U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28271
THE KNOT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3895178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
462 BROADWAY, 6th FLOOR
NEW YORK, NEW YORK 10013
(Address of Principal Executive Officer and Zip Code)
(212) 219-8555
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
As of August 10, 2001, there were 14,714,264 shares of the registrant's
common stock outstanding.
THE KNOT, INC.
INDEX TO FORM 10-Q
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000....................................................................... 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2001 and 2000..................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000............................................................ 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations... 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 28
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................................... 28
Item 2: Changes in Securities and Use of Proceeds............................................... 28
Item 4: Submission of Matters to a Vote of Security Holders .................................... 29
Item 5: Other Information....................................................................... 29
Item 6: Exhibits and Reports on Form 8-K........................................................ 29
2
Item 1. Financial Statements (Unaudited)
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000*
(Unaudited)
----------- ------------
Assets
Current assets:
Cash and cash equivalents .................................................. $ 10,559,045 $ 15,859,624
Restricted cash............................................................. 39,931 -
Accounts receivable, net of allowances of $976,114 and $865,457 at
June 30, 2001 and December 31, 2000, respectively...................... 5,548,899 8,361,672
Inventories................................................................. 788,979 866,541
Deferred production and marketing costs..................................... 579,857 1,149,609
Other current assets........................................................ 612,927 910,650
------------- ------------
Total current assets........................................................... 18,129,638 27,148,096
Property and equipment, net.................................................... 3,345,762 3,886,021
Intangible assets, net......................................................... 9,543,159 9,886,636
Other assets................................................................... 435,854 433,272
------------- ------------
Total assets................................................................... $ 31,454,413 $ 41,354,025
============= ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses....................................... $ 3,836,505 $ 3,903,658
Short term borrowings....................................................... 1,737,913 1,650,000
Deferred revenue............................................................ 4,813,482 5,209,359
Current portion of long-term debt........................................... 312,799 306,613
------------- ------------
Total current liabilities...................................................... 10,700,699 11,069,630
Long term debt................................................................. 553,448 697,789
Other liabilities.............................................................. 262,966 196,008
------------- ------------
Total liabilities.............................................................. 11,517,113 11,963,427
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares, authorized; 14,714,264
shares and 14,676,253 shares issued and outstanding at
June 30, 2001 and December 31, 2000, respectively........................ 147,142 146,762
Additional paid-in-capital.................................................. 59,579,058 59,657,388
Deferred compensation....................................................... (449,604) (763,074)
Deferred sales and marketing................................................ (979,829) (1,306,445)
Accumulated deficit......................................................... (38,359,467) (28,344,033)
-------------- -------------
Total stockholders' equity..................................................... 19,937,300 29,390,598
------------- ------------
Total liabilities and stockholders' equity..................................... $ 31,454,413 $ 41,354,025
============= ============
*The condensed consolidated balance sheet as of December 31, 2000 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net revenues $ 6,208,541 $ 6,856,799 $ 11,431,532 $10,575,831
Cost of revenues 2,329,682 1,856,457 4,545,043 3,011,285
----------- ----------- ------------ -----------
Gross profit 3,878,859 5,000,342 6,886,489 7,564,546
Operating expenses:
Product and content development 1,107,365 1,612,875 2,442,641 2,557,886
Sales and marketing 3,760,366 4,418,988 8,165,091 7,249,688
General and administrative 2,397,695 2,153,424 4,701,999 3,723,908
Non-cash compensation 92,671 237,892 211,621 502,310
Non-cash sales and marketing 163,308 163,308 326,616 326,616
Depreciation and amortization 618,762 582,535 1,301,586 836,816
----------- ----------- ------------ -----------
Total operating expenses 8,140,167 9,169,022 17,149,554 $15,197,224
----------- ----------- ------------ -----------
Loss from operations (4,261,308) (4,168,680) (10,263,065) (7,632,678)
Interest income, net 95,021 343,004 247,631 915,454
----------- ----------- ------------ -----------
Net loss $(4,166,287) $(3,825,676) $(10,015,434) $(6,717,224)
=========== =========== ============ ===========
Net loss per share - basic and diluted $ (0.28) $ (0.26) $ (0.68) $ (0.46)
=========== =========== ============ ===========
Weighted average number of shares used in calculating
basic and diluted net loss per share 14,708,940 14,590,310 14,700,516 14,554,652
=========== =========== ============ ===========
See accompanying notes.
