets to their weddings and related purchases. According to an independent research report, the domestic wedding market generates over $45 billion in retail sales annually. Our easy-to-use online sites provide full-service offerings for couples planning their weddings. We provide future brides and grooms with comprehensive content, including thousands of articles on wedding planning organized by topic and a database of local wedding vendors in 52 markets nationwide. Our sites also feature numerous interactive services and personalized planning tools. By providing hosted chats and message boards, we create an online community where brides and grooms can interact. We offer consumers a convenient place to purchase a broad range of wedding-related items through our online gift registry, shops for wedding supplies and travel agency. We also author a series of books and publish a semiannual gown guide that provide cross-promotional opportunities and increase our brand awareness and our online audience. We provide advertisers and vendors with targeted access to couples actively seeking information and making meaningful buying decisions relating to all aspects of their weddings. We receive revenue primarily from sponsorship, advertising and production contracts. We also generate revenue from the sale of merchandise, publishing and the sale of travel packages. For the nine months ended September 30, 1999, sponsorship, advertising and production revenues represented 65% of our net revenues. In September 1999, we generated over 15.4 million page views on our Web site compared to 2.5 million page views in December 1998. We are currently enrolling as members an average of over 1,000 new couples per day. OUR STRATEGY Our strategy is to expand our position as the leading online resource providing comprehensive wedding planning information, products and services by: - building strong brand recognition of The Knot; - aggressively growing our membership base and increasing member usage; - providing a full-service shopping solution to make the wedding planning process more convenient, efficient and enjoyable; - generating multiple revenue streams; and - pursuing strategic alliances and acquisitions. 1 6 OUR OFFICES Our business was incorporated on May 2, 1996. Our principal executive offices are located at 462 Broadway, 6th Floor, New York, New York 10013. Our telephone number is (212) 219-8555. The address of our Web site is www.theknot.com. We are also located on America Online (keywords "Knot" and "weddings"). OUR TRADEMARKS The Knot is a registered trademark and/or service mark of The Knot, Inc. We have applied for federal registration of the marks The Knot Ultimate Wedding Checklist, Wedding Photographers Network, WPN, The Knot Wedding Gift Registry, The Knot Registry, Click Trips and Bridalink Store. Other trademarks and service marks appearing in this prospectus are the property of their respective holders. THE OFFERING Common stock offered................................. 3,500,000 shares Common stock to be outstanding after this offering... 13,973,103 shares Use of proceeds...................................... For general corporate purposes, capital expenditures and working capital.
The number of shares of common stock to be outstanding after this offering is based on our shares outstanding as of November 5, 1999. This information excludes 3,849,868 shares of common stock reserved for issuance under our 1999 Stock Incentive Plan, of which 1,724,665 shares are issuable upon the exercise of stock options outstanding as of November 5, 1999, and 2,066,667 shares of common stock issuable upon the exercise of warrants outstanding as of November 5, 1999. 2 7 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PERIOD FROM MAY 2, 1996 YEAR ENDED NINE MONTHS ENDED (INCEPTION) TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, --------------------- ----------------------- 1996 1997 1998 1998 1999 -------------- --------- --------- ----------- --------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net revenues....................... $ 71 $ 596 $ 1,040 $ 826 $ 2,635 Cost of revenues................... 9 67 131 82 904 --------- --------- --------- --------- --------- Gross profit....................... 62 529 909 744 1,731 Total operating expenses........... 768 1,425 2,823 1,935 7,982 Loss from operations............... (706) (896) (1,914) (1,191) (6,251) Net loss........................... $ (752) $ (1,095) $ (1,509) $ (830) $ (6,008) ========= ========= ========= ========= ========= Basic and diluted net loss per share............................ $ (0.46) $ (0.67) $ (0.60) $ (0.35) $ (1.96) ========= ========= ========= ========= ========= Weighted average number of shares used in calculating basic and diluted net loss per share....... 1,625,410 1,625,410 2,497,065 2,344,126 3,066,960 ========= ========= ========= ========= ========= Pro forma basic and diluted net loss per share................... $ (0.46) $ (0.67) $ (0.32) $ (0.19) $ (0.67) ========= ========= ========= ========= ========= Pro forma weighted average number of shares used in calculating basic and diluted net loss per share............................ 1,625,410 1,625,410 4,780,024 4,264,126 8,932,455 ========= ========= ========= ========= =========
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. See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing basic and diluted net loss per share.
SEPTEMBER 30, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- ----------- ----------- (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents............................ $ 9,302 $ 9,302 $37,597 Working capital...................................... 9,257 9,257 37,552 Total assets......................................... 13,846 13,846 42,141 Convertible preferred stock.......................... 17,901 -- -- Total stockholders' equity........................... 11,524 11,524 39,819
The pro forma balance sheet data reflect the automatic conversion into common stock of all outstanding convertible preferred stock upon the closing of this offering. The pro forma as adjusted data reflect our receipt of the estimated net proceeds from the sale of the 3,500,000 shares of common stock 3 8 offered by us at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Unless otherwise indicated, all information in this prospectus reflects the automatic conversion of all outstanding shares of convertible preferred stock into 7,360,000 shares of our common stock upon the closing of this offering, assumes the filing of our amended and restated certificate of incorporation upon the closing of this offering and assumes no exercise of the underwriters' over-allotment option. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus. 4 9 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following events actually occurs, our business and financial results may suffer. In such event, the market price of our common stock could decline, and you could lose all or part of your investment in our common stock. RISKS RELATED TO OUR BUSINESS WE HAVE AN UNPROVEN BUSINESS MODEL AND IT IS UNCERTAIN WHETHER ONLINE WEDDING-RELATED SITES CAN GENERATE SUFFICIENT REVENUES TO SURVIVE. Our model for conducting business and generating revenues is new and unproven. Our business model depends upon our ability to generate revenue streams from multiple sources through our online sites, including: - Internet sponsorship and advertising fees from third parties; and - online sales of wedding gifts and supplies. It is uncertain whether wedding-related online sites that rely on attracting sponsors and advertisers, as well as people to purchase wedding gifts and supplies, can generate sufficient revenues to survive. For our business to be successful, we must provide users with an acceptable blend of products, information, services and community offerings that will attract wedding consumers to our online sites frequently. In addition, we must provide sponsors, advertisers and vendors the opportunity to reach these wedding consumers. We provide our services to users without charge and we may not be able to generate sufficient revenues to pay for these services. Accordingly, we are not certain that our business model will be successful or that we can sustain revenue growth or be profitable. WE HAVE A LIMITED OPERATING HISTORY AND EXPECT TO ENCOUNTER DIFFICULTIES FACED BY EARLY STAGE COMPANIES IN THE INTERNET ADVERTISING AND ONLINE WEDDING MARKETS. We commenced operations in May 1996 and recorded our first revenues in September 1996, immediately following the launch of our first online property. Accordingly, we have only a limited operating history with which you can evaluate our business and prospects. An investor in our common stock must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, such as the Internet advertising and online wedding markets. These risks include our ability to: - increase the audience on our sites; - broaden awareness of our brand; - strengthen user-loyalty; - offer compelling content; - maintain our leadership in generating traffic; - maintain our current, and develop new, strategic relationships; - attract a large number of advertisers from a variety of industries; 5 10 - respond effectively to competitive pressures; - generate revenues from the sale of merchandise and e-commerce; - integrate our recent acquisitions into our existing operations; - continue to develop and upgrade our technology; and - attract, integrate, retain and motivate qualified personnel. As a result of our limited operating history, we do not have historical financial data for a significant number of periods upon which to forecast our revenues and results of operations. These risks could negatively impact our financial condition if left unaddressed. For more information on the effects of some of these risks, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE HAVE A HISTORY OF SIGNIFICANT LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE. We have not achieved profitability and expect to continue to incur significant losses and negative cash flow for the foreseeable future. We incurred net losses of $752,000 for the period from May 2, 1996 (inception) through December 31, 1996, $1.1 million for the year ended December 31, 1997, $1.5 million for the year ended December 31, 1998, and $6.0 million for the nine months ended September 30, 1999. As of September 30, 1999, our accumulated deficit was $9.4 million. We also expect to continue to incur significant operating expenses and capital expenditures and, as a result, we will need to generate significant revenues to achieve and maintain profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. Failure to achieve or maintain profitability may materially and adversely affect the market price of our common stock. For more information on our losses and the effects of our expenses on our financial performance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE LACK SIGNIFICANT REVENUES AND MAY BE UNABLE TO ADJUST SPENDING QUICKLY ENOUGH TO OFFSET ANY UNEXPECTED REVENUE SHORTFALL. Our revenues for the foreseeable future will remain dependent on user traffic levels and advertising activity on our sites and the expansion of our e-commerce activity. In addition, we plan to expand and develop content and to upgrade and enhance our technology and infrastructure to support our growth. We incur a significant percentage of our expenses, such as employee compensation and rent, prior to generating revenues associated with those expenses. Moreover, our expense levels are based, in part, on our expectation of future revenues. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenues in relation to our growth in expenses, then our business, results of operations and financial condition would be materially and adversely affected. For more information on our net revenues and the effects of our expenses on our financial performance, see "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 6 11 OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK. Our quarterly revenues and operating results have fluctuated significantly in the past and are expected to continue to fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include: - the level of online usage; - the level of traffic on our online sites; - demand for online advertising; - seasonal trends in both online usage and advertising placements; - the addition or loss of advertisers; - the advertising budgeting cycles of specific advertisers; - the number of users that purchase merchandise from us; - the amount and timing of capital expenditures and other costs relating to the expansion of our operations, including those related to acquisitions; - the introduction of new sites and services by us or our competitors; - changes in our pricing policies or the pricing policies of our competitors; - general economic conditions; and - economic conditions specific to the Internet, electronic commerce and online media. We do not believe that period-to-period comparisons of our operating results are necessarily meaningful and you should not rely upon these comparisons as indicators of our future performance. Due to the foregoing factors, it is possible that our results of operations in one or more future quarters may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock is likely to decline. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations Data" for detailed information on our quarterly operating results. 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. In 1999, approximately 40% 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 7 12 notice. If the carrying of our sites on AOL is discontinued, our business, results of operations and financial condition would be materially and adversely affected. For more information about our relationship with AOL, see "Business -- Relationship with AOL." OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS. Seasonal and cyclical patterns may affect our revenues. In 1997, 19% of weddings occurred in the first quarter, 28% occurred in the second quarter, 30% occurred in the third quarter and 23% occurred in the fourth quarter. Because we launched The Knot Registry in November 1998 and acquired Bridalink in July 1999, we have limited experience generating merchandise revenues. Therefore, we have been unable to determine whether our merchandise revenues are affected by seasonal fluctuations in the number of weddings. In addition, we believe that advertising sales in traditional media, such as television and radio, generally are lower in the first and third calendar quarters of each year. Historically, we have experienced increases in our traffic during the first and second quarters of the year. As a result of these factors, we may experience fluctuations in our revenues, which could have a material adverse effect on our business and results of operations. WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE KNOT BRAND NAME. Building recognition of our brand is critical to attracting and expanding our online user base. Because we plan to continue building brand recognition, we may find it necessary to accelerate expenditures on our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness. Our failure to successfully promote and maintain our brand would adversely affect our financial condition and cause us to incur significant expenses in promoting our brand without an associated increase in our net revenues. IF WE CANNOT PROTECT OUR DOMAIN NAMES, IT WILL IMPAIR OUR ABILITY TO BRAND SUCCESSFULLY THE KNOT. We currently hold various Web domain names, including www.theknot.com. The acquisition and maintenance of domain names generally is regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may not successfully carry out our business strategy of establishing a strong brand for The Knot if we cannot prevent others from using similar domain names or trademarks. This could impair our ability to increase market share and revenues. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT AND ANY FUTURE ACQUISITIONS. In July 1999, we acquired Bridalink.com, an Internet wedding supply store, and Click Trips, Inc., an online travel agency. In August 1999, we acquired Wedding Photographers Network, an online searchable database of wedding photographers. We may encounter 8 13 difficulty integrating the personnel, operations, technology and software of these acquired businesses. In addition, one or more of the key personnel of the acquired businesses may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. In the future, we may acquire, or invest in, complementary companies, products or technologies. Acquisitions and investments involve numerous risks, including: - difficulties in integrating operations, technologies, products and personnel; - diversion of financial and management resources from existing operations; - risks of entering new markets; - potential loss of key employees; and - inability to generate sufficient revenues to offset acquisition or investment costs. THE COSTS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR STRATEGIC ALLIANCES COULD DILUTE YOUR INVESTMENT OR ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. To pay for an acquisition or to enter into a strategic alliance, we might use equity securities, debt, cash, including the proceeds from this offering, 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 that 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 FAILS TO DEVELOP OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR BUSINESS WILL 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 65% of our net revenues for the nine months ended September 30, 1999 and 82% of our net revenues for the year ended December 31, 1998. The Internet advertising market is new and rapidly evolving, and it cannot yet be compared with traditional advertising media to gauge its effectiveness. As a result, demand for and market acceptance of Internet advertising solutions are uncertain. Many of our current and potential customers have little or no experience with Internet advertising and have allocated only a limited portion of their advertising and marketing budgets to Internet activities. The adoption of Internet advertising, particularly by entities that have historically relied upon traditional methods of advertising and marketing, requires the acceptance of a new way of advertising and marketing. These customers may find Internet advertising to be less effective for meeting their business needs than traditional methods of advertising and marketing. Furthermore, there are software programs that limit or prevent advertising from being delivered to a user's computer. Widespread adoption of this software by users would significantly undermine the commercial viability of Internet advertising. If these markets fail to develop or develop more slowly than we expect, our business, results of operations and financial condition would be materially and adversely affected. 9 14 WE HAVE A SMALL NUMBER OF SPONSORS AND ADVERTISERS AND THE LOSS OF A NUMBER OF THESE COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We derive sponsorship revenues from contracts ranging up to three years and advertising revenues principally from short-term advertising contracts. We depend on a limited number of sponsors and advertisers for a significant part of our net revenues. Consequently, the loss of any of these sponsors or advertisers could materially and adversely affect our business, results of operations and financial condition. For the nine months ended September 30, 1999, no single sponsor or advertiser accounted for 10% or more of our net revenues. For the year ended December 31, 1998, Banfi Products Corp. accounted for 19% of our net revenues. During the nine months ended September 30, 1999, we did not generate net revenues from the sale of sponsorships or advertisements to Banfi Products Corp. We anticipate that our future results of operations will continue to depend to a significant extent upon revenues from a small number of sponsors and advertisers. In addition, we anticipate that such sponsors and advertisers will continue to vary over time. For example, although Banfi Products accounted for a large percentage of our revenues in 1998, different sponsors and advertisers will account for a large percentage of our revenues this year. To achieve our long-term goals, we will need to attract additional significant sponsors and advertisers on an ongoing basis. Our failure to enter into a sufficient number of large contracts during a particular period may have a material adverse effect on our business, results of operations and financial condition. For more information on our advertising revenues, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE MAY NOT BE ABLE 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, results of operations and financial condition 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. 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 10 15 might not be successful. Furthermore, a party making such a claim could secure a judgement 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 most of our products. Our agreement with QVC expires on the fourth anniversary of this offering. 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, Year 2000 problems or other 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. Our experience with QVC as a warehousing, fulfillment and distribution service provider is limited. In connection with our transition to QVC as our primary fulfillment provider, we have experienced system failures and other problems resulting in duplicate orders and billing, delivery mistakes and damaged products. We are unable to predict whether we will have similar problems in the future. Any of these problems could cause us to lose customers and revenues. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING NECESSARY TO EXECUTE OUR BUSINESS STRATEGY. We currently believe that the net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. To the extent we require additional funds to support our operations or the expansion of our business, we may need to sell additional equity, issue debt or convertible securities or obtain credit facilities through financial institutions. We cannot assure you that additional funding, if required, will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY INCREASED 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 for members, users and advertisers from the following areas: - online services or Web sites targeted at brides and grooms as well as the online sites of retail stores, manufacturers and regional wedding directories; - bridal magazines, such as Bride's and Modern Bride; and 11 16 - 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 or membership bases than we have and, therefore, have a significantly greater ability to attract advertisers and users. In addition, many of our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in Internet user requirements, as well as devote greater resources than we can to the development, promotion and sale of services. There can be no assurance that our current or potential competitors will not develop products and services comparable or superior to those that we develop or adapt more quickly than we do to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, lower margins or loss of market share, any of which would materially and adversely affect our business, results of operations and financial condition. In addition, if we expand internationally, we may face additional competition. There can be no assurance that we will be able to compete successfully against current and future competitors. OUR RESULTS OF OPERATIONS FOR A PARTICULAR PERIOD MAY BE MATERIALLY AND ADVERSELY AFFECTED IF SALES TO SPONSORS OR ADVERTISERS FORECASTED IN A PARTICULAR PERIOD ARE DELAYED OR DO NOT OTHERWISE OCCUR. The time between the date of initial contact with a potential sponsor or advertiser and the execution of a contract with the sponsor or advertiser is often lengthy, typically ranging from six weeks for smaller agreements to six months for larger agreements, and is subject to delays over which we have little or no control, including: - customers' budgetary constraints; - customers' internal acceptance reviews; - the success and continued internal support of advertisers' and sponsors' own development efforts; and - the possibility of cancellation or delay of projects by advertisers or sponsors. During the sales cycle, we may expend substantial funds and management resources in advance of generating sponsorship or advertising revenues. Accordingly, if sales to advertisers or sponsors forecasted in a particular period are delayed or do not otherwise occur, our revenues and results of operations would be adversely affected. 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, 12 17 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 disruptions or failures would reduce the attractiveness of our online sites significantly. Substantially all of our communications hardware and some of our other computer hardware operations are located at Exodus Communications' facilities in Jersey City, New Jersey. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems. Computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our online sites. Our business could be materially and adversely affected if our systems were affected by any of these occurrences. We do not presently have any secondary "off-site" systems or a formal disaster recovery plan. Our sites must accommodate a high volume of traffic and deliver frequently updated information. Our sites have in the past experienced slower response times or decreased traffic. These types of occurrences in the future could cause users to perceive our sites as not functioning properly and therefore cause them to use another online site or other methods to obtain information or services. In addition, our users depend on Internet service providers, online service providers and other site operators for access to our online sites. Many of them have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system disruptions or failures unrelated to our systems. Although we carry general liability insurance, our insurance may not cover any claims by dissatisfied providers or subscribers or may not be adequate to indemnify us for any liability that may be imposed in the event that a claim were brought against us. Our business, results of operations and financial condition could be materially and adversely affected by any system disruption or failure, security breach or other damage that interrupts or delays our operations. WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US. We are dependent on various third parties for software, systems and related services in connection with our hosting and accounting software, data transmission and security systems. Several of the third parties that provide software and services to us have a limited operating history and have relatively new technology. These third parties are dependent on reliable delivery of services from others. If our current providers were to experience prolonged systems failures or delays, we would need to pursue alternative sources of services. Although alternative sources of these services are available, we may be unable to secure such services on a timely basis or on terms favorable to us. As a result, we may experience business disruptions if these third parties fail to provide reliable software, systems and related services to us. WE MAY BE LIABLE IF THIRD PARTIES MISAPPROPRIATE OUR USERS' PERSONAL INFORMATION. If third parties were able to penetrate our network security or otherwise misappropriate our users' personal or credit card information, we could be subject to liability. Our 13 18 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. WE MAY SUFFER DISRUPTION TO OUR BUSINESS AND WE COULD INCUR MATERIAL EXPENSES IF ANY OF THE COMPUTER SYSTEMS OR SOFTWARE WE RELY ON FAIL TO BE YEAR 2000 COMPLIANT. The Year 2000 problem could harm our business and financial results. Many currently installed computer systems and software products are coded to accept or recognize only two-digit entries in the date code field. These systems may interpret the date code "00" as the year 1900 rather than the year 2000. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded or replaced to comply with Year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. Although we have completed testing of our systems, including internally developed proprietary software, third-party software, hardware and services, and believe that they are Year 2000 compliant, we have not developed a contingency plan. Moreover, we may discover Year 2000 problems that need to be upgraded, modified or replaced, which could be time consuming and expensive. In addition there can be no assurance that our non-information technology systems, including our telephone systems and utilities, are Year 2000 compliant and will not have to be upgraded, modified or replaced. Our failure to fix or replace internally developed proprietary software, third-party software, hardware or services on a timely basis could result in lost revenues, increased operating costs, the loss of customers and other business interruptions. We depend heavily on a number of third-party vendors to provide both network services and equipment. A significant Year 2000-related disruption of the network services or equipment that third-party vendors provide to us could cause our sponsors, advertisers, members and visitors to consider seeking alternate providers. Year 2000 issues could also cause an unmanageable burden on our technical support personnel, which in turn could materially and adversely affect our business, results of operations and financial condition. In addition, there can be no assurance that governmental agencies, utility companies, Internet access companies, third-party service providers, including AOL and QVC, and others outside of our control will be Year 2000 compliant. The failure by such entities to be Year 2000 compliant could result in a systemic failure such as a prolonged Internet, telecommunications or electrical failure. These suppliers could also prevent us from delivering services to our customers, decrease the use of the Internet or prevent users from accessing our sites. IF THE ASSUMPTIONS THAT WE USE REGARDING THE GROWTH OF E-COMMERCE AND INTERNET ARE INCORRECT, THEN THE FINANCIAL PROJECTIONS WE INCLUDE IN THIS PROSPECTUS MAY BE MATERIALLY DIFFERENT FROM ACTUAL RESULTS. This prospectus contains various third-party data and projections related to our business and the Internet, including those relating to revenue generated by e-commerce, the number of Internet users and the amount spent on Internet advertising. These data and 14 19 projections have been included in studies prepared by independent market research firms, and the projections are based on surveys, financial reports and models used by these firms, as well as a number of assumptions. If the underlying data or one or more of the assumptions contained in these reports turns out to be incorrect, actual results or circumstances may be materially different from the projections included in this prospectus. Any difference could reduce our revenue and harm our results of operations. RISKS RELATED TO OUR INDUSTRY WE ARE DEPENDENT ON CONTINUED GROWTH IN THE USE OF THE INTERNET AND COMMERCIAL ONLINE SERVICES AS MEDIA FOR COMMERCE. We cannot assure you that a sufficiently broad base of consumers will adopt, and continue to use, the Internet and commercial online services as media for commerce, particularly for purchases of wedding gifts and supplies. Even if consumers adopt the Internet or commercial online services as a media for commerce, we cannot be sure that the necessary infrastructure will be in place to process such transactions. Our long-term viability depends substantially upon the widespread acceptance and the development of the Internet or commercial online services as effective media for consumer commerce and for advertising. Use of the Internet or commercial online services to effect retail transactions and to advertise is at an early stage of development. Convincing consumers to purchase wedding gifts and supplies online may be difficult. Demand for recently introduced services and products over the Internet and commercial online services is subject to a high level of uncertainty. Few proven services and products exist. The development of the Internet and commercial online services into a viable commercial marketplace is subject to a number of factors, including: - 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. WE DEPEND ON THE CONTINUED VIABILITY OF THE INFRASTRUCTURE OF THE INTERNET AND OTHER COMMERCIAL ONLINE SERVICES. 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. Outages or delays, including those resulting from Year 2000 problems, could adversely affect online sites, e-mail and the level of traffic on all sites. We also depend on online access providers that provide our users with access to our services. In the past, users have experienced difficulties due to systems failures unrelated to our systems. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle 15 20 increased levels of Internet or other online service activity or to increased governmental regulation. Insufficient availability of telecommunications services to support the Internet or other online services also could result in slower response times and negatively impact use of the Internet and other online services generally, and our sites in particular. If the use of the Internet and other online services fails to grow or grows more slowly than expected, if the infrastructure for the Internet and other online services does not effectively support growth that may occur or if the Internet and other online services do not become a viable commercial marketplace, we may not achieve profitability. WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY AND THIS MAY HARM OUR BUSINESS. If we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, our business, results of operations and financial condition would be materially and adversely affected. The Internet and e-commerce are characterized by rapid technological change. Sudden changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices could render our existing online sites and proprietary technology and systems obsolete. The emerging nature of products and services in the online wedding market and their rapid evolution will require that we continually improve the performance, features and reliability of our online services. Our success will depend, in part, on our ability: - to enhance our existing services; - to develop and license new services and technology that address the increasingly sophisticated and varied needs of our prospective customers and users; and - to respond to technological advances and emerging industry standards and practices on a cost-effective and timely 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 and could materially and adversely affect our business, results of operations and financial condition. WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. 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 16 21 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. Our business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the Internet and other online services. WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR SITES. We may be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish on our online sites. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We could also be subject to claims based upon the content that is accessible from our online sites through links to other online sites or through content and materials that may be posted by members in chat rooms or bulletin boards. Our insurance, which covers commercial general liability, may not adequately protect us against these types of claims. WE MAY INCUR POTENTIAL PRODUCT LIABILITY FOR PRODUCTS SOLD ONLINE. Consumers may sue us if any of the products that we sell online are defective, fail to perform properly or injure the user, or if consumers experience problems with honeymoon packages purchased through our sites. To date, we have had limited experience selling products online and developing relationships with manufacturers or suppliers of such products. We plan to sell a range of products targeted specifically at brides and grooms through The Knot Registry, The Knot Shop, Bridalink.com, Click Trips and other e-commerce sites that we may acquire in the future. Such a strategy involves numerous risks and uncertainties. Although our agreements with manufacturers and providers of travel services typically contain provisions intended to limit our exposure to liability claims, these limitations may not prevent all potential claims. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our financial results, reputation and brand name. WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY. We may decide to expand internationally. There are additional risks related to doing business in international markets, such as changes in regulatory requirements, tariffs and other trade barriers, fluctuations in currency exchange rates, and adverse tax consequences. In addition, there are likely to be different consumer preferences and requirements in such markets. Furthermore, we may face difficulties in staffing and managing any foreign operations. We cannot assure you that one or more of these factors would not harm any future international operations. WE MAY INCUR SIGNIFICANT EXPENSES RELATED TO THE SECURITY OF PERSONAL INFORMATION ONLINE. The need to transmit securely confidential information online has been a significant barrier to e-commerce and online communications. Any well-publicized compromise of security could deter people from using the Internet or other online services or from using them to conduct transactions that involve transmitting confidential information. Because our success depends on the acceptance of online services and e-commerce, we may incur 17 22 significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. RISKS RELATED TO THIS OFFERING AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER ALL MATTERS REQUIRING A STOCKHOLDER VOTE. After this offering, our executive officers, directors and existing stockholders who each own greater than 5% of the common stock that was outstanding immediately before this offering and their affiliates will, in the aggregate, beneficially own approximately 76% of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership could also have the effect of delaying or preventing a change in control. FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE. Following this offering, we will have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the public market or the perception that such sales could occur. THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS AND ANY VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US. Prior to this offering, investors could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after the offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. The market price of our common stock may decline below the initial public offering price after this offering. Fluctuations in market price and volume are particularly common among securities of Internet and other technology companies. The market price of our common stock may fluctuate significantly in response to the following factors, some of which are beyond our control: - variations in quarterly operating results; - changes in market valuations of Internet and other technology companies; - our announcements of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - failure to complete significant sponsorship, advertising and merchandise sales; - additions or departures of key personnel; - future sales of common stock; and - changes in financial estimates by securities analysts. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its common stock. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. 18 23 WE MAY SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE. The net proceeds of this offering are not allocated for specific uses. Our management will have broad discretion to spend the net proceeds from this offering in ways with which investors may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could have a material and adverse effect on our business, results of operations and financial condition, and could cause the price of our common stock to decline. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements which involve risks and uncertainties. These forward-looking statements, which are usually accompanied by words such as "may," "might," "will," "should," "could," "intends," "estimates," "predicts," "potential," "continue," "believes," "anticipates," "plans," "expects" and similar expressions, relate to statements about our market opportunities, our strategy, our competition, our projected expense levels and the adequacy of our available cash resources. This prospectus also contains forward-looking statements attributed to third parties relating to their estimates regarding the wedding industry and the growth of Internet use. These forward-looking statements are based on assumptions that may be incorrect and there can be no assurance that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described above and elsewhere in this prospectus. 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. 19 24 USE OF PROCEEDS We estimate that we will receive net proceeds from the sale of the shares of common stock in this offering of $28.3 million, assuming an initial public offering price of $9.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be $32.7 million. The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate future access to public equity markets. As of the date of this prospectus, we have no specific plans to use the net proceeds from this offering other than as set forth below. We expect to use the proceeds for working capital, capital expenditures and other general corporate purposes. The actual amounts expended for these purposes will vary significantly depending on a number of factors, including revenue growth, if any, and the extent and timing of our entry into target markets and capital expenditures. We may also use a portion of the net proceeds to acquire or invest in businesses, technologies or products that are complementary to our business. However, we have no present plans or commitments and are not currently engaged in any negotiations with respect to such transactions. Pending our use of the net proceeds of this offering for these purposes, we intend to invest the proceeds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY We have not declared or paid any cash dividends on our capital stock since our inception. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Consequently, stockholders will need to sell shares of common stock to realize a return on their investment, if any. 20 25 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999: - on an actual basis; - on a pro forma basis to give effect to the automatic conversion of 7,360,000 shares of outstanding preferred stock into 7,360,000 shares of common stock upon the closing of this offering; - on a pro forma as adjusted basis to give effect to the sale of 3,500,000 shares of common stock by us in this offering at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This information should be read in conjunction with our financial statements and the notes to those statements included in this prospectus.
