The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model. The calculation for fair value of stock options requires considerable judgment including the estimation of stock price volatility, expected option lives and risk-free investment rates. We develop estimates based on historical data and market information which may change significantly over time and, accordingly, have a large impact on valuation.
Refer to the section entitled “Stock-Based Compensation” on page 24 for a further discussion of the impact of SFAS No. 123(R) on our recording of stock-based compensation for the three and nine months ended September 30, 2006.
Net revenues and operating expenses of WeddingChannel have been included in our consolidated statements of operations since September 8, 2006. Accordingly, the WeddingChannel amounts are identical for the three and nine months ended September 30, 2006.
Net revenues were $18.5 million and $51.0 million for the three and nine months ended September 30, 2006, respectively, compared to $13.1 million and $38.6 million for the corresponding periods in 2005. Net revenues in 2006 include $1.5 million from WeddingChannel.
Online sponsorship and advertising revenues increased to $9.4 million and $25.5 million for the three and nine months ended September 30, 2006, respectively, as compared to $6.7 million and $18.5 million for the corresponding periods in 2005. The 2006 revenue amounts include $378,000 for WeddingChannel. In addition to the impact from WeddingChannel, revenue from local vendor online advertising programs increased by $1.1 million and $3.5 million for the three and nine months ended September 30, 2006, respectively, or by approximately 25% and 27% when compared to the corresponding periods in 2005, primarily as a result of an increase in the number and average spending of local vendor clients, including the continuing impact of price increases. There was also an increase of $1.2 million and $3.2 million in national online sponsorship and advertising revenue for the three and nine months ended September 30, 2006, or approximately 55% and 54%, respectively, when compared to the corresponding periods in 2005, largely due to an increase in the average spending by our national accounts. Online sponsorship and advertising revenues amounted to 51% of our net revenues for the three months ended September 30, 2006 and 2005.
For the nine months ended September 30, 2006 and 2005, sponsorship and advertising revenues amounted to 50% and 48% of our net revenues, respectively.
Registry services revenue was $955,000 and $1.1 million for the three and nine months ended September 30, 2006 as compared to $63,000 and $210,000 for the corresponding periods in 2005. The increases are primarily the result of $797,000 in commissions earned from WeddingChannel’s retail partners. Registry services revenue amounted to 5% of our net revenues for the three months ended September 30, 2006 and 0.5% for the three months ended September 30, 2005. For the nine months ended September 30, 2006 and 2005, registry services revenue was 2% and 0.5% of our net revenues, respectively.
Merchandise revenues increased to $4.3 million and $12.2 million for the three and nine months ended September 30, 2006, respectively, as compared to $3.3 million and $10.6 million for the corresponding periods in 2005. The 2006 revenue amounts include $262,000 sold through the WeddingChannel store. In addition, revenues for The Knot Wedding Shop increased by $867,000 and $1.9 million or 29% and 20% for the three and nine months ended September 30, 2006, respectively, as compared to the prior year. Site improvements and more effective marketing efforts resulted in increased traffic and sales with respect to the shopping areas on our site. The sale of wedding supplies to wholesale customers decreased by $93,000 and $318,000 for the three and nine months ended September 30, 2006, respectively, as compared to the prior year. Subsequent to August 2006, we are no longer pursuing wholesale customers. The balance of the merchandise revenue variance relates to registry revenue. In 2006, we are no longer maintaining inventory and recording sales of registry-related products. Merchandise revenues amounted to 23% of our net revenues for the three months ended September 30, 2006 and 25% for the three months ended September 30, 2005. For the nine months ended September 30, 2006 and 2005, merchandise revenue was 24% and 27% of our net revenues, respectively.
Publishing and other revenues increased to $3.9 million and $12.2 million for the three and nine months ended September 30, 2006, respectively, as compared to $3.1 million and $9.3 million for the corresponding periods in 2005. Local print revenue increased by $436,000 and $1.7 million for the three and nine months ended September 30, 2006, respectively, or approximately 35% and 30%, respectively, when compared to the corresponding periods in 2005, due to an increase in advertising pages sold, including pages associated with the local section of our national magazine, and a small increase in pricing. For the three and nine months ended September 30, 2006, national print revenue increased by $251,000 and $560,000, respectively, or 14% and 17%, respectively, primarily as a result of an increase in the number of designer advertisers and advertising page rates for both designer and national advertisers in our national magazine. We also recorded a small amount of revenue from the initial issue ofThe Nestmagazine. We recorded $361,000 in author royalties for the nine months ended September 30, 2006 upon the delivery and acceptance of two new books from our current program of wedding and newlywed-related publications. Additionally, for the nine months ended September 30, 2006, we recorded revenues of $314,000 from our bridal events program in partnership with Four Seasons Hotels and Resorts. Publishing and other revenue amounted to 21% and 24% of our net revenues for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005, publishing and other revenue were both 24% of our net revenues.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including outbound shipping costs, costs related to the production of national and regional magazines and The Knot TV, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of Internet and hosting services.