4
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
--------------------------------
2001 2000
---- ----
Operating activities
Net loss ....................................................................... $ (10,015,434) $ (6,717,224)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 642,653 410,242
Amortization of goodwill..................................................... 658,933 426,574
Amortization of deferred compensation........................................ 211,621 502,310
Amortization of deferred sales and marketing................................. 326,616 326,616
Reserve for returns.......................................................... 437,550 303,584
Allowance for doubtful accounts.............................................. 971,186 218,878
Other non-cash charges....................................................... 86,363 -
Changes in operating assets and liabilities
(Net of the effects of acquisitions):
Restricted cash.............................................................. (39,931) -
Accounts receivable.......................................................... 1,177,086 (3,285,140)
Inventories.................................................................. 46,294 (196,232)
Deferred production and marketing............................................ 569,753 (670,131)
Other current assets......................................................... 297,723 138,760
Other assets................................................................. (45,083) 8,667
Accounts payable and accrued expenses........................................ (43,544) 1,207,649
Deferred revenue............................................................. (395,879) 1,304,529
Other liabilities............................................................ 66,958 69,458
-------------- ------------
Net cash used in operating activities........................................... (5,047,135) (5,951,460)
Investing activities
Purchases of property and equipment............................................. (181,098) (1,935,230)
Maturity of short term investments.............................................. - 619,514
Acquisition of businesses, net of acquired cash................................. (122,805) (9,529,791)
--------------- ------------
Net cash used in investing activities........................................... (303,903) (10,845,507)
Financing activities
Proceeds from short term borrowings............................................. 474,656 200,000
Repayment of short term borrowings.............................................. (448,097) (311,754)
Financing costs................................................................. - (515,088)
Proceeds from issuance of common stock.......................................... 20,539 -
Proceeds from exercise of stock options......................................... 3,361 24,232
-------------- ------------
Net cash provided by (used in) financing activities............................. 50,459 (602,610)
Decrease in cash and cash equivalents........................................... (5,300,579) (17,399,577)
Cash and cash equivalents at beginning of period................................ 15,859,624 40,006,175
-------------- ------------
Cash and cash equivalents at end of period...................................... $ 10,559,045 $ 22,606,598
============== ============
See accompanying notes.
5
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying financial information as of December 31, 2000 is derived
from audited financial statements, and the financial statements as of June
30, 2001 and for the three and six months ended June 30, 2001 and 2000 are
unaudited. The unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and, in the opinion of the
Company's management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly its financial position as
of June 30, 2001, the results of operations for the three and six months
ended June 30, 2001 and 2000 and cash flows for the six months ended June 30,
2001 and 2000.
Certain historical financial information has been reclassified to conform
with current presentation. These financial statements should be read in
conjunction with the Company's audited financial statements and accompanying
notes for the year ended December 31, 2000 included in the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of The
Knot and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Use of Estimates
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results may differ from these estimates. Interim results
are not necessarily indicative of results for a full year.
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.
Restricted Cash
Restricted cash as of June 30, 2001 includes a certificate of deposit held as
collateral in connection with a line of credit with a bank.
Recent Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and
financial position of the Company.
6
3. Net Revenues by Type
Net revenues by type are as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
Type
Sponsorship, advertising
and production $ 1,118,277 $ 2,467,864 $ 2,527,573 $ 5,042,621
Merchandise 2,367,699 1,241,745 4,045,921 2,128,913
Publishing, travel and other 2,722,565 3,147,190 4,858,038 3,404,297
----------- ----------- ----------- -----------
Total $ 6,208,541 $ 6,856,799 $11,431,532 $10,575,831
=========== =========== =========== ===========
For the three months ended June 30, 2001 and 2000, merchandise revenue
included outbound shipping and handling charges of approximately $266,000 and
$129,000, respectively. For the six months ended June 30, 2001 and 2000,
merchandise revenue included outbound shipping and handling charges of
approximately $461,000 and $230,000, respectively.
Cost of Revenues
Cost of revenues by type:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
Type
Sponsorship, advertising
and production $ 119,261 $ 153,250 $ 311,123 $ 371,618
Merchandise 1,353,886 877,167 2,322,846 1,520,965
Publishing, travel and other 856,535 826,040 1,911,074 1,118,702
----------- ----------- ----------- -----------
Total $ 2,329,682 $ 1,856,457 $ 4,545,043 $ 3,011,285
=========== =========== =========== ===========
4. Short Term Borrowings
The Company's subsidiary, Weddingpages, Inc., ("Weddingpages") has a line of
credit with a bank that expires February 1, 2002 and has available borrowings
under the agreement up to the lesser of $2,500,000 or 70% of eligible
receivables, as defined. As of June 30, 2001, there were $1,737,913 of
borrowings outstanding under the agreement. The line of credit, which bears
an interest rate at one-half percent over the bank's prime lending rate, is
secured by the assets of Weddingpages and is guaranteed by the Company.
7
5. Long-Term Debt
Long-term debt as of June 30, 2001:
Note due in annual installments of $60,000 through October 2008,
based on imputed interest of 8.75%................................................. $ 335,197
9.0% equipment installment note, due in monthly installments
of $4,566 through December 2002.................................................... 73,568
10.0% equipment installment note, due in monthly installments
of $8,131 through August 2003...................................................... 188,682
Consulting agreement, due in monthly installments
of $12,800 through March 2003...................................................... 268,800
--------
Total long-term debt............................................................... 866,247
Less current portion of long-term debt............................................. 312,799
--------
Long-term debt, excluding current portion.......................................... $553,448
========
Maturities of long-term obligations for the five years ending June 30, 2006
are as follows: 2002, $312,799; 2003, $266,220; 2004, $52,327; 2005, $39,446;
2006, $42,898 and $152,557 thereafter.