SEPTEMBER 30, 1999 ------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED ------- ------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long-term debt.............................................. $ -- $ -- $ -- Stockholders' equity: Preferred Stock, $.001 par value, actual -- no shares authorized, issued or outstanding; pro forma and pro forma as adjusted -- 5,000,000 shares authorized and no shares issued or outstanding............................ -- -- -- Series A convertible preferred stock, $.001 par value; actual -- 3,360,000 shares authorized, issued and outstanding; pro forma and pro forma as adjusted -- no shares authorized, issued or outstanding................ 3,938 -- -- Series B convertible preferred stock, $.001 par value; actual -- 4,000,000 shares authorized, issued and outstanding; pro forma and pro forma as adjusted -- no shares authorized, issued or outstanding................ 13,963 -- -- Common stock, $.01 par value; actual -- 14,640,000 shares authorized and 3,093,608 shares issued and outstanding; pro forma -- 100,000,000 shares authorized and 10,453,608 shares issued and outstanding; pro forma as adjusted -- 100,000,000 shares authorized and 13,953,608 shares issued and outstanding........................... 31 104 139 Additional paid-in-capital.................................. 7,796 25,624 53,884 Deferred compensation....................................... (2,716) (2,716) (2,716) Deferred sales and marketing................................ (2,123) (2,123) (2,123) Accumulated deficit......................................... (9,365) (9,365) (9,365) ------- ------- ------- Total stockholders' equity.............................. $11,524 $11,524 $39,819 ======= ======= ======= Total capitalization................................. $11,524 $11,524 $39,819 ======= ======= =======
The table above is based on shares outstanding as of September 30, 1999. This table excludes: - 1,762,968 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 1999, with a weighted average exercise price of $1.97 per share, which include 2,203 shares issuable upon exercise of stock options not granted under our existing stock option plan; - 10,000 shares of common stock issuable upon the exercise of stock options granted in connection with the Bridalink.com acquisition; - 5,000 shares of common stock issued in connection with the Click Trips acquisition and 10,000 shares of common stock issuable upon the exercise of options to be granted upon achievement by Click Trips of performance-based goals; - 10,000 shares of common stock issued in connection with the Wedding Photographers Network acquisition; - 133,511 shares of common stock issuable to management of Casenhiser Clothing Company, Inc. in connection with their employment by us, on the second, third and fourth anniversaries of the April 1998 acquisition of Bridal Search; - 366,667 shares of common stock issuable upon the exercise of a warrant with an exercise price of $7.20 per share held by AOL; and - 1,700,000 shares of common stock issuable upon the exercise of a warrant with an exercise price of $5.00 per share held by QVC Interactive Holdings, LLC. 21 26 DILUTION Our pro forma net tangible book value as of September 30, 1999 was approximately $10.9 million, or approximately $1.04 per share of common stock. Pro forma net tangible book value per share is determined by dividing the amount of our total tangible assets less total liabilities by the number of shares of our common stock outstanding after giving pro forma effect to the conversion of each share of preferred stock into one share of common stock upon the closing of this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to our sale of 3,500,000 shares offered hereby at an assumed initial public offering price of $9.00 per share and after deducting estimated underwriting discounts and estimated offering expenses payable by us, and the application of the estimated net proceeds therefrom, our pro forma net tangible book value as of September 30, 1999 would have been $39.2 million, or $2.81 per share. This represents an immediate increase in pro forma net tangible book value of $1.77 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $6.19 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $9.00 Pro forma net tangible book value per share as of September 30, 1999.......................................... $1.04 Increase per share attributable to new investors.......... 1.77 ----- Pro forma net tangible book value per share after this offering.................................................. 2.81 ----- Dilution in pro forma net tangible book value per share to new investors............................................. $6.19 =====
The following table summarizes, on a pro forma basis as of September 30, 1999, after giving effect to the automatic conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $9.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------- ----------- ------- ------------- Existing stockholders................. 10,453,608 74.9% $19,509,600 38.2% $1.40 New investors......................... 3,500,000 25.1% 31,500,000 61.8% 9.00 ----------- ----- ----------- ----- Total............................. 13,953,608 100.0% $51,009,600 100.0% =========== ===== =========== =====
The foregoing tables and calculations exclude: - 1,762,968 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 1999, with a weighted average exercise price of $1.97 per share, which include 2,203 shares issuable upon exercise of stock options not granted under our existing stock option plan; - 10,000 shares of common stock issuable upon the exercise of stock options granted in connection with the Bridalink.com acquisition; - 5,000 shares of common stock issued in connection with the Click Trips acquisition and 10,000 shares of common stock issuable upon the exercise of options to be granted upon achievement by Click Trips of performance-based goals; - 10,000 shares of common stock issued in connection with the Wedding Photographers Network acquisition; - 133,511 shares of common stock issuable to management of Casenhiser Clothing Company, Inc. in connection with their employment by us, on the second, third and fourth anniversaries of the April 1998 acquisition of Bridal Search; - 366,667 shares of common stock issuable upon the exercise of a warrant with an exercise price of $7.20 per share held by AOL; and - 1,700,000 shares of common stock issuable upon the exercise of a warrant with an exercise price of $5.00 per share held by QVC Interactive Holdings, LLC. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. 22 27 SELECTED FINANCIAL DATA The selected balance sheet data as of December 31, 1997 and 1998 and as of September 30, 1999 and the selected statement of operations data for the period from May 2, 1996 (inception) through December 31, 1996, the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999 have been derived from our audited financial statements included in this prospectus. Balance sheet data as of December 31, 1996 have been derived from our audited financial statements not included in this prospectus. The statement of operations data for the nine months ended September 30, 1998 have been derived from unaudited financial statements included in this prospectus. In the opinion of management, the statement of operations data for the nine months ended September 30, 1998 have been prepared on the same basis as the audited financial statements appearing in this prospectus and include all necessary adjustments, consisting only of normal recurring adjustments, we believe to be necessary for a fair presentation of the data. 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. The selected financial data set forth below should be read 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 in this prospectus.
PERIOD FROM MAY 2, 1996 YEAR ENDED NINE MONTHS (INCEPTION) TO DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, --------------------- --------------------- 1996 1997 1998 1998 1999 -------------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues..................................... $ 71 $ 596 $ 1,040 $ 826 $ 2,635 Cost of revenues................................. 9 67 131 82 904 --------- --------- --------- --------- --------- Gross profit..................................... 62 529 909 744 1,731 Operating expenses: Product and content development................ 262 635 1,031 788 1,685 Sales and marketing............................ 255 503 768 476 2,913 General and administrative..................... 242 265 809 539 2,194 Non-cash compensation.......................... -- -- 93 57 717 Non-cash sales and marketing................... -- -- -- -- 127 Depreciation and amortization.................. 9 22 122 75 346 --------- --------- --------- --------- --------- Total operating expenses......................... 768 1,425 2,823 1,935 7,982 Loss from operations............................. (706) (896) (1,914) (1,191) (6,251) Interest income (expense), net................... (46) (199) 15 (29) 243 --------- --------- --------- --------- --------- Loss before extraordinary items.................. (752) (1,095) (1,899) (1,220) (6,008) Extraordinary items.............................. -- -- 390 390 -- --------- --------- --------- --------- --------- Net loss......................................... $ (752) $ (1,095) $ (1,509) $ (830) $ (6,008) ========= ========= ========= ========= ========= Loss per share -- basic and diluted: Loss before extraordinary items................ $ (0.46) $ (0.67) $ (0.76) $ (0.52) $ (1.96) Extraordinary items............................ -- -- 0.16 0.17 -- --------- --------- --------- --------- --------- Net loss per share............................... $ (0.46) $ (0.67) $ (0.60) $ (0.35) $ (1.96) ========= ========= ========= ========= ========= Weighted average number of shares used in calculating basic and diluted net loss per share.......................................... 1,625,410 1,625,410 2,497,065 2,344,126 3,066,960 ========= ========= ========= ========= ========= Pro forma basic and diluted net loss per share... $ (0.46) $ (0.67) $ (0.32) $ (0.19) $ (0.67) ========= ========= ========= ========= ========= Pro forma weighted average number of shares used in calculating basic and diluted net loss per share.......................................... 1,625,410 1,625,410 4,780,024 4,264,126 8,932,455 ========= ========= ========= ========= =========
DECEMBER 31, -------------------------- SEPTEMBER 30, 1996 1997 1998 1999 ----- ------- ------ ------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 16 $ 305 $1,038 $ 9,302 Working capital............................................. (84) 194 1,003 9,257 Total assets................................................ 194 1,153 1,950 13,846 Convertible preferred stock................................. -- -- 3,938 17,901 Total stockholders' equity.................................. (751) (1,017) 1,646 11,524
23 28 UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS The following unaudited pro forma condensed statement of operations for the year ended December 31, 1998 has been derived from the application of pro forma adjustments to the historical financial statements of The Knot, Inc. and Casenhiser Clothing Company, Inc. d/b/a Bridal Search, which are included elsewhere in this prospectus. The unaudited pro forma condensed statement of operations information gives effect to the acquisition of the assets of Casenhiser Clothing Company, Inc. as if such transaction had occurred on January 1, 1998. The unaudited pro forma condensed statement of operations does not purport to be indicative of what our actual results of operations would have been assuming the acquisition of Casenhiser Clothing Company, Inc. had been completed on January 1, 1998, nor does it purport to be indicative of results of operations that we may achieve in the future. We have accounted for the acquisition of Casenhiser Clothing Company, Inc. using the purchase method of accounting. We have allocated the aggregate purchase price to the assets acquired based upon their fair values. We have allocated the excess purchase price over the fair value of the assets acquired to goodwill. 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. See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing basic and diluted net loss per share. The adjustment to pro forma net revenues for the year ended December 31, 1998 reflects the elimination of $38,000 of licensing fees that we paid to Casenhiser Clothing Company, Inc. The adjustments to pro forma total operating expenses include $19,000 of goodwill amortized during the period, $97,000 of non-cash compensation amortized during the period, $33,000 of payroll and related expenses and $9,000 facilities costs. 24 29 UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CASENHISER CLOTHING PRO THE KNOT, INC. COMPANY, INC. ADJUSTMENTS FORMA -------------- ---------------- ----------- --------- Net revenues............................ $1,040 $44 $(38) $1,046 Cost of revenues........................ 131 -- -- 131 --------- --------- --------- --------- Gross profit............................ 909 44 (38) 915 Total operating expenses................ 2,823 48 120 2,991 --------- --------- --------- --------- Loss from operations.................... (1,914) (4) (158) (2,076) Net loss................................ $(1,509) $(6) $(158) $(1,673) ========= ========= ========= ========= Basic and diluted net loss per share.... $(0.60) $(0.66) ========= ========= Weighted average number of shares used in calculating basic and diluted net loss per share........................ 2,497,065 2,537,588 ========= ========= Pro forma basic and diluted net loss per share................................. $(0.32) $(0.35) ========= ========= Pro forma weighted average number of shares used in calculating basic and diluted net loss per share............ 4,780,024 4,820,547 ========= =========
25 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations together with our financial statements, the notes to those statements and the other information in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. You should consider carefully the information about these risks and uncertainties contained in the section of this prospectus entitled "Risk Factors" before you decide to buy our common stock. OVERVIEW The Knot is the leading online wedding destination on the World Wide Web and the primary wedding content provider on America Online and several other of AOL's leading brands, including AOL.com, Netscape Netcenter and CompuServe. We commenced operations in May 1996, and recorded our first revenues in September 1996, immediately following the launch of our first online property. Our Web site was launched in July 1997. We launched The Knot Registry, our online gift registry, in November 1998 and significantly expanded our registry product offerings in July 1999. In July 1999, we acquired the assets of Bridalink.com, an Internet wedding supply store and the common stock of Click Trips, Inc., an online travel agency. Also in July 1999, we entered into a strategic alliance with Weddingpages, Inc. In August 1999, we acquired the assets of Wedding Photographers Network, a searchable database of local wedding photographers. We derive revenues from the sale of sponsorship, advertising and production contracts. We also derive revenues from the sale of merchandise, from publishing and from the sale of travel packages. Sponsorship revenues are derived principally from contracts currently ranging up to three years. Sponsorships are designed to integrate advertising with specific editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific editorial area and can purchase a special feature on our sites. Advertising revenues are derived principally from short-term contracts which typically range from one month up to one year. Advertising contracts include banner advertisements and listings for local wedding vendors. Sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. To date, we have recognized our sponsorship and advertising revenues over the duration of the contracts on a straight line basis as we have exceeded minimum guaranteed impressions. To the extent that minimum guaranteed impressions are not met, we are generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this were to occur, we would defer and recognize the corresponding revenues over the extended period. Production revenues are derived from the development of online sites and tools. Production revenues are recognized when the development is completed and the online sites and tools are delivered. To promote our brand on third-party sites, we produce online sites for third parties featuring both The Knot and the third party. The cost of production of these sites is included in our operating expenses. In return, we receive distribution and exposure to their viewers, outbound links to our sites and, in some circumstances, offline brand marketing. We do not recognize revenues with respect to these barter transactions. 26 31 Sponsorship, advertising and production revenues amounted to $1.7 million, or 65% of our net revenues, for the nine months ended September 30, 1999, and $853,000 or 82% of our net revenues, for the year ended December 31, 1998. For the nine months ended September 30, 1999, our top six advertisers accounted for 39% of our net revenues. For the year ended December 31, 1998, a different advertiser accounted for 19% of our net revenues. For the year ended December 31, 1997, one advertiser accounted for 42% of our net revenues and another advertiser accounted for 13% of our net revenues. From May 2, 1996 (our inception date) through December 31, 1996, four advertisers accounted for 34%, 30%, 23% and 13% of net revenues. Our large advertisers generally differed from period to period. We expect that our large advertisers will continue to differ over time. Merchandise revenues are derived from the sales of merchandise through Bridalink.com, which was acquired in July 1999, The Knot Registry and The Knot Shop. Merchandise revenues include outbound shipping and handling charges. For the nine months ended September 30, 1999, merchandise revenues were derived principally from Bridalink.com and The Knot Registry. Merchandise revenues are recognized when products are shipped to customers, reduced by an allowance for estimated sales returns. Merchandise revenues amounted to 26% of our net revenues for the nine months ended September 30, 1999 and 2% of our net revenues for the year ended December 31, 1998. Publishing revenues are derived from author royalties paid to us related to our book publishing contract and from sales of books published by us, such as our gown guide. Royalties are recognized when we have met all contractual obligations, which typically include the delivery and acceptance of a final manuscript. Revenues from the sale of books are recognized when the books are shipped, reduced by an allowance for estimated sales returns. Publishing revenues amounted to 6% of our net revenues for the nine months ended September 30, 1999 and 16% of our net revenues for the year ended December 31, 1998. Travel revenues are derived from commissions earned on the sale of travel packages by our online travel agency, Click Trips, Inc., which we acquired on July 31, 1999. These revenues are recognized when the customer commences travel. Travel commission revenues amounted to 2% of our net revenues for the nine months ended September 30, 1999. We generated revenues for the nine months ended September 30, 1998 and for the year ended December 31, 1997, 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 and $74,000 of commission revenues from AOL which represented 5% and 13% of our net revenues for the years ended December 31, 1998 and 1997, respectively. We paid $16,000 and $68,000 in commissions to AOL for the years ended December 31, 1998 and 1997, respectively. We recorded deferred compensation of approximately $3.3 million through September 30, 1999, primarily as a result of the issuance of stock options to employees with exercise prices per share subsequently 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 27 32 compensation expense on an accelerated method over the four-year vesting period of the related options. In July 1999, we amended our anchor tenant agreement with AOL and recorded deferred sales and marketing of $2.3 million as a result of the issuance of a warrant to AOL in connection with that amendment. Deferred sales and marketing is being amortized as non-cash sales and marketing expense on a straight-line basis over the life of the agreement. 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. We have incurred net losses of $9.4 million from our inception on May 2, 1996 through September 30, 1999. We have historically relied on advances under a retired note payable to AOL and on private sales of equity securities to fund our operations. We expect operating and net losses to continue for the foreseeable future as we continue to incur significant expenses while pursuing our business strategy. 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 NINE MONTHS ENDED (INCEPTION) TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, --------------- -------------------- 1996 1997 1998 1998 1999 -------------- ------ ------ ----------- ------ (UNAUDITED) Net revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues................... 12.8 11.2 12.6 9.9 34.3 -------- ------ ------ ------ ------ Gross profit....................... 87.2 88.8 87.4 90.1 65.7 Operating expenses: Product and content development................... 371.2 106.6 99.1 95.5 63.9 Sales and marketing.............. 361.2 84.4 73.9 57.7 110.5 General and administrative....... 343.1 44.4 77.9 65.2 83.3 Non-cash compensation............ -- -- 9.0 6.9 27.2 Non-cash sales and marketing..... -- -- -- -- 4.8 Depreciation and amortization.... 12.9 3.7 11.7 9.1 13.1 -------- ------ ------ ------ ------ Total operating expenses........... 1,088.4 239.1 271.6 234.4 302.8 Loss from operations............... (1,001.2) (150.3) (184.2) (144.3) (237.1) Interest income (expense), net..... (64.9) (33.4) 1.4 (3.6) 9.2 -------- ------ ------ ------ ------ Loss before extraordinary items.... (1,066.1) (183.7) (182.8) (147.9) (227.9) Extraordinary items................ -- -- 37.5 47.2 -- -------- ------ ------ ------ ------ Net loss........................... (1,066.1)% (183.7)% (145.3)% (100.7)% (227.9)% ======== ====== ====== ====== ======
28 33 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 Net revenues Net revenues increased to $2.6 million for the nine months ended September 30, 1999 from $826,000 for the nine months ended September 30, 1998. Sponsorship, advertising and production revenues increased to $1.7 million for the nine months ended September 30, 1999 from $656,000 for the nine months ended September 30, 1998, primarily due to revenues generated from additional sponsorship and production contracts, and 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 65% and 79% for the nine months ended September 30, 1999 and 1998, respectively. Merchandise revenues amounted to $694,000 for the nine months ended September 30, 1999, resulting primarily from the acquisition of Bridalink.com in July 1999 and the launch of The Knot Registry in November 1998. As a percentage of net revenues, merchandise revenues accounted for 26% for the nine months ended September 30, 1999. There were no merchandise revenues in the corresponding period in 1998. Publishing revenues increased to $160,000 for the nine months ended September 30, 1999 from $143,000 for the nine months ended September 30, 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 6% and 17% for the nine months ended September 30, 1999 and 1998, respectively. Travel revenues accounted for $54,000 of our net revenues for the nine months ended September 30, 1999, resulting from the acquisition of Click Trips, Inc. in July 1999. As a percentage of net revenues, travel revenues accounted for 2% for the nine months ended September 30, 1999. There were no travel revenues in the corresponding period in 1998. We anticipate that the components of our net revenues will continue to fluctuate as our business continues to grow. Cost of Revenues Cost of revenues consists of the cost of merchandise sold, 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 $904,000 for the nine months ended September 30, 1999 from $82,000 for the nine months ended September 30, 1998. The increase was primarily due to an increase in the sale of merchandise through Bridalink.com and The Knot Registry, and an increase in the cost of producing online sites and tools. As a percentage of our net revenues, cost of revenues increased to 34% for the nine months ended September 30, 1999 from 10% for the nine months ended September 30, 1998. We anticipate that the cost of revenues will continue to grow in absolute dollars as we increase our merchandising efforts and expand our sponsorship and production contracts. Sponsorship, advertising and production gross margins are currently greater than merchandise gross margins. As our business continues to grow and our net revenues continue to change, we expect our cost of revenues to continue to fluctuate as a percentage of net revenues. 29 34 Product and Content Development Product and content development expenses consist of payroll and related expenses for creative personnel, information technology, and expenses for third-party software developers and contract programmers. Product and content development expenses increased to $1.7 million for the nine months ended September 30, 1999 from $788,000 for the nine months ended September 30, 1998. The increase was primarily attributable to hiring additional staff to enhance the content and functionality of our sites, partially offset by a decrease in third-party programming and content licensing fees. As a percentage of our net revenues, product and content development expenses decreased to 64% for the nine months ended September 30, 1999 from 95% for the nine months ended September 30, 1998. We believe that significant investments in product and content development are required to remain competitive and, therefore, expect that our product and content development expenses will continue to increase in absolute dollars for the foreseeable future. Sales and Marketing Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service and public relations personnel, as well as expenditures for our AOL anchor tenant agreement, advertising and promotional activities, and fulfillment and distribution of merchandise. Sales and marketing expenses increased to $2.9 million for the nine months ended September 30, 1999, from $476,000 for the nine months ended September 30, 1998. The increase was primarily due to carriage fees paid under our anchor tenant agreement with AOL, which went into effect on January 1, 1999, increased personnel costs related to the hiring of additional sales and marketing personnel and increased sales commissions. As a percentage of our net revenues, sales and marketing expenses increased to 111% for the nine months ended September 30, 1999 from 58% for the nine months ended September 30, 1998. We believe that significant investments in sales and marketing personnel and programs are required to remain competitive and to build our brand both online and offline, and, therefore, that our sales and marketing expenses will continue to increase in absolute dollars for the foreseeable future. General and Administrative General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, legal and accounting fees, facilities costs and insurance expenses. General and administrative expenses increased to $2.2 million for the nine months ended September 30, 1999 from $539,000 for the nine months ended September 30, 1998. This increase was primarily due to increased personnel costs and professional fees. As a percentage of our net revenues, general and administrative expenses increased to 83% for the nine months ended September 30, 1999 from 65% for the nine months ended September 30, 1998. 30 35 We expect our general and administrative expenses to increase in absolute dollars for the foreseeable future as we continue to hire personnel and incur expenses to build our administrative infrastructure to support the growth of our business and our operations as a public company. Non-Cash Compensation We recorded $3.0 million of deferred compensation during the nine months ended September 30, 1999 and $268,000 of deferred compensation for the nine months ended September 30, 1998. Amortization of deferred compensation increased to $695,000 for the nine months ended September 30, 1999 from $57,000 for the nine months ended September 30, 1998. As a percentage of our net revenues, amortization of deferred compensation increased to 26% for the nine months ended September 30, 1999 from 7% of our net revenues for the nine months ended September 30, 1998. Non-Cash Sales and Marketing We recorded $2.3 million of deferred sales and marketing during the nine months ended September 30, 1999, related to the issuance of a warrant to AOL in connection with our amended anchor tenant agreement in July 1999. Amortization of deferred sales and marketing was $127,000 for the nine months ended September 30, 1999. As a percentage of net revenues, amortization of deferred sales and marketing amounted to 5% for the nine months ended September 30, 1999. Depreciation and Amortization Depreciation and amortization expenses consist of depreciation and amortization of property and equipment and amortization of goodwill related to acquisitions. Depreciation and amortization expenses increased to $346,000 for the nine months ended September 30, 1999 from $75,000 for the nine months ended September 30, 1998. This increase was primarily due to increased depreciation due to the increase in property and equipment purchases and additional amortization of goodwill related to acquisitions. As a percentage of net revenues, depreciation and amortization expense increased to 13% for the nine months ended September 30, 1999 from 9% for the nine months ended September 30, 1998. PERIOD FROM MAY 2, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND YEARS ENDED DECEMBER 31, 1997 AND 1998 Net Revenues Net revenues increased to $1.0 million for the year ended December 31, 1998 from $596,000 for the year ended December 31, 1997 and from $71,000 in the period from inception through December 31, 1996. The increase for each period was due primarily to an increase in the average dollar value of sponsorship programs and in the number of sponsors and advertisers. As a percentage of net revenues, sponsorship and advertising revenues accounted for approximately 82%, 100%, and 100% for the years ended December 31, 1998 and 1997 and for the period from inception through December 31, 1996, respectively. 31 36 Merchandise revenues were $17,000 for the year ended December 31, 1998 as a result of the launch of The Knot Registry in November 1998. As a percentage of net revenues, merchandise revenues accounted for 2% for the year ended December 31, 1998. There were no merchandise revenues for the year ended December 31, 1997 or for the period from inception through December 31, 1996. Publishing revenues were $143,000, for the year ended December 31, 1998 as a result of the delivery and acceptance of the first book under our publishing contract. As a percentage of net revenues, pubishing revenues accounted for 14% for the year ended December 31, 1998. There were no publishing revenues for the year ended December 31, 1997 or for the period from inception through December 31, 1996. Cost of Revenues Cost of revenues increased to $131,000 for the year ended December 31, 1998, from $67,000 for the year ended December 31, 1997 and from $9,000 in the period from inception through December 31, 1996. The increase in cost of revenues for each period was primarily due to the increased number of sponsors and advertisers. Cost of revenues for the year ended December 31, 1998 included the cost of merchandise sold as a result of the launch of The Knot Registry in November 1998. Internet access and hosting services expenses also increased in each period. As a percentage of net revenues, cost of revenues remained relatively constant at 13%, 11% and 13% for the years ended December 31, 1998 and 1997, and for the period from inception through December 31, 1996, respectively. Product and Content Development Product and content development expenses increased to $1.0 million for the year ended December 31, 1998, from $635,000 for the year ended December 31, 1997 and from $262,000 for the period from inception through December 31, 1996. The increase for each period was primarily attributable to increased personnel costs related to enhancing the content and functionality of our sites. As a percentage of net revenues, product and content development expenses decreased to 99% from 107% and from 371% for the years ended December 31, 1998 and 1997, and for the period from inception through December 31, 1996, respectively. The percentage decreases for each period were primarily attributable to the higher growth rate in our net revenues as compared to the growth rate associated with these expenses. Sales and Marketing Sales and marketing expenses increased to $768,000 for the year ended December 31, 1998, from $503,000 for the year ended December 31, 1997 and from $255,000 for the period from inception through December 31, 1996. The increases for each period were primarily a result of the retention of an outside public relations firm and higher sales commissions paid as a result of increased sponsorship and advertising sales. As a percentage of net revenues, sales and marketing expenses decreased to 74% from 84% and from 361% for the years ended December 31, 1998 and 1997 and for the period from inception through December 31, 1996, respectively. The percentage decreases for each period were primarily attributable to the higher growth rate in our net revenues as compared to the growth rate associated with these expenses. 32 37 General and Administrative General and administrative expenses increased to $809,000 for the year ended December 31, 1998, from $265,000 for the year ended December 31, 1997 and from $242,000 for the period from inception through December 31, 1996. The increase for each period was primarily due to an increase in personnel costs and facilities expenses resulting from an increase in the number of personnel hired to support the growth of our business. As a percentage of net revenues, general and administrative expenses increased to 78% for the year ended December 31, 1998 from 44% for the year ended December 31, 1997 and decreased from 343% for the period from inception through December 31, 1996. The percentage increase from 1997 to 1998 was primarily attributable to increased personnel costs, while the percentage decrease from 1996 to 1997 was primarily attributable to the higher growth rate in our net revenues as compared to the growth rate in general and administrative expenses. Non-Cash Compensation We recorded $480,000 in deferred compensation for the year ended December 31, 1998. Amortization of deferred compensation was $93,000, or 9% of our net revenues, for the year ended December 31, 1998. Depreciation and Amortization Depreciation and amortization expenses increased to $122,000 for the year ended December 31, 1998, from $22,000 for the year ended December 31, 1997 and from $9,000 in the period from inception through December 31, 1996. The increase for each period was primarily due to increased depreciation resulting from increased purchases of property and equipment to support the growth of our business. Also included in depreciation and amortization for the year ended December 31, 1998 was approximately $54,000 of goodwill amortization related to the acquisition of Bridal Search in April 1998. As a percentage of net revenues, depreciation and amortization remained relatively constant at 12%, 4% and 13% of net revenues for the years ended December 31, 1998 and 1997, and for the period from inception through December 31, 1996, respectively. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statement of operations data for each of the seven quarters ended September 30, 1999. We have prepared these data on the same basis as our audited financial statements in this prospectus and have included all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations for these interim periods. You should read these interim financial data together with our audited financial statements and the notes to those statements in this prospectus. Our historical results of operations do not necessarily indicate the results of operations we will achieve in the future, and our results of 33 38 operations for interim periods do not necessarily indicate the results of operations for any future period.