Cost of revenues increased to $4.2 million and $11.4 million for the three and nine months ended September 30, 2006, respectively, from $3.0 million and $8.8 million for the corresponding periods in 2005. Online advertising cost of revenue increased by $99,000 and $395,000 for the three and nine months ended September 30, 2006, respectively, primarily due to the production costs associated with The Knot TV. The cost of revenues from the sale of merchandise increased by $505,000 and $933,000 for the three and nine months ended September 30, 2006, respectively, due to the increases in revenue. Publishing and other cost of revenue increased by $549,000 and $1.2 million for the three and nine months ended September 30, 2006, respectively, due to higher production costs for both our national and local print publications as a result of increased advertising page counts, production costs associated with the initial issue ofThe Nestmagazine in August 2006 and direct costs related to the bridal events program. As a percentage of our net revenues, cost of revenues was 23% and 22% for the three and nine months ended September 30, 2006, respectively, as compared to 23% for each of the corresponding periods in the prior year. Margin improvements resulting from a higher mix of registry services revenue and higher online advertising revenue for the three and nine
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months ended September 30, 2006, respectively, were generally offset by lower margins for publishing and other revenue due to the investment inThe Nest magazine and the costs for the bridal events program.
Product and Content Development
Product and content development expenses consist primarily of payroll and related expenses for editorial, creative and information technology personnel and computer hardware and software costs.
Product and content development expenses increased to $2.2 million and $5.8 million for the three and nine months ended September 30, 2006, respectively, from $1.7 million and $5.2 million for the corresponding periods in 2005. These increases include $329,000 associated with WeddingChannel, primarily for personnel and related expenses. Other personnel and related expenses increased by $326,000 and $761,000 for the three and nine months ended September 30, 2006, respectively, primarily due to additional investments in information technology and editorial staff, including increases of approximately $62,000 and $116,000, respectively, related to stock-based compensation. These increases were offset, in part, by reductions in costs for computer hardware and software and outside consultants. In addition, for the nine months ended September 30, 2005, we incurred severance and other costs of approximately $120,000 in connection with the relocation of a significant portion of our information technology function to Austin, Texas. As a percentage of our net revenues, product and content development expenses decreased to 12% and 11% for each of the three and nine months ended September 30, 2006, respectively, as compared to 13% for the corresponding periods in the prior year.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service, registry and public relations personnel, as well as the costs for promotional activities and fulfillment and distribution of merchandise.
Sales and marketing expenses increased to $4.7 million and $13.7 million for the three and nine months ended September 30, 2006, respectively, from $3.5 million and $10.7 million for the corresponding periods in 2005. These costs include $372,000 associated with WeddingChannel, primarily for personnel and related expenses. Other personnel and related costs increased by $274,000 and $1.5 million for the three and nine months ended September 30, 2006, respectively, primarily as a result of investments in national and local sales staff, in part, as additional support for sales efforts for new initiatives, including The Nest. These increases include approximately $46,000 and $168,000, respectively, related to stock-based compensation. For the three and nine months ended September 30, 2006, we incurred higher sales commissions and incentives of $136,000 and $258,000, respectively, as a result of the increases in online and print advertising revenue and additional promotion expenses of $294,000 for the nine months. Both periods in 2006 include $224,000 of fulfillment expenses for the initial issue ofThe Nest magazine. As a percentage of our net revenues, sales and marketing expenses were 25% and 27% for the three and nine months ended September 30, 2006, respectively, and 27% and 28% for the corresponding periods in 2005.
General and Administrative
General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, legal and accounting fees, facilities costs, insurance and bad debt expenses.