8
6. Acquisitions
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as
of February 1, 2000, by and among the Company, Knot Acquisition Corporation,
a Delaware corporation and wholly-owned subsidiary of the Company ("Buyer"),
and Weddingpages Buyer merged with and into Weddingpages on March 29, 2000,
with Weddingpages as the surviving Corporation (the "Merger").
The purchase price of $10.0 million consisted of approximately $9.2 million
for the common stock and outstanding common stock options of Weddingpages,
inclusive of $700,000 payable to the former Chief Executive Officer of
Weddingpages in consideration for the execution of a non-compete agreement,
and approximately $775,000 of other costs associated with the acquisition.
The excess of the purchase price over the fair value of net tangible and
intangible assets and liabilities acquired of $9.3 million was recorded as
goodwill. Approximately $527,000 of the purchase price was held in an escrow
account and was subject to certain deductions in the event of third party
claims against indemnified parties. In May 2001, the Company received
$150,000 from the escrow account in satisfaction of certain claims against
the sellers. This amount was recorded as a reduction of goodwill.
In May 2001, Weddingpages completed the purchase of a former franchise
market. The total purchase price for this acquisition of $90,000 was
recorded as goodwill.
7. Related Party Transactions
On May 1, 2000, the Company entered into an International Anchor Tenant
Agreement with America Online, Inc. ("AOL"), whereby the Company received
distribution within AOL and its affiliates within international markets. The
agreement originally provided for an expiration date of May 1, 2003 and for
quarterly carriage fees payable by the Company over the term of the agreement
in the amount of $215,000 per quarter through February 1, 2001, increasing to
$287,500 per quarter through February 1, 2002, and increasing to $372,500 per
quarter through February 1, 2003.
Effective March 31, 2001, the International Anchor Tenant Agreement was
amended to limit the International Markets where the Company will receive
distribution from AOL to France. In exchange for this amendment, the Company
paid in May 2001 a one-time restructuring fee of $550,000 and a total
carriage fee for France for the remaining term of the amended agreement of
$200,000. The amended agreement expires on May 1, 2003.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis in conjunction with our
financial statements and related notes included elsewhere in this report. This
discussion contains forward-looking statements relating to future events and the
future performance of The Knot based on our current expectations, assumptions,
estimates and projections about us and our industry. These forward-looking
statements involve risks and uncertainties. Our actual results and timing of
various events could differ materially from those anticipated in such
forward-looking statements as a result of a variety of factors, as more fully
described in this section and elsewhere in this report. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
Recent Events
On June 21, 2001, we received a letter from The Nasdaq Stock Market,
Inc. ("Nasdaq") notifying us of our failure to comply with the minimum bid price
of $1.00 per share as required by Nasdaq's Marketplace Rule 4450(a)(5), and
therefore, our common stock is subject to delisting from the Nasdaq National
Market. Further, on June 28, 2001, we received a letter from Nasdaq notifying us
of our failure to maintain the minimum market value of public float required for
continued listing set forth in Marketplace Rule 4450(a)(2). We appealed
these Nasdaq determinations and a Nasdaq listing qualifications panel hearing
was held on August 9, 2001. The outcome of this hearing has not yet been
determined, and we cannot assure you that our appeal of these determinations
will be successful.
Overview
The Knot is the leading wedding resource providing products and
services to couples planning their weddings and future lives together. Our Web
site, at www.theknot.com, is the most trafficked wedding destination online and
offers comprehensive content, extensive wedding-related shopping, an online
wedding gift registry and an active community. The Knot is the premier wedding
content provider on America Online (AOL Keywords: Knot and weddings) and MSN. We
publish The Knot Wedding Gowns, a national wedding fashion magazine and, through
our subsidiary Weddingpages, Inc., publish regional wedding magazines in over 40
company-owned and franchised markets in the United States. We also author a
series of books on wedding planning and, through another subsidiary, Click
Trips, Inc., offer honeymoon booking and other travel services. Our offline
presence provides cross-promotional opportunities and assists us in increasing
our brand awareness and our overall audience. We are based in New York and have
several other offices across the country.
We commenced operations in May 1996 and recorded our first revenues in
September 1996, immediately following the launch of our first online property.
Our Web site was launched in July 1997. We launched The Knot Registry, our
online gift registry, in November 1998 and significantly expanded our registry
product offerings in July 1999. In July 1999, we acquired the assets of
Bridalink.com, an Internet wedding supply store and the common stock of Click
Trips, an online travel agency. In August 1999, we acquired the assets of
Wedding Photographers Network, a searchable database of local wedding
photographers. In March 2000, we acquired Weddingpages, the largest publisher of
regional wedding magazines in the nation.
We derive revenues from the sale of online sponsorship, advertising and
production contracts. We also derive revenues from the sale of merchandise, from
publishing and from the sale of travel packages.
Online sponsorship revenues are derived principally from contracts
currently ranging up to twenty-four months. Sponsorships are designed to
integrate advertising with specific online editorial content. Sponsors can
purchase the exclusive right to promote products or services on a specific
online editorial area and can purchase a special feature on our sites.
Online advertising revenues are derived principally from short-term
contracts that typically range from one month up to one year. Advertising
contracts include online banner advertisements and online listings for local
wedding vendors.