THREE MONTHS ENDED --------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1998 1998 1998 1998 1999 1999 1999 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) Net revenues........... $ 226 $ 439 $ 161 $ 214 $ 194 $ 544 $ 1,897 Cost of revenues....... 33 28 21 49 53 188 663 ------- ------- ------- ------- ------- ------- ------- Gross profit........... 193 411 140 165 141 356 1,234 Operating expenses: Product and content development....... 166 290 333 242 401 464 820 Sales and marketing......... 94 144 238 292 706 788 1,419 General and administrative.... 83 153 302 271 420 621 1,153 Non-cash compensation...... -- 22 35 36 129 213 375 Non-cash sales and marketing......... -- -- -- -- -- -- 127 Depreciation and amortization...... 7 31 38 46 69 106 171 ------- ------- ------- ------- ------- ------- ------- Total operating expenses............. 350 640 946 887 1,725 2,192 4,065 Loss from operations... (157) (229) (806) (722) (1,584) (1,836) (2,831) Interest income (expense), net....... (49) 4 16 44 (10) 110 143 ------- ------- ------- ------- ------- ------- ------- Loss before extraordinary items................ (206) (225) (790) (678) (1,594) (1,726) (2,688) Extraordinary items.... -- 390 -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net loss............... $ (206) $ 165 $ (790) $ (678) $(1,594) $(1,726) $(2,688) ======= ======= ======= ======= ======= ======= =======
Net revenues for the three months ended September 30, 1999 increased by $1.4 million as compared to the three months ended June 30, 1999 primarily as a result of revenues generated from additional sponsorship and production contracts, the launch of local vendor advertising programs in July 1999, as well as merchandise revenues generated through Bridalink.com which was acquired in July 1999. There was a corresponding increase in both cost of revenues and sales and marketing expenses during the three months ended September 30, 1999. Net revenues for the three months ended June 30, 1999 increased from the three months ended March 31, 1999 as a result of an increase in the average dollar value of sponsorship agreements and in the number of sponsors and advertisers. Net revenues for the three months ended September 30, 1998 decreased from the prior three month period as a result of lower sponsorship revenues as well as decreased publishing revenues. Net revenues for the three months ended June 30, 1998 increased from the prior three month period primarily as a result of publishing revenues recognized from the delivery and acceptance of the first book under our book publishing contract. Sales and marketing expenses for the three months ended March 31, 1999 increased from the three months ended December 31, 1998 as a result of carriage fees under our new anchor tenant agreement with AOL which went into effect on January 1, 1999. 34 39 LIQUIDITY AND CAPITAL RESOURCES We funded our operations from our inception on May 2, 1996 through April 1998 primarily with advances under a retired note payable to AOL. Subsequent to April 1998, we have funded our operations primarily through private sales of preferred equity securities totaling $18.0 million. As of September 30, 1999, we had $9.3 million in cash and cash equivalents. Net cash used in operating activities was $4.8 million for the nine months ended September 30, 1999. This resulted primarily from the net loss for the period as adjusted for depreciation and amortization and an increase in accounts receivable, other current assets and inventories, partially offset by increases in accounts payable and accrued expenses and deferred revenue. Net cash used in operating activities was $1.7 million for the year ended December 31, 1998, $837,000 for the year ended December 31, 1997 and $625,000 for the period from May 2, 1996 (inception) through December 31, 1996, primarily as a result of the net loss for the periods, adjusted for depreciation and amortization. Net cash used in investing activities was $1.6 million for the nine months ended September 30, 1999, primarily due to the purchase of property and equipment and cash paid for business acquisitions. Net cash used in investing activities was $305,000 for the year ended December 31, 1998, $24,000 for the year ended December 31, 1997 and $58,000 for the period from inception through December 31, 1996, primarily due to the purchase of property and equipment and, in 1998, cash paid for a business acquisition. Net cash provided by financing activities was $14.7 million for the nine months ended September 30, 1999 primarily resulting from the issuance of Series B Preferred Stock in April 1999. Financing activities provided $2.8 million for the year ended December 31, 1998 from the sale of Series A Preferred Stock. Financing activities for the year ended December 31, 1997 provided $1.2 million and for the period from inception through December 31, 1996 provided $700,000, representing borrowings under a note payable to AOL. Although we have no material commitments for capital expenditures, our capital expenditures have increased from $58,000 for the period from inception through December 31, 1996 to over $1.1 million for the nine months ended September 30, 1999, consistent with the growth in our operations and staffing. We anticipate that this increase in capital expenditures will continue for the foreseeable future as a result of increased growth. We intend to continue to pursue acquisitions of, or investments in, complementary businesses, services and technologies, expand our sales and marketing programs and conduct more aggressive brand promotions. As of September 30, 1999, we had commitments under non-cancelable operating leases amounting to $6.1 million, of which $374,000 will be due on or before September 30, 2000. We currently believe that the net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. We cannot assure you that additional funding, if required, will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly 35 40 limited. Those limitations would materially and adversely affect our business, results of operations and financial condition. RECENT ACQUISITIONS On July 6, 1999, we purchased all of the assets of Bridalink.com for approximately $124,000 in cash and the issuance of immediately vested stock options to purchase up to 10,000 shares of our common stock at an exercise price $1.50 per share. Bridalink.com operates www.bridalink.com, an Internet wedding supply store located in Northern California. On July 31, 1999, we acquired all of the capital stock of Click Trips, Inc. for 5,000 shares of common stock. Under the terms of the acquisition agreement, the 5,000 shares of common stock will be held in escrow for six months for the purpose of indemnifying us against any potential liabilities of Click Trips. Click Trips has the right to receive options to purchase up to an additional 10,000 shares of our common stock upon the attainment of $1.2 million in commission revenue for the year ended December 31, 2000. The exercise price related to the options will be equal to the fair market value of our common stock on the date of grant. Click Trips operates www.clicktrips.com, an online travel agency and is located in Warminster, Pennsylvania. On August 18, 1999, we acquired the assets of Wedding Photographers Network, a division of The Denis Reggie Company, for 10,000 shares of our common stock. Wedding Photographers Network is a searchable database of local wedding photographers and is located in Atlanta, Georgia. We have accounted for these acquisitions using the purchase method of accounting. Goodwill resulting from these acquisitions is being amortized using the straight line method over three years. The results of operations for each acquisition are included in the period subsequent to the date of each acquisition. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept or recognize only two-digit entries in the date code field. These systems and software products will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software may need to be upgraded, redesigned or replaced to comply with such Year 2000 requirements to avoid system failure or miscalculations causing disruptions of normal business activities. Our business, results of operations and financial condition would suffer if the systems on which we depend to conduct our business are not Year 2000 compliant. Our potential areas of exposure include products purchased from third parties, information technology that we use for internal operations including computers and software, and non-information technology systems and services including telephone systems, electricity and other items that we use for internal operations. STATE OF READINESS We are not currently aware of any Year 2000 compliance problems relating to our systems that would have a material adverse effect on our business, results of operations and financial condition. We have made a preliminary assessment of the Year 2000 readiness of 36 41 our operating, financial and administrative systems, including hardware and software. All of the internally developed production systems for our sites are Year 2000 compliant. We have received and have on file Year 2000 readiness statements from AOL, QVC and each of our current third-party technology vendors. In each case, these technology vendors state that the Year 2000 date change will not result in a significant interruption in critical services or negatively impact their clients in any material way. With respect to information technology we addressed Year 2000 compliance issues primarily through commercially available patches or upgrades in the ordinary course of business. We have completed integrated testing of our systems, including internally developed proprietary software, third-party software, hardware and services, and have found no Year 2000 compliance problems. We have contacted our principal vendors of material non-information technology systems and services used by us, such as our telephone system and utility providers, and requested confirmation of the Year 2000 compliance of their systems and services. We have received notification from some of these vendors that the systems and services that they provide to us are Year 2000 compliant. We have replaced the systems and services of non-compliant vendors with compliant alternatives. COSTS To date, we have spent an immaterial amount on Year 2000 compliance issues, and we expect to incur additional costs not to exceed $200,000 in connection with identifying, evaluating and addressing Year 2000 compliance issues. Most of our expenses for the Year 2000 have related to, and are expected to continue to relate to, the operating costs associated with time spent by employees and consultants in the evaluation process and execution of Year 2000 compliance. Such expenses, if higher than anticipated, could have a material adverse effect on our business, results of operations and financial condition. RISKS We believe, based upon our investigations and testing to date, that the Year 2000 issue will not have a material adverse effect on our business, results of operations or financial condition. However, despite all of our efforts to date towards insuring Year 2000 compliance, latent issues may still surface in the future that require upgrades, modifications, or replacement, all of which could be time-consuming and expensive. Our failure to fix or replace internally developed proprietary software, third-party software, hardware, or services on a timely basis could result in lost revenues, increased operating costs, the loss of customers and other business interruptions. We depend heavily on a number of third-party vendors to provide both network services and equipment. A significant Year 2000-related disruption of the network, services or equipment that third-party vendors provide to us could cause our sponsors, advertisers, members and visitors to consider seeking alternate providers. Year 2000 issues could also cause an unmanageable burden on our technical support personnel, which in turn could materially and adversely affect our business, results of operations and financial condition. In addition, there can be no assurance that governmental agencies, utility companies, Internet access companies, third-party service providers, including AOL and QVC, and others outside of our control will be Year 2000 compliant. The failure by such entities to be Year 2000 compliant could result in a systemic failure such as a prolonged Internet, telecommunications or electrical failure. These suppliers could also prevent us from delivering services to our customers, decrease the use of the Internet or prevent users from 37 42 accessing our sites which could have a material adverse effect on our business, results of operations and financial condition. CONTINGENCY PLAN Because no systems have been found to be non-compliant, we have determined that a contingency plan is not required. We are unable to provide for contingencies arising as a result of large scale or Internet-wide failure because we are not aware of any adequate replacement service for the Internet. 38 43 BUSINESS OVERVIEW The Knot is the leading online wedding destination on the World Wide Web and the primary wedding content provider on America Online and several other of AOL's leading brands, including AOL.com, Netscape Netcenter and CompuServe. We combine comprehensive content and an online community with wedding-related commerce. Our online sites provide full-service offerings targeted at the planning needs of today's brides and grooms. We believe that our sites enable our users to overcome the many challenges of the wedding planning process by providing a one-stop solution. In addition, we provide advertisers and vendors with targeted access to couples actively seeking information and making meaningful buying decisions relating to all aspects of their weddings. Located at www.theknot.com on the Web and on AOL at keywords "Knot" and "weddings", our sites provide future brides and grooms with useful information and resources. We offer: - - a searchable database that draws on thousands of articles on wedding planning; - - a database of approximately 13,000 local vendors in 52 markets nationwide; - - a searchable bridal gown database with more than 15,000 gown images from over 140 bridal designers; - - a searchable database with more than 750 bridal accessories, including headpieces, shoes and purses; - - 45 weekly hosted chats; - - nine integral tools for planning the wedding; - - an online gift registry with more than 10,000 gifts; - - an online shop of over 450 wedding supplies and gifts; and - - honeymoon travel packages. We also service the wedding market through a series of books and a semiannual gown guide. These traditional forms of media provide cross-promotional opportunities and assist us in increasing our brand awareness and our online audience. Engaged couples are increasingly turning to The Knot. In September 1999, we generated over 15.4 million page views on our Web site compared to 2.5 million in December 1998. As of September 30, 1999, more than 395,000 couples had enrolled on our site to become members, and we are currently enrolling as members an average of over 1,000 new couples per day. INDUSTRY BACKGROUND Growth of the Internet and Online Commerce The Internet has emerged as a global medium that allows millions of people worldwide to obtain information, communicate and conduct business. In its June 1999 report, International Data Corporation estimates that the number of Internet users 39 44 worldwide will grow from approximately 142 million users in 1998 to 502 million by the end of 2003. Additionally, worldwide commerce revenues on the Internet are expected to grow from approximately $50 billion at the end of 1998 to approximately $1.3 trillion by the end of 2003. The Internet has also become an attractive medium for advertising. Advertisers can utilize the Internet to target specific groups based on consumer tastes and buying patterns. Forrester Research estimates that the dollar volume of online advertising will increase from $1.5 billion in 1998 to $15.3 billion in 2003. The Wedding Industry Each year approximately 2.4 million couples get married in the United States. According to an independent research report, the domestic wedding market generates approximately $45 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 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 1998 the top three bridal magazines generated an average of $190.74 in revenues per reader, compared to an average of $75.50 in revenues per reader in the top three travel magazines and an average of $53.63 in revenues per reader in the top three women's magazines. The wedding market also represents significant opportunities for the retail industry. Over 91% of all to-be-weds register for gifts. 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 40 45 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. Traditional Wedding Resources Fail to Adequately Service Today's Engaged Couples The wedding market is highly fragmented and wedding resources are widely dispersed. In addition, to-be-weds face difficulty in locating wedding planning information. Traditionally, to-be-weds have relied upon many different resources when planning their weddings, including family and friends, bridal magazines, books, bridal registries, wedding consultants and travel agents. Because the traditional providers of wedding resources are single-service/product focused, to-be-weds must manage multiple providers. Consequently, to-be-weds find wedding planning to be stressful, time consuming and inconvenient. Seeking information and ideas, most engaged couples turn to bridal magazines for assistance. Many couples, however, find that the sheer volume of gown ad pages, scarcity of editorial content, the lack of organization of these magazines and their infrequent publishing schedules make them an inefficient and insufficient source of timely and relevant wedding planning information. In addition, the registry process is equally burdensome. Increasingly, to-be-weds supplement department store bridal registries, the customary source of wedding gifts, to satisfy their gift preferences. Despite the inconvenience, a significant portion of today's engaged couples register at two or more stores and increasingly turn to specialty and discount stores to obtain the product variety they desire. 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 41% of all home 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 SOLUTION We are the leading online destination targeting the wedding market. We focus on the needs of engaged couples and have created an online environment that provides information, advice, community, tools and commerce in the areas of wedding planning most important to couples including engagement, wedding day, honeymoons and newlywed life. In addition, we provide vendors and advertisers with targeted marketing opportunities 41 46 due to the well-defined demographic profile of our users. Key components of our solution include: BENEFITS TO USERS 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 wide range of wedding-related information and resources. We also provide offline information and services to brides and grooms. We author books that serve as guides for wedding planning and publish The Knot Ultimate Wedding Gown Guide, a semiannual publication cataloguing wedding gowns from the top designers in the world. 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 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 over 11,000 questions. We also send out a weekly general newsletter 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. We have developed The Knot Registry, which we believe is the Internet's most comprehensive wedding gift registry. 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 registry gifts ranging from fine china and blenders to mountain bikes and safaris. Our strategic relationship with QVC facilitates our ability to offer a broad range of products and enables products to be shipped generally within 48 hours of receipt of order. Wedding guests can quickly and easily purchase gifts online or offline via toll-free phone service, fax or mail, 24 hours a day. Through our online wedding supply stores, to-be-weds can conveniently purchase from one source a broad range of gifts for the wedding party and supplies for the wedding ceremony, such as decorated disposable cameras, ring pillows and unity candles. Many of these items are highly specialized and difficult to find through traditional retail outlets. Access to the Local Wedding Market. Through our strategic alliance with Weddingpages, Inc., we offer a database of approximately 13,000 local wedding vendors. In July 1999, we entered into an 18-month exclusive agreement with Weddingpages, a publisher of local wedding magazines across the United States and owner of a Web site offering wedding-related services and information. Weddingpages Bride and Home is published in 52 markets twice yearly. This magazine is distributed on a continual roll-out 42 47 basis with estimated newsstand circulation that exceeds the combined circulation of Bride's and Modern Bride. Through this strategic alliance, we offer a national online site with a local sales force in over 50 markets and an extensive database that brides and grooms can search to find vendors at their wedding locations. Categories in the local vendor database include wedding venues, caterers, florists, bridal shops, photographers, musicians and limousine services. Weddingpages sells online advertising to local wedding vendors on our behalf. We receive the revenue from these sales and pay Weddingpages a 65% sales commission. We also pay Weddingpages a monthly fee for related administrative and operating functions, including customer service, ad production and accounting services. In addition, in August 1999, we acquired Wedding Photographers Network, a division of The Denis Reggie Company. Wedding Photographers Network allows to-be-weds to search for local wedding photographers meeting their specific needs. 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 to 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 site appears which showcases the advertiser's products and services. These sites 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. 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. OUR STRATEGY Our objective is to expand our position as the leading online 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 of the Knot is critical to attracting and expanding our online user base. We have secured the leading position in the online wedding market. To maintain the focus on The Knot brand, we will continue to emphasize our editorial and creative content. We believe that our content and ability to make the wedding process easier, more fun and convenient for today's busy couples will continue to build our brand. 43 48 We will also strengthen brand awareness through our book series and gown guide. Through our affiliation with Weddingpages, the largest local wedding publication in the United States, we are increasing our brand awareness at the local level. We plan to continue building brand recognition by leveraging our membership base and creating innovative and integrated marketing solutions. Aggressively Grow Membership. New member enrollment per month has grown from 11,000 in December 1998 to over 36,000 in September 1999. We currently enroll as members an average of over 1,000 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. Provide Full-Service Wedding Resources. We facilitate the wedding planning process by providing what we believe is one of the most comprehensive package of services, tools and commerce applications. By continuing to combine our extensive wedding content and our active online community with a full-service shopping solution, we plan to maintain our strong position and to make the wedding planning process more convenient, efficient and enjoyable. We intend to continue to expand the services we offer and the content we provide. Capitalize on Multiple Revenue Opportunities. We intend to leverage the size and favorable demographics of our online community to generate multiple revenue streams. Our primary focus to date has been on national advertising revenues and on providing our sponsors and advertisers with targeted access to couples actively seeking information and making purchase decisions. We view our relationships with our sponsors and advertisers as critical to our success. We intend to continue to seek additional sponsorship contracts with longer terms and higher dollar values for our contracts. We also intend to benefit from our increased presence in the local wedding market. Our searchable database features advertising in 52 local markets for local wedding vendors, such as photographers, caterers and florists. 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 revenues from publishing our books and semiannual gown guide. 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 and Acquisitions. We plan to expand our business through strategic alliances and acquisitions. Since April 1999, we have entered into strategic relationships with QVC and Weddingpages, and we have acquired Bridalink, Click Trips and Wedding Photographers Network. Our relationship with QVC allows us to rapidly purchase, process and ship merchandise for The Knot Registry, and our relationship with Weddingpages allows us to provide our users with access to an extensive database of local vendors and resources. The acquisitions of Bridalink, Click Trips and Wedding Photographers Network expanded the resources available on our sites for to-be- weds. We intend to seek other opportunities to acquire or form alliances with other companies that will enhance our business. 44 49 THE KNOT'S ONLINE NETWORK Our sites allow users to access information, participate in interactive chats and message boards, and purchase items online. The following is a brief description of our online content: EDITORIAL CONTENT Engagement This area provides advice on proposing, choosing a diamond ring, and throwing an engagement party. It also includes steps to take after the bride and groom are engaged. Planning Advice This area informs couples on the business points of planning a wedding. Topics include questions to ask wedding vendors, points to be included in contracts and tips for weddings on a budget. Wedding Ideas Photos, stories, and creative ideas from weddings around the country are featured in this area. Additional topics include ethnic traditions, second weddings and theme wedding ideas. The Dress The articles and photo features in this area cover all aspects of bridal fashion. Highlights include the latest bridal gown trends, advice on choosing accessories and advice on which gowns look good on whom. Big Day Beauty Articles and photos in this area advise brides on the latest trends in bridal make-up and hair, as well as recommend pre-wedding fitness and spa treatments. Grooms and Guys This area is devoted to grooms, groomsmen, dads and ring bearers. Articles include topics from wedding duties and toasts to groomsmen gifts and bachelor parties. Maids and Moms This area is devoted to helping bridesmaids, moms and flowergirls sort out their wedding duties. Also included are articles on throwing showers, finding bridesmaid dresses and throwing bachelorette parties. Newlywed Nesting This area focuses on helping the bride and groom set up house, including what to register for, how to entertain, how to make post-wedding financial decisions and how to maintain relationships after the wedding. Honeymoon Escapes Articles and photo features in this area cover honeymoon destinations throughout the world. Included in the area is advice on overseas travel, resorts, packing tips and activities. 45 50 INTERACTIVE FEATURES AND TOOLS Ask Carley In this area, the wedding editors provide answers to couples' etiquette questions. Topics include divorced families, second weddings, problem bridesmaids, and general wedding etiquette. Gown Search This database of wedding attire includes more than 15,000 wedding gown images from over 140 bridal designers. A bride can search for gowns by price, designer or silhouette and save results to her own saved gown list to view later. In addition, this database features bridesmaid dresses, attire for the mothers of the bride and groom, and flower girl dresses. Big Day Budgeter This personalized budget calculator creates a category-by-category wedding budget. For each category, the budgeter offers advice and explains what the couple can afford in their price range. The budgeter saves the couple's budget information online, where they can update it 24 hours a day. Local Vendor Finder In partnership with Weddingpages, we provide listings of more than 13,000 wedding vendors in 52 local markets nationwide. Categories include caterers, bakers, banquet halls, limousine companies, musicians, and other wedding professionals. Information includes contact information, photos and service descriptions. Personal Wedding Web Pages Couples can create a Web page for their wedding. On these three-page Web sites couples can include photos, personal stories, ceremony details such as location and time, local lodging and activities for guests, names and description of bridal party members and a link to buy items on the couple's registry list at The Knot. The Ultimate Wedding Checklist This checklist provides a personalized, week-by-week wedding planning to-do list created according to a couple's wedding date. Couples visit the Web site for their daily to-dos and check off items they have completed. Wedding Photographers Network This is a database of professional wedding photographers that provides couples the ability to search by date, location and price. Couples can view online portfolios of the photographers' work. Diamond Finder This database of diamond information helps couples find an appropriate stone based on budget, cut, quality and size requirements. This feature also includes the ability to appraise a diamond or to double-check a price. Wedding Guest List Manager This online address book allows couples to manage their guest list, invitations and seating. Couples can track guest address information as well as the total number of guests invited and guest responses. Additionally, they can create a seating chart and record gifts received and thank you notes sent. Accessory Search This database allows brides to search for bridal accessories by designer name or category. Categories include headpieces, shoes, purses, gloves and jewelry. Brides can also search by specific criteria such as price point. Search results include photos, price, style number and purchase information. 46 51 COMMUNITY FEATURES Wedding Chat We have 24-hour chat rooms on both America Online and the Web. We have 45 weekly hosted chats. Our 18 chat hosts, usually newlyweds, manage the room to facilitate conversation flow and help brides find information on The Knot that answers their questions. Newsletters Couples can subscribe to a general weekly newsletter featuring updates on current Knot editorial articles, tips on using The Knot and special promotions. Couples can also subscribe to biweekly newsletters focused on topics such as registry and accessories. Discussion Groups The Knot message boards provide an area for couples to exchange personal stories, creative ideas and advice. Special board features include the wedding dress resale classifieds board, and the "vendor referral" board, where brides list their favorite wedding professionals. Wedding Announcements A database of wedding announcements that allows visitors to The Knot to find couples marrying in a specific area of the country or on a specific wedding date. Photos and stories about the couples' weddings are included in this area, which also allows visitors to post good wishes for them. SPONSORSHIP, ADVERTISING AND PRODUCTION We have derived a significant amount of our revenues to date from the sale of sponsorship, advertising and production contracts. For the nine months ended September 30, 1999, sponsorship, advertising and production revenues represented 65% of our net revenues. Our strategy is focused on generating a majority of our advertising revenues from sponsors and advertisers who seek a cost-effective means to reach the wedding market. Sponsors advertise on the editorial areas of our sites, and can purchase special features in an area designated solely for them. These programs are typically exclusive and are for a period of up to three years. Sponsorships provide content while showcasing sponsors' products and services, creating a relationship between our users and our sponsors. The special feature programs typically include an exclusive Knot-designed online site, as well as site-wide banners and links to the sponsor's Web site. In addition, special features also include integrated marketing programs which may include online promotional events, such as sweepstakes, or hosted chat sessions, collection of user data for the sponsor, offline promotions, such as collateral material distribution at bridal shows and links to other strategic areas of the sponsor's Web site. For example, OurBeginning.com, a wedding invitation supplier, is the exclusive sponsor of The Complete Guide to Invitations where we publish articles about wording, addressing and assembling invitations as well as an Invitation Q&A section. There are advertising banners and text that link to OurBeginning.com's special feature area as well as to their site. The special feature area also contains links to the OurBeginning.com Web site. Both content specific area and special feature sponsorships may also include interactive tools. For example, Mondera's Wedding Band Finder, which is hosted on our 47 52 Web site allows users to search for wedding bands by gender, price or metal. If there are wedding bands available that meet the user's criteria, a buy button appears on the screen. If the user clicks on the buy button, they will be linked directly to Mondera's Web site where the user can make the purchase. We offer short-term advertising contracts ranging from one month to one year. For example, a local photographer can purchase a listing on our Wedding Photographers Network which typically contains key contact information and may also contain a portfolio sample of a photographer's work. Advertisers can also purchase banner advertisements. E-COMMERCE The Knot Shop and Bridalink.com We offer wedding supplies through The Knot Shop and 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 450 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 orders from our warehouse located in Redding, California. The Knot Registry The Knot Registry offers a broad selection of more than 10,000 products and services from more than 500 well-recognized brands. Approximately 45% of our products are supplied by QVC vendors. Wedding guests can quickly and easily purchase gifts online or via phone or fax, 24 hours a day. 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. The Knot Registry is designed to provide convenience for the engaged couple, allowing them to: - register from anywhere 24 hours a day; - modify and monitor their registry selections at any time throughout their engagement; - arrange for custom announcements, including personalized e-mail and registry announcement cards, to guests, notifying them of the couple's registration; - select a delivery date; - elect to participate in completion programs after the wedding to purchase registry gifts selected but not received; and - interact with our shopping experts through e-mail, instant messenger or a toll-free phone service to help them decide which products best suit their needs. 48 53 Couples may browse products by traditional categories or price. To assist registering couples through the difficult and time-consuming gift selection process, The Knot Registry is also organized into custom groupings of products and services designed to match the interests of particular lifestyles, such as adventurous, romantic or cosmopolitan. This merchandising strategy is designed to save the registrant time and streamline the registry process. Through The Knot Registry, wedding guests can quickly and easily purchase gifts online. The Knot Registry offers direct access to the couple's registry list, a custom display of what remains to be purchased by category or price and secure transactions to complete the order online. For guests lacking online access, the couple's custom registry list is available for review via a toll-free phone service, fax or mail, 24 hours a day. 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. This services agreement was fully implemented on September 7, 1999. Our strategic relationship with QVC affords us the ability to purchase merchandise for The Knot Registry from QVC vendors at a specified premium over QVC's volume discount rate. At the customer's request, a product generally can be shipped within 48 hours of order. We utilize QVC to process and ship all merchandise orders from The Knot Registry. Our services agreement with QVC expires on the fourth anniversary of this offering. We have the option to extend the term of the services agreement for an additional 180 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 believe The Knot Registry model offers several advantages over other online retailers, traditional bridal registries or both. These advantages include:
ADVANTAGE OVER TRADITIONAL ADVANTAGE OVER BRIDAL REGISTRY ONLINE RETAILERS --------------- ---------------- - - Items are registered weeks or even months prior X to the desired shipment date. This allows us to better plan our inventory needs and maximize inventory turns. - - The state-of-the-art fulfillment capabilities X X of QVC allow us to implement a just-in-time inventory strategy which reduces our inventory carrying costs. - - Since wedding guests often pay for gifts when X X ordered and prior to procurement, we benefit from the float on these funds. - - Shipments are often bundled and shipped X X together, reducing shipment costs. - - The bride and groom may review their list of X X gifts prior to shipment, enabling them to round out sets or exchange gifts prior to shipment. This review minimizes returns, while representing an opportunity for us to sell them additional products.