General and administrative expenses increased to $4.2 million and decreased to $10.8 million for the three and nine months ended September 30, 2006, respectively, as compared to $3.9 million and $10.9 million for the corresponding periods in 2005. Legal and other professional costs related to our previous litigation with WeddingChannel amounted to $163,000 for the nine months ended September 30, 2006. On September 26, 2006, the Court approved a stipulation between WeddingChannel and us dismissing the case without prejudice and without costs. Legal costs related to this litigation were $1.5 million and $3.7 million in the three and nine months ended September 30, 2005, respectively. For the three months ended September 30, 2006 compared to September 30, 2005, we incurred additional stock-based compensation expense of approximately $248,000, higher costs of $249,000 with respect to the development of a formal disaster recovery plan, higher consulting and audit costs related to Sarbanes-Oxley compliance of $412,000, additional professional and other legal costs of $212,000 and higher bad debt expense of $112,000. For the nine months ended September 30, 2006 compared to September 30, 2005, we incurred additional stock-based compensation expense of approximately $761,000, higher costs of $576,000 with respect to the
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development of a formal disaster recovery plan, higher consulting and audit costs related to Sarbanes-Oxley compliance of $659,000, additional professional and other legal costs of $585,000, and higher bad debt expense of $217,000. Other general and administrative expenses associated with WeddingChannel for the three and nine months ended September 30, 2006 were $314,000. As a percentage of our net revenues, general and administrative expenses decreased to 23% and 21% for the three and nine months ended September 30, 2006, respectively, from 30% and 28% for each of the corresponding periods in 2005.
Stock-Based Compensation
The following table details the effect on net income and earnings per share had stock-based compensation expense been recorded based on the fair value method under SFAS No. 123, as amended, for the three and nine months ended September 30, 2005.
| | | | | | | |
| | Three Months
Ended | | Nine Months
Ended | |
| | September 30, 2005 | | September 30, 2005 | |
| |
| |
| |
Net income, as reported | | $ | 722,461 | | $ | 2,471,178 | |
Add: Total stock-based employee compensation expense included in reported net income | | | 23,750 | | | 23,750 | |
Deducted: Total stock-based employee compensation expense determined under fair value method for all awards | | | (305,621 | ) | | (766,850 | ) |
| |
|
| |
|
| |
Net income, pro forma | | $ | 440,590 | | $ | 1,728,078 | |
| |
|
| |
|
| |
Basic earnings per share, as reported | | $ | 0.03 | | $ | 0.11 | |
| |
|
| |
|
| |
Basic earnings per share, pro forma | | $ | 0.02 | | $ | 0.08 | |
| |
|
| |
|
| |
Diluted earnings per share, as reported | | $ | 0.03 | | $ | 0.10 | |
| |
|
| |
|
| |
Diluted earnings per share, pro forma | | $ | 0.02 | | $ | 0.07 | |
| |
|
| |
|
| |
As of September 30, 2006, total unrecognized estimated compensation expense related to nonvested stock options, restricted shares and ESPP rights was $3.3 million, which is expected to be recognized over a weighted average period of 2.6 years. We currently believe that stock-based compensation expense for the calendar year ended December 31, 2006 will range from $1.5 million to $1.6 million.
Since June 2005, we have awarded shares of restricted stock as our primary form of stock-based compensation. However, we may elect to resume granting stock options in the future.
Depreciation and Amortization
Depreciation and amortization consists of depreciation and amortization of property and equipment and capitalized software, and amortization of intangible assets related to acquisitions.
Depreciation and amortization increased to $975,000 and $1.8 million for the three and nine months ended September 30, 2006, respectively, as compared to $341,000 and $901,000 for the corresponding periods in 2005. For the three months ended September 30, 2006, we recorded additional depreciation and amortization of property, equipment, capitalized software and intangible assets of $460,000, primarily related to assets acquired as a result of the WeddingChannel acquisition. The increase was also due to increasing capital expenditures during calendar year 2005 and in the nine months ended September 30, 2006, including amounts for our new e-commerce platform and additional computer hardware and software to establish secondary back-up systems in connection with the development of a formal disaster recovery plan.
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Interest Income
Interest income, net of interest expense, increased to $1.1 million and $1.7 million for the three and nine months ended September 30, 2006, respectively, as compared to $207,000 and $504,000 for the corresponding periods in 2005. These increases were primarily the result of higher funds available for investment, resulting from proceeds from the private placement, the availability of proceeds received from the follow-on offering prior to the payment of the cash portion of the purchase price for WeddingChannel and higher interest rates.