Certain online sponsorship and advertising contracts provide for the
delivery of a minimum number of impressions. Impressions are the featuring of a
sponsor's advertisement, banner, link or other form of content on our sites. To
date, we have recognized our sponsorship and advertising revenues over the
duration of the contracts on a
10
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.
For the quarter ended June 30, 2001, our top seven advertisers
accounted for 6% of our net revenues. For the quarter ended June 30, 2000, our
top seven advertisers accounted for 16% of our net revenues. For the six months
ended June 30, 2001, our top seven advertisers accounted for 7% of our net
revenues. For the six months ended June 30, 2000, our top seven advertisers
accounted for 24% of our net revenues.
To promote our brand on third-party sites, we produce online sites for
third parties featuring both The Knot and the third party. The cost of
production of these sites is included in our operating expenses. In return, we
receive distribution and exposure to their viewers, outbound links to our sites
and, in some circumstances, offline brand marketing. We do not recognize
revenues with respect to these barter transactions.
Merchandise revenues include the selling price of wedding
supplies and products from our gift registry sold by us through our web site and
through a co-branded site with QVC, Inc. and include related outbound shipping
and handling charges. Merchandise revenues also include commissions earned in
connection with the sale of products from our gift registry under agreements
with certain strategic partners. Merchandise revenues are recognized when
products are shipped to customers, reduced by discounts as well as an allowance
for estimated sales returns.
Publishing revenue includes advertising revenue derived from the
publication of The Knot Wedding Gowns magazine and the publication of regional
wedding magazines by Weddingpages, Inc. as well as service fees and royalty
fees from producing the Weddingpages magazine for certain franchisees. These
revenues and fees are recognized upon the publication of the related magazine
at which time all material services related to the magazine have been
performed. Additionally, publishing revenues are derived from the sale of
magazines and from author royalties received related to book publishing
contracts. Revenues from the sale of magazines are recognized when the
products are shipped, reduced by an allowance for estimated sales returns.
Royalties are recognized when all contractual obligations have been met, which
typically include the delivery and acceptance of a final manuscript.
Travel revenues are derived from commissions earned on the sale of
travel packages by our online travel agency, Click Trips, Inc. Such revenues are
recognized when the customer commences travel.
We record deferred compensation, net of reversals related to stock
options forfeited, primarily as a result of the issuance of stock options to
employees with exercise prices per share determined for financial reporting
purposes to be below the fair market value per share of our common stock at the
dates of grant. The difference is recorded as a reduction of stockholders'
equity and amortized as non-cash compensation expense on an accelerated method
over the four-year vesting period of the related options.
Results of Operations
Net Revenues
Net revenues were $6.2 million and $11.4 million for the three and six
months ended June 30, 2001, compared to $6.9 million and $10.6 million for the
corresponding periods in 2000.
Sponsorship, advertising and production revenues decreased to $1.1
million and $2.5 million for the three and six months ended June 30, 2001,
respectively, as compared to $2.5 million and $5.0 million for the corresponding
periods in 2000. A reduction in the number and average value of sponsorship and
production contracts as a result of an overall downturn in the online
advertising sector contributed to the respective $1.4 million and $2.5 million
decreases. Within sponsorship, advertising and production revenues, revenue from
local vendor online advertising programs increased by $280,000 and $576,000 for
the three and six months ended June 30, 2001, respectively, or by approximately
60% in each period when compared to the corresponding periods in 2000, as a
result of additional contracts sold. Sponsorship, advertising and production
revenues amounted to 18% of our net revenues for the quarter ended June 30, 2001
and 36% for the quarter ended June 30, 2000. For the six months ended June 30,
2001 and 2000,
11
sponsorship, advertising and production revenues amounted to 22% and 48% of our
net revenues, respectively.
Merchandise revenues increased to $2.4 million and $4.0 million for the
three and six months ended June 30, 2001, respectively, as compared to $1.2
million and $2.1 million for the corresponding periods in 2000. These increases
were primarily due to an increase in sales of wedding supplies of $1.1 million
and $1.9 million, respectively. Merchandise revenues amounted to 38% of our net
revenues for the quarter ended June 30, 2001 and 18% of our net revenues for the
quarter ended June 30, 2000. For the six months ended June 30, 2001 and 2000,
merchandise revenue was 35% and 20% of our net revenues, respectively.
Publishing, travel and other revenues amounted to $2.7 million and $4.9
million for the three and six months ended June 30, 2001, respectively, as
compared to $3.1 million and $3.4 million for the corresponding periods in 2000.
These revenues are primarily attributed to print advertising revenue derived
from the publication of regional wedding magazines by Weddingpages as well as
service fees and royalties from producing the Weddingpages magazine for certain
franchisees. The decrease in revenue for the three months ended June 30, 2001 is
primarily due to the timing of publication of these magazines in certain
markets. Three local markets which published in the second quarter of 2000 are
actually publishing in either the first or third quarter of 2001. Advertising
revenues, service fees and royalties derived from the Weddingpages operation
commenced in the quarter ending June 30, 2000 which is the principal reason
for the increase in revenue for the six months ended June 30, 2001 over the
comparable prior year period. Publishing, travel and other revenues amounted
to 44% and 46% of our net revenue for the quarters ended June 30, 2001 and
2000, respectively, and 43% and 32% for the six months ended June 30, 2001
and 2000, respectively.