49 54 CLICK TRIPS, INC. On July 31, 1999, we acquired Click Trips, Inc., an online travel agency located at www.clicktrips.com. 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. In addition, the live chat, past guest reviews, message boards and travel articles available on Click Trips allow us to strengthen our sense of community among our online audience. The Click Trips acquisition advances our brand-building initiative by integrating the travel-related content and commerce platform with our existing wedding-related offerings. PUBLICATIONS The Knot Book Series Our book series consists of three books which are being published over three years by Broadway Books, a division of Random House. We develop 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 encourages readers to visit our sites. To date, we have completed two of the books and a third is under development: - The Knot's Complete Guide to Weddings in the Real World was published in December 1998 and has gone to a second printing. This book is a detailed wedding-planning resource for to-be-weds, offering the information a bride and groom need to plan their wedding, from buying the ring to crossing the threshold. - The Knot Ultimate Wedding Planner, our second book, has been accepted by the publisher and is scheduled to be published in January 2000. This book includes worksheets, checklists, etiquette, tips, calendars and answers to frequently-asked questions. We sell our books on our online sites and through bookstores. We earn royalties on sales of our books. Wedding Gown Guide We released The Knot Ultimate Wedding Gown Guide in June 1999. This guide is an extensive catalogue of wedding gowns from the top designers in the world, published without advertisements to be an attractive and efficient alternative to traditional bridal magazines. With over 300 pages of color photos, the publication provides in one resource information a bride needs to find the dress of her dreams, including front, back and detail photos of over 1,000 gowns, full descriptions and price information, and an index of designers and their locations. The Ultimate Wedding Gown Guide also provides a buying checklist and accessory and trend information. We intend to publish The Knot Ultimate Wedding Gown Guide twice a year. We sell the gown guide on our Web site, through QVC's television show and at bridal trade shows. 50 55 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 tools, wedding checklists and gown search. 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. 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. MARKETING We utilize a number of strategies and programs to build awareness of The Knot brand and to position The Knot as the definitive resource for wedding planning and information. We employ an active press relations team, which responds to numerous press inquiries. We promote our brand through television and radio appearances by Carley Roney, our head wedding expert. In addition, we actively encourage our promotions staff to speak at industry and corporate events to enhance our reputation and promote our diverse products. Our participation in wedding tradeshows and other industry events also provides opportunities to promote The Knot brand. We are the exclusive online sponsor of the Great Bridal Expo, the largest traveling consumer/trade show dedicated to the wedding market. In exchange for our agreement to design, promote and host the Great Bridal Expo Web site, the Great Bridal Expo has agreed to distribute approximately 50,000 of The Knot branded shopping bags in 25 cities nationwide and will display two large banners featuring The Knot throughout the trade shows. In addition, The Knot Ultimate Wedding Gown Guide will be sold at the registration desks for the Great Bridal Expo, and a video featuring The Knot will be displayed at each of the locations. 51 56 We also take advantage of cross-promotional opportunities among our properties and services. For example, The Knot's online presence will introduce, promote and sell our publications. These opportunities help increase our brand awareness and online traffic. 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 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 $198.4 million in 1998. The Knot Registry faces competition from online sources such as registry aggregators. We also 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. We believe that the principal competitive factors in the online 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 online wedding resource 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. In addition, if we expand internationally, we may face additional competition. There can be no assurance that we will be able to compete successfully 52 57 against current and future competitors, or that competitive pressures faced by us would not have a material adverse effect on our business, results of operations 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 Exodus Communications' Jersey City, New Jersey data center. Systems administrators and network managers at Exodus 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 99.9% 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 eShare Expressions, our chat server and NetGravity, our ad server. Also, we use MapQuest for geographical mapping applications. 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 We are not currently subject to direct federal, state or local regulation, and laws or regulations applicable to access to or commerce over the Internet, other than regulations applicable to businesses generally. Due to the increasing popularity and use of the Internet and other online services, however, it is possible that a number of laws and regulations may be adopted regarding the Internet or other online services covering 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 53 58 fully determined and, therefore, such legislation could subject us and/or our customers to potential liability, which in turn could have an adverse effect on our business, results of operations and financial condition. The adoption of any such laws or regulations might also decrease the rate of growth of Internet use, which in turn could decrease the demand for our service or increase the cost of doing business or in some other manner have a material adverse effect on our business, results of operations and financial condition. 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. The vast majority of such laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Several states have also proposed legislation that would limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online service regarding the manner in which information is collected from users and provided to third parties. 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. In addition, 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, Texas 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 jurisdictions. Any such new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect on our business, results of operations and financial condition. To obtain membership on our sites, users must disclose their names, addresses, e-mail addresses and roles in the wedding. Our members use budgeting tools, wedding checklists, gown search, personal Web pages and message boards on our sites. We do not currently sell any member's personal identifying information to third parties unless the member has provided written consent. 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 advertising, content and e-mail. Privacy concerns 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, 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. The European Union recently enacted its own privacy regulations that may result in limits on the collection and use of some user information. The FTC has begun investigations into the privacy practices of companies that collect information about individuals on the Internet. Although we are not currently subject to direct regulation by the FTC, there can be no assurance that we will not become subject to direct regulation in the future. 54 59 It may take years to determine how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet. 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 do not currently 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 expand internationally. 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 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 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. Therefore, such claims could have a material adverse effect on our business, results of operations and financial condition. EMPLOYEES At November 5, 1999, we had a total of 109 employees, of which 53 were involved in product and content development, 34 were involved in sales and marketing, and 22 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. 55 60 FACILITIES 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 3,000 square feet of space for warehousing and operations in Redding, California. This lease expires on May 31, 2001, with an option to extend for an additional two years. Click Trips, our subsidiary in Warminster, Pennsylvania, also leases approximately 1,100 square feet of office space. The lease for this space expires on December 1, 2000, with an option to extend for an additional year. We currently anticipate that we will require additional space to accommodate our growth as more personnel are hired. LEGAL PROCEEDINGS We are not presently a party to any material legal proceedings. 56 61 MANAGEMENT OUR EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The executive officers, key employees and directors of The Knot, and their ages and positions as of November 5, 1999, are:
NAME AGE POSITION - ---- ---- -------- David Liu(2)......................... 34 President, Chief Executive Officer and Chairman of the Board Sandra Stiles(1)..................... 49 Chief Operating Officer, Assistant Secretary and Director Richard Szefc........................ 50 Chief Financial Officer, Treasurer and Secretary Carlos Manuel Abreu.................. 40 Chief Technology Officer Carley Roney......................... 31 Editor-in-Chief Michael Wolfson...................... 33 Vice President, Distribution Rob Fassino.......................... 32 Vice President, Business Integration Russell Casenhiser................... 34 Vice President of Retail Sales Adam Sandow.......................... 31 Vice President of Sales John Link(1)(2)...................... 57 Director Ann Winblad(1)(2).................... 48 Director
- ------------------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. DAVID LIU is a co-founder of The Knot and has been our Chief Executive Officer and a director since our inception in May 1996. From January 1993 to May 1996, Mr. Liu served as Director of Production of RunTime Inc., a CD-ROM development firm that he co-founded with Ms. Roney. Prior to January 1993, Mr. Liu was the Director of Production at VideOvation, a subsidiary of the Reader's Digest. Mr. Liu received a B.F.A. in Film and Television from New York University. Mr. Liu is married to Ms. Roney. SANDRA STILES has been Chief Operating Officer since November 1998 and Assistant Secretary since September 1999. From November 1998 to May 1999, she served as our Chief Financial Officer. Ms. Stiles has served as a director of The Knot since May 1998. From September 1994 to October 1998, she was the Senior Vice President and Director of Operations for the Children's Book and Value Publishing division of Random House. She also served as a Vice President and the Corporate Comptroller of Random House from October 1990 to August 1994. Prior to October 1990, Ms. Stiles held various positions at OmniCorp Holdings, Inc., Bertelsmann Inc. and Arthur Andersen & Co. She received a B.S. in Accounting from New York University. RICHARD SZEFC has been Chief Financial Officer since May 1999 and Treasurer and Secretary since September 1999. From July 1998 to May 1999, Mr. Szefc was an independent consultant. From April 1990 to July 1998, Mr. Szefc served as Executive Vice President and Chief Financial Officer of Random House. Prior to April 1990, Mr. Szefc 57 62 served as a partner in the audit practice of Arthur Andersen & Co. Mr. Szefc received a B.S. in Economics from the University of Pennsylvania. CARLOS MANUEL ABREU has served as our Chief Technology Officer since February 1999. From March 1992 to January 1999, Mr. Abreu was the Chief Executive Officer and Chief Technology Officer of Cyberphilia, Inc., a developer of intranets, extranets and e-commerce solutions for advertising, pharmaceutical, public relations, publishing, architectural, e-commerce and other companies. Mr. Abreu received a B.S. in Computer Science from Rutgers University. CARLEY RONEY is a co-founder of The Knot. She has served as the Editor-in-Chief since our inception in May 1996. From May 1996 to September 1999, she also served as Vice President of Creative Development. From January 1994 to May 1996, she served as President at RunTime Inc., a CD-ROM development firm that she co-founded with David Liu. Ms. Roney received a M.A. in cultural studies and a B.F.A. in Film and Television from New York University. Ms. Roney is married to Mr. Liu. MICHAEL WOLFSON is a co-founder of The Knot and has served as Vice President of Distribution since our inception. From May 1996 to September 1999, he served as our Secretary. From April 1998 to April 1999, he also served as the Vice President of Membership Acquisition. From October 1994 to February 1996, Mr. Wolfson served as Director of Development of the Digital Media Division of Margeotes Fertitta and Partners, an advertising agency. In 1992, Mr. Wolfson founded and served as President of Luna Pictures, a company providing Avid-based editing facilities for television and movie production companies. Mr. Wolfson received a B.F.A. in Film and Television from New York University. ROB FASSINO is a co-founder of The Knot. He has served as Vice President, Business Integration since August 1999. He also served as Vice President of Production from April 1999 to August 1999, and Vice President of Sales from June 1996 to April 1999. From October 1994 to June 1996, Mr. Fassino served as the Director of the Digital Media Division of Margeotes Fertitta and Partners, an advertising agency. Mr. Fassino received a B.F.A. in Film and Television from New York University. RUSSELL CASENHISER has served as Vice President of Retail Sales since May 1999. He has also served as Director of Registry Operations from April 1998 to May 1999. From January 1996 to April 1998, Mr. Casenhiser was the President and co-founder of Bridal Search, an online directory of bridal gowns. From September 1992 to December 1995, Mr. Casenhiser served as the President of La Galleria, a high-end retail clothing store. Mr. Casenhiser received a B.S. in Economics from Pepperdine University and a M.B.A from Pepperdine University. ADAM SANDOW has served as Vice President of Sales since February 1999. From December 1994 to January 1999, Mr. Sandow was President of Travel Publishing Group, Inc., a consumer magazine publisher. JOHN LINK has served as one of our directors since June 1999. Mr. Link has been the Executive Vice President of Information Technology since January 1991 and Chief Information Officer of QVC since March 1994. He also served as Senior Vice President of Information Technology from June 1989 to March 1994. Prior to June 1989, Mr. Link held various senior technical management positions at Sun Company. Mr. Link received a B.A. in Physics from the University of Delaware, a Master of Science in Computer Science from the University of Pennsylvania and completed the Program for Management 58 63 Development at Harvard Business School. He is a member of the Society for Information Management. ANN WINBLAD has served as one of our directors since April 1998. Ms. Winblad has been a general partner of Hummer Winblad Venture Partners, a venture capital investment firm, since 1989. She is a member of the board of trustees of the University of St. Thomas and is an advisor to numerous entrepreneurial groups such as the Software Development Forum, the Stanford/MIT Venture Forum and the Massachusetts Computer Software Council, Software Industry Business Practices. Ms. Winblad also serves on the boards of directors of Net Perceptions Inc., a developer and supplier of realtime recommendation technology for the Internet, Liquid Audio Inc., a provider of an open platform that enables the digital delivery of music over the Internet, and several private companies. Ms. Winblad received a B.S. in Mathematics and Business Administration from the University of St. Thomas and an M.A. in Education with an Economics focus from the University of St. Thomas. COMPOSITION OF THE BOARD Prior to the closing of this offering, we intend to file a revised certificate of incorporation under which our board of directors will be divided into three classes, each of whose members will serve for a staggered three-year term. Upon the expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires. Our board of directors has resolved that John Link and Ann Winblad will be Class I Directors whose terms expire at the 2000 annual meeting of stockholders. Sandra Stiles will be a Class II Director whose term expires at the 2001 annual meeting of stockholders. David Liu will be a Class III Director whose term expires at the 2002 annual meeting of stockholders. A director's term will be subject to the election and disqualification of their successors, or their earlier death, resignation or removal. BOARD COMMITTEES The Audit Committee of the board of directors reviews, acts on and reports to the board of directors on various auditing and accounting matters, including the recommendation of our auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of our independent auditors and the accounting practices of The Knot. The members of the Audit Committee are John Link, Sandra Stiles and Ann Winblad. The Compensation Committee of the board of directors recommends, reviews and oversees the salaries, benefits and stock option plans for our employees, consultants, directors and other individuals whom we compensate. The Compensation Committee also administers our compensation plans. The members of the Compensation Committee are John Link, David Liu and Ann Winblad. DIRECTOR COMPENSATION Directors who are also employees of The Knot receive no additional compensation for their services as directors. Directors who are not employees of The Knot will not receive a fee for attendance in person at meetings of the board of directors or committees of the Board of Directors, but they will be reimbursed for travel expenses and other out-of-pocket costs incurred with in connection with the attendance at meetings. 59 64 EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS On April 12, 1999, we entered into an employment contract with Mr. Liu, our Chief Executive Officer, for three years. The contract provides for salary and the payment of one or more annual bonuses at the sole discretion of the board of directors. In the event of his termination without cause before the end of the contract term, Mr. Liu is entitled to one year's salary plus benefits. The contract also contains a covenant by Mr. Liu not to compete for the term of the contract and for one year after the term expires. As of August 1, 1999, Mr. Liu's annual salary is $180,000. On April 12, 1999, we entered into an employment contract with Ms. Roney, our Editor-in-Chief, for three years. The contract provides for salary and the payment of one or more annual bonuses at the sole discretion of the Board of Directors. In the event of her termination without cause before the end of the contract term, Ms. Roney is entitled to one year's salary plus benefits. The contract also contains a covenant by Ms. Roney not to compete for the term of the contract and for one year after the term expires. As of August 1, 1999, Ms. Roney's annual salary is $120,000. On November 2, 1998, we entered into an employment contract with Ms. Stiles, our Chief Operating Officer, which is terminable at any time. In the event of her termination without cause, Ms. Stiles is entitled to one year's salary plus benefits. As of August 1, 1999, Ms. Stiles' annual salary is $175,000. On May 31, 1999, we entered into an employment contract with Mr. Szefc, our Chief Financial Officer, which is terminable at any time. The contract provides for an annual salary of $135,000 which has subsequently been increased to $150,000, and, for termination without cause, one year's salary plus benefits. In addition, in the event an individual or related group of persons acquires 50% or more of our voting stock, at least 50% of Mr. Szefc's options will vest immediately. As of July 16, 1999, Mr. Szefc's salary is $150,000. EXECUTIVE COMPENSATION The following table sets forth the compensation earned for all services rendered to us in all capacities during 1998 by our Chief Executive Officer and our most highly compensated executive officers, other than our Chief Executive Officer, who earned more than $100,000 in 1998 on an annualized basis and who served as executive officers at the end of 1998. 60 65 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS SECURITIES ------------------- UNDERLYING OTHER ANNUAL NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION - --------------------------- ------- ------- ----------------- ------------ David Liu...................... $94,833(1) $30,000 -- $ -- Chief Executive Officer Sandra Stiles.................. 18,333(2) -- -- -- Chief Operating Officer
- ------------------------- (1) During the first quarter of 1998, Mr. Liu received $21,500 of the $94,833 in compensation from Element Studios, a corporation formed in connection with our inception. (2) Ms. Stiles did not receive salary prior to November 2, 1998. Total annualized salary for 1998 equals $110,000. OPTION GRANTS IN LAST YEAR The following table sets forth information regarding exercisable and unexercisable stock options granted to each of the named executive officers in the last fiscal year. No options were exercised by the named executive officers during the year ended December 31, 1998. There was no public trading market for the common stock as of December 31, 1998. Potential realizable values are computed by: - multiplying the number of shares of common stock subject to a given option by the assumed market value on the date of grant, - assuming that the aggregate stock value derived from that calculation compounds annually for the entire term of the option, and - subtracting from that result the aggregate option exercise prices.
INDIVIDUAL GRANTS (1) ------------------------------------------------ POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF STOCK SECURITIES GRANTED TO PRICE APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM(2) OPTIONS IN FISCAL PRICE PER EXPIRATION ----------------------- NAME GRANTED YEAR SHARE DATE 5% 10% - ---- ---------- ---------- --------- ---------- ---------- ---------- David Liu................. -- -- $ -- -- $ -- $ -- Sandra Stiles............. 380,000 65.2% 0.50 04/30/08 119,490 302,811
- ------------------------- (1) Each option represents the right to purchase one share of common stock. The options shown in these columns, which were originally granted under our Incentive Plan, vest according to the following schedule: (a) twenty-five percent (25%) upon the one year anniversary of the grant and (b) thereafter, ratably per month for the remaining 36 months. Total options granted to employees in the last fiscal year were 583,000. 61 66 (2) Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of our future common stock prices. These amounts represent assumed rates of appreciation in the value of our common stock from the fair market value on the date of grant. Actual gains, if any, on stock option exercise depend on the future performance of the common stock. The amounts reflected in the table may not necessarily be achieved. The initial public offering price is higher than the estimated fair market value on the date of grant, and the potential realizable value of the option grants would be significantly higher than the numbers shown in the table if future stock prices were projected to the end of the option term by applying the same annual rates of stock price appreciation to the initial public offering price. AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1998 AND YEAR-END OPTION VALUES The following table provides summary information concerning stock options held as of December 31, 1998 by each of the named executive officers. No options were exercised during fiscal 1998 by any of the named executive officers. The value of unexercised in-the-money options has been calculated by determining the difference between the exercise price per share payable upon exercise of such options and the assumed initial offering price of $9.00 per share.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998 ----------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ -------------- ----------- ------------- David Liu........................ -- -- $ -- $ -- Sandra Stiles.................... -- 380,000 -- 3,230,000
1999 STOCK INCENTIVE PLAN INTRODUCTION. The 1999 Stock Incentive Plan is intended to serve as the successor program to our Incentive Plan. The 1999 plan was adopted by the board of directors and approved by the stockholders in November 1999. The 1999 plan will become effective when the underwriting agreement for this offering is signed. At that time, all outstanding options under our existing 1997 plan will be transferred to the 1999 plan, and no further option grants will be made under the 1997 plan. The transferred options will continue to be governed by their existing terms, unless our compensation committee decides to extend one or more features of the 1999 plan to those options. Except as otherwise noted below, the transferred options have substantially the same terms as will be in effect for grants made under the discretionary option grant program of our 1999 plan. SHARE RESERVE. 3,849,868 shares of our common stock have been authorized for issuance under the 1999 plan. This share reserve consists of the number of shares we estimate will be carried over from the 1997 plan plus an additional increase of approximately 1,000,000 shares. The share reserve under our 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 our 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 62 67 number determined by the Board). In addition, no participant in the 1999 plan may be granted stock options or direct stock issuances for more than 500,000 shares (1,000,000 shares in the year of initial hire) of common stock in total in any calendar year. PROGRAMS. Our 1999 plan has five separate programs: - the discretionary option grant program, under which eligible individuals may be granted options to purchase shares of our common stock at an exercise price not less than the fair market value of those shares on the grant date; - the stock issuance program, under which eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services; - the salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary each year to the acquisition of special below market stock option grants; - the automatic option grant program, under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date; and - the director fee option grant program, under which our non-employee board members may be given the opportunity to apply a portion of any retainer fee otherwise payable to them in cash each year to the acquisition of special below-market option grants. ELIGIBILITY. The individuals eligible to participate in our 1999 plan include our officers and other employees, our board members and any consultants we hire. ADMINISTRATION. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a nonstatutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The compensation committee will also have the authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program in the event that program is put into effect for one or more calendar years. PLAN FEATURES. Our 1999 plan will include the following features: - The exercise price for any options granted under the plan may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. - The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program, including any transferred options from our 1997 plan, in return for the grant of new options for the same or different 63 68 number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. - Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for a payment from us equal to the fair market value of the shares subject to the surrendered options less the exercise price payable for those shares. We may make the payment in cash or in shares of our common stock. None of the options under our 1997 plan have any stock appreciation rights. CHANGE IN CONTROL. The 1999 plan will include the following change in control provisions which may result in the accelerated vesting of outstanding option grants and stock issuances: - In the event that we are acquired by merger, asset sale, or sale of more than 50% of our voting securities by the stockholders, each outstanding option under the discretionary option grant program which is not to be assumed by the successor corporation will immediately become exercisable for all the option shares, and all outstanding unvested shares will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. - The compensation committee may grant options which will become exercisable for all the option shares (i) in the event those options are assumed in the acquisition but the optionee's service with us or the acquiring entity is subsequently terminated or (ii) in connection with a successful tender offer for more than fifty percent of our outstanding voting stock or a change in the majority of our board through one or more contested elections the vesting of any outstanding shares under our 1999 plan may be accelerated upon similar terms and conditions. SALARY INVESTMENT OPTION GRANT PROGRAM. In the event the compensation committee decides to put this program into effect for one or more calendar years, each of our executive officers and other highly compensated employees may elect to reduce his or her base salary for the calendar year by an amount not less than $5,000 nor more than $50,000. Each selected individual who makes such an election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option will have exercise price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the amount of the salary reduction. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the salary reduction is to be in effect. AUTOMATIC OPTION GRANT PROGRAM. Each individual who first becomes a non- employee board member at any time after the effective date of this offering will receive an option grant to purchase 15,000 shares of common stock on the date such individual joins the board. In addition, on the date of each annual stockholders meeting held after the effective date of this offering, each non-employee board member who is to continue to serve as a non-employee board member, including each of our current non-employee board 64 69 members, will automatically be granted an option to purchase 5,000 shares of common stock, provided such individual has served on the board for at least six months. Each automatic grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of 10 years, subject to earlier termination following the optionee's cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the exercise price paid per share, any shares purchased under the option which are not vested at the time of the optionee's cessation of board service. The shares subject to each initial 15,000-share automatic option grant will vest in a series of three (3) successive annual installments upon the optionee's completion of each year of board service over the three (3)-year period measured from the grant date. The shares subject to each annual 5,000-share automatic grant will vest upon the optionee's completion of one (1) year of Board Service measured from the grant date. However, the shares will immediately vest in full upon certain changes in control or ownership or upon the optionee's death or disability while a board member. DIRECTOR FEE OPTION GRANT PROGRAM. If this program is put into effect in the future, then each non-employee board member may elect to apply all or a portion of any cash retainer fee for the year to the acquisition of a below-market option grant. The option grant will automatically be made on the first trading day in January in the year for which the non-employee board member would otherwise be paid the cash retainer fee in the absence of his or her election. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of our common stock on the grant date. Accordingly, the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the election is in effect. However, the option will become immediately exercisable for all the option shares upon the death or disability of the optionee while serving as a board member. ADDITIONAL PROGRAM FEATURES. Our 1999 plan will also have the following features: - Outstanding options under the salary investment and director fee option grant programs will immediately vest if we are acquired by a merger or asset sale or if there is a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board through one or more contested elections. - Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment option grant program and the automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share based upon the highest price per share of our common stock paid in that tender offer. - The board may amend or modify the 1999 plan at any time, subject to any required stockholder approval. The 1999 plan will terminate no later than November 3, 2009. 65 70 EMPLOYEE STOCK PURCHASE PLAN INTRODUCTION. Our Employee Stock Purchase Plan was adopted by the board of directors and approved by the stockholders in November 1999. The plan will become effective immediately upon the signing of the underwriting agreement for this offering. The plan is designed to allow our eligible employees and the eligible employees of our participating subsidiaries to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions. SHARE RESERVE. 300,000 shares of our common stock will initially be reserved for issuance. The reserve will automatically increase on the first trading day in January each calendar year, beginning in calendar year 2001, by an amount equal to the total number of shares of our common stock issued under the plan in the prior calendar year. In no event will any such annual increase exceed 300,000 shares without approval of our board of directors. OFFERING PERIODS. The plan will have a series of successive offering periods, each with a maximum duration of 24 months. The initial offering period will start on the date the underwriting agreement for the offering covered is signed and will end on the last business day in January 2002. The next offering period will start on the first business day in February 2002, and subsequent offering periods will be set by our compensation committee. ELIGIBLE EMPLOYEES. Individuals scheduled to work more than 20 hours per week for more than 5 calendar months per year may join an offering period on the start date or any semi-annual entry date within that period. Semi-annual entry dates will occur on the first business day of February and August each year. Individuals who become eligible employees after the start date of an offering period may join the plan on any subsequent semi-annual entry date within that offering period. PAYROLL DEDUCTIONS. A participant may contribute up to 15% of his or her Base Salary through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 85% of the fair market value per share on the participant's entry date into the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date. Semi-annual purchase dates will occur on the last business day of January and July each year. However, a participant may not purchase more than 1,000 shares on any purchase date, and not more than 150,000 shares may be purchased in total by all participants on any purchase date. Our compensation committee will have the authority to change these limitations for any subsequent offering period. RESET FEATURE. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new two-year offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period. CHANGE IN CONTROL. Should we be acquired by merger or sale of substantially all of our assets or more than 50 percent of our voting securities, then all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. The purchase price will be equal to 85% of the market value per share on the participant's entry date into the offering period in which an acquisition occurs or, if lower, 85% of the fair market value per share immediately prior to the acquisition. 66 71 PLAN PROVISIONS. The following provisions will also be in effect under the plan: - The plan will terminate no later than the last business day of January 2010. - The board may at any time amend, suspend or discontinue the plan. However, certain amendments may require stockholder approval. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our amended and restated certificate of incorporation provides that the liability of a director of The Knot shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law. Under the Delaware General Corporation Law, the directors have a fiduciary duty to The Knot which is not eliminated by this provision of the amended and restated certificate of incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. Section 145 of the Delaware General Corporation Law empowers a corporation to indemnify its directors and officers to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: - for any breach of the director's duty of loyalty to The Knot or its stockholders; - for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involve intentional misconduct or a knowing violation of law; - for the payment of dividends or approval of stock repurchases or redemptions that are prohibited by the Delaware General Corporation Law; or - for any transaction from which the director derived an improper personal benefit. The Delaware General Corporation Law provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, a vote of stockholders or otherwise. Our amended and restated certificate of incorporation eliminates the personal liability of directors to the fullest extent permitted by Section 102(b)(7) of the Delaware General Corporation Law and provides that The Knot shall fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that that person is or was a director or officer of The Knot, or is or was serving at the request of The Knot as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. This indemnification shall be against expenses including attorney's fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the indemnitee in connection with such action, suit or proceeding. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our current directors and executive officers, in addition to the indemnification provided for in The Knot's amended and restated certificate of incorporation. The Knot believes that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. In addition, The Knot intends to obtain liability insurance for its directors and officers. 67 72 At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under the amended and restated certificate of incorporation or under the indemnification agreements referred to above. The Knot is not aware of any threatened litigation or proceeding that may result in a claim for this type of indemnification. 68 73 CERTAIN TRANSACTIONS SERIES A PREFERRED STOCK AND INVESTMENTS BY AOL During 1996, AOL advanced $700,000 to us to fund the development of our online property located on AOL. On January 17, 1997, AOL loaned us $1,150,000 under a promissory note bearing interest at the rate of 6.54% per year. In addition, we granted AOL a warrant to purchase 3,250,820 shares of Series A Preferred Stock at $0.38 per share. The promissory note and the warrant were scheduled to expire on January 16, 2007. In connection with AOL's investment, we entered into an interactive services agreement under which The Knot would be featured on AOL. The interactive services agreement was later superseded by an anchor tenant agreement as described below. On April 28, 1998, we sold an aggregate of 3,360,000 shares of our Series A Preferred Stock at a price of $1.172 per share to Hummer Winblad Venture Partners III, L.P., Hummer Winblad Technology Fund III, L.P. and AOL for an aggregate purchase price of $3.9 million. In connection with the sale of these shares, AOL converted $937,600 of the principal outstanding under the promissory note held by AOL into 800,000 shares of Series A Preferred Stock. The remaining $912,400 balance of principal plus accrued interest was forgiven and the aforementioned warrant was cancelled. In addition, the investors entered into an investors rights agreement under which we granted the investors registration rights for the shares underlying the Series A Preferred Stock. For more information, see "Description of Capital Stock -- Registration Rights." SERIES B PREFERRED STOCK On April 13, 1999, we sold 4,000,000 shares of our Series B Preferred Stock at a price of $3.75 per share to QVC. QVC paid an aggregate of $15.0 million for the shares of Series B Preferred Stock and received a warrant to purchase 1,700,000 shares of our common stock at an exercise price of $5.00 per share. The warrant becomes exercisable upon the earlier of the fourth anniversary of the issuance of the warrant or our initial public offering of common stock. In addition, QVC received registration rights in connection with their shares of stock and the shares issuable upon the exercise of its warrant, and became a party to the investor rights agreement. The Series B Preferred Stock and the warrant have been assigned to QVC Interactive Holdings, LLC. We also entered into a services agreement with QVC, which we believe is on terms and conditions no less favorable to us than we could have obtained from unaffiliated third parties. AOL ANCHOR TENANT AGREEMENT 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. Under the terms of the agreement, The Knot continues to be the primary wedding content provider on AOL and on several other of AOL's leading properties, including AOL.com Netscape Netcenter 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 day's prior notice. Advertisements and promotions are subject to AOL's approval, and the advertisements may not promote AOL competitors such as other Internet service providers or search engines. We believe the terms and conditions of our anchor tenant agreement with AOL, taken as a whole, are no less favorable to us than we could have obtained from unaffiliated third parties. 69 74 In consideration for AOL's agreement to extend the term of the agreement, we granted to AOL a warrant, exercisable for eight years from the date of grant, to purchase 366,667 shares of our common stock at a price equal to $7.20 per share. The warrant is immediately exercisable and expires in July 2007. In addition, AOL received registration rights with respect to the shares issuable under the warrant. BRIDAL SEARCH On April 2, 1998, we acquired substantially all of the assets of Casenhiser Clothing Company, Inc., d/b/a Bridal Search, for $50,000 and the issuance of 162,540 shares of our common stock. In addition, we agreed to issue up to 356,046 additional shares of common stock upon the achievement of future performance criteria, of which 178,031 shares were issued in connection with the launch of The Knot Registry in November 1998. In August 1999, we entered into a settlement and release agreement under which Bridal Search agreed to forego its rights to receive the remaining 178,015 shares associated with the achievement of future performance criteria in exchange for a payment of $150,000. In addition, in connection with their employment by us, we are required to issue 178,015 shares of common stock to under which former members of Bridal Search's management upon the first, second, third and fourth anniversaries of their employment, of which 44,504 shares were earned and issued in April 1999. 70 75 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of the common stock as of November 5, 1999, and as adjusted to reflect the sale of the shares of common stock offered by this prospectus, by each person or group of affiliated persons whom we know to beneficially own 5% or more of the common stock, each of our directors and named executive officers and all of our directors and executive officers as a group. Unless otherwise indicated, the address of each beneficial owner listed below is c/o The Knot, Inc., 462 Broadway, 6th Floor, New York, New York 10013. The following table gives effect to the shares of common stock issuable within 60 days of November 5, 1999 upon the exercise of all options and other rights beneficially owned by the indicated stockholders on that date. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power of the to shares. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control of all shares beneficially owned.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) NUMBER OF SHARES -------------------------------- BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING - ---------------- --------------------- --------------- -------------- NAMED EXECUTIVE OFFICERS AND DIRECTORS: David Liu(2)(3).................... 673,383 6.4% 4.8% Sandra Stiles(4)................. 158,334 1.5 1.1 John Link(5)..................... -- * * Ann Winblad(6)................... 2,560,000 24.4 18.3 OTHER 5% STOCKHOLDERS: QVC Interactive Holdings, Inc.(7)....................... 5,700,000 46.8 36.4 Hummer Winblad Funds(6).......... 2,560,000 24.4 18.3 America Online, Inc.(8).......... 1,166,667 10.8 8.1 Rob Fassino(2)................... 673,383 6.4 4.8 Carley Roney(2)(3)............... 673,383 6.4 4.8 Michael Wolfson(2)............... 673,383 6.4 4.8 All directors and executive officers as a group (6 persons)(9)...................... 3,391,717 31.9 24.0