Provision for Taxes on Income
For the three and nine months ended September 30, 2006, we recorded income tax expense of $90,000 and $366,000, respectively, as compared to $37,000 and $151,000 for the corresponding periods in 2005. This was primarily due to operating income generated in certain states and a provision for federal minimum tax related to the use of our net operating loss carryforwards.
Liquidity and Capital Resources
On July 10, 2006, we completed the sale of 2,750,000 shares of common stock to three institutional investors for gross proceeds of $50.2 million. The net proceeds after placement fees and other offering costs were approximately $47.6 million.
On August 15, 2006, we completed a follow-on offering for the sale of 2,000,000 shares of our common stock at a public offering price per share of $16.00. On September 13, 2006, we issued an additional 809,600 shares of our common stock at $16.00 per share pursuant to the overallotment option set forth in the underwriting agreement related to the follow-on offering. We received proceeds of approximately $42.1 million net of fees, underwriting discounts and other expenses associated with the follow-on offering. The proceeds from the sale of shares completed on August 15, 2006 were used to fund a portion of the cash consideration for the WeddingChannel acquisition.
As of September 30, 2006, our cash, cash equivalents and short-term investments amounted to $77.7 million. We currently invest primarily in short-term debt instruments that are highly liquid, of high-quality investment grade, and have maturities of less than three months, with the intent to make such funds readily available for operating purposes.
Net cash provided by operating activities was $13.6 million for the nine months ended September 30, 2006. This resulted primarily from the net income for the period of $8.8 million, depreciation, amortization, non-cash services expense and stock-based compensation of $3.3 million and a decrease in accounts receivable, net of deferred revenue and net of businesses acquired of $1.7 million due to improved collection efforts and further credit card usage by local vendors. These sources of cash were offset, in part, by an increase in deferred production and marketing costs of $121,000. Net cash provided by operating activities was $4.9 million for the nine months ended September 30, 2005. This resulted primarily from the net income for the period of $2.5 million, depreciation, amortization, non-cash services expense and stock-based compensation of $1.5 million, a decrease in accounts receivable, net of deferred revenue, of $988,000 due to improved collection efforts and further credit card usage by local vendors and an increase in accounts payable and accrued expenses of $230,000. These sources of cash were offset, in part, by an increase in inventory of $389,000.
Net cash used in investing activities was $51.8 million for the nine months ended September 30, 2006 due primarily to cash paid in connection with the acquisition of WeddingChannel, net of cash acquired, and the business and assets of OAM Solutions, Inc. aggregating $53.3 million and purchases of property, equipment and software of $3.1 million, offset, in part, by the sale of short-term investments, net of purchases, of $4.6 million. Net cash provided by investing activities was $7.5 million for the nine months ended September 30, 2005 and consisted primarily of proceeds from the sale of short-term investments, net of purchases, of $9.6 million offset, in part, by purchases of property and equipment of $1.4 million and cash paid for the acquisition of the business and assets of GreatBoyfriends LLC of $621,000. We currently believe that purchases of property and equipment for the calendar year ended December 31, 2006 will range between $3.5 million and $4.0 million as a result of the planned acquisition of additional computer hardware and software to establish secondary back-up systems in connection with the development of a formal disaster recovery plan for our Company and due to leasehold improvements to be made at our Omaha facility.
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Net cash provided by financing activities was $91.2 million for the nine months ended September 30, 2006 primarily due to proceeds from the issuance of common stock in connection with the completion of the private placement and follow-on offering in the third quarter of 2006 for which we received aggregate net proceeds of $89.9 million. We also received proceeds from the exercise of stock options and through our Employee Stock Purchase Plan of $1.3 million. Net cash provided by financing activities was $1.2 million and $501,000 for the nine months ended September 30, 2005 and 2004, respectively, primarily due to proceeds from the issuance of common stock in connection with the exercise of stock options and purchases of stock through our Employee Stock Purchase Plan.
Through September 30, 2006, we have reserved all future tax benefits resulting from tax deductions in excess of recognized stock-based compensation expense and, accordingly, we have not reflected any such benefits in our consolidated statements of cash flows.
We have only achieved operating income in recent periods, and we have an accumulated deficit of $33.4 million as of September 30, 2006. We believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future. This expectation is primarily based on internal estimates of revenue growth, as well as continuing emphasis on controlling operating expenses. However, there can be no assurance that actual costs will not exceed amounts estimated, that actual revenues will equal or exceed estimated amounts, or that we will sustain profitable operations, due to significant uncertainties surrounding our estimates and expectations.