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the costs related to the production of regional wedding
magazines and the Knot Wedding Gowns magazine, payroll and related expenses for
our personnel who are responsible for the production of customized online sites
and tools, and costs of Internet and hosting services.
Cost of revenues increased to $2.3 million and $4.5 million for the
three and six months ended June 30, 2001, respectively, from $1.9 million and
$3.0 million for the corresponding periods in 2000. Cost of revenues from the
sale of wedding supplies increased by $490,000 and $841,000 for the three and
six month periods ended June 30, 2001, respectively, as compared to the
corresponding periods in 2000, as a result of increased sales. Cost of revenue
related to the production of regional wedding magazines commenced in the second
quarter of 2000 and accounted for $880,000 of the increase in cost of revenues
for the six months ended June 30, 2001. As a percentage of our net revenues,
cost of revenues increased to 38% for the quarter ended June 30, 2001, from 27%
for the quarter ended June 30, 2000. For the six month periods, cost of revenues
increased to 40% of our net revenue in 2001 from 28% in the prior year. Both
periods in 2001 were impacted by a lower mix of advertising revenue which
generates a higher margin than merchandise and publishing revenue, partially
offset by improved margins for merchandise revenue.
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 decreased to $1.1 million for
the three months ended June 30, 2001 from $1.6 million for the corresponding
period in 2000. This decrease was primarily the result of reduced personnel
costs associated with cost reduction initiatives instituted at the end of 2000
and continuing into the current year. Product and content development expenses,
at $2.4 million for the six months ended June 30, 2001, were relatively flat
compared to the six months ended June 30, 2000. The effects of the cost
reduction initiatives were more pronounced in the second quarter of 2001 as a
result of an increase in product and content development expenses from the first
quarter to the second quarter of 2000 of approximately $645,000, primarily
related to personnel costs, including $217,000 in costs associated with our
Weddingpages subsidiary. As a percentage of our net revenues, product and
content development expenses decreased to 18% and 21% for the three and six
months ended June 30, 2001, respectively, from 24% for both corresponding
periods in 2000.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses for sales and marketing, customer service and public relations
personnel, as well as expenditures for our AOL anchor tenant agreements,
advertising and promotional activities and fulfillment and distribution of
merchandise.
12
Sales and marketing expenses decreased to $3.8 million for the three
months ended June 30, 2001 from $4.4 million for the corresponding period in
2000. The decrease was the result of various cost reduction initiatives which
reduced personnel and related costs by $194,000, promotional expenses by $58,000
and smaller cost savings in a number of other areas. In addition, there was a
reduction in sales commission expense of $117,000 due to a decline in
sponsorship and production revenue.
Sales and marketing expense increased to $8.2 million for the six
months ended June 30, 2001 from $7.2 million for the corresponding period in
2000. This increase includes $1.3 million in personnel and related costs
associated with the local sales force of Weddingpages, which commenced in the
second quarter of 2000. Additionally, in 2001, there was an increase of $787,000
in fees related to our International Anchor Tenant Agreement with AOL. This
included the quarterly carriage fee through March 2001 and a one-time
restructuring fee paid in connection with the amendment of this agreement,
effective March 31, 2001, to limit the international markets where the
Company will receive distribution from AOL to France. These cost increases were
partially offset by a decrease in personnel and related costs and promotion
expenses of $125,000 and $320,000, respectively, as a result of various cost
reduction initiatives, as well as a decrease in sales commission expense of
$300,000 due to a decline in sponsorship and production revenues.
As a percentage of our net revenues, sales and marketing expenses
decreased to 61% and increased to 71% for the three and six months ended June
30, 2001, respectively, from 64% and 69% for the corresponding periods in 2000.
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 were $2.4 million for the three
months ended June 30, 2001 compared to $2.2 million for the corresponding period
in 2000. This increase was primarily due to additional bad debt expense recorded
in 2001. General and administrative expenses increased to $4.7 million for the
six months ended June 30, 2001 from $3.7 million for the six months ended June
30, 2000. The increase includes an additional $400,000 in personnel and other
general and administrative costs associated with our Weddingpages operation
which commenced in the second quarter of 2000. In addition, in 2001, there was
an increase in legal and professional fees and bad debts of approximately
$225,000 and $750,000, respectively. These increases were partially offset by a
decrease in personnel related costs of $150,000, as well as decreases in a
number of other administrative cost categories. As a percentage of our net
revenues, general and administrative expenses increased to 39% and 41% for the
three and six months ended June 30, 2001, respectively, as compared to 31% and
35% for the corresponding periods in 2000.
Non-Cash Compensation
We recorded no deferred compensation during the three and six months
ended June 30, 2001. Amortization of deferred compensation decreased to $93,000
and $212,000, respectively, compared with $238,000 and $502,000 for the
corresponding periods in 2000.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing of $2.3 million related to the
issuance of a warrant to AOL in connection with our amended anchor tenant
agreement in July 1999. Amortization of deferred sales and marketing was
$163,000 in each of the three month periods ended June 30, 2001 and 2000 and
$327,000 in each of the six month periods ended June 30, 2001 and 2000.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and amortization of intangible assets
related to acquisitions.