- ------------------------- * Less than 1%. (1) Percentage of beneficial ownership is based on 10,473,103 shares of common stock outstanding as of November 5, 1999 and 13,973,103 shares of common stock outstanding after this offering. (2) Consists of 673,383 shares owned by each of the four founders of The Knot, of which 505,037 shares are subject to repurchase under a vesting agreement over the 36-month period beginning April 28, 1998, as long as each such founder remains an employee of The Knot. As of November 5, 1999, 252,519 of the 505,037 shares held by each founder subject to vesting, had vested. The Knot has the right to repurchase all or any 71 76 portion of the unvested shares for $0.01 per share for a period of 60 days from the date of early termination. (3) Excludes 673,383 shares of common stock owned by this stockholder's spouse. (4) Consists of 142,500 shares of common stock issuable upon exercise of presently exercisable options and 15,834 shares of common stock issuable upon the exercise of options exercisable within 60 days. Does not include 221,666 shares of common stock issuable upon the exercise of options that do not vest within 60 days of November 5, 1999. (5) Mr. Link's address is c/o QVC, Studio Park, West Chester, PA 19830. (6) Consists of common stock issuable upon automatic conversion of 2,432,000 shares of Series A Preferred Stock owned by Hummer Winblad Venture Partners III, L.P., and 128,000 shares of Series A Preferred Stock owned by Hummer Winblad Technology Fund III, L.P. John Hummer, Ann Winblad (one of our directors) and Mark Gorenberg are general partners of Hummer Winblad Equity Partners II, L.P., the general partner of each of the Hummer Winblad Funds. Consequently, Hummer Winblad Equity Partners II and Mr. Hummer, Ms. Winblad and Mr. Gorenberg may each be deemed to beneficially own all of the shares held by the Hummer Winblad Funds. Hummer Winblad Equity Partners II, Mr. Hummer, Ms. Winblad and Mr. Gorenberg each disclaim beneficial ownership of such shares, except to the extent of their pecuniary interest. The address of the Hummer Winblad Funds is 2 South Park, 2nd Floor, San Francisco, CA 94107. (7) Consists of common stock issuable upon automatic conversion of 4,000,0000 shares of Series B Preferred Stock owned by QVC Interactive Holdings, LLC and 1,700,000 shares issuable upon the exercise of a currently exercisable warrant at the time of the initial public offering. The address of QVC Interactive Holdings, LLC is Studio Park, West Chester, PA 19830. (8) Consists of common stock issuable upon automatic conversion of 800,000 shares of Series A Preferred Stock owned by AOL and 366,667 shares issuable upon the exercise of a currently exercisable warrant. The address of AOL is 22000 AOL Way, Dulles, Virginia 20166. (9) Includes 158,334 shares of common stock issuable upon the exercise of options which are currently vested or which vest within 60 days of November 5, 1999. 72 77 DESCRIPTION OF CAPITAL STOCK GENERAL Immediately prior to the closing of this offering, we intend to amend and restate our certificate of incorporation and bylaws. Our amended and restated certificate of incorporation and bylaws, summarized below, are included as exhibits to the registration statement of which this prospectus forms a part. Upon the closing of our offering, our authorized capital stock will consist of 100,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. COMMON STOCK As of November 5, 1999, there were 10,473,103 shares of our common stock outstanding held of record by eighteen (18) stockholders. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive ratably those dividends, if any, as may be declared by our board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. Upon the liquidation, dissolution or winding up of The Knot, the holders of our common stock are entitled to receive ratably our net assets available, if any, after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of our common stock are, and the shares offered in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate and issue in the future. PREFERRED STOCK Upon the closing of this offering, there will be no shares of preferred stock outstanding. Our board of directors will be 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. For more information, see "-- Anti-Takeover Effects of Various Provisions of Delaware Law and The Knot's Certificate of Incorporation and Bylaws." OPTIONS We have 3,849,868 shares of our common stock reserved for issuance, upon exercise of stock options, under 1999 Stock Incentive Plan. As of November 5, 1999, there were outstanding options to purchase a total of 1,724,665 shares of common stock, of which 73 78 options to purchase approximately 211,572 will be exercisable upon the closing of this offering. Since we intend to file a registration statement on Form S-8 as soon as practicable following the closing of this offering, any shares issued upon exercise of these options will be immediately available for sale in the public market, subject to the terms of lock-up agreements entered into with the underwriters. In addition, we have issued options to purchase 12,203 shares of common stock outside of our existing stock option plan, all of which are exercisable. For more information, see "Management -- 1999 Stock Incentive Plan" and "Shares Eligible for Future Sale." REGISTRATION RIGHTS Under an investors' rights agreement, beginning six months after the closing of this offering, the holders of 9,426,667 shares of common stock and shares of common stock issuable upon the exercise of outstanding warrants will be entitled to demand registration rights in connection with the registration of their shares under the Securities Act of 1933. We are not required to effect more than four registrations under these demand registration rights. In addition, these holders will be entitled to piggyback registration rights in connection with the registration of their shares under the Securities Act of 1933, subject to various limitations. Further, at any time after we become eligible to file a registration statements on Form S-3, these holders may require us to file registration statements under the Securities Act of 1933 on Form S-3 in connection with their shares of common stock. These registration rights are subject to conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares of common stock held by security holders with registration rights to be included in a registration. Generally, we are required to bear all of the expenses of all of these registrations, except underwriting discounts and selling commissions. Registration of any shares of common stock held by security holders with registration rights would result in shares becoming freely tradable without restriction under the Securities Act of 1933 immediately upon effectiveness of such registration. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to some exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained that status with the approval of the board of directors or the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to various exceptions, an "interested stockholder" is a person who, together with his, her or its affiliates and associates, owns or, within three years did own, 15% or more of the corporation's voting stock. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts aimed at us and, accordingly, may discourage attempts to acquire us. In addition, various provisions of our amended and restated certificate of incorporation and our amended and restated bylaws, which provisions will be in effect upon the closing of the offering and are summarized in the following paragraphs, may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. 74 79 BOARD OF DIRECTORS VACANCIES. Our amended and restated certificate of incorporation authorizes our board of directors to fill vacant directorships or increase the size of the board of directors. This may deter a stockholder from removing incumbent directors and simultaneously gaining control of our board of directors by filling the vacancies created by this removal with its own nominees. STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our amended and restated certificate of incorporation provides that stockholders may not take action by written consent, but only at duly called annual or special meetings of stockholders. Our amended and restated bylaws further provides that special meetings of our stockholders may be called only by the chairman of the board of directors, our chief executive officer or a majority of the board of directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS. Our amended and restated bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide us timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices, not less than 90 days nor more than 120 days prior to the first anniversary of the date of the preceding year's annual meeting provided regarding the previous year's annual meeting of stockholders; provided, that if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days earlier than or 70 calendar days after this anniversary, notice by the stockholder, to be timely, must be so received not earlier than 120 days prior to such annual meeting nor later than the later of: - 90 days prior to the annual meeting of stockholders; or - the close of business on the 10th day following the date on which notice of the date of the meeting is given to stockholders or made public, whichever occurs first. Our amended and restated bylaws also specify requirements as to the form and content of a stockholders' notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to various limitations imposed by the Nasdaq National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could make more difficult or discourage an attempt to obtain control of The Knot by means of a proxy contest, tender offer, merger or otherwise. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, New York, New York. 75 80 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices of our common stock. Furthermore, since no shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon the closing of this offering, we will have outstanding an aggregate of 13,973,103 shares of our common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, all shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The following table illustrates the shares eligible for sale in the public market:
NUMBER OF SHARES DATE - ---------------- ---- 0 After the date of this prospectus, freely tradable shares sold in this offering and shares saleable under Rule 144(k) that are not subject to the 180-day lock-up 0 After 90 days from the date of this prospectus, shares saleable under Rule 144 or Rule 701 that are not subject to the 180-day lock-up 10,455,900 After 180 days from the date of this prospectus, the 180-day lock-up is released and these shares are saleable under Rule 144 (subject, in some cases, to volume limitations), Rule 144(k) or Rule 701 17,203 After 180 days from the date of this prospectus, restricted securities that are held for less than one year are not yet saleable under Rule 144
LOCK-UP AGREEMENTS All of our stockholders and option holders have signed lock-up agreements under which they agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for 180 days after the date of this prospectus. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately 139,731 shares immediately after the offering, or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 76 81 in connection with such sale. Sales under Rule 144 are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us. RULE 144(k) Under Rule 144(k), a person who is not one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise contractually restricted, "144(k)" shares may be sold immediately upon completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock plan or other written agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS After this offering, the holders of 9,426,667 shares of common stock and shares of common stock issuable upon the exercise of outstanding warrants will be entitled to rights in connection with the registration of those shares under the Securities Act. For more information, see "Description of Capital Stock -- Registration Rights." After such registration, these shares of our common stock become freely tradeable without restriction under the Securities Act. These sales could have a material adverse effect on the trading price of our common stock. STOCK PLANS We intend to file a registration statement under the Securities Act covering 3,849,868 shares of common stock reserved for issuance under our 1999 Stock Incentive Plan, and our Employee Stock Purchase Plan and the shares reserved for issuance upon exercise of outstanding non-plan options. We expect this registration statement to be filed and to become effective as soon as practicable after the effective date of this offering. As of November 5, 1999, options to purchase 1,724,665 shares of common stock were issued and outstanding. All of these shares will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations applicable to our affiliates and, in the case of some options, the expiration of lock-up agreements. 77 82 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist LLC and Salomon Smith Barney Inc. are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriter Shares ----------- --------- Credit Suisse First Boston Corporation..................... Hambrecht & Quist LLC...................................... Salomon Smith Barney Inc. ................................. -------- Total...................................................... 3,500,000 ========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 525,000 additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments in the sale of the common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
Per Share Total ------------------------------- ------------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us................. $ $ $ $ Expenses payable by us.................. $ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the number of shares of common stock being offered. 78 83 We, our officers and directors and substantially all of our existing stockholders and option holders have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 relating to, any additional debt securities shares of our common stock or securities convertible into or exchangeable or exercisable for any of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except in our case issuances under the exercise of employee stock options outstanding on the date hereof. The underwriters have reserved for sale, at the initial public offering price, up to 175,000 shares of the common stock for officers, directors, employees, business associates and persons related to, or affiliated with, the foregoing, who may have an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against specified liabilities under the Securities Act of 1933, or to contribute to payments which the underwriters may be required to make in respect thereof. We will make application to list the shares of common stock on The Nasdaq Stock Market's National Market under the symbol "KNOT." Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The principal factors to be considered in determining the public offering price include the following: the information included in this prospectus and otherwise available to the representatives; market conditions for initial public offerings; the history and the prospects for the industry in which we will compete; the ability of our management; the prospects for our future earnings; the present state of our development and our current financial condition; the general condition of the securities markets at the time of this offering; and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. The representatives on behalf of the underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate 79 84 member are purchased in a stabilizing transaction or a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 80 85 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom such purchase confirmation is received that: - such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, - where required by law, that such purchaser is purchasing as principal and not as agent, and - such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION FOR ONTARIO PURCHASERS The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be 81 86 obtained from us. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 82 87 LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Brobeck, Phleger & Harrison LLP, New York, New York. Various legal matters in connection with the offering will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. EXPERTS The consolidated financial statements and schedule for The Knot, Inc. as of December 31, 1997 and 1998 and September 30, 1999 and for the period from its inception on May 2, 1996 to December 31, 1996, the years ended December 31, 1997 and 1998 and the nine month period ended September 30, 1999, included in this prospectus and elsewhere in the registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere in this prospectus, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements for Casenhiser Clothing Company, Inc. d/b/a Bridal Search as of December 31, 1997 and April 1, 1998 and for the year ended December 31, 1997 and for the period ended April 1, 1998, included in this prospectus and elsewhere in the registration statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere in this prospectus, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 with exhibits and schedules, under the Securities Act with respect to the common stock to be sold in this offering. This prospectus does not contain all of the information set forth in this registration statement. For further information about The Knot and the shares of common stock to be sold in the offering, please refer to this registration statement. For additional information, please refer to the exhibits that have been filed with our registration statement on Form S-1. You may read and copy all or any portion of the registration statement or any other information we file at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C., 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the public reference rooms. Our Securities and Exchange Commission filings, including the registration statement, will also be available to you on the Securities and Exchange Commission's Web site (http://www.sec.gov). As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, and will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. We intend to furnish our stockholders with annual reports containing audited financial statements and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited financial information. 83 88 INDEX TO FINANCIAL STATEMENTS THE KNOT, INC. Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999.................................... F-3 Consolidated Statements of Operations for the period from May 2, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1998 (Unaudited) and 1999...... F-4 Consolidated Statements of Stockholders' (Deficit) Equity for the period from May 2, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999..... F-5 Consolidated Statements of Cash Flows for the period from May 2, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1998 (Unaudited) and 1999...... F-6 Notes to Consolidated Financial Statements.................. F-8 CASENHISER CLOTHING COMPANY, INC. Report of Independent Auditors.............................. F-25 Balance Sheets as of December 31, 1997 and April 1, 1998.... F-26 Statements of Operations for the year ended December 31, 1997 and the period ended April 1, 1997 (Unaudited) and April 1, 1998............................................. F-27 Statements of Shareholder's (Deficit) Equity for the year ended December 31, 1997 and the period ended April 1, 1998...................................................... F-28 Statements of Cash Flows for the year ended December 31, 1997 and the period ended April 1, 1997 (Unaudited) and April 1, 1998............................................. F-29 Notes to Financial Statements............................... F-30
F-1 89 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, 1997 and 1998 and September 30, 1999, and the related consolidated statements of operations, stockholders' (deficit) equity and cash flows for the period from May 2, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and the nine month period ended September 30, 1999. 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 generally accepted auditing standards. 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, 1997 and 1998, and September 30, 1999 and the consolidated results of their operations and their cash flows for the period from May 2, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and the nine month period ended September 30, 1999 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York October 26, 1999, except for Note 12 as to which the date is November 5, 1999 F-2 90 THE KNOT, INC. CONSOLIDATED BALANCE SHEETS
PRO FORMA STOCKHOLDER'S DECEMBER 31, EQUITY AT ------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 ----------- ----------- ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents...................... $ 305,375 $ 1,037,589 $ 9,301,870 Accounts receivable, net of allowance of $133,000 in 1999............................. 39,480 189,545 1,078,808 Inventories.................................... -- 28,741 511,639 Other current assets........................... 1,667 32,018 677,931 ----------- ----------- ----------- Total current assets............................. 346,522 1,287,893 11,570,248 Property and equipment, net...................... 51,144 243,044 1,281,714 Goodwill, net.................................... -- 349,677 622,199 Deferred financing costs, net.................... 747,029 -- 296,667 Other assets..................................... 8,149 69,293 75,344 ----------- ----------- ----------- Total assets..................................... $ 1,152,844 $ 1,949,907 $13,846,172 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable and accrued expenses.......... $ 104,385 $ 225,094 $ 1,424,341 Deferred revenue............................... 48,436 60,111 889,263 ----------- ----------- ----------- Total current liabilities........................ 152,821 285,205 2,313,604 Note payable..................................... 2,016,770 -- -- Other liabilities................................ -- 18,800 8,800 ----------- ----------- ----------- Total liabilities................................ 2,169,591 304,005 2,322,404 Commitments and contingencies Stockholders' (deficit) equity: Series A convertible preferred stock, $.001 par value; 3,360,000 shares authorized, issued and outstanding at December 31, 1998 and September 30, 1999 (liquidation value of $3,937,920 at September 30, 1999)............ -- 3,937,920 3,937,920 Series B convertible preferred stock, $.001 par value; 4,000,000 shares authorized, issued and outstanding at September 30, 1999 (liquidation value of $15,000,000 at September 30, 1999).......................... -- -- 13,963,000 Common stock, $.01 par value; 14,640,000 shares authorized; 1,625,410, 3,034,103 and 3,093,608 shares issued and outstanding at December 31, 1997 and 1998 and September 30, 1999, respectively; 100,000,000 and 10,453,608 shares authorized and outstanding, proforma, respectively....................... 16,254 30,341 30,936 $ 104,536 Additional paid-in-capital..................... 814,779 1,421,714 7,796,448 25,623,768 Deferred compensation.......................... -- (387,020) (2,716,139) (2,716,139) Deferred sales and marketing................... -- -- (2,122,984) (2,122,984) Accumulated deficit............................ (1,847,780) (3,357,053) (9,365,413) (9,365,413) ----------- ----------- ----------- ----------- Total stockholders' (deficit) equity............. (1,016,747) 1,645,902 11,523,768 $11,523,768 ----------- ----------- ----------- =========== Total liabilities and stockholders' (deficit) equity......................................... $ 1,152,844 $ 1,949,907 $13,846,172 =========== =========== ===========
See accompanying notes. F-3 91 THE KNOT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MAY 2, 1996 (DATE OF NINE MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ------------- ----------- ----------- ----------- ----------- (Unaudited) Net revenues......................... $ 70,567 $ 596,071 $ 1,039,584 $ 825,791 $ 2,635,430 Cost of revenues..................... 9,044 66,905 131,214 81,977 903,990 ---------- ----------- ----------- ----------- ----------- Gross profit......................... 61,523 529,166 908,370 743,814 1,731,440 Operating expenses: Product and content development.... 261,921 635,440 1,030,323 788,362 1,685,057 Sales and marketing................ 254,864 503,113 768,250 476,159 2,913,246 General and administrative......... 242,116 264,746 809,385 538,589 2,194,582 Non-cash compensation.............. -- -- 93,046 56,787 716,719 Non-cash sales and marketing....... -- -- -- -- 127,016 Depreciation and amortization...... 9,128 22,226 121,718 75,411 346,461 ---------- ----------- ----------- ----------- ----------- Total operating expenses............. 768,029 1,425,525 2,822,722 1,935,308 7,983,081 Loss from operations................. (706,506) (896,359) (1,914,352) (1,191,494) (6,251,641) Interest income (expense), net....... (45,780) (199,135) 14,968 (29,412) 243,281 ---------- ----------- ----------- ----------- ----------- Loss before extraordinary items...... (752,286) (1,095,494) (1,899,384) (1,220,906) (6,008,360) Extraordinary items.................. -- -- 390,111 390,111 -- ---------- ----------- ----------- ----------- ----------- Net loss............................. $ (752,286) $(1,095,494) $(1,509,273) $ (830,795) $(6,008,360) ========== =========== =========== =========== =========== Loss per share -- basic and diluted: Loss before extraordinary items.... $ (.46) $ (.67) $ (.76) $ (.52) $ (1.96) Extraordinary items................ -- -- .16 .17 -- ---------- ----------- ----------- ----------- ----------- Net loss........................... $ (.46) $ (.67) $ (.60) $ (.35) $ (1.96) ========== =========== =========== =========== =========== Weighted average number of shares used in calculating basic and diluted net loss per share......... 1,625,410 1,625,410 2,497,065 2,344,126 3,066,960 ========== =========== =========== =========== ===========
See accompanying notes. F-4 92 THE KNOT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
SERIES A CONVERTIBLE SERIES B CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------------- ----------------------- --------------------- PAID IN SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE CAPITAL --------- ---------- --------- ----------- --------- --------- ---------- Issuance of common stock at inception, May 2, 1996............ -- $ -- -- $ -- 1,625,410 $16,254 $ (15,254) Net loss for the period from May 2, 1996 (date of inception) to December 31, 1996................. -- -- -- -- -- -- -- --------- ---------- --------- ----------- --------- ------- ---------- Balance at December 31, 1996....... -- -- -- -- 1,625,410 16,254 (15,254) Issuance of warrant in connection with note payable................. -- -- -- -- -- -- 830,033 Net loss for the year ended December 31, 1997................. -- -- -- -- -- -- -- --------- ---------- --------- ----------- --------- ------- ---------- 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 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 Amortization of deferred compensation...................... -- -- -- -- -- -- -- 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 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 distribution agreement....... -- -- -- -- -- -- 2,250,000 Amortization of deferred sales and marketing......................... -- -- -- -- -- -- -- Deferred compensation related to the issuance of stock options..... -- -- -- -- -- -- 3,045,838 Amortization of deferred compensation...................... -- -- -- -- -- -- -- Net loss for the nine months ended September 30, 1999................ -- -- -- -- -- -- -- --------- ---------- --------- ----------- --------- ------- ---------- Balance at September 30, 1999...... 3,360,000 $3,937,920 4,000,000 $13,963,000 3,093,608 $30,936 $7,796,448 ========= ========== ========= =========== ========= ======= ========== TOTAL DEFERRED STOCKHOLDERS' DEFERRED SALES AND ACCUMULATED (DEFICIT) COMPENSATION MARKETING DEFICIT EQUITY ------------ ----------- ----------- ------------- Issuance of common stock at inception, May 2, 1996............ $ -- $ -- $ -- $ 1,000 Net loss for the period from May 2, 1996 (date of inception) to December 31, 1996................. -- -- (752,286) (752,286) ----------- ----------- ----------- ----------- Balance at December 31, 1996....... -- -- (752,286) (751,286) Issuance of warrant in connection with note payable................. -- -- -- 830,033 Net loss for the year ended December 31, 1997................. -- -- (1,095,494) (1,095,494) ----------- ----------- ----------- ----------- 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....... (186,916) -- -- -- 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..... (293,150) -- -- -- Amortization of deferred compensation...................... 93,046 -- -- 93,046 Net loss for the year ended December 31, 1998................. -- -- (1,509,273) (1,509,273) ----------- ----------- ----------- ----------- Balance at December 31, 1998....... (387,020) -- (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 distribution agreement....... -- (2,250,000) -- -- Amortization of deferred sales and marketing......................... -- 127,016 -- 127,016 Deferred compensation related to the issuance of stock options..... (3,045,838) -- -- -- Amortization of deferred compensation...................... 716,719 -- -- 716,719 Net loss for the nine months ended September 30, 1999................ -- -- (6,008,360) (6,008,360) ----------- ----------- ----------- ----------- Balance at September 30, 1999...... $(2,716,139) $(2,122,984) $(9,365,413) $11,523,768 =========== =========== =========== ===========
See accompanying notes. F-5 93 THE KNOT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 2, 1996 (DATE OF NINE MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ------------- ----------- ----------- ----------- ----------- (Unaudited) OPERATING ACTIVITIES Net loss before extraordinary items............ $(752,286) $(1,095,494) $(1,899,384) $(1,220,906) $(6,008,360) Adjustments to reconcile net loss before extraordinary items to net cash used in operating activities Depreciation and amortization................ 9,128 22,226 67,429 39,299 192,459 Amortization of goodwill..................... -- -- 54,289 36,112 154,002 Amortization of deferred financing costs..... -- 83,004 27,668 27,668 -- Amortization of deferred compensation............................... -- -- 93,046 56,787 716,719 Amortization of deferred sales and marketing.................................. 127,016 Noncash interest expense..................... 45,780 120,990 30,248 30,248 -- Allowance for doubtful accounts and loan receivable................................. -- -- -- -- 183,000 Changes in operating assets and liabilities: Accounts receivable........................ (40,567) 1,087 (150,065) (42,404) (716,808) Inventories................................ -- -- (28,741) (33,719) (388,556) Other current assets....................... (57,271) 56,604 (29,959) (11,007) (645,551) Other assets............................... (29,485) 21,336 (61,144) (61,405) (6,051) Accounts payable and accrued expenses...... 199,324 (94,939) 120,709 54,856 788,088 Deferred revenue........................... -- 48,436 11,675 23,168 788,224 Other liabilities.......................... -- -- 18,800 18,800 (10,000) --------- ----------- ----------- ----------- ----------- Net cash used in operating activities.......... (625,377) (836,750) (1,745,429) (1,082,503) (4,825,818) INVESTING ACTIVITIES Purchases of property and equipment............ (58,231) (24,267) (255,299) (203,522) (1,185,119) Loan receivable................................ -- -- -- (50,000) (50,000) Acquisition of businesses, net of cash acquired..................................... -- -- (50,000) -- (335,051) --------- ----------- ----------- ----------- ----------- Net cash used in investing activities.......... (58,231) (24,267) (305,299) (253,522) (1,570,170) FINANCING ACTIVITIES Proceeds from note payable..................... 700,000 1,150,000 -- -- -- Proceeds from short term borrowings............ -- -- -- -- 750,000 Repayment of short term borrowings............. -- -- -- -- (750,000) Financing costs................................ -- -- (217,378) (217,378) (339,731) Proceeds from issuance of convertible preferred stock........................................ -- -- 3,000,320 3,000,320 15,000,000 --------- ----------- ----------- ----------- ----------- Net cash provided by financing activities................................... 700,000 1,150,000 2,782,942 2,782,942 14,660,269 --------- ----------- ----------- ----------- ----------- Increase in cash and cash equivalents.......... 16,392 288,983 732,214 1,446,917 8,264,281 Cash and cash equivalents at beginning of period....................................... -- 16,392 305,375 305,375 1,037,589 --------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period..... $ 16,392 $ 305,375 $ 1,037,589 $ 1,752,292 $ 9,301,870 ========= =========== =========== =========== ===========
F-6 94 THE KNOT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
PERIOD FROM MAY 2, 1996 (DATE OF NINE MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ------------- ----------- ----------- ----------- ----------- (Unaudited) SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of warrant in connection with long term debt.................................... $ -- $ 830,033 $ -- $ -- $ -- Issuance of common stock in connection with recapitalization............................. -- -- 10,681 10,681 -- Issuance of common stock in connection with acquisition.................................. -- -- 358,334 171,401 -- Accrued deferred financing costs............... -- -- -- -- 84,445 Conversion of loan payable into preferred stock........................................ -- -- 937,600 937,600 -- --------- ----------- ----------- ----------- ----------- Total noncash investing and financing activities................................... $ -- $ 830,033 $ 1,306,615 $ 1,119,682 $ 84,445 ========= =========== =========== =========== ===========
See accompanying notes. F-7 95 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 1. ORGANIZATION AND NATURE OF OPERATIONS The Knot, Inc. (the "Company"), formerly Weddings.com, Inc., was incorporated in the state of Delaware on May 2, 1996 ("Inception"). On June 18, 1996, the Company changed its name from Weddings.com, Inc. to The Knot, Inc. The Company is a leading online destination targeting the wedding market. The Company provides wedding resources on the World Wide Web and is the primary wedding content provider on America Online and several other of AOL's leading brands, including AOL.com, Netscape Netcenter and CompuServe. The Company's online sites provide articles on wedding planning, organized by topic, a database of local wedding vendors, interactive services and personalized planning tools, a searchable bridal gown database, various communities of hosted chats and message boards, a gift registry, a wedding supply and gift store and honeymoon travel packages. The Company also authors a series of books and publishes a semiannual gown guide. The accompanying financial statements include the accounts of Click Trips, Inc., a wholly owned subsidiary from July 31, 1999 through September 30, 1999. All intercompany transactions have been eliminated in consolidation. In August 1999, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission ("SEC") that would permit the Company to sell shares of the Company's common stock in connection with a proposed initial public offering ("IPO"). Following the closing of the Company's IPO, the Company will be authorized to issue 105,000,000 shares; 100,000,000 of these shares will be designated as common stock having a par value of $.01, and 5,000,000 of these shares will be undesignated preferred shares, having a par value of $.001. The Company will be authorized to issue shares of undesignated preferred stock in one or more classes or series without further stockholder approval. If the offering is consummated under the terms presently anticipated, all the then outstanding shares of the Company's convertible stock will automatically convert into shares of common stock on a one-for-one basis upon the closing of the proposed IPO. The conversion of all of the convertible preferred stock has been reflected in the accompanying unaudited pro forma consolidated balance sheet as if it had occurred on September 30, 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. The most significant estimates included in the preparation of the financial statements are related to asset lives, the valuation of common stock, preferred stock and warrants. F-8 96 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $243,000, $1,003,000, and $9,039,000 at December 31, 1997 and 1998 and September 30, 1999, respectively. The market value of the Company's cash equivalents approximates their cost plus accrued interest. 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. 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. GOODWILL Goodwill is being amortized over three years using the straight-line method. Accumulated amortization of goodwill approximates $54,000 and $208,000 at December 31, 1998 and September 30, 1999, respectively. F-9 97 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 are as follows:
PERIOD FROM INCEPTION YEAR ENDED NINE MONTHS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, DECEMBER 31, --------------------- ------------------------ TYPE 1996 1997 1998 1998 1999 - ---- ------------ -------- ---------- ----------- ---------- (UNAUDITED) Sponsorship, advertising and production........... $70,567 $596,071 $ 853,240 $656,117 $1,724,154 Merchandise............ -- -- 17,487 -- 694,119 Publishing, travel and other................ -- -- 168,857 169,674 217,157 ------- -------- ---------- -------- ---------- Total.................. $70,567 $596,071 $1,039,584 $825,791 $2,635,430 ======= ======== ========== ======== ==========
REVENUE RECOGNITION Sponsorship and Advertising Sponsorship revenues are derived principally from contracts currently ranging up to three years. Sponsorships are designed to integrate advertising with specific editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific editorial area and can purchase special feature on the Company's sites. Advertising revenues are derived principally from short-term contracts which typically range from one month up to one year. Advertising contracts include banner advertisements and listings for local wedding vendors. 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 sponsorship and advertising revenues over the duration of the contracts on a straight line basis as the Company 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, F-10 98 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 the Company's 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 the viewers of such third party sites, outbound links to its sites and, in some circumstances, offline brand marketing. The Company does not recognize revenue with respect to these barter transactions. Usage revenues received from America Online, Inc. ("AOL") which totaled approximately $74,000 for the year ended December 31, 1997 and $47,000 (unaudited) for the nine months ended September 30, 1998 were derived from AOL customers visiting the Company's AOL site. Usage revenues were recognized as they were earned based upon hours of viewership of the Company's site. As discussed in Note 4, the Company signed a new agreement with AOL which eliminated usage revenues from, and licensing fees to AOL, subsequent to September 30, 1998. Merchandise Merchandise revenues are derived from sales of merchandise through Bridalink.com, The Knot Registry and The Knot Shop. Merchandise revenues include outbound shipping and handling charges. Merchandise revenues from product sales are recognized when the products are shipped to customers, reduced by an allowance for estimated sales returns. Publishing Publishing revenues are derived from author royalties related to book publishing contracts and sales of books published by the Company. Royalties related to book publishing contracts are recognized when the Company has met all contractual obligations, which typically includes the delivery and acceptance of a final manuscript. Revenues related to the sale of books are recognized when the books are shipped, reduced by an allowance for estimated returns. Travel Travel revenues are derived from commissions 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 and production contracts, as well as advances received against future royalties to be earned relating to book publishing contracts. F-11 99 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COST OF REVENUES Cost of revenues consists of the cost of merchandise sold, 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. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense totaled approximately $69,000, $79,000, $46,000, $11,000 (unaudited) and $57,000 for the period from inception through December 31, 1996 and for the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1998 and 1999, 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. The Company maintains a significant portion of its cash and cash equivalents with one financial institution. 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 year ended December 31, 1998, one advertiser accounted for 19% of our net revenues. For the year ended December 31, 1997, one advertiser accounted for 42% of our net revenues and a different advertiser accounted for 13% of our net revenues. From May 2, 1996 (our inception date) through December 31, 1996, four advertisers accounted for 34%, 30%, 23% and 13% of our net revenues, respectively. At September 30, 1999, two advertisers accounted for 14% and 12% of accounts receivable, respectively. At December 31, 1998, four advertisers accounted for 26%, 16%, 13%, and 12% of accounts receivable, respectively. At December 31, 1997, two advertisers accounted for 62% and 38% of accounts receivable, respectively. 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 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. F-12 100 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTERIM FINANCIAL INFORMATION The unaudited interim financial information as of September 30, 1998 and for the nine months then ended has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, contains all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. Operating results for any interim period are not necessarily indicative of results to be expected for the entire year. NET LOSS PER SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share." Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share adjusts basic loss per share for the effects of convertible securities, stock 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 In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. The Company operates in a single segment. The chief operating decision maker allocates resources and assesses the performance associated with sponsorship and advertising, merchandise, publishing and travel on a single segment basis. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." This statement 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, F-13 101 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1998. The Company has adopted the provisions of SOP 98-1 during the nine months ended September 30, 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. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------- SEPTEMBER 30, 1997 1998 1999 ------- -------- ------------- Leasehold improvements...................... $ 8,200 $ 8,200 $ 100,109 Software.................................... -- 47,900 489,058 Furniture and fixtures...................... 3,761 14,222 28,785 Computer equipment.......................... 70,537 271,505 955,004 ------- -------- ---------- 82,498 341,827 1,572,956 Less accumulated depreciation and amortization.............................. 31,354 98,783 291,242 ------- -------- ---------- $51,144 $243,044 $1,281,714 ======= ======== ==========
4. 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. 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. F-14 102 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On April 28, 1998, AOL converted $937,600 of the outstanding balance under the AOL Note to 800,000 shares of Series A Convertible Preferred Stock (See Note 8). The remaining balance of $1,109,418 which included accrued interest of $197,018, was forgiven and the AOL Note and AOL Warrant were canceled. The forgiveness of debt and the write-off of the related unamortized deferred financing costs at April 28, 1998 of $719,307 are included in extraordinary items. In October 1998, the Company entered into an Anchor Tenant Agreement with AOL (the "AOL Agreement"), whereby the Company received distribution within the AOL service. Beginning 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. 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 will be recognized as non-cash sales and marketing expense on the straight line basis over the term of the agreement. 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 becomes exercisable upon the earlier of the fourth anniversary of the issuance of the warrant or upon the occurrence of certain events including the closing of an 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 will provide warehousing, fulfillment and distribution services with respect to the Company's registry and book products. Additionally, the services agreement, which has a term of four years from the date of this offering, 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 on-line site. F-15 103 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACQUISITIONS 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. Under the agreement, the former owners of Bridal Search are also entitled to receive an additional 178,015 shares of the Company's common stock, contingent upon their employment by the Company and which vest over four years. The value of these shares of $186,916 was recorded as deferred compensation. As of September 30, 1999, 44,504 shares had vested pursuant to the agreement. 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 supply store located in Northern California. The acquisition was accounted for under the purchase method of accounting. 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, INC. In July 1999, the Company acquired all of the capital stock of Click Trips, Inc. ("Click Trips") for 5,000 shares of common stock. The common stock was valued at $7.00 per share for financial reporting purposes. Such shares are being held in escrow for six months for the purpose of indemnifying the Company against any potential liabilities of Click Trips. Click Trips has the right to receive options to purchase up to 10,000 shares of the Company's common stock upon the attainment of $1,200,000 in commission revenues for the year ended December 31, 2000. The exercise price related to such options will be equal to the fair market value of the Company's common stock on the date of grant. Click Trips operates an online travel agency. The acquisition was accounted for under the purchase method of accounting. 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. F-16 104 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. This acquisition was accounted for under the purchase method of accounting. 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 year ended December 31, 1998, and for the nine months ended September 30, 1999 giving effect to the acquisitions of Bridal Search, Bridalink.com, Click Trips, Inc. and Wedding Photographers Network as if these acquisitions had occurred at the beginning of each period presented (with the exception of Bridal Search which is already reflected in the Company's consolidated historical financial statements for the nine months ended September 30, 1999) are shown below. Pro forma basic and diluted net loss per share has been calculated assuming the conversion of all convertible preferred stock on the date of issuance.
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1998 SEPTEMBER 30, 1999 ----------------- ------------------ Net revenues................................. $ 1,698,000 $ 3,665,025 Loss before extraordinary item............... (1,895,000) (5,865,000) Net loss..................................... (1,505,000) (5,865,000) Basic and diluted net loss per share......... (.59) (1.90) Pro forma basic and diluted net loss per (.31) (.65) share......................................
6. ALLIANCE AGREEMENT WITH WEDDINGPAGES, INC. In July 1999, the Company entered into an 18-month exclusive alliance agreement with Weddingpages, Inc., ("Weddingpages"). Weddingpages sells online advertising to local wedding vendors on our behalf. We receive the revenue from the sale of advertisements and pay Weddingpages a 65% sales commission. We also pay Weddingpages a monthly fee for related administration and operating functions, including customer service, ad production, and accounting services. 7. SHORT TERM BORROWINGS In July 1998, the Company entered into a short term borrowing agreement with a bank whereby the Company was allowed to borrow up to $750,000 at an interest rate equal to prime plus 2%. The agreement matured in April 1999. In August 1999, this balance was paid in full. F-17 105 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. CAPITAL STOCK The Company's Amended and Restated Articles of Incorporation provides for 22,000,000 authorized shares of capital stock consisting of 14,640,000 shares of common stock each having a par value of $.01 per share and 7,360,000 shares of convertible 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, $937,600 of the AOL Note was converted into 800,000 shares of Series A Convertible Preferred Stock (See Note 4). 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 4). Each share of Series A and Series B Preferred Stock is convertible into one share of the Company's common stock subject to certain anti-dilution provisions. The Series A and Series B Convertible Preferred Stock will be automatically converted into common stock upon completion of an initial public offering of the Company's common stock with minimum net proceeds to the Company of $10,000,000 with a minimum price per share of $7.50. The holders of the Series A and Series B Preferred Stock shall be entitled to receive noncumulative annual dividends, at the rate of $.09 and $.30 per share, respectively, if and when declared by the Board of Directors. The holders of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which their preferred stock is convertible. Neither series of preferred stock is redeemable. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A and B Preferred Stock shall be entitled to receive $1.172 and $3.75 for each outstanding share of stock, respectively, plus declared but unpaid dividends on such shares. 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. F-18 106 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 392,807 and 266,544, per founder, at December 31, 1998, and September 30, 1999, respectively. 9. STOCK OPTIONS Under the terms of the Company's Incentive Plan (the "1997 Plan"), 2,849,868 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"), restricted stock, or any combination thereof. Awards may be granted to such directors, officers, employees and consultants of the Company as the Board of Directors shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options.