Contractual Obligations and Commitments
We do not have any special purposes entities or capital leases, and other than operating leases, which are described below, we do not engage in off-balance sheet financing arrangements.
In the ordinary course of business, we enter into various arrangements with vendors and other business partners principally for magazine production, inventory purchases, host services and bandwidth.
As of September 30, 2006, we had no material commitments for capital expenditures.
As of September 30, 2006, we had commitments under non-cancelable operating leases amounting to approximately $5.3 million.
As of September 30, 2006, other long-term liabilities of $811,000 primarily represented accruals to recognize rent expense on a straight-line basis over the respective lives of five of our operating leases under which rental payments increase over the lease periods. These accruals will be reduced as the operating lease payments, summarized in the table of contractual obligations below, are made.
Our contractual obligations as of September 30, 2006 are summarized as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Payments due by Period | |
| | | |
| |
| Contractual Obligations | | | Total | | Less than 1
year | | 1-3
years | | 3-5
years | | More than 5
years | |
|
| | |
| |
| |
| |
| |
| |
| | (in thousands) | |
Long term debt | | $ | 153 | | $ | 47 | | $ | 106 | | $ | — | | $ | — | |
Operating leases | | | 5,312 | | | 1,277 | | | 2,223 | | | 1,507 | | | 305 | |
Purchase commitments | | | 1,067 | | | 360 | | | 707 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 6,532 | | $ | 1,684 | | $ | 3,036 | | $ | 1,507 | | $ | 305 | |
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|
| |
|
| |
|
| |
|
| |
|
| |
Seasonality
We believe that the impact of the frequency of weddings from quarter to quarter results in lower registry services and merchandise revenues in the first and fourth quarters.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows of the Company due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.
We are exposed to some market risk through interest rates related to the investment of our current cash, cash equivalents and short-term investments of approximately $77.7 million as of September 30, 2006. These funds are generally invested in highly liquid debt instruments. As such instruments mature and the funds are re-invested, we are exposed to changes in market interest rates. This risk is not considered material, and we manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments.
We have no activities related to derivative financial instruments or derivative commodity instruments, and we are not currently subject to any significant foreign currency exchange risk.
Item 4. Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2006. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2006 identified in connection with the evaluation thereof by the Company’s management, including the Chief Executive Officer and Chief Financial Officer, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 19, 2003, WeddingChannel.com, Inc. (“WeddingChannel”) filed a complaint against The Knot in the United States District Court for the Southern District of New York. The complaint alleged that The Knot violated U.S. Patent 6,618,753 (“Systems and Methods for Registering Gift Registries and for Purchasing Gifts”), and further alleged that certain actions of The Knot gave rise to various federal statute, state statute and common law causes of actions. WeddingChannel sought, among other things, damages and injunctive relief. This complaint was served on the Company on September 22, 2003. On September 26, 2006, the Court approved a stipulation between WeddingChannel and The Knot dismissing the case without prejudice and without costs.
The Knot is engaged in other legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations, financial position or cash flows.
Item 1A. Risk Factors
Risks that could have a negative impact on our business, results of operations and financial condition include without limitation, (i) The Knot’s unproven business model, (ii) The Knot’s history of significant losses, (iii) the significant fluctuation to which The Knot’s quarterly revenues and operating results are subject, (iv) the seasonality of the wedding industry and (v) other factors detailed in documents The Knot files from time to time with the Securities and Exchange Commission. A more detailed description of each of these and other risk factors can be found under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed on March 17, 2006.
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In addition, the following risks could have a negative impact on our business, results of operations and financial condition:
Risks Related to the Merger with WeddingChannel
We may not realize the anticipated benefits of acquiring WeddingChannel.
The Knot and WeddingChannel entered into the Merger Agreement in order to, among other objectives, create a combined company that will serve as a more effective marketing resource for advertisers and that will achieve cost savings and operating efficiencies. Achieving the anticipated benefits of the Merger is subject to uncertainties, including whether The Knot integrates WeddingChannel in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in expected revenues and diversion of management’s time and energy and could materially and adversely impact The Knot’s business, financial condition and results of operations.
We may experience difficulties integrating WeddingChannel with The Knot.