Depreciation and amortization expenses increased to $619,000 and $1.3
million for the three and six months
13
ended June 30, 2001, respectively, from $583,000 and $837,000 for the
corresponding periods in 2000. The increase for the three month period was
primarily due to a $76,000 increase in depreciation related to property and
equipment offset, in part, by a reduction in amortization of intangible assets
related to acquisitions. The increase for the six month period was primarily due
to an increase in each of depreciation expense and amortization of intangible
assets of approximately $230,000. As a percentage of net revenues, depreciation
and amortization expense increased to 10% from 8% for the three month periods
ending June 30, 2001 and 2000, respectively, and to 11% from 8% for the six
months ended June 30, 2001 and 2000, respectively.
Interest Income
Interest income, net of interest expense, decreased to $95,000 and
$248,000 for the three and six months ended June 30, 2001, respectively, as
compared to $343,000 and $915,000 for the corresponding periods in 2000. These
decreases were a result of lower amounts of cash and cash equivalents available
for investment.
Liquidity and Capital Resources
As of June 30, 2001, our cash and cash equivalents amounted to $10.6
million. We currently invest primarily in short-term debt instruments that are
highly liquid, of high-quality investment grade, and have maturities of less
than three months, with the intent to make such funds readily available for
operating purposes.
Net cash used in operating activities was $5.0 million for the six
months ended June 30, 2001. This resulted primarily from the loss for the
period, as adjusted for depreciation and amortization and other non-cash charges
of $3.3 million, and a decrease in deferred revenue of $396,000, partially
offset by decreases in accounts receivable of $1.2 million and decreases in
deferred production and marketing of $570,000. Net cash used in operating
activities was $6.0 million for the six months ended June 30, 2000. This
resulted primarily from the loss for the period, as adjusted for depreciation
and amortization and other non-cash charges of $2.2 million, increases in
accounts receivable of $3.3 million and increases in deferred production and
marketing expenses of $670,000, partially offset by increases in accounts
payable and accrued expenses of $1.2 million and deferred revenue of
$1.3 million.
Net cash used in investing activities was $304,000 for the six months
ended June 30, 2001 primarily due to cash paid by Weddingpages for the
acquisition of former franchise markets of $196,000 less amounts received from
escrow in May 2001 in satisfaction of certain claims against the sellers of
Weddingpages. In addition, purchases of property and equipment amounted to
$181,000. Net cash used in investing activities was $10.8 million for the six
months ended June 30, 2000, primarily due to cash paid for the acquisition of
Weddingpages of $9.5 million and purchases of property and equipment of
approximately $1.9 million, partially offset by the maturity of short-term
investments of $620,000.
Net cash provided by financing activities was $50,000 for the six
months ended June 30, 2001, primarily due to the net proceeds from short term
borrowings and proceeds from the issuance of common stock.
Net cash used in financing activities was $603,000 for the six months
ended June 30, 2000, primarily due to the payment of expenses related to our
initial public stock offering and net reductions in our short term borrowings.
These expenses were offset, in part, by proceeds from the exercise of stock
options.
Our subsidiary, Weddingpages, has a line of credit with a bank that
expires on February 1, 2002 and has available borrowings under the agreement up
to the lesser of $2,500,000 or 70% of eligible receivables, as defined. As of
June 30, 2001, there was $1,737,913 of borrowings outstanding under the
agreement. The line of credit which bears an interest rate at one-half percent
over the bank's prime lending rate is secured by the assets of Weddingpages and
is guaranteed by the Company.
As of June 30, 3001, we had no material commitments for capital
expenditures.
As of June 30, 2001, we had commitments under non-cancelable operating
leases amounting to $6.0 million, of which $638,000 will be due on or before
June 30, 2002.
As of June 30, 2001 we had commitments under our amended anchor tenant
agreements with AOL in the
14
amount of $1.8 million. Approximately $1.2 million of these AOL commitments will
be due on or before June 30, 2002.
We currently believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements
through the end of the first quarter of 2002. We expect to evaluate acquisitions
of, or investments in, complimentary businesses, services and technologies,
expand our sales and marketing programs and conduct more aggressive brand
promotions. We cannot assure you that additional funding, if required, will be
available to us in amounts or on terms acceptable to us. If sufficient funds are
not available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of acquisition opportunities, develop or enhance our
services or products, or otherwise respond to competitive pressures would be
significantly limited. Those limitations would materially and adversely affect
our business, results of operations and financial condition.
15
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Important Factors Regarding Forward-Looking Statements
In addition to other information in this Quarterly Report on Form 10-Q,
the following risk factors should be carefully considered in evaluating our
business because such factors currently or may have a significant impact on our
business, operating results or financial condition. This Quarterly Report on
Form 10-Q contains forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below and elsewhere in this
Quarterly Report.
Risk Related to our Possible Delisting from Nasdaq
We face possible Nasdaq delisting which would result in a limited
public market for our common stock, make obtaining future equity financing more
difficult for us and could result in lower prices and larger spreads in the bid
and ask prices for shares of our common stock.