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- -------------- Balance at December 31, 1996.......................... -- $ -- Options granted....................................... 98,825 .01 Options canceled...................................... -- -- --------- Options outstanding at December 31, 1997.............. 98,825 .01 Options granted....................................... 583,000 .50 Options canceled...................................... (8,810) .01 --------- Options outstanding at December 31, 1998.............. 673,015 .93 Options granted....................................... 1,131,750 2.84 Options canceled...................................... (44,000) 1.77 --------- Options outstanding at September 30, 1999............. 1,760,765 $1.97 =========
As of December 31, 1998 and September 30, 1999, 34,828 and 229,509, respectively, of the above options were exercisable. Generally, options are granted at the fair market value of the stock on the date of grant as determined by the Board of Directors. Options vest up to a four year period and have terms not to exceed 10 years. 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 F-19 107 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and diluted net loss before extraordinary items per share would have been changed to the following pro forma amounts:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------------- 1997 1998 1998 1999 ----------- ----------- ----------- ----------- (UNAUDITED) Net loss before extraordinary items, as reported.......... $(1,095,494) $(1,899,384) $(1,220,906) $(6,008,360) Net loss before extraordinary items, pro forma............ (1,096,282) (1,988,488) (1,273,178) (6,341,133) Basic and diluted loss before extraordinary items per share, as reported.......... (.67) (.76) (.52) (1.96) Basis and diluted loss per share, pro forma............ (.67) (.80) (.54) (2.07)
The fair value of each option granted has been estimated on the date of grant using the minimum value method option pricing model with the following assumptions:
DECEMBER 31, ------------------ SEPTEMBER 30, 1997 1998 1999 ------- ------- ------------- Expected option lives......................... 4 years 4 years 4 years Risk-free interest rates...................... 5.72% 4.64% 5.75% Expected volatility........................... 0% 0% 0% Dividend yield................................ 0% 0% 0%
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. During the year ended December 31, 1998 and the nine months ended September 30, 1999, 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 $293,000 during 1998 and $3,046,000 during the nine months ended September 30, 1999. These amounts, together with deferred compensation recorded in connection with the acquisition of Bridal Search, will be recognized as noncash compensation expense on an accelerated basis over the vesting period of the options consistent with the method described in FASB Interpretation No. 28. 10. 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. F-20 108 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Company's deferred tax assets and liabilities consist of the following:
DECEMBER 31, SEPTEMBER 30, ----------------------- ------------------------- 1997 1998 1998 1999 --------- ----------- ----------- ----------- (UNAUDITED) Deferred tax assets: Net operating loss carryforwards.............. $ 804,600 $ 1,374,000 $ 1,030,200 $ 3,874,000 Deferred revenue.............. -- 5,800 4,300 2,900 Depreciation and amortization............... 8,900 49,500 37,200 111,100 Other......................... 500 800 500 100 --------- ----------- ----------- ----------- Total deferred tax assets....... 814,000 1,430,100 1,072,200 3,988,100 Deferred tax liabilities: Capitalized software costs.... -- -- -- (188,500) --------- ----------- ----------- ----------- Net deferred tax assets......... 814,000 1,430,100 1,072,200 3,799,600 Valuation allowance........... (814,000) (1,430,100) (1,072,200) (3,799,600) --------- ----------- ----------- ----------- Total 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, 1998, the Company had net operating loss carryforwards of approximately $2,975,000 for federal and state income tax purposes which are set to expire in years 2011 through 2018. 11. COMMITMENTS OPERATING LEASES The Company leases office facilities and certain warehouse space under noncancelable operating lease agreements which expire at various dates through 2003. In October 1999, the Company entered into a lease amendment for additional office space through March 31, 2012. Future minimum lease payments under noncancelable operating leases including the lease amendment made in October 1999, are as follows: Year ending September 30: 2000..................................... $ 374,000 2001..................................... 415,000 2002..................................... 416,000 2003..................................... 400,000 2004..................................... 450,000 Thereafter............................... 4,060,000 ---------- Total...................................... $6,115,000 ==========
Rent expense for the period from Inception to December 31, 1996, the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 F-21 109 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounted to approximately $30,000, $43,000, $183,000, $98,000 (unaudited) and $198,000, respectively. Sublease income for the year ended December 31, 1998 and the nine months ended September 30, 1998 and 1999 amounted to $97,000, $66,000 (unaudited) and $36,000, respectively. OTHER At September 30, 1999, the Company is obligated to pay certain fees as follows: Year ending September 30: 2000..................................... $1,150,000 2001..................................... 1,200,000 2002..................................... 1,200,000 2003..................................... 300,000 ---------- Total...................................... $3,850,000 ==========
12. SUBSEQUENT EVENTS 1999 STOCK INCENTIVE PLAN (THE "1999 PLAN") In November 1999, the Company's Board of Directors adopted the 1999 Plan, as a successor plan to the 1997 Plan, pursuant to which 1,000,000 additional shares of the Company's common stock have been reserved for issuance to selected employees, non-employee directors and consultants. All options under the 1997 Plan are incorporated into the 1999 Plan and no further option grants will be made under the 1997 Plan. The 1999 Plan will become effective upon completion of the Company's initial public offering of its common stock. EMPLOYEE STOCK PURCHASE PLAN In November 1999, the Company's Board of Directors adopted the Employee Stock Purchase Plan to be effective upon completion of the Company's initial public offering of its common stock. The Company has initially reserved 300,000 shares of common stock for issuance under the 1999 Plan. F-22 110 THE KNOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMON STOCK At November 5, 1999, the Company had reserved the following shares of common stock for future issuance after giving effect to transactions in this footnote: Conversion of Series A and Series B Preferred Stock.... 7,360,000 Options under the 1999 Stock Incentive Plan............ 3,849,868 Common stock warrant................................... 1,700,000 Common stock warrant................................... 366,667 Options under the Employee Stock Purchase Plan......... 300,000 Options related to the acquisition of Bridalink.com.... 10,000 Options related to the acquisition of Click Trips, Inc.................................................. 10,000 Common Shares issuable in connection with employment of certain management of Bridal Search.................. 133,511 ---------- Total common stock reserved for future issuance........ 13,730,046 ==========
F-23 111 REPORT OF INDEPENDENT AUDITORS The Shareholder of Casenhiser Clothing Company, Inc. We have audited the accompanying balance sheets of Casenhiser Clothing Company, Inc. (the "Company") as of December 31, 1997 and April 1, 1998, and the related statements of operations, shareholder's equity and cash flows for the year ended December 31, 1997 and the period ended April 1, 1998. 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 generally accepted auditing standards. 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 financial position of the Company at December 31, 1997 and April 1, 1998 and the results of its operations and its cash flows for the year ended December 31, 1997 and the period ended April 1, 1998 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York August 18, 1999 F-24 112 CASENHISER CLOTHING COMPANY, INC. BALANCE SHEETS
DECEMBER 31, APRIL 1, 1997 1998 ------------ --------- ASSETS Current assets: Cash................................................ $ 2,333 $ 3,249 Inventories......................................... 2,480 2,320 Other current assets................................ 1,750 850 --------- --------- Total current assets.................................. 6,563 6,419 Property and equipment................................ 45,902 45,902 Less: accumulated depreciation........................ (39,436) (40,113) --------- --------- Property and equipment, net........................... 6,466 5,789 --------- --------- Total assets.......................................... $ 13,029 $ 12,208 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable and accrued expenses............... $ -- $ 5,743 --------- --------- Total current liabilities............................. -- 5,743 Commitments and contingencies Shareholder's equity: Common stock, $.01 par value; 100,000 shares authorized; 10,000, shares issued and outstanding at December 31, 1997 and April 1, 1998, respectively..................................... 100 100 Additional paid-in-capital.......................... 172,578 172,578 Accumulated deficit................................. (159,649) (166,213) --------- --------- Total shareholder's equity............................ 13,029 6,465 --------- --------- Total liabilities and shareholder's equity............ $ 13,029 $ 12,208 ========= =========
See accompanying notes. F-25 113 CASENHISER CLOTHING COMPANY, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, PERIOD ENDED PERIOD ENDED 1997 APRIL 1, 1997 APRIL 1, 1998 ------------ ------------- ------------- (UNAUDITED) Net revenues.................................... $137,590 $11,908 $44,025 Operating expenses.............................. 75,898 18,810 48,402 -------- ------- ------- Income (loss) from operations................... 61,692 (6,902) (4,377) Interest expense................................ (7,631) (1,149) (2,187) -------- ------- ------- Net income (loss)............................... $ 54,061 $(8,051) $(6,564) ======== ======= ======= Income (loss) per share -- basic and diluted: Net income (loss)............................. $ 5.41 $ (.81) $ (.66) ======== ======= ======= Weighted average number of shares used in calculating basic and diluted net income (loss) per share.............................. 10,000 10,000 10,000 ======== ======= =======
See accompanying notes. F-26 114 CASENHISER CLOTHING COMPANY, INC. STATEMENTS OF SHAREHOLDER'S (DEFICIT) EQUITY
COMMON STOCK ADDITIONAL --------------- PAID IN ACCUMULATED TOTAL (DEFICIT) SHARES AMOUNT CAPITAL DEFICIT EQUITY ------ ------ ---------- ----------- --------------- Balance at December 31, 1996..... 10,000 $100 $172,578 $(213,710) $(41,032) Net income for the year ended December 31, 1997................ -- -- -- 54,061 54,061 ------ ---- -------- --------- -------- Balance at December 31, 1997..... 10,000 100 172,578 (159,649) 13,029 Net loss for the period ended April 1, 1998.................. -- -- -- (6,564) (6,564) ------ ---- -------- --------- -------- Balance at April 1, 1998......... 10,000 $100 $172,578 $(166,213) $ 6,465 ====== ==== ======== ========= ========
See accompanying notes. F-27 115 CASENHISER CLOTHING COMPANY, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED PERIOD ENDED PERIOD ENDED DECEMBER 31, APRIL 1, APRIL 1, 1997 1997 1998 ------------ ------------ ------------ (UNAUDITED) OPERATING ACTIVITIES Net income (loss).......................... $ 54,061 $(8,051) $(6,564) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation expense..................... 4,311 1,078 677 Changes in operating assets and liabilities: Inventories........................... (2,480) -- 160 Other current assets.................. (1,750) -- 900 Accounts payable and accrued expenses............................ (51,820) 6,973 5,743 -------- ------- ------- Net cash provided by operating activities............................... 2,322 -- 916 Increase in cash........................... 2,322 -- 916 Cash at beginning of period................ 11 11 2,333 -------- ------- ------- Cash at end of period...................... $ 2,333 $ 11 $ 3,249 ======== ======= =======
See accompanying notes. F-28 116 CASENHISER CLOTHING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS APRIL 1, 1998 1. ORGANIZATION AND NATURE OF OPERATIONS Casenhiser Clothing Company, Inc. d/b/a Bridal Search built and maintained an online database of wedding gowns, gown descriptions and photographs. This database was licensed exclusively to The Knot, Inc. On April 2, 1998, The Knot, Inc. acquired all of the assets of Bridal Search for $50,000 in cash and 162,540 shares of The Knot, Inc.'s common stock, and the licensing agreement was terminated. In addition, The Knot, Inc. 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 November 1998. The remaining 178,015 shares were issuable upon the attainment of certain revenue based goals. In August 1999, The Knot, Inc. 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. Under the agreement, former management of Bridal Search are also entitled to receive an additional 178,015 shares of The Knot, Inc.'s common stock, contingent upon their employment by The Knot, Inc. which vest over four years. As of June 30, 1999, 44,504 shares had vested pursuant to the agreement. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. The most significant estimates included in the preparation of the financial statements are related to asset lives. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and accounts payable approximate fair value due to the short-term nature of these instruments. INVENTORY Inventory consists of finished goods. Inventory costs are determined principally by using the first-in, first-out (FIFO) method, and are stated at the lower of such cost or realizable value. PROPERTY AND EQUIPMENT Property and equipment is comprised primarily of office and computer equipment and is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, five years. F-29 117 CASENHISER CLOTHING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets 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 incurred. 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. The Company has elected to be taxed as an S Corporation for federal income tax purposes. As such, the Company has not been subject to federal income tax since the shareholder has included the corporation's taxable income or loss in their individual income tax returns. NET REVENUES BY TYPE Net revenues by type are as follows:
YEAR ENDED PERIOD ENDED APRIL 1, DECEMBER 31, ---------------------- TYPE 1997 1997 1998 - ---- ------------ ----------- ------- (UNAUDITED) Licensing................................. $107,317 $ -- $37,157 Merchandise............................... 19,773 1,908 6,868 Advertising............................... 10,500 10,000 -- -------- ------- ------- Total..................................... $137,590 $11,908 $44,025 ======== ======= =======
REVENUE RECOGNITION Licensing Licensing revenue is recognized on a monthly basis in accordance with a licensing agreement with The Knot, Inc. F-30 118 CASENHISER CLOTHING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Merchandise Merchandise revenues are derived from the sale of wedding supply and novelty items and are recognized when the products are shipped to customers. Such revenues include outbound shipping and handling charges. The Company provides an allowance for estimated sales returns. Advertising Advertising revenues are derived principally from short-term advertising contracts and recognized on a straight-line basis over the duration of the contract. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense approximated $3,400, $100, and $2,800 (unaudited) for the year ended December 31, 1997 and the periods ended April 1, 1998 and 1997, respectively. CONCENTRATION OF CREDIT RISK For the year ended December 31, 1997 and the period ended April 1, 1998, one customer (The Knot, Inc.) accounted for 78% and 84% of net revenues, respectively. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The adoption of this standard has had no impact on the Company's financial statements. Accordingly, the Company's comprehensive net loss is equal to its net loss for all periods presented. 3. COMMITMENTS OPERATING LEASES The Company leased office space in California on a month to month basis. Rent expense for the years ended December 31, 1997 and the periods ended April 1, 1998 and 1997 amounted to $1,000, $2,000 and $0 (unaudited), respectively. 4. YEAR 2000 (UNAUDITED) The Company currently operates numerous date-sensitive computer applications and systems throughout its business. As the century change approaches, it will be essential for the Company to ensure that these systems properly recognize the year 2000 and continue to process critical operation and financial information. The Company has established processes for evaluating and managing the risks and costs associated with preparing the Company's systems and applications for the year 2000 change. The Company has substantially completed these modifications and costs to allow thorough testing before the year 2000. F-31 119 BACK INSIDE COVER: - Center of page contains four photos from various weddings. - Bottom of page contains The Knot's Web site address and lists The Knot's AOL keyword ("weddings"). 120 [THE KNOT LOGO] 121 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of the common stock being registered.
AMOUNT TO BE PAID ---------- SEC registration fee....................................... $ 12,788 NASD filing fee............................................ 5,100 Nasdaq National Market listing fee......................... 95,000 Legal fees and expenses.................................... 350,000 Accounting fees and expenses............................... 250,000 Printing and engraving..................................... 250,000 Blue Sky fees and expenses................................. 10,000 Transfer Agent and Registrar fees and expenses............. 15,000 Miscellaneous.............................................. 12,112 ---------- Total................................................. $1,000,000 ==========
- --------------- * To be provided by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The registrant's Certificate of Incorporation in effect as of the date hereof, and the registrant's Amended and Restated Certificate of Incorporation to be in effect upon the closing of this offering (collectively, the "Certificate") provides that, except to the extent prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the registrant's directors shall not be personally liable to the registrant or its stockholders for monetary damages for any breach of fiduciary duty as directors of the registrant. Under the DGCL, the directors have a fiduciary duty to the registrant which is not eliminated by this provision of the Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director's duty of loyalty to the registrant, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by DGCL. This provision also does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. The registrant intends to obtain liability insurance for its officers and directors. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or II-1 122 status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, a vote of stockholders or otherwise. The Certificate eliminates the personal liability of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL and provides that the registrant shall fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the registrant, or is or was serving at the request of the registrant as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our current directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification provided in our certificate of incorporation and to provide additional procedural protections in the event of litigation. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under the Certificate. The registrant is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. We intend to obtain liability insurance for our directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Common Stock. On April 2, 1998, November 13, 1998 and April 2, 1999, the registrant issued 162,540, 178,031 and 44,504 shares of common stock, respectively, valued at $1.05 for financial reporting purposes, to Casenhiser Clothing Company, Inc. d/b/a Bridal Search and certain members of its management in connection with the acquisition of the assets of Bridal Search. On April 28, 1998 the registrant issued to each of its four founders 267,030 shares of common stock valued at $1.05 for financial reporting purposes, in connection with a recapitalization of the company. On July 30, 1999, the registrant issued 5,000 shares of common stock valued at $7.00 per share for financial reporting purposes, to Jack Benoff in connection with the acquisition of Click Trips, Inc. On August 18, 1999, the registrant issued 10,000 shares of common stock valued at $8.00 per share for financial reporting purposes, to Denis Reggie in connection with the acquisition of Wedding Photographers Network. Preferred Stock and Warrants. On April 28, 1998, the registrant sold an aggregate of 3,360,000 shares of Series A Preferred Stock to Hummer Winblad Venture Partners III, L.P., Hummer Winblad Technology Fund III, L.P. and America Online for an aggregate purchase price of $3.9 million. Upon the closing of this offering, all of the outstanding shares of Series A Preferred Stock will convert into an aggregate of 3,360,000 shares of common stock. II-2 123 On April 13, 1999, the registrant sold 4,000,000 shares of Series B Preferred Stock to QVC, Inc. for an aggregate of $15.0 million. Upon the closing of this offering all of the outstanding shares of Series B Preferred Stock will convert into an aggregate of 4,000,000 shares of common stock. In connection with this sale, QVC received a warrant to purchase 1,700,000 shares of common stock at an exercise price of $5.00 per share. The warrant becomes exercisable upon the earlier of the fourth anniversary of the issuance of the warrant or the initial public offering of the registrant's common stock. On July 23, 1999, the registrant issued to America Online a warrant to purchase 366,667 shares of common stock at a price equal to $7.20 per share, in connection with the amended anchor tenant agreement between registrant and AOL. The warrant is exercisable for eight years from the date of grant. Options. The registrant from time to time has granted stock options to employees, directors and consultants. The following table sets forth information regarding such grants during the past three fiscal years.
NUMBER OF OPTIONS EXERCISE PRICES ----------------- --------------- May 2, 1996 (inception) to December 31, 1996........ 0 $ 0 January 1, 1997 to December 31, 1997................ 98,825 $ 0.01 January 1, 1998 to December 31, 1998................ 583,000 $ 0.50
The above securities were offered and sold by the registrant in reliance upon exemptions from registration pursuant either to (i) Section 4(2) of the Securities Act of 1933, as transactions not involving any public offering, or (ii) Rule 701 under the Securities Act of 1933. No underwriters were involved in connection with the sales of securities referred to in this Item 15. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits.
NUMBER DESCRIPTION - ------ ----------- 1.1* Form of Underwriting Agreement 3.1** Amended and Restated Certificate of Incorporation 3.2 Form of Amended and Restated Certificate of Incorporation to be in effect upon the closing of this offering 3.3** Bylaws 3.4 Form of Amended and Restated Bylaws to be in effect upon the closing of this offering 4.1 Specimen Common Stock certificate 4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions defining the rights of holders of common stock of the registrant 4.3** Common Stock Warrant Certificate of QVC Interactive Holdings, Inc. 4.4** Warrant Agreement of America Online, Inc. 5.1 Opinion of Brobeck, Phleger & Harrison LLP 10.1** Employment Agreement between The Knot, Inc. and David Liu 10.2** Employment Agreement between The Knot, Inc. and Carley Roney
II-3 124
NUMBER DESCRIPTION - ------ ----------- 10.3** Employment Agreement between The Knot, Inc. and Richard Szefc 10.4** Employment Agreement between The Knot, Inc. and Sandra Stiles 10.5 1999 Stock Incentive Plan 10.6 Employee Stock Purchase Plan 10.7** Third Amended and Restated Investor Rights Agreement 10.8+** Services Agreement between The Knot, Inc. and QVC, Inc. 10.9+** Amended and Restated Anchor Tenant Agreement between The Knot, Inc. and America Online, Inc. 10.10 Form of Indemnification Agreement 21.1** Subsidiaries 23.1 Consent of Ernst & Young LLP 23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1) 24.1** Powers of Attorney (See Signature Page) 27.1** Financial Data Schedule
- ------------------------- * To be supplied by amendment. ** Previously filed. + Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act. (b) Financial Statement Schedules. Schedule II -- Valuation and Qualifying Accounts, Nine Months Ended September 30, 1999 ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 125 The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act of 1933, shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 126 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, State of New York, on this 10th day of November, 1999. THE KNOT, INC. By: /s/ DAVID LIU ------------------------------------ David Liu President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE(S) DATE --------- -------- ---- /s/ DAVID LIU President, Chief Executive November 10, 1999 - --------------------------------------------------- Officer and Chairman of David Liu the Board of Directors (principal executive officer) * Chief Financial Officer, November 10, 1999 - --------------------------------------------------- Treasurer and Secretary Richard Szefc (principal financial and accounting officer) * Chief Operating Officer, November 10, 1999 - --------------------------------------------------- Assistant Secretary and Sandra Stiles Director * Director November 10, 1999 - --------------------------------------------------- John Link * Director November 10, 1999 - --------------------------------------------------- Ann Winblad *By: /s/ DAVID LIU ---------------------------------------------- David Liu as Attorney-in-Fact
II-6 127 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of The Knot, Inc. as of December 31, 1997 and 1998 and September 30, 1999, and the related consolidated statements of operations, stockholders' (deficit) equity and cash flows for the period from May 2, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and the nine month period ended September 30, 1999, and have issued our report thereon dated October 26, 1999. Our audits also included the consolidated financial statement schedule listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP New York, New York October 26, 1999, except for Note 12 as to which the date is November 5, 1999 S-1 128 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS NINE MONTHS ENDED SEPTEMBER 30, 1999
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT BEGINNING COSTS AND CHARGED TO NET OF SEPTEMBER 30, OF YEAR EXPENSES OTHER ACCOUNTS RECOVERIES 1999 ---------- ---------- -------------- ---------- ------------- Allowance for Doubtful Accounts 1999................ $ -- $133,000 $ -- $ -- $133,000 Allowance for Loan Receivable 1999......................... $ -- $ 50,000 $ -- $ -- $ 50,000
S-2 129 INDEX TO EXHIBITS
NUMBER DESCRIPTION - ------ ----------- 1.1* Form of Underwriting Agreement 3.1** Amended and Restated Certificate of Incorporation 3.2 Form of Amended and Restated Certificate of Incorporation to be in effect upon the closing of this offering 3.3** Bylaws 3.4 Form of Amended and Restated Bylaws to be in effect upon the closing of this offering 4.1 Specimen Common Stock certificate 4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions defining the rights of holders of common stock of the registrant 4.3** Common Stock Warrant Certificate of QVC Interactive Holdings, Inc. 4.4** Warrant Agreement of America Online, Inc. 5.1 Opinion of Brobeck, Phleger & Harrison LLP 10.1** Employment Agreement between The Knot, Inc. and David Liu 10.2** Employment Agreement between The Knot, Inc. and Carley Roney 10.3** Employment Agreement between The Knot, Inc. and Richard Szefc 10.4** Employment Agreement between The Knot, Inc. and Sandra Stiles 10.5 1999 Stock Incentive Plan 10.6 Employee Stock Purchase Plan 10.7** Third Amended and Restated Investor Rights Agreement 10.8+** Services Agreement between The Knot, Inc. and QVC, Inc. 10.9+** Amended and Restated Anchor Tenant Agreement between The Knot, Inc. and America Online, Inc. 10.10 Form of Indemnification Agreement 21.1** Subsidiaries 23.1 Consent of Ernst & Young LLP 23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1) 24.1** Powers of Attorney (See Signature Page) 27.1** Financial Data Schedule
- ------------------------- * To be supplied by amendment. ** Previously filed. + Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act. EX-3.2 2 FORM OF AMENDED AND RESTATED CERT. OF INC. 1 Exhibit 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE KNOT, INC. (Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware) The Knot, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY: FIRST: The present name of this corporation is "The Knot, Inc." The name under which this corporation was originally incorporated was "Weddings.com, Inc." The date of filing of the original Certificate of Incorporation of this corporation with the Secretary of the State of Delaware was May 2, 1996. An Amended and Restated Certificate of Incorporation of this corporation was filed with the Secretary of State of the State of Delaware on April 27, 1998 and on April 8, 1999. SECOND: That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of the Corporation, declaring said amendment and restatement to be advisable and in the best interests of the Corporation and its stockholders, and authorizing the appropriate officers of the Corporation to solicit the consent of the stockholders of the issued and outstanding Common Stock, $0.01 par value, and Preferred Stock, $0.001 par value, voting as a single class and as separate classes, all in accordance with the applicable provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware; THIRD: That the resolution setting forth the proposed amendment and restatement is as follows: RESOLVED, that the Amended and Restated of Certificate of Incorporation of the Corporation be amended and restated in its entirety as follows: ARTICLE I Name The name of the Corporation is The Knot, Inc. 2 ARTICLE II Registered Office The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, State of Delaware 19801. The name of its registered agent at such address is Corporation Trust Company. ARTICLE III Powers/Term The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law. The Corporation is to have perpetual existence. ARTICLE IV Capital Stock A. Classes of Stock. The total number of shares of stock which the Corporation shall have authority to issue is one hundred and five million (105,000,000), consisting of five million (5,000,000) shares of Preferred Stock, par value $0.001 per share (the "Preferred Stock"), and one hundred million (100,000,000) shares of Common Stock, par value $0.01 per share (the "Common Stock"). The consideration for the issuance of the shares shall be paid to or received by the Corporation in full before their issuance and shall not be less than the par value per share. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. B. Common Stock. (1) General. All shares of Common Stock will be identical and will entitle the holders thereof to the same rights, powers and privileges. The rights, powers and privileges of the holders of the Common Stock are subject to and qualified by the rights of holders of any then outstanding Preferred Stock. (2) Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. (3) Dissolution, Liquidation or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or 2 3 involuntary, each issued and outstanding share of Common Stock shall entitle the holder thereof to receive an equal portion of the net assets of the Corporation available for distribution to the holders of Common Stock, subject to any preferential rights of any then outstanding Preferred Stock. (4) Voting Rights. Except as otherwise required by law or this Amended and Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held of record by such holder on the books of the Corporation for the election of directors and on all matters submitted to a vote of stockholders of the Corporation. Except as otherwise required by law or provided herein, holders of Preferred Stock shall vote together with holders of Common Stock as a single class, subject to any special or preferential voting rights of any then outstanding Preferred Stock. There shall be no cumulative voting. (5) Redemption. The Common Stock is not redeemable. C. Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by law, by the rules of a national securities exchange, if applicable, and by the provisions of this ARTICLE IV, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (1) The number of shares constituting that series and the distinctive designation of that series; (2) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (3) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (4) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (5) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (6) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; 3 4 (7) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights or priority, if any, of payment of shares of that series; and (8) Any other relative rights, preferences and limitations of that series. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the Common Stock with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. D. Preemptive Rights. No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series, or any unissued bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of any class or series or carrying any right to purchase stock of any class or series; but any such unissued stock, bonds, certificates or indebtedness, debentures or other securities convertible into or exchangeable for stock or carrying any right to purchase stock may be issued pursuant to resolution of the Board of Directors of the Corporation to such persons, firms, corporations or associations, whether or not holders thereof, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. ARTICLE V Directors A. Number. The number of directors of the Corporation shall be such number, not less than three (3) nor more than fifteen (15) (exclusive of directors, if any, to be elected by holders of preferred stock of the Corporation, voting separately as a class), as shall be set forth from time to time in the bylaws, provided that no action shall be taken to decrease or increase the authorized number of directors unless at least 66.67% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose approve such decrease or increase. Vacancies in the Board of Directors of the Corporation, however caused, and newly created directorships shall be filled by a vote of a majority of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires and when the director's successor is elected and qualified. 4 5 B. Classified Board of Directors. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III, each of which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 2000; each initial director in Class II shall hold office until the annual meeting of stockholders in 2001; and each initial director in Class III shall hold office until the annual meeting of stockholders in 2002. Notwithstanding the foregoing provisions of this ARTICLE V, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. Subject to the provisions of this ARTICLE V, should the number of directors not be equally divisible by three, the excess director or directors shall be assigned to Classes I or II as follows: (i) if there shall be an excess of one directorship over a number equally divisible by three, such extra directorship shall be classified in Class I; and (ii) if there shall be an excess of two directorships over a number divisible by three, one shall be classified in Class I and the other in Class II. In the event of any increase or decrease in the authorized number of directors, (1) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his earlier resignation, removal from office or death, and (2) the newly created or eliminated directorship resulting from such increase or decrease shall be appointed by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. C. Removal of Directors. Notwithstanding any other provisions of this Amended and Restated Certificate of Incorporation or the bylaws of the Corporation, any director or the entire Board of Directors of the Corporation may be removed, at any time, but only for cause or by the affirmative vote of the holders of not less than 66.67% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose. Notwithstanding the foregoing, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the preceding provisions of this ARTICLE V shall not apply with respect to the director or directors elected by such holders of preferred stock. ARTICLE VI Stockholder Meetings Meetings of stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the Corporation. The stockholders of the Corporation may not take any action by written consent in lieu of a meeting. 5 6 ARTICLE VII Limitation of Directors' Liability Except to the extent that the General Corporation Law of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. If the General Corporation Law is amended after approval by the stockholders of this ARTICLE VII to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. ARTICLE VIII Indemnification The Corporation may, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. Indemnification may include payment by the Corporation of expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of an undertaking by the Indemnitee to repay such payment if it is ultimately determined that such person is not entitled to indemnification under this ARTICLE VIII, which undertaking may be accepted without reference to the financial ability of such person to make such repayment. The Corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of the Corporation. 6 7 The indemnification rights provided in this ARTICLE VIII (i) shall not be deemed exclusive of any other rights to which Indemnitees may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. The Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this ARTICLE VIII. Any repeal or modification of the foregoing provisions of this Article VIII shall not adversely affect any right or protection hereunder of any Covered Person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE IX Amendment of Bylaws In furtherance of and not in limitation of powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to adopt, repeal, alter, amend and rescind the bylaws of the Corporation by vote of 66.67% of the Board of Directors. ARTICLE X Amendment of Certificate of Incorporation The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Amended and Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in ARTICLES V, VI, VII, VIII, IX and this ARTICLE X may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 66.67% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). * * * FOURTH: That said amendments were duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law. 7 8 IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been signed by the Chief Executive Officer and the Secretary of the Corporation this ___ day of October, 1999. ---------------------------------- David Liu, Chief Executive Officer ---------------------------------- Richard Szefc, Secretary 8 EX-3.4 3 FORM OF AMENDED AND RESTATED BYLAWS 1 Exhibit 3.4 AMENDED AND RESTATED BY-LAWS OF THE KNOT, INC. ARTICLE I CERTIFICATE OF INCORPORATION AND BYLAWS Section 1. These By-Laws are subject to the Certificate of Incorporation of the Corporation, as amended to date. In these By-Laws, references to law, the Certificate of Incorporation and By-Laws mean the law, the provisions of the Certificate of Incorporation and the By-Laws as from time to time in effect. ARTICLE II OFFICES Section 1. The registered office of the Corporation in the State of Delaware shall be at 1013 Centre Road, in the city of Wilmington, County of New Castle, State of Delaware. The registered agent at such address shall be Corporation Trust Company. Section 2. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE III MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 2 Section 2. Annual meetings of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote the directors to be elected at such meeting, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may only be called by the chairman of the board or the president and shall be called by the chairman of the board, the president or secretary at the request in writing of two-thirds of the Board of Directors. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of fifty percent (50%) of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2 3 Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Unless otherwise provided in the Certificate of Incorporation, the Chairman of the Board may adjourn a meeting of stockholders from time to time, without notice other than announcement at the meeting. No notice of the time and place of an adjourned meeting need be given except as required by law. Section 12. A. Annual Meetings of Stockholders 1. Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the Corporation's notice of meeting (or any supplement thereto), (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section 12, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 12. 2. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (a)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the date of the preceding year's annual meeting; provided, however, that if either the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each 3 4 case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the By-laws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, (ii) the class and number of shares of capital stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation's outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (b) otherwise to solicit proxies from stockholders in support of such proposal or nomination. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation. 3. Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 12 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy (70) days prior to such annual meeting), a stockholder's notice required by this Section 11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. B. Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time notice provided for in this Section 12 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and upon such election, who complies with the notice procedures set forth in this Section 12. If the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in 4 5 such election of directors may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 12 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth (120) day prior to such special meeting and not later than the later of (x) the close of business of the ninetieth (90th) day prior to such special meeting or (y) the close of business of the tenth (10th) day following the day on which public announcement is first made of the date of such special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. C. General. 1. Only such persons who are nominated in accordance with the procedures set forth in this Section 12 shall be eligible to be elected at an annual or special meeting of stockholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 12. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the chairman of the board shall have the power and duty (a) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 12 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder's nominee or proposal in compliance with such stockholder's representation as required by clause (A)(2)(c)(iv) of this Section 12) and (b) if any proposed nomination or business was not made or proposed in compliance with this Section 12, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. 2. For purposes of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 and 15(d) of the Exchange Act. 3. Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 12 shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation. Notwithstanding any other provision of law, the Certificate of Incorporation or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least 66.67% of the votes which all the stockholders 5 6 would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 12. ARTICLE IV DIRECTORS Section 1. The number of directors which shall constitute the whole Board shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, except as provided in Section 2 of this Article. The Board shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. The Board of Directors shall be classified in accordance with the provisions of the Corporation's Certificate of Incorporation. Directors need not be stockholders. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by 66.67% of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election at which such director's class is to be elected and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business of the Corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Meetings of the Board of Directors Section 4. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Members of the Board of Directors may participate in regular or special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person. 6 7 Section 6. Special meetings of the Board may be called by the chairman of the board, the chief executive officer or the president on two (2) days' notice to each director by mail or twenty-four (24) hours notice to each director either personally or by telecopy; special meetings shall be called by the chairman of the board, the chief executive officer, president or secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director, in which case special meetings shall be called by the chairman of the board, the chief executive officer, the president or secretary in like manner and on like notice on the written request of the sole director. Section 7. At all meetings of the Board a majority of the directors fixed by Section 1 shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 8. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 9. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Committees of Directors Section 10. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the 7 8 Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-Laws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 11. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Compensation of Directors Section 12. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Removal of Directors Section 13. Any director or the entire Board of Directors may be removed only in accordance with the provisions of the Corporation's Certificate of Incorporation. ARTICLE V NOTICES Section 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telecopy. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in 8 9 writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI OFFICERS Section 1. The officers of the Corporation shall be chosen by the Board of Directors and shall consist of a chief executive officer, chief financial officer, president, treasurer and a secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more vice-presidents, assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a chief executive officer, a president, a treasurer, and a secretary and may choose vice presidents. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors or a committee thereof. Section 5. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The Chairman of the Board Section 6. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which such individual shall be present. Such individual shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. Section 7. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which such individual shall be present. Such individual shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. 9 10 Chief Executive Officer Section 8. Such individual shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 9. Such individual shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President Section 10. The President shall conduct general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the right of the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer or officers of the Corporation. The President shall have the general power and duties of supervision and management usually vested in the office of President of a corporation. In the absence of the Chairman and Vice Chairman of the Board, the President shall preside at all meetings of the stockholders and the Board of Directors Such individual shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The Vice-Presidents Section 11. In the absence of the president or in the event of his inability or refusal to act, the vice-president, if any, (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. The Secretary and Assistant Secretary Section 12. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. Such individual shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall 10 11 perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision such individual shall be. Such individual shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Section 13. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of directors may from time to time prescribe. The Treasurer and Assistant Treasurers Section 14. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. Section 15. The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. Section 16. If required by the Board of Directors, such individual shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 17. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. 11 12 ARTICLE VII CERTIFICATE OF STOCK Section 1. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the chairman or vice-chairman of the Board of Directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by him in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions or such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such individual were such officer, transfer agent or registrar at the date of issue. Lost Certificates Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 12 13 Transfer of Stock Section 4. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Fixing Record Date Section 5. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Registered Stockholders Section 6. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII GENERAL PROVISIONS Dividends Section 1. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. 13 14 Section 2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Checks Section 3. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Fiscal Year Section 4. The fiscal year of the Corporation shall end on December 31, unless otherwise fixed by resolution of the Board of Directors. Seal Section 5. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Transactions with Interested Parties Section 6. No contract or transaction between the Corporation and one or more of the directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because such director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his, her or their votes are counted for such purpose, if: (1) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (2) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, 14 15 and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IX AMENDMENTS These By-Laws may be repealed, altered, amended or rescinded by the stockholders of the Corporation by vote of not less than 66.67% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). In addition, in accordance with the Corporation's Certificate of Incorporation, the Board of Directors may repeal, alter, amend or rescind these By-Laws by vote of 66.67% of the Board of Directors. 15 EX-4.1 4 SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 Number Shares [The Knot Logo] SEE REVERSE FOR CERTAIN DEFINITIONS THE KNOT, INC. CUSIP 499184 10 9
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE Common Stock THIS CERTIFIES THAT IS THE HOLDER OF FULLY PAID AND NON-ASSESSABLE SHARES OF $0.01 PAR VALUE, OF THE COMMON STOCK OF The Knot, Inc. hereinafter called the "Corporation", transferable on the books of the Corporation by the holder hereof in person, or by duly authorized attorney, upon surrender of this certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation of the Corporation and all amendments thereto (copies of which are on file in the office of the Transfer Agent), to all of which the holder of this certificate by acceptance hereof assents. This certificate is not valid unless countersigned by the Transfer Agent. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. /s/ Richard Szefc /s/ David Liu - --------------------------- ------------------------ CHIEF FINANCIAL OFFICER, [SEAL] CHIEF EXECUTIVE OFFICER, SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: American Stock Transfer & Trust Company New York, NY Transfer Agent and Registrar - --------------------------- 2 The Corporation will furnish to any shareholder upon request and without charge a full statement of the designation, relative rights, preferences and limitations of the shares of each class authorized to be issued and the designation, relative rights, preferences and limitations of each series of preferred shares which the Company is authorized to issue so far as the same have been fixed, and the authority of the Board of Directors of the Company to designate and fix the relative rights, preferences and limitations of other series. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ____ Custodian ____ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act________________ in common (State) Additional abbreviations may also be used though not in the above list. For Value Received, ______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________________________ _________________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________________Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated ___________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER Signature(s) Guaranteed: __________________________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATION AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad 15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. 2 EX-5.1 5 OPINION OF BROBECK, PHLEGER & HARRISON LLP 1 Exhibit 5.1 [BROBECK, PHLEGER & HARRISON LLP LETTERHEAD] November 9, 1999 The Knot, Inc. 462 Broadway, 6th Floor New York, NY 10013 Re: The Knot, Inc. Registration Statement on Form S-1 for up to 4,025,000 shares of Common Stock Ladies and Gentlemen: We have acted as counsel to The Knot, Inc., a Delaware corporation (the "Company"), in connection with the proposed issuance and sale by the Company of up to 4,025,000 shares of the Company's Common Stock (the "Shares") pursuant to the Company's Registration Statement on Form S-1 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). This opinion is being furnished in accordance with the requirements of Item 16(a) of Form S-1. We have reviewed the Company's charter documents and the corporate proceedings taken by the Company in connection with the issuance and sale of the Shares. Based on such review, we are of the opinion that the Shares have been duly authorized, and if, as and when issued in accordance with the Registration Statement and the related prospectus (as amended and supplemented through the date of issuance) will be legally issued, fully paid and nonassessable. We consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the prospectus which is part of the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act, the rules and regulations of the Securities and Exchange Commission promulgated thereunder, or Item 509 of Regulation S-K. This opinion letter is rendered as of the date first written above and we disclaim any obligation to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or the Shares. EX-10.5 6 1999 STOCK INCENTIVE PLAN 1 Exhibit 10.5 THE KNOT, INC. 1999 STOCK INCENTIVE PLAN ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1999 Stock Incentive Plan is intended to promote the interests of The Knot, Inc., a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into five separate equity programs: (i) the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, (ii) the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special options, (iii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), (iv) the Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive options at periodic intervals to purchase shares of Common Stock; and (v) the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special option grant. B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. 2 III. ADMINISTRATION OF THE PLAN A. The following provisions shall govern the administration of the Plan: (i) The Board shall have the authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders but may delegate such authority in whole or in part to the Primary Committee. (ii) Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. (iii) Administration of the Automatic Option Grant Program shall be self-executing in accordance with the terms of that program. B. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full power and authority subject to the provisions of the Plan: (i) to establish such rules as it may deem appropriate for proper administration of the Plan, to make all factual determinations, to construe and interpret the provisions of the Plan and the awards thereunder and to resolve any and all ambiguities thereunder; (ii) to determine, with respect to awards made under the Discretionary Option Grant and Stock Issuance Programs, which eligible persons are to receive such awards, the time or times when such awards are to be made, the number of shares to be covered by each such award, the vesting schedule (if any) applicable to the award, the status of a granted option as either an Incentive Option or a Non-Statutory Option and the maximum term for which the option is to remain outstanding; (iii) to amend, modify or cancel any outstanding award with the consent of the holder or accelerate the vesting of such award; and (iv) to take such other discretionary actions as permitted pursuant to the terms of the applicable program. Decisions of each Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties. C. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. D. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be 2 3 entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any options or stock issuances under the Plan. IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. C. Only non-employee Board members shall be eligible to participate in the Automatic Option Grant and Director Fee Option Grant Programs. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed Three Million Eight Hundred Forty Nine Thousand Eight Hundred and Sixty Eight (3,849,868) shares. Such authorized share reserve consists of (i) the number of shares which remain available for issuance, as of the Underwriting Date, under the Predecessor Plan, including the shares subject to the outstanding options to be incorporated into the Plan and the additional shares which would otherwise be available for future grant, plus (ii) an increase of One Million (1,000,000) shares authorized by the Board subject to stockholder approval prior to the Underwriting Date. B. The number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first trading day of each calendar year during the term of the Plan, beginning with the 2001 calendar year, by an amount equal to the lesser of (i) two percent (2%) of the shares of Common Stock outstanding on the last trading day of the immediately preceding calendar year, and (ii) One Million (1,000,000) shares or such lesser number of shares determined by the Board. C. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than Five Hundred Thousand (500,000) shares of Common Stock in the aggregate per calendar year, beginning with 3 4 the 1999 calendar year; provided, however, that for the calendar year in which such person first commences Service, the limit shall be increased to One Million (1,000,000) shares. D. Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plan) shall be available for subsequent issuance under the Plan to the extent those options expire, terminate or are cancelled for any reason prior to exercise in full. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the original exercise or issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent options or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. Shares of Common Stock underlying one or more stock appreciation rights exercised under the Plan shall NOT be available for subsequent issuance. E. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities by which the share reserve is to increase each calendar year pursuant to the automatic share increase provisions of the Plan, (iii) the number and/or class of securities for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year, (iv) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (v) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan and (vi) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 4 5 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator at the time of the option grant and may be less than, equal to or greater than the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section II of Article Seven and the documents evidencing the option, be payable in one or more of the following forms: (i) in cash or check made payable to the Corporation; (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-approved brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. 5 6 C. CESSATION OF SERVICE. 1. The following provisions shall govern the exercise of any options outstanding at the time of the Optionee's cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by his or her Beneficiary. (iii) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. (iv) Should the Optionee's Service be terminated for Misconduct or should the Optionee engage in Misconduct while his or her options are outstanding, then all such options shall terminate immediately and cease to be outstanding. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding: (i) to extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service to such period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) to permit the option to be exercised, during the applicable post-Service exercise period, for one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to 6 7 repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. Non-Statutory Options shall be subject to the same restrictions, except that a Non-Statutory Option may, to the extent permitted by the Plan Administrator, be assigned in whole or in part during the Optionee's lifetime (i) as a gift to one or more members of the Optionee's immediate family, to a trust in which Optionee and/or one or more such family members hold more than fifty percent (50%) of the beneficial interest or to an entity in which more than fifty percent (50%) of the voting interests are owned by one or more such family members or (ii) pursuant to a domestic relations order. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Six shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. 7 8 III. CHANGE IN CONTROL/HOSTILE TAKE-OVER A. Each option outstanding at the time of a Change in Control but not otherwise fully-vested shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Change in Control, assumed or otherwise continued in full force and effect by the successor corporation (or parent thereof) pursuant to the terms of the Change in Control, (ii) such option is replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change in Control on the shares of Common Stock for which the option is not otherwise at that time exercisable and provides for subsequent payout in accordance with the same vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. Each option outstanding at the time of the Change in Control shall terminate as provided in Section III.C. of this Article Two. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continue in full force and effect pursuant to the terms of the Change in Control or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Change in Control, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise expressly continued in full force and effect pursuant to the terms of the Change in Control. D. Each option which is assumed in connection with a Change in Control shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments to reflect such Change in Control shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year. E. The Plan Administrator may at any time provide that one or more options will automatically accelerate in connection with a Change in Control, whether or not those options are assumed or otherwise continued in full force and effect pursuant to the terms of the Change in Control. Any such option shall accordingly become exercisable, immediately prior to the effective date of such Change in Control, for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of 8 9 Common Stock. In addition, the Plan Administrator may at any time provide that one or more of the Corporation's repurchase rights shall not be assignable in connection with such Change in Control and shall terminate upon the consummation of such Change in Control. F. The Plan Administrator may at any time provide that one or more options will automatically accelerate upon an Involuntary Termination of the Optionee's Service within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control in which those options do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1) year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may at any time provide that one or more of the Corporation's repurchase rights shall immediately terminate upon such Involuntary Termination. G. The Plan Administrator may at any time provide that one or more options will automatically accelerate in connection with a Hostile Take-Over. Any such option shall become exercisable, immediately prior to the effective date of such Hostile Take-Over, for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. In addition, the Plan Administrator may at any time provide that one or more of the Corporation's repurchase rights shall terminate automatically upon the consummation of such Hostile Take-Over. Alternatively, the Plan Administrator may condition such automatic acceleration and termination upon an Involuntary Termination of the Optionee's Service within a designated period (not to exceed eighteen (18) months) following the effective date of such Hostile Take-Over. Each option so accelerated shall remain exercisable for fully-vested shares until the expiration or sooner termination of the option term. H. The portion of any Incentive Option accelerated in connection with a Change in Control or Hostile Take Over shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. IV. STOCK APPRECIATION RIGHTS The Plan Administrator may, subject to such conditions as it may determine, grant to selected Optionees stock appreciation rights which will allow the holders of those rights to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Option Surrender Value of the number of shares for which the option is surrendered over (b) the aggregate exercise price payable for such shares. The distribution may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. 9 10 ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM I. OPTION GRANTS The Primary Committee may implement the Salary Investment Option Grant Program for one or more calendar years beginning after the Underwriting Date and select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for each such calendar year. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Five Thousand Dollars ($5,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete discretion to determine whether to approve the filed authorization in whole or in part. To the extent the Primary Committee approves the authorization, the individual who filed that authorization shall be granted an option under the Salary Investment Grant Program on the first trading day in January for the calendar year for which the salary reduction is to be in effect. II. OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, A is the dollar amount of the approved reduction in the Optionee's base salary for the calendar year, and 10 11 B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. CESSATION OF SERVICE. Each option outstanding at the time of the Optionee's cessation of Service shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the earlier of (i) the expiration of the option term or (ii) the expiration of the three (3)-year period following the Optionee's cessation of Service. To the extent the option is held by the Optionee at the time of his or her death, the option may be exercised by his or her Beneficiary. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. III. CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Change in Control or Hostile Take-Over while the Optionee remains in Service, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control or Hostile Take-Over, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such option accelerated in connection with a Change in Control shall terminate upon the Change in Control, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control. Each such option accelerated in connection with a Hostile Take-Over shall remain exercisable until the expiration or sooner termination of the option term. B. Each option which is assumed in connection with a Change in Control shall be appropriately adjusted to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding options. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Option Surrender Value of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. 11 12 IV. REMAINING TERMS The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for options made under the Discretionary Option Grant Program. 12 13 ARTICLE FOUR STOCK ISSUANCE PROGRAM I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening options. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals or Service requirements. Each such award shall be evidenced by one or more documents which comply with the terms specified below. A. PURCHASE PRICE. 1. The purchase price per share of Common Stock subject to direct issuance shall be fixed by the Plan Administrator and may be less than, equal to or greater than the Fair Market Value per share of Common Stock on the issue date. 2. Subject to the provisions of Section II of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. VESTING/ISSUANCE PROVISIONS. 1. The Plan Administrator may issue shares of Common Stock which are fully and immediately vested upon issuance or which are to vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. Alternatively, the Plan Administrator may issue share right awards which shall entitle the recipient to receive a specified number of vested shares of Common Stock upon the attainment of one or more performance goals or Service requirements established by the Plan Administrator. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to his or her unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 13 14 3. The Participant shall have full stockholder rights with respect to the issued shares of Common Stock, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock, or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. 6. Outstanding share right awards shall automatically terminate, and no shares of Common Stock shall actually be issued in satisfaction of those awards, if the performance goals or Service requirements established for such awards are not attained. The Plan Administrator, however, shall have the authority to issue shares of Common Stock in satisfaction of one or more outstanding share right awards as to which the designated performance goals or Service requirements are not attained. II. CHANGE IN CONTROL/HOSTILE TAKE-OVER A. All of the Corporation's outstanding repurchase rights shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent (i) those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continue in full force and effect pursuant to the terms of the Change in Control or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. B. The Plan Administrator may at any time provide for the automatic termination of one or more of those outstanding repurchase rights and the immediate vesting of the shares of Common Stock subject to those terminated rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary Termination of the Participant's Service within a designated period (not to exceed eighteen (18) months) following the effective date of any 14 15 Change in Control or Hostile Take-Over in which those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continue in full force and effect. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 15 16 ARTICLE FIVE AUTOMATIC OPTION GRANT PROGRAM I. OPTION TERMS A. GRANT DATES. Options shall be made on the dates specified below: 1. Each individual who is first elected or appointed as a non-employee Board member at any time after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase Fifteen Thousand (15,000) shares of Common Stock, provided that individual has not previously been in the employ of the Corporation (or any Parent or Subsidiary). 2. On the date of each Annual Stockholders Meeting beginning with the 2000 Annual Stockholder Meeting, each individual who is to continue to serve as a non-employee Board member shall automatically be granted a Non-Statutory Option to purchase Five Thousand (5,000) shares of Common Stock. B. EXERCISE PRICE. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date. D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each initial 15,000-share option shall vest, and the Corporation's repurchase right shall lapse, in a series of three (3) successive equal annual installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon the Optionee's completion of one (1) year of Board service measured from the option grant date. Each annual 5,000-share option shall vest, and the Corporation's repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the option grant date. 16 17 E. CESSATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options outstanding at the time of the Optionee's cessation of Board service: (i) Any option outstanding at the time of the Optionee's cessation of Board service for any reason shall remain exercisable for a twelve (12)-month period following the date of such cessation of Board service, but in no event shall such option be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by his or her Beneficiary. (iii) Following the Optionee's cessation of Board service, the option may not be exercised in the aggregate for more than the number of shares for which the option was exercisable on the date of such cessation of Board service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service, terminate and cease to be outstanding for any and all shares for which the option is not otherwise at that time exercisable. (iv) However, should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully-vested shares of Common Stock. II. CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Change in Control or Hostile Take-Over, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option may, immediately prior to the effective date of such Change in Control or Hostile Take-Over, became fully exercisable for all of the shares of Common Stock at the time subject to such option and maybe exercised for all or any of those shares as fully-vested shares of Common Stock. Each such option accelerated in connection with a Change in Control shall terminate upon the Change in Control, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control. Each such option accelerated in connection with a Hostile Take-Over shall remain exercisable until the expiration or sooner termination of the option term. B. All outstanding repurchase rights shall automatically terminate and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control or Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding options. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Option Surrender Value of the shares of Common Stock at 17 18 the time subject to each surrendered option (whether or not the option is otherwise at the time exercisable for those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. D. Each option which is assumed in connection with a Change in Control shall be appropriately adjusted to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for options made under the Discretionary Option Grant Program. 18 19 ARTICLE SIX DIRECTOR FEE OPTION GRANT PROGRAM I. OPTION GRANTS The Board may implement the Director Fee Option Grant Program as of the first day of any calendar year beginning after the Underwriting Date. Upon such implementation of the Program, each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to the first day of the calendar year for which the election is to be in effect. Each non-employee Board member who files such a timely election with respect to the annul retainer fee shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which that fee would otherwise be payable. II. OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, A is the portion of the annual retainer fee subject to the non-employee Board member's election, and B is the Fair Market Value per share of Common Stock on the option grant date. 19 20 C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each month of Board service during the calendar year in which the option is granted. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. CESSATION OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee at the time of such cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. Should the Optionee die after cessation of Board service but while holding one or more options, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the Optionee's Beneficiary. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Board service. III. CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Change in Control or Hostile Take-Over while the Optionee remains in Board service, each outstanding option held by such Optionee shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control or Hostile Take-Over, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such option accelerated in connection with a Change in Control shall terminate upon the Change in Control, except to the extent assumed by the successor corporation (or parent thereof) or otherwise expressly continued in full force and effect pursuant to the terms of the Change in Control. Each such option accelerated in connection with a Hostile Take-Over shall remain exercisable until the expiration or sooner termination of the option term. B. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding options. The Optionee shall in return be entitled to a cash distribution from the Corporation in an 20 21 amount equal to the excess of (i) the Option Surrender Value of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. IV. REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for options made under the Discretionary Option Grant Program. 21 22 ARTICLE SEVEN MISCELLANEOUS I. NO IMPAIRMENT OF AUTHORITY Outstanding awards shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. II. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. III. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan with the right to use shares of Common Stock in satisfaction of all or part of the Withholding Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 22 23 IV. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on November 3, 1999. The Plan shall become effective immediately upon the Underwriting Date. However, the Salary Investment Option Grant and Director Fee Option Grant Programs shall not be implemented until such time as the Primary Committee or the Board may deem appropriate. Options may be granted under the Discretionary Option Grant Program at any time on or after the Underwriting Date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the adoption of the Plan by the Board, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plan, and no further options or direct stock issuances shall be made under the Predecessor Plan after the Underwriting Date. All options outstanding under the Predecessor Plan on the Underwriting Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Changes in Control, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions. D. The Plan shall terminate upon the earliest of (i) November 2, 2009, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Change in Control. Upon such plan termination, all outstanding options and unvested stock issuances shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. V. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations. B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess 23 24 shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. VI. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VII. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VIII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 24 25 APPENDIX The following definitions shall be in effect under the Plan: A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under the Plan. B. BENEFICIARY shall mean, in the event the Plan Administrator implements a beneficiary designation procedure, the person designated by an Optionee or Participant, pursuant to such procedure, to succeed to such person's rights under any outstanding awards held by him or her at the time of death. In the absence of such designation or procedure, the Beneficiary shall be the personal representative of the estate of the Optionee or Participant or the person or persons to whom the award is transferred by will or the laws of descent and distribution. C. BOARD shall mean the Corporation's Board of Directors. D. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through any of the following transactions: (i) a merger, consolidation or reorganization approved by the Corporation's stockholders, unless securities representing more than fifty percent (50%) of the total combined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the same proportion, by the persons who beneficially owned the Corporation's outstanding voting securities immediately prior to such transaction, (ii) any stockholder-approved transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board recommends such stockholders accept. E. CODE shall mean the Internal Revenue Code of 1986, as amended. F. COMMON STOCK shall mean the Corporation's common stock. G. CORPORATION shall mean The Knot, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of The Knot, Inc. which shall by appropriate action adopt the Plan. H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the director fee option grant program in effect under the Plan. A-1 26 I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan. J. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. K. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement. (iv) For purposes of any options made prior to the Underwriting Date, the Fair Market Value shall be determined by the Plan Administrator, after taking into account such factors as it deems appropriate. M. HOSTILE TAKE-OVER shall mean: (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or A-2 27 (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. N. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. O. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation or Parent or Subsidiary employing the individual which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. P. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any intentional wrongdoing by such person, whether by omission or commission, which adversely affects the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. This shall not limit the grounds for the dismissal or discharge of any person in the Service of the Corporation (or any Parent or Subsidiary). Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. R. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. S. OPTION SURRENDER VALUE shall mean the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation or, in the event of a Hostile Take-Over, effected through a tender offer, the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over, if greater. However, if the surrendered option is an Incentive Option, the Option Surrender Value shall not exceed the Fair Market Value per share. A-3 28 T. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program. U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. X. PLAN shall mean the Corporation's 1999 Stock Incentive Plan, as set forth in this document. Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. However, the Primary Committee shall have the plenary authority to make all factual determinations and to construe and interpret any and all ambiguities under the Plan to the extent such authority is not otherwise expressly delegated to any other Plan Administrator. Z. PREDECESSOR PLAN shall mean the Corporation's pre-existing 1997 Long Term Incentive Plan in effect immediately prior to the Underwriting Date hereunder. AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program with respect to all eligible individuals. BB. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment grant program in effect under the Plan. A-4 29 CC. SECONDARY COMMITTEE shall mean a committee of one (1) or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. DD. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. EE. SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. FF. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. GG. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan. HH. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. II. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). JJ. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. KK. UNDERWRITING DATE shall mean the date on which the Underwriting Agreement is executed and priced in connection with an initial public offering of the Common Stock. LL. WITHHOLDING TAXES shall mean the Federal, state and local income and employment withholding tax liabilities to which the holder of Non-Statutory Options or unvested shares of Common Stock may become subject in connection with the exercise of those options or the vesting of those shares. A-5 EX-10.6 7 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10.6 THE KNOT, INC. EMPLOYEE STOCK PURCHASE PLAN I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of The Knot, Inc., a Delaware corporation, by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Section 423 of the Code. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The maximum number of shares of Common Stock which may be issued in the aggregate under the Plan shall initially not exceed Three Hundred Thousand (300,000) shares. B. The number of shares available for issuance under the Plan shall automatically increase on the first business day of each calendar year, beginning in the year 2001, by the lesser of (i) the number of shares of Common Stock issued under the Plan in the immediately preceding calendar year or (ii) 300,000 shares or such other lesser number determined by the Board. C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to the maximum number and class of securities issuable in the aggregate under the Plan, (ii) the maximum number and class of securities purchasable per Participant and in the aggregate on any one Purchase Date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. OFFERING PERIODS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive offering periods until such time as (i) the maximum number of shares of 2 Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Each offering period shall be of such duration (not to exceed twenty-four (24) months) as determined by the Plan Administrator prior to the start date of such offering period. However, the initial offering period shall commence at the Effective Time and terminate on the last business day in January 2002. Subsequent offering periods shall commence as designated by the Plan Administrator. C. Each offering period shall be comprised of a series of one or more successive Purchase Intervals. Purchase Intervals shall run from the first business day in February each year to the last business day in July of the same year and from the first business day in August each year to the last business day in January of the following year. However, the first Purchase Interval in effect under the initial offering period shall commence at the Effective Time and terminate on the last business day in July 2000. D. Should the Fair Market Value per share of Common Stock on any Purchase Date within an offering period be less than the Fair Market Value per share of Common Stock on the start date of that offering period, then that offering period shall automatically terminate immediately after the purchase of shares of Common Stock on such Purchase Date, and a new offering period shall commence on the next business day following such Purchase Date. The new offering period shall have a duration of twenty-four (24) months, unless a shorter duration is established by the Plan Administrator within five (5) business days following the start date of that offering period. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the start date of an offering period under the Plan may enter that offering period on such start date or on any subsequent Semi-Annual Entry Date within that offering period, provided he or she remains an Eligible Employee. B. Each individual who first becomes an Eligible Employee after the start date of an offering period may enter that offering period on any subsequent Semi-Annual Entry Date within that offering period on which he or she is an Eligible Employee. C. The date an individual enters an offering period shall be designated his or her Entry Date for purposes of that offering period. D. To participate in the Plan for a particular offering period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock purchase agreement and a payroll deduction authorization) and file such forms with the Plan Administrator (or its designate) on or before his or her scheduled Entry Date. VI. PAYROLL DEDUCTIONS A. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock during an offering period may be any multiple of one percent (1%) of 2 3 the Base Salary paid to the Participant during each Purchase Interval within that offering period, up to a maximum of fifteen percent (15%). The deduction rate so authorized shall continue in effect throughout the offering period, except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may, at any time during the offering period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Interval. (ii) The Participant may, prior to the commencement of any new Purchase Interval within the offering period, increase the rate of his or her payroll deduction by filing the appropriate form with the Plan Administrator. The new rate (which may not exceed the fifteen percent (15%) maximum) shall become effective on the start date of the first Purchase Interval following the filing of such form. B. Payroll deductions shall begin on the first pay day following the Participant's Entry Date into the offering period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of that offering period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be required to be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date, whether within the same or a different offering period. VII. PURCHASE RIGHTS A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a separate purchase right for each offering period in which he or she participates. The purchase right shall be granted on the Participant's Entry Date into the offering period and shall provide the Participant with the right to purchase shares of Common Stock, in a series of successive installments over the remainder of such offering period, upon the terms set forth below. The Participant shall execute a stock purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. 3 4 B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be automatically exercised in installments on each successive Purchase Date within the offering period, and shares of Common Stock shall accordingly be purchased on behalf of each Participant (other than Participants whose payroll deductions have previously been refunded pursuant to the Termination of Purchase Right provisions below) on each such Purchase Date. The purchase shall be effected by applying the Participant's payroll deductions for the Purchase Interval ending on such Purchase Date to the purchase of whole shares of Common Stock at the purchase price in effect for the Participant for that Purchase Date. C. PURCHASE PRICE. The purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date within the offering period shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into that offering period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common Stock purchasable by a Participant on each Purchase Date during the offering period shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Interval ending with that Purchase Date by the purchase price in effect for the Participant for that Purchase Date. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed One Thousand (1,000) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. In addition, the maximum number of shares of Common Stock purchasable in the aggregate by all Participants on any one Purchase Date under the Plan shall not exceed One Hundred Fifty Thousand (150,000) shares, subject to periodic adjustments in the event of certain changes in the corporation's capitalization. E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable on the Purchase Date shall be promptly refunded. F. TERMINATION OF PURCHASE RIGHT. The following provisions shall govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the next scheduled Purchase Date in the offering period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the Purchase Interval in which such termination occurs shall, at the Participant's election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time such purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. 4 5 (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the offering period for which the terminated purchase right was granted. In order to resume participation in any subsequent offering period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into that offering period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the Purchase Interval in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the Purchase Interval in which such leave commences, to (a) withdraw all the payroll deductions collected to date on his or her behalf for that Purchase Interval or (b) have such funds held for the purchase of shares on his or her behalf on the next scheduled Purchase Date. In no event, however, shall any further payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service (i) within ninety (90) days following the commencement of such leave or, (ii) prior to the expiration of any longer period for which such Participant's right to reemployment with the Corporation is guaranteed by either statute or contract, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began unless the Participant withdraws from the Plan prior to his or her return. An individual who returns to active employment following a leave of absence which exceeds in duration the applicable clause (i) or (ii) time period shall be treated as a new Employee for purposes of the Plan and must, in order to resume participation in the Plan, re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into the offering period. G. CHANGE OF CONTROL. Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Change of Control, by applying the payroll deductions of each Participant for the Purchase Interval in which such Change of Control occurs to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into the offering period in which such Change of Control occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Change of Control. However, the applicable limitation on the number of shares of Common Stock purchasable by all Participants in the aggregate shall not apply to any such purchase. The Corporation shall use its best efforts to provide at least ten (10)-days prior written notice of the occurrence of any Change of Control, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Change of Control. 5 6 H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares of Common Stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. I. ASSIGNABILITY. The purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value per share on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. For purposes of applying such accrual limitations to the purchase rights granted under the Plan, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue in a series of installments on each successive Purchase Date during the offering period on which such right remains outstanding. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Interval, then the payroll deductions which the Participant made during that Purchase Interval with respect to such purchase right shall be promptly refunded. 6 7 D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on November 3, 1999 and shall become effective at the Effective Time, provided no purchase rights granted under the Plan shall be exercised, and no shares of Common Stock shall be issued hereunder, until (i) the Plan shall have been approved by the stockholders of the Corporation and (ii) the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. In the event such stockholder approval is not obtained, or such compliance is not effected, within twelve (12) months after the date on which the Plan is adopted by the Board, the Plan shall terminate and have no further force or effect, and all sums collected from Participants during the initial offering period hereunder shall be refunded. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest of (i) the last business day in January 2010, (ii) the date on which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following such termination. X. AMENDMENT/TERMINATION OF THE PLAN A. The Board may alter, amend, suspend or terminate the Plan at any time to become effective immediately following the close of any Purchase Interval. However, the Plan may be amended or terminated immediately upon Board action, if and to the extent necessary to assure that the Corporation will not recognize, for financial reporting purposes, any compensation expense in connection with the shares of Common Stock offered for purchase under the Plan, should the financial accounting rules applicable to the Plan at the Effective Time be subsequently revised so as to require the recognition of compensation expense in the absence of such amendment or termination. B. In no event may the Board effect any of the following amendments or revisions to the Plan without the approval of the Corporation's stockholders: (i) increase the number of shares of Common Stock issuable under the Plan, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan or (iii) modify eligibility requirements for participation in the Plan. 7 8 XI. GENERAL PROVISIONS A. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. B. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation; however, each Plan Participant shall bear all costs and expenses incurred by such individual in the sale or other disposition of any shares purchased under the Plan. C. The provisions of the Plan shall be governed by the laws of the State of New York without regard to that State's conflict-of-laws rules. 8 9 SCHEDULE A CORPORATIONS PARTICIPATING IN EMPLOYEE STOCK PURCHASE PLAN AS OF THE EFFECTIVE TIME The Knot, Inc. Click Trips, Inc. 10 APPENDIX The following definitions shall be in effect under the Plan: A. BASE SALARY shall mean the regular base salary paid to a Participant by one or more Participating Companies during such individual's period of participation in the Plan, plus any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate. Base Salary shall not include any overtime payments, bonuses, commissions, profit-sharing distributions or other incentive-type payments, or any contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant's behalf by the Corporation or any Corporate Affiliate to any employee benefit or welfare plan now or hereafter established B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE OF CONTROL shall mean a change of ownership of the Corporation pursuant to any of the following transactions: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation, or (iii) the acquisition, directly or indirectly, by a person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by or is under common control with the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATE AFFILIATE shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. A-1 11 G. CORPORATION shall mean The Knot, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of The Knot, Inc. which shall by appropriate action adopt the Plan. H. EFFECTIVE TIME shall mean the time at which the Underwriting Agreement is executed. Any Corporate Affiliate which becomes a Participating Corporation after such Effective Time shall designate a subsequent Effective Time with respect to its employee-Participants. I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a Participating Corporation on a basis under which he or she is regularly expected to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401(a). J. ENTRY DATE shall mean the date an Eligible Employee first commences participation in the offering period in effect under the Plan. The earliest Entry Date under the Plan shall be the Effective Time. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of the initial offering period which begins at the Effective Time, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. L. 1933 ACT shall mean the Securities Act of 1933, as amended. M. PARTICIPANT shall mean any Eligible Employee of a Participating Corporation who is actively participating in the Plan. A-2 12 N. PARTICIPATING CORPORATION shall mean the Corporation and such Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan are listed in attached Schedule A. O. PLAN shall mean the Corporation's Employee Stock Purchase Plan, as set forth in this document. P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more Board members appointed by the Board to administer the Plan. Q. PURCHASE DATE shall mean the last business day of each Purchase Interval. The initial Purchase Date shall be July 31, 2000. R. PURCHASE INTERVAL shall mean each successive six (6)-month period within the offering period at the end of which there shall be purchased shares of Common Stock on behalf of each Participant. S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in February and August each year on which an Eligible Employee may first enter an offering period. T. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. U. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the Corporation's initial public offering of its Common Stock. A-3 EX-10.10 8 FORM OF INDEMNIFICATION AGREEMENT 1 Exhibit 10.10 FORM OF INDEMNIFICATION AGREEMENT Agreement dated as of _________________, between The Knot, Inc., a Delaware corporation (the "Company", which for the purposes of this Agreement shall include any Subsidiary as defined herein), and ____________ (the "Indemnitee"). WHEREAS, the Company desires to attract and retain highly qualified individuals, such as the Indemnitee, to serve the Company; WHEREAS, the Company desires to retain the Indemnitee to provide services to it; WHEREAS, the Company and the Indemnitee recognize the significant risk of personal liability for Agents (as defined herein) which arises from corporate litigation practices; WHEREAS, the Company and the Indemnitee further recognize that liability insurance for the Company's Agents, when available, is often available only at significant expense and provides for coverage of limited scope and that competent and experienced persons are often unable or unwilling to serve as Agents unless they are protected by comprehensive liability insurance or indemnification; WHEREAS, the Indemnitee is willing to serve the Company, subject to certain conditions, including execution and delivery of this Agreement by the Company in order that the Indemnitee be furnished the indemnity provided for herein; WHEREAS, the Company's Restated Certificate of Incorporation ("Charter") and By-Laws do not prohibit or restrict contracts between the Company and its Agents with respect to indemnification of such Agents; and WHEREAS, in view of such considerations, the Company desires to provide, independent from the indemnification to which the Indemnitee is otherwise entitled by law and under the Company's Charter and By-Laws, indemnification to the Indemnitee and the Expense Advances (as defined herein), all as set forth in this Agreement to the maximum extent permitted by law; NOW, THEREFORE, to induce the Indemnitee to serve the Company and in consideration of these premises and the mutual agreements set forth in this Agreement, as well as other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Indemnitee hereby agree as follows: 1. Definitions. For the purposes of this Agreement, (a) Agent. "Agent" means any person who (i) is or was a director, officer, employee, trustee or other agent or fiduciary of the Company; (ii) is or was serving at the request, for the convenience, or to represent the interests of the Company or a Company 2 -2- employee benefit plan, its participants or its beneficiaries, as a director, officer, employee, trustee or other agent or fiduciary of another corporation, limited liability company, partnership, joint venture, trust or other entity (including, without limitation, any employee benefit plan); or (iii) was a director, officer, employee, trustee or other agent or fiduciary of a corporation, limited liability company, partnership, joint venture, trust or other entity which was a predecessor of the Company, or was a director, officer, employee, trustee or other agent or fiduciary of any other such entity at the request of such predecessor. The use of the term "Agent" shall not be construed to alter the legal relationship between an Agent, as defined herein, and the Company. (b) Change in Control. "Change in Control" means that after the date of this Agreement any of the following shall occur: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding voting securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease to be a majority thereof (otherwise than through death, disability or retirement in accordance with the Company's normal retirement policies); (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, limited liability company, partnership, joint venture, trust or other entity other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such a merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete or substantial liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (c) Claim. "Claim" means any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation, whether conducted by the Company or any other party, which the Indemnitee believes in good faith might lead to the institution of any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation, whether civil, criminal, administrative, investigative or any other type whatsoever, with respect to an Indemnifiable Event. (d) References to the "Company" shall include, in addition to The Knot, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which The Knot, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, trustees or other agents or fiduciaries, so that if the Indemnitee is or was a director, officer, employee, trustee or other agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a 3 -3- director, officer, employee, trustee or other agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, the Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as the Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (e) Expense Advance. "Expense Advance" means a payment to the Indemnitee of Expenses in advance of the settlement of or final judgment on any Claim. (f) Expenses. "Expenses" means all costs and liabilities of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements and other out-of-pocket costs, judgments, fines, penalties and amounts paid in settlements) paid or incurred by or imposed upon the Indemnitee in the investigation, defense, settlement or appeal of, or otherwise in connection with, a Claim (including, without limitation, being a witness) or in establishing or enforcing a right to indemnification under this Agreement, the Company's Charter or By-Laws, Section 145 of the General Corporation Law of the State of Delaware or otherwise, and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. (g) Indemnifiable Event. "Indemnifiable Event" means any event or occurrence related to the fact that the Indemnitee is or was a director, officer, employee, trustee or other agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee or other agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of the Indemnitee while serving in such capacity. (h) Independent Legal Counsel. "Independent Legal Counsel" means an attorney or firm of attorneys, selected in accordance with the provisions of Section 8(a), whether or not in the event of a Change in Control. (i) Potential Change in Control. "Potential Change in Control" means that after the date of this Agreement any of the following shall occur: (i) any person or entity publicly announces an intention to take or to consider taking actions which if consummated might result in a Change in Control or (ii) the Company's Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (j) Reviewing Party. "Reviewing Party" means the person or body appointed by the Company's Board of Directors pursuant to Section 11(d) and in accordance with applicable law, which person or body shall be either members of the Company's Board of Directors who are not interested in the particular Claim or Independent Legal Counsel. If there has been a Change in Control or Potential Change in Control, the Reviewing Party shall be Independent Legal Counsel. (k) Subsidiary. "Subsidiary" means any corporation, limited liability company, partnership, joint venture, trust or other entity of which more than 50% of the outstanding voting securities are owned directly or indirectly by the Company, by the Company and one or more other Subsidiaries, or by one or more other Subsidiaries. 4 -4- 2. Agreement to Serve. The Indemnitee agrees to serve the Company as an Agent, at its will (or under separate agreement if such agreement exists), in the capacity in which the Indemnitee has been requested to serve by the Company, so long as the Indemnitee is duly appointed or elected and qualified in accordance with the Charter and By-Laws of the Company, or until such time as the Indemnitee tenders the Indemnitee's resignation in writing, provided, however, that nothing contained in this Agreement is intended to create any right to continued service by the Indemnitee. 3. Basic Indemnification. Subject to the terms of this Agreement: (a) Claims Other than Derivative Claims in Favor of the Company. As to all Claims other than derivative Claims in favor of the Company, the Company shall indemnify the Indemnitee against all Expenses. (b) Derivative Claims for Judgment in Favor of the Company. As to all derivative Claims in favor of the Company, the Company shall indemnify the Indemnitee against all Expenses, provided that no indemnification shall be made as to such derivative Claim if the Indemnitee has been finally adjudged to be liable to the Company in connection with such Claim or any claim, issue or matter therein, unless and only to the extent that the Court of Chancery of Delaware or the court in which the Claim was brought shall determine that, despite the adjudication of liability but in view of all the circumstances, the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses which the Court of Chancery or such other court shall deem proper. (c) Standard of Conduct Required for Entitlement to Basic Indemnification. The Indemnitee shall be entitled to indemnification under Sections 3(a) and (b) above if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, provided that in the case of any criminal action or proceeding, the Indemnitee had no reasonable cause to believe the Indemnitee's conduct was unlawful and, in the case of Section 3(b), subject to the exclusion set forth therein. The termination of any Claim by judgment, order, settlement (whether with or without court approval), conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that (i) the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, (ii) the Indemnitee had reasonable cause to believe that the Indemnitee's conduct was unlawful or (iii) a court determined that indemnification is not permitted by applicable law or pursuant to Section 3(b). In addition, neither the failure of any Reviewing Party to have made a determination as to whether the Indemnitee has met the standard of conduct set forth in this Section 3(c) or had any particular belief, nor an actual determination by any Reviewing Party that the Indemnitee has not met such standard of conduct or did not have such belief, shall be a defense to the Indemnitee's right to indemnification or create a presumption that the Indemnitee did not meet any particular standard of conduct or did not have any particular belief. If the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interest of the participants and beneficiaries of an employee benefit plan, the Indemnitee shall be deemed to have acted in a manner in or not opposed to the best interests of the Company. 5 -5- (d) Success on the Merits. To the extent that the Indemnitee has been successful on the merits or otherwise (including, without limitation, dismissal or withdrawal of a Claim with or without prejudice) in defense of any Claim or in defense of any claim, issue or matter therein, the Company shall indemnify the Indemnitee against Expenses in connection with such Claim. 4. Additional Indemnification Rights. The Company further agrees to indemnify the Indemnitee in connection with any Claim and to make Expense Advances to the Indemnitee, in each case to the fullest extent as may be provided for under the Company's Charter, By-Laws, vote of the stockholders or disinterested directors and/or applicable law notwithstanding that any such indemnification or Expense Advance is not specifically authorized by the other provisions of this Agreement. It is the intent of the parties hereto that (i) in the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify or make Expense Advances to an Agent to a greater degree than would be afforded currently under the Company's Charter, By-Laws, vote of the stockholders or disinterested directors and this Agreement, the Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change; (ii) in the event of any change, after the Date of this Agreement, in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify or make Expense Advances to an Agent to a greater degree than would be afforded currently under the Company's Charter, By-Laws, vote of the stockholders or disinterested directors and this Agreement, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 5(a) hereof; and (iii) this Agreement be interpreted and enforced so as to provide indemnification and Expense Advances under such circumstances as set forth in this Agreement, if any, in which the providing of indemnification or Expense Advances would otherwise be discretionary. 5. Exclusions. Any other provision of this Agreement to the contrary notwithstanding, the Company shall not be obligated to indemnify or provide Expenses Advances to the Indemnitee: (a) to the extent any such indemnification or Expense Advance would be prohibited under applicable law; or (b) to the extent that the Indemnitee actually received from any other source (including an insurer) amounts otherwise payable hereunder; (c) to the extent the Claims are initiated or brought voluntarily by the Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Charter or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether the Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the case may be; 6 -6- (d) to the extent any Expenses are incurred by the Indemnitee with respect to any action instituted (i) by the Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or have lapsed) that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or have lapsed) that each of the material defenses asserted by the Indemnitee in such action was made in bad faith or was frivolous; (e) for Expenses and the payment of profits arising from the purchase and sale by the Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute; provided that notwithstanding the foregoing provisions of this Section 5, the Indemnitee shall be entitled under Section 6 to receive Expense Advances with respect to any Claim unless and until a court having jurisdiction over such Claim shall have made a final determination (as to which all rights of appeal therefrom shall have been exhausted or lapsed) that the Indemnitee is prohibited from receiving indemnification with respect thereto. 6. Expense Advances. Within five business days of receipt by the Company of an undertaking (the "Undertaking"), substantially in the form attached hereto as Exhibit 1, by or on behalf of the Indemnitee to repay the amount of any Expense Advance with respect to any Claim if and to the extent that it shall ultimately be determined that the Indemnitee is not entitled to indemnification for such amount, the Company shall make Expense Advances to the Indemnitee. The Undertaking shall be unsecured and shall bear no interest. 7. Non-Exclusivity; Continuation. The indemnification and Expense Advances pursuant to this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Company's Charter or By-Laws, any vote of the Company's stockholders or disinterested directors, any other agreement, any law or otherwise, both as to actions in the Indemnitee's official capacity and as to actions in another capacity while an Agent. All agreements and obligations of the Company contained in this Agreement shall continue as to the Indemnitee while the Indemnitee is an Agent and after the Indemnitee has ceased to be an Agent. 8. Change in Control; Potential Change in Control. (a) The Company agrees that if there is a Change in Control, then with respect to all matters concerning the rights of the Indemnitee to indemnification and Expense Advances under this Agreement, the Company's Charter or By-Laws, any vote of the Company's stockholders or disinterested directors, any other agreement, any law or otherwise, the Company shall seek legal advice only from Independent Legal Counsel. For all purposes of this Agreement, such Independent Legal Counsel shall be such person or firm selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld) which has not otherwise performed services for the Company or the Indemnitee within the prior three years (other than in connection with such matters). The Independent Legal Counsel shall, 7 -7- among other things, render its written opinion to the Company and the Indemnitee as to whether and to what extent the Indemnitee is permitted to be indemnified and receive Expense Advances. The Company agrees to pay the fees and expenses of the Independent Legal Counsel relating to its engagement pursuant to this Agreement. (b) In the event of a Potential Change in Control, the Company may, in its sole discretion, create a trust for the benefit of the Indemnitee and from time to time fund such trust in such amounts as the Company's Board of Directors may determine to satisfy Expenses reasonably anticipated or proposed to be incurred or paid from time to time in connection with any Claims. The terms of any trust established pursuant hereto shall provide that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the trustee shall advance (solely to the extent of trust assets), within two business days of a request by the Indemnitee, all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the trust under the circumstances under which the Indemnitee would be required to reimburse the Company under Section 6), (iii) the trustee shall promptly pay (solely to the extent of trust assets) to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (iv) all unexpended funds in such trust shall revert to the Company upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified (or is not entitled to be indemnified) under the terms of this Agreement as to all Claims. The trustee shall be a person or entity reasonably satisfactory to the Indemnitee. Nothing in this Section 8(b) shall relieve the Company of any of its obligations under any other provision of this Agreement. 9. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement or otherwise to indemnification or Expense Advances by the Company for a portion, but not all, of any Expenses incurred by the Indemnitee, the Company shall indemnify or provide Expense Advances to the Indemnitee (as the case may be) for the portion thereof to which the Indemnitee is entitled. 10. Contribution. If indemnification is unavailable by reason of a court decision described in Section 11(e) based on grounds other than that set forth in Section 5(a), then in respect of any Claim in which the Company is jointly liable with the Indemnitee (or would be if joined in such Claim), the Company shall contribute to the amount of the Indemnitee's Expenses in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and by the Indemnitee on the other hand from the transaction from which such Claim arose, and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the events which resulted in such Expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnitee on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 11. Procedures. 8 -8- (a) Timing of Payments. All payments of Expenses (including, without limitation, Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by the Indemnitee therefor is presented to the Company, but in no event later than thirty (30) business days after such written demand by the Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than ten (10) business days after such written demand by the Indemnitee is presented to the Company. (b) Notice. Promptly after receipt by the Indemnitee of notice of the commencement, or the threat of commencement, of any Claim, the Indemnitee shall, if the Indemnitee believes that indemnification or Expense Advances with respect thereto may be sought from the Company by the Indemnitee pursuant to this Agreement, notify the Company of the commencement or threat of commencement thereof; the Indemnitee's notice to the Company may, but need not, be substantially in the form attached hereto as Exhibit 2. Any failure of the Indemnitee to provide such notice to the Company shall not, however, relieve the Company of any liability which it may have to the Indemnitee unless and to the extent such failure causes material adverse impact upon the interests of the Company. If, at the time it receives such notice from the Indemnitee, the Company has directors' and officers' liability insurance in effect, the Company shall give prompt notice of the commencement, or the threat of commencement, of such Claim to the insurers in accordance with the procedures set forth in the respective applicable insurance policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies; provided that no such payments by such insurers shall relieve the Company of any liability or obligation which it may have to the Indemnitee except as and to the extent expressly provided under this Agreement. (c) Assumption of Defense. If the Company shall be obligated to pay Expenses arising in connection with any Claim against the Indemnitee, the Company shall be entitled to assume the defense of such Claim, with counsel approved by the Indemnitee (whose approval shall not be unreasonably withheld), upon the delivery to the Indemnitee of notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees and expenses of counsel subsequently incurred by the Indemnitee with respect to the same Claim, provided that (i) the Indemnitee shall have the right to employ the Indemnitee's own counsel in connection with any Claim at the Indemnitee's expense; (ii) if (A) the employment of counsel by the Indemnitee shall have been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such Claim, in each such case the fees and expenses of the Indemnitee's counsel shall be paid by the Company; and (iii) the Company shall not settle any Claim in any manner which would impose any penalty, limitation or unindemnified Expense on the Indemnitee without the Indemnitee's consent. (d) Determination of Entitlement to Indemnification. In the event of any demand by the Indemnitee for indemnification under this Agreement or otherwise, the 9 -9- Board of Directors of the Company shall promptly designate a Reviewing Party. The Reviewing Party shall determine that indemnification is proper if it finds that the Indemnitee has met the required standard of conduct set forth in Section 3(c) and that indemnification is not prohibited pursuant to Section 5. If the Reviewing Party is more than one member of the Company's Board of Directors, it shall act by a majority vote. If the Reviewing Party is Independent Legal Counsel, the determination of the Reviewing Party shall be rendered in the form of a written legal opinion. Subject to Sections 11(e) and 12, any indemnification under Sections 3 and 4 (unless ordered by a court or pursuant to Section 3(d)) shall be made by the Company only as authorized in the specific case and upon the determination of the Reviewing Party that the Indemnitee is entitled to indemnification in the circumstances because the Indemnitee has met the standard of conduct set forth in Section 3(c) and that indemnification is not prohibited pursuant to Section 5. The Indemnitee's demand for indemnification shall create a presumption that the Indemnitee is entitled to indemnification and the Reviewing Party shall have 30 days from the date of receipt of the Indemnitee's demand in which to render in writing and deliver to the Indemnitee its determination. If the Reviewing Party makes no timely determination, the Reviewing Party shall be deemed to have determined that the Indemnitee is entitled to the indemnification demanded. If the Reviewing Party determines, which determination shall be based upon clear and convincing evidence sufficient to rebut the aforesaid presumption of entitlement, that the Indemnitee is not entitled to indemnification, in whole or in part, in the circumstances because the Indemnitee has not met the standard of conduct set forth in Section 3(c) or because the indemnification is prohibited pursuant to Section 5, the Indemnitee shall (i) be entitled to obtain a favorable determination or to appeal such negative determination in the manner provided in Sections 11(e) and 12 and (ii) not be required to reimburse the Company for any Expense Advances or Expenses theretofore paid to or on behalf of the Indemnitee until a final determination has been made with respect to the Indemnitee's legal entitlement to indemnification (as to which all rights of appeal therefrom shall have been exhausted or shall have lapsed). (e) Indemnitee's Rights on Unfavorable Determination. Notwithstanding a determination by a Reviewing Party or any forum listed in Section 12 that the Indemnitee is not entitled to indemnification with respect to a specific Claim, or any claim, issue or matter therein, the Indemnitee shall have the right to apply to the Court of Chancery of Delaware or any other court of competent jurisdiction for the purpose of determining and enforcing the Indemnitee's right to indemnification pursuant to this Agreement or otherwise and the Company hereby consents to service of process and agrees to appear in any such proceeding. Such court shall find that the Indemnitee is entitled to indemnification unless the Company shall prove by clear and convincing evidence that (i) the Indemnitee did not meet the applicable standard of conduct required to entitle the Indemnitee to such indemnification or that indemnification is prohibited pursuant to Section 5, and (ii) the requirements of Section 3(d) have not been met. 12. Appeal of a Reviewing Party's Determination of No Right to Indemnification. (a) The Indemnitee shall be entitled to select from the following alternatives a forum in which the validity of a Reviewing Party's determination that the Indemnitee is not entitled to indemnification will be heard, which forum shall determine that the Indemnitee is entitled to such indemnification unless such forum determines that there is clear and convincing evidence that (i) the Indemnitee did not meet the applicable standard of conduct required to 10 -10- entitle the Indemnitee to such indemnification or that indemnification is prohibited pursuant to Section 5, and (ii) the requirements of Section 3(d) have not been met: (A) those members of the Company's Board of Directors who are disinterested parties with respect to the Claim, acting by a majority vote; (B) Independent Legal Counsel, in a written opinion; or (C) those stockholders of the Company who are disinterested parties with respect to the Claim, acting by a majority vote. (b) As soon as practicable, and in no event later than 30 days after notice of the Indemnitee's choice of forum pursuant to Section 12(a), the Company shall, at its own expense, submit to the selected forum in such manner as the Indemnitee or the Indemnitee's counsel may reasonably request, the basis for the determination that the Indemnitee is not entitled to indemnification, and the Company shall act in the utmost good faith to assure the Indemnitee a complete opportunity to defend against and appeal such determination. 13. Binding Effect; Successors and Assigns. This Agreement shall bind and inure to the benefit of the successors, heirs, personal and legal representatives and assigns of the parties hereto, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all, substantially all or a substantial part of the business or assets of the Company. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part of the business or assets of the Company, by written agreement in form and substance satisfactory to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 14. Expenses and Expense Advances to Enforce the Agreement. It is the intent of the Company that the Indemnitee shall not be required to incur any Expenses arising from any effort to enforce the Indemnitee's rights under this Agreement, because incurring such Expenses would substantially detract from the benefits intended to be extended to the Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee that the Company has failed to comply with any of its obligations under this Agreement or if the Company or any other person or entity (other than the Court of Chancery of Delaware or any other court of competent jurisdiction in a final determination, as which all rights of appeal therefrom shall have been exhausted or shall have lapsed) takes any action to declare this Agreement or any provision hereof void or unenforceable, or institutes any action, suit or proceeding designed (or having the effect of being designed) to deny or recover from the Indemnitee the benefits intended to be provided to the Indemnitee hereunder, the Company hereby irrevocably authorizes the Indemnitee from time to time to retain counsel of the Indemnitee's choice to represent the Indemnitee in connection with the enforcement of the Indemnitee's rights under this Agreement. If the Indemnitee is successful in whole or in part in enforcing the Indemnitee's rights under this Agreement, the Company shall pay and be solely responsible for any and all costs and liabilities (including, without limitation, all attorneys' fees and related disbursements and other out-of-pocket costs) incurred by the Indemnitee in connection therewith. 11 -11- 15. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) when delivered by hand or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party shall be as shown on the signature page of this Agreement or as subsequently modified by the addressee by such written notice. 16. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and (iii) to the fullest extent possible, any such provision held to be invalid, illegal or unenforceable shall be reformed so as to be valid, legal and enforceable and to give effect to the intent manifested by such provision. 17. Modifications, Amendments, and Waivers. No modification or amendment of this Agreement, or waiver of any of the provisions hereof, shall be binding unless executed in writing by both of the parties hereto, in the case of a modification or amendment, or by the waiving party, in the case of a waiver. No waiver of any such provision shall be deemed to constitute a waiver of such provision on any other occasion or a waiver of any other provision. 18. Consent to Jurisdiction. The Company and the Indemnitee each hereby irrevocably consent to the non-exclusive jurisdiction of the Court of Chancery of Delaware for any purpose in connection with any action or proceeding which arises out of or relates to this Agreement. 19. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. 20. Subrogation. In the event of payment by the Company under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who agrees, at the sole expense of the Company, to execute all papers reasonably required and to do all other acts and things that may be reasonably necessary on the part of the Indemnitee to secure such rights, including the execution of documents necessary to enable the Company to bring suit to enforce such rights. 21. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof. 22. No Construction as Employment Agreement. In the case of any Indemnitee who is an employee of the Company, nothing contained in this Agreement shall be construed as 12 -12- giving the Indemnitee any right to be retained in the employ of the Company or affiliated entities. 23. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 13 -13- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE KNOT, INC. By:________________________ ____________________________ Name:______________________ Indemnitee Title:_______________________ Address: ____________________ Address: _____________________ ____________________ _____________________ ____________________ _____________________ 14 -14- Exhibit 1 UNDERTAKING 1. This Undertaking is submitted pursuant to the Indemnification Agreement dated as of ________________ between The Knot, Inc., a Delaware corporation (the "Company"), and the undersigned (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings set forth in the Agreement. 2. I am requesting certain Expense Advances in connection with a Claim. 3. I hereby undertake to repay such Expense Advances if it shall ultimately be determined that I am not entitled to be indemnified by the Company therefor under the Agreement or otherwise. 4. The Expense Advances are, in general, all related to: Signed: ______________________________ Dated: ______________________________ 15 -15- Exhibit 2 NOTICE AND DEMAND FOR INDEMNIFICATION 1. This Notice and Demand for Indemnification is submitted pursuant to the Indemnification Agreement dated as of _________________ between The Knot, Inc., a Delaware corporation (the "Company"), and the undersigned (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings set forth in the Agreement. 2. I am notifying the Company as to the following Claim: 3. I am requesting indemnification and Expense Advances with respect to such Claim to the full extent provided for in the Agreement or to which I may otherwise be entitled. Signed: ______________________________ Dated: ______________________________ EX-23.1 9 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated October 26, 1999 (except for Note 12 as to which the date is November 5, 1999) with respect to the financial statements of The Knot, Inc. and our report dated August 18, 1999, with respect to the financial statements of Casenhiser Clothing Company, Inc. included in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-87345) and related Prospectus of The Knot, Inc. dated November 10, 1999. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP New York, New York November 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----