Integrating WeddingChannel’s operations into The Knot’s business will be a time-consuming process that will require considerable attention on the part of our management. We may experience unanticipated difficulties or expenses in connection with the integration of editorial, information technology and customer service functions. Similarly, the process of combining sales and marketing forces, consolidating information technology, communications and administrative functions, and coordinating product and service offerings can take longer, cost more, and provide fewer benefits than initially projected. To the extent any of these events occurs, the anticipated benefits of the Merger may not be realized, or may be realized more slowly than is currently expected. In addition, any failure to integrate the two companies in a timely and efficient manner may increase the risk that the Merger will result in the loss of customers or key employees or the continued diversion of the attention of management.
The Merger may result in a loss of customers, advertisers or suppliers, or a reduction in revenues from existing customers or advertisers.
Some customers of The Knot or WeddingChannel may seek alternative sources of services or products due to, among other reasons, a desire not to do business with the combined company or perceived concerns that the combined company may not continue to support and maintain certain services or customer service standards or develop certain product lines. Difficulties in combining operations could also result in the loss of suppliers or potential disputes or litigation with customers, suppliers or others. Any steps by management to counter such potential increased customer or supplier attrition may not be effective. Failure by management to control attrition could result in worse than anticipated financial performance.
Some advertisers have historically placed ads on both The Knot’s website and WeddingChannel’s website. It is possible, following the completion of the Merger, that these advertisers will decide to reduce their overall spending with the combined company as compared to their prior advertising spending with the two websites when they were separate and run by unrelated companies. To the extent that this occurs, this may have a material adverse effect on our business, financial condition and results of operations.
The combined company will depend on a limited number of customers for some significant portion of our sales, and our financial success is linked to the success of our customers, our customers’ commitment to our services and products, and our ability to satisfy and retain our customers.
One customer would have accounted for more than 10% of our pro forma consolidated net revenues, after giving effect to the Merger, during the year ended December 31, 2005. We expect that this customer will continue to represent a significant portion of our net revenues in the future, especially with the consolidation that is occurring in the retail industry. The loss of this customer or a reduction in the amount of our net revenues generated by this customer could have a material adverse effect on our business, results of operations or financial condition.
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The combined company will generate significant revenues from its registry services business, in which we will face various risks.
The registry services business of the combined company is dependent on the continued use of our website by our retail partners whose registries are posted on the website. While Federated Department Stores, Inc. (“Federated”) has entered into an extension of their current registry services contract with WeddingChannel, contingent upon the closing of the Merger, various other retailers have contracts with WeddingChannel that are coming up for renewal in the near future. In the event that one or more retail partners should decide not to renew their registry services agreements with WeddingChannel following the completion of the Merger, that could materially and adversely affect our business, results of operations and financial condition.
The registry services business of the combined company is also dependent on our retail partners keeping their respective websites operational, as well as on the traffic which visits those sites. We also rely on information provided by these partners to update and integrate registry information daily. Any decline in traffic or technical difficulties experienced by these websites may negatively affect the revenues of the combined company.
The fulfillment and delivery of products purchased by customers using our registry services is administered by our retail partners and, therefore, we are dependent on our retail partners to manage inventory, process orders and distribute products to our customers in a timely manner. If our retail partners experience problems with customer fulfillment or inventory management, or if we cannot integrate our processes with those of our partners, our business, results of operations and financial condition would be harmed.
The retail services business is highly competitive. Our retail partners compete for customers, employees, locations, products and other important aspects of their businesses with many other local, regional, national and international retailers, both online and offline. We are dependent on our retail partners to manage these competitive pressures, and to the extent they are unable to do so, we may experience lower revenue and/or higher operating costs, which could materially and adversely affect our results of operations.
The services and products of the combined company may infringe on intellectual property rights of third parties and any infringement could require us to incur substantial costs and distract our management.
Although we will avoid knowingly infringing intellectual property rights of third parties, including licensed content, the combined company may be subject to claims alleging infringement of third-party proprietary rights. If we are subject to claims of infringement or are infringing the rights of third parties, we may not be able to obtain licenses to use those rights on commercially reasonable terms, if at all. In that event, we would need to undertake substantial reengineering to continue our online offerings. Any effort to undertake such reengineering might not be successful.
The combined company will be dependent on certain key personnel, and the loss of any of these persons may prevent us from implementing our combined business plan in an effective and timely manner.
Our success depends, and the success of the combined company will depend, largely upon the continued services of our executive officers and other key personnel, including operational and information technology executives. Any loss or interruption of the services of one or more of our executive officers or these key personnel could result in our inability to manage our operations effectively and/or pursue our business strategy.