We must satisfy a number of requirements to maintain our listing on the
Nasdaq National Market, including maintaining a minimum bid price for our common
stock of $1.00 per share and maintaining a market value for our publicly-held
shares of at least $5 million. A company fails to satisfy these requirements if
its closing bid price remains below $1.00 per share or if the market value for
the publicly-held shares remains below $5 million, in each case, for 30
consecutive business days.
On June 21, 2001, we received a letter from The Nasdaq Stock Market,
Inc. notifying us of our failure to comply with the minimum bid price of $1.00
per share as required by Nasdaq's Marketplace Rule 4450(a)(5), and therefore,
our common stock is subject to delisting from the Nasdaq National Market.
Further, on June 28, 2001, we received a letter from Nasdaq notifying us of our
failure to maintain the minimum market value of public float required for
continued listing set forth in Marketplace Rule 4450(a)(2). We appealed
these Nasdaq determinations and a Nasdaq listing qualifications panel hearing
was held on August 9, 2001. The outcome of this hearing has not yet been
determined, and we cannot assure you that our appeal of these determinations
will be successful.
If our common stock loses its Nasdaq National Market status, shares of
our common stock would likely trade in the over-the-counter market in the
so-called "pink sheets" or the OTC Bulletin Board, which was established for
securities that do not meet the Nasdaq National Market listing requirements.
Consequently, selling our common stock would be more difficult because smaller
quantities of shares would likely be bought and sold, transactions could be
delayed, and security analysts' and news media coverage of us may be reduced.
These factors could result in lower prices and larger spreads in the bid and ask
prices for shares of our common stock.
Such delisting from the Nasdaq National Market or further declines in
our stock price could also greatly impair our ability to raise additional
necessary capital through equity or debt financing and significantly increase
the dilution to stockholders caused by our issuing equity in financing or other
transactions. The price at which we issue shares in such transactions is
generally based on the market price of our common stock, and a decline in our
stock price could result in the need for us to issue a greater number of shares
to raise a given amount of funding or acquire a given dollar value of goods or
services.
In addition, if our common stock is not listed on the Nasdaq National
Market, we may become subject to Rule 15g-9 under the Securities and Exchange
Act of 1934, as amended. That rule imposes additional sales practice
requirements on broker-dealers that sell low-priced securities to persons other
than established customers and institutional accredited investors. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule may
affect the ability of broker-dealers to sell the common stock and affect the
ability of holders to sell their shares of our common stock in the secondary
market.
16
Risks Related to Our Business
We have an unproven business model, and it is uncertain whether online
wedding-related sites can generate sufficient revenues to survive.
Our model for conducting business and generating revenues is new and
unproven. Our business model depends in large part on our ability to generate
revenue streams from multiple sources through our online sites, including:
o Internet sponsorship and advertising fees from third parties; and
o online sales of wedding gifts, supplies and honeymoon travel packages.
It is uncertain whether wedding-related online sites that rely on
attracting sponsors and advertisers, as well as people to purchase wedding gifts
and supplies, can generate sufficient revenues to survive. For our business to
be successful, we must provide users with an acceptable blend of products,
information, services and community offerings that will attract wedding
consumers to our online sites frequently. In addition, we must provide sponsors,
advertisers and vendors the opportunity to reach these wedding consumers. We
provide our services to users without charge and we may not be able to generate
sufficient revenues to pay for these services. Accordingly, we are not certain
that our business model will be successful or that we can sustain revenue growth
or be profitable.
We have a history of significant losses since our inception and expect to incur
significant losses for the foreseeable future.
We have not achieved profitability and expect to continue to incur
significant losses and negative cash flow for the foreseeable future. We
incurred net losses of $1.5 million for the year ended December 31, 1998, $9.2
million for the year ended December 31, 1999, $15.8 million for the year ended
December 31, 2000 and $10.0 million for the six months ended June 30, 2001. As
of June 30, 2001, our accumulated deficit was $38.4 million. We also expect to
continue to incur significant operating expenses and, as a result, we will need
to generate significant revenues to achieve and maintain profitability. Even if
we do achieve profitability, we cannot assure you that we can sustain or
increase profitability on a quarterly or annual basis in the future. Failure to
achieve or maintain profitability may materially and adversely affect our
business, results of operations and financial condition and the market price of
our common stock. For more information on our losses and the effects of our
expenses on our financial performance, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
We lack significant revenues and may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall.
Our revenues for the foreseeable future will remain dependent on online
user traffic levels, advertising activity both online and offline and the
expansion of our e-commerce activity. In addition, we plan to expand and develop
content and to upgrade and enhance our technology and infrastructure to support
our growth. We incur a significant percentage of our expenses, such as employee
compensation and rent, prior to generating revenues associated with those
expenses. Moreover, our expense levels are based, in part, on our expectation of
future revenues. We may be unable to adjust spending quickly enough to offset
any unexpected revenue shortfall. If we have a shortfall in revenues in relation
to our growth in expenses, then our results of operations would be materially
and adversely affected. For more information on our net revenues and the effects
of our expenses on our financial performance, see and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Our quarterly revenues and operating results are subject to significant
fluctuation, and these fluctuations may adversely affect the trading price of
our common stock.
Our quarterly revenues and operating results have fluctuated
significantly in the past and are expected to continue to fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside our control. These factors include:
o the level of online usage and traffic on our Web site;
17
o demand for online and offline advertising;
o seasonal trends in both online usage and advertising placements;
o the addition or loss of advertisers;
o the advertising budgeting cycles of specific advertisers;
o the number of users that purchase merchandise from us;
o the magazine publishing cycle of Weddingpages;
o the amount and timing of capital expenditures and other costs relating to the
expansion of our operations, including those related to acquisitions;
o the introduction of new sites and services by us or our competitors;
o changes in our pricing policies or the pricing policies of our competitors;
and
o general economic conditions; and economic conditions specific to the
Internet, electronic commerce, online and offline media.
We do not believe that period-to-period comparisons of our operating
results are necessarily meaningful and you should not rely upon these
comparisons as indicators of our future performance.
Due to the foregoing factors, it is possible that our results of
operations in one or more future quarters may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock is likely to decline.
Because the frequency of weddings vary from quarter to quarter, our operating
results may fluctuate due to seasonal factors.
Seasonal and cyclical patterns may affect our revenues. In 1999, 18.2%
of weddings occurred in the first quarter, 25.9% occurred in the second quarter,
29.3% occurred in the third quarter and 26.6% occurred in the fourth quarter.
Because we launched The Knot Registry in November 1998 and acquired Bridalink in
July 1999, we have limited experience generating merchandise revenues. Based
upon our limited experience, we believe merchandise revenues generally are lower
in the fourth quarter of each year. In addition, we believe that advertising
sales in traditional media, such as television and radio, and print generally
are lower in the first and third calendar quarters of each year. Historically,
we have experienced increases in our traffic during the first and second
quarters of the year. As a result of these factors, we may experience
fluctuations in our revenues from quarter to quarter.
If sales to sponsors or advertisers forecasted in a particular period are
delayed or do not otherwise occur, our results of operations for a particular
period would be materially and adversely affected.
The time between the date of initial contact with a potential sponsor
or advertiser and the execution of a contract with the sponsor or advertiser is
often lengthy, typically ranging from six weeks for smaller agreements to nine
months for larger agreements, and is subject to delays over which we have little
or no control, including:
o customers' budgetary constraints;
o customers' internal acceptance reviews;
o the success and continued internal support of advertisers' and sponsors' own
development efforts; and
o the possibility of cancellation or delay of projects by advertisers or
sponsors.
During the sales cycle, we may expend substantial funds and management
resources in advance of generating sponsorship or advertising revenues.
Accordingly, if sales to advertisers or sponsors forecasted in a particular
period
18
are delayed or do not otherwise occur, we would generate less sponsorship and
advertising revenues during that period and our results of operations for that
period would suffer.
Our financial condition and revenues would be adversely affected if traffic on
our AOL site decreased or if carriage of our sites on AOL was discontinued.
AOL has accounted for a significant portion of our online traffic to
date. During the three months ended June 30, 2001, approximately 17% of our
users were customers of AOL's Internet services. If the financial condition and
operations of AOL were to deteriorate significantly, or if the traffic on our
AOL site were to substantially decrease, our revenues could be adversely
affected.
In addition, our anchor tenant agreement with AOL expires on January 6,
2003. AOL may extend it for an additional two years but does not have any
obligation to extend or renew the agreement. Through the AOL agreement, we
provide content on America Online, AOL.com, AOL Hometown, Netscape and
CompuServe. Under the terms of the agreement, AOL may terminate the agreement
without cause only with respect to our carriage on AOL Hometown, Netscape, and
CompuServe upon 30 days' prior written notice. If the carrying of our sites on
AOL is discontinued, we would lose members, sponsors and advertisers and our
business, results of operations and financial condition would be materially and
adversely affected.
We have a limited operating history and expect to encounter difficulties faced
by early stage companies in the Internet advertising and online wedding markets.
We commenced operations in May 1996 and recorded our first revenues in
September 1996, immediately following the launch of our first online property.
Accordingly, we have only a limited operating history and face many of the risks
and difficulties frequently encountered by early stage companies in new and
rapidly evolving markets, such as the Internet advertising and online wedding
markets. These risks include our ability to:
o increase the audience on our sites;
o broaden awareness of our brand;
o strengthen user-loyalty;
o offer compelling content;
o maintain our leadership in generating traffic;
o maintain our current, and develop new, strategic relationships;
o attract a large number of advertisers from a variety of industries;
o respond effectively to competitive pressures;
o generate revenues from the sale of merchandise and e-commerce;
o continue to develop and upgrade our technology; and
o attract, integrate, retain and motivate qualified personnel.
As a result of our limited operating history, we do not have meaningful
historical financial data for a significant number of periods upon which to
forecast our revenues and results of operations.
These risks could negatively impact our financial condition if left
unaddressed. For more information on the effects of some of these risks, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
19
We may be unable to continue to build awareness of The Knot brand name which
would negatively impact our business and cause our sponsorship and advertising
revenues to