The operating results of the combined company may fluctuate due to seasonality.
Seasonal and cyclical patterns may affect our revenues. Commissions from the sale of registry products and revenues from the sale of wedding-related merchandise are generally higher in the second and third quarters of each year. As a result of these factors, we may experience fluctuations in our revenues from quarter to quarter.
The Merger may adversely affect our financial results.
We are accounting for the Merger using purchase accounting. As a result, we expect to take a charge against our earnings for amortization of intangibles with a finite life, and we may be required to take other non-recurring charges, including writedowns of significant amounts of intangible assets with indefinite lives or goodwill. Our business, results of operations and financial condition may be harmed by such charges.
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Future sales of shares of our common stock, or the perception that these shares might be sold, could cause the market price of our common stock to drop significantly.
Following the completion of our recent follow-on offering, we have 30,972,265 shares of our common stock outstanding (which includes 2,750,000 shares of common stock issued in connection with our July 2006 private placement). Only certain of these shares are subject to lock-up restrictions with the underwriters of the follow-on offering, and these lock-up restrictions will expire 90 days following the date of the pricing of the follow-on offering. In addition, we issued 1,149,876 shares of our common stock as part of the consideration paid to stockholders of WeddingChannel upon the completion of the Merger, and most of those shares are freely tradable.
On July 20, 2006, we filed a shelf registration statement covering resales of the 2,750,000 shares of common stock by the institutional investors who purchased shares in the private placement. This registration statement was declared effective on August 14, 2006. These shares are freely tradable.
Upon the closing of the Merger, The Knot granted Federated registration rights for as long as it owns at least 5% of the outstanding common stock of The Knot, which rights will be exercisable commencing one year from the date on which the Merger was consummated. Certain future holders may be granted rights to participate in, or require us to file, registration statements with the SEC for resales of common stock.
We cannot predict the effect, if any, that future sales of shares of our common stock into the market, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of outstanding stock options), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock.
Risks Related to the Securities Markets
Our stock price has been highly volatile and is likely to experience significant price and volume fluctuations in the future, which could result in substantial losses for our stockholders and subject us to litigation.
The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Our common stock has experienced significant volume and price fluctuations in the past. For example, from October 1, 2005 through September 30, 2006, the market price of our common stock nearly doubled, increasing from $11.33 to $22.13. Our current market price and valuation may not be sustainable. If the market price of our common stock declines significantly, you may be unable to resell your common stock at or above your purchase price. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the subject of securities class action litigation, we could face substantial costs and be negatively affected by diversion of our management’s attention and resources. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly, including a decline below your purchase price, in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations, which could result in substantial losses for our stockholders.
Provisions in our articles of incorporation, bylaws and Delaware law may make it more difficult to effect a change in control, which could adversely affect the price of our common stock.
Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock and potentially prevent the payment of a premium to stockholders in an acquisition. In addition, our certificate of incorporation includes provisions giving the board the exclusive right to fill all board vacancies, providing for a classified board of directors and permitting removal of directors only for cause and with a super-majority vote of the stockholders.
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These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, and may limit the price that investors are willing to pay in the future for shares of our common stock.
We are also subject to provisions of the Delaware General Corporation Law that prohibit business combinations with persons owning 15% or more of the voting shares of a corporation’s outstanding stock for three years following the date that person became an interested stockholder, unless the combination is approved by the board of directors prior to the person owning 15% or more of the stock, after which the business combination would be subject to special stockholder approval requirements. This provision could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or may otherwise discourage a potential acquiror from attempting to obtain control from us, which in turn could have a material adverse effect on the market price of our common stock.
We have not paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future.
We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. As a result, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial conditions, current and anticipated cash needs and plans for expansion. Accordingly, investors must rely on sales of their common stock after price appreciation, which may not occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
Our executive officers, directors and principal stockholders exercise significant control over all matters requiring a stockholder vote.
As of September 30, 2006, our executive officers and directors and 5% stockholders, and their affiliates, in the aggregate, beneficially owned approximately 41% of our outstanding common stock. As a result, if some or all of these stockholders act as a group, they would 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.
Item 6. Exhibits
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| 31.1 | Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2 | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32.1 | Certification of Chairman and Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: November 14, 2006 | THE KNOT, INC. |
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| By: | /s/ Richard Szefc |
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| | Richard Szefc |
| | Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) |
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EXHIBIT INDEX
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Number | Description |
|
|
| |
31.1 | Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 | Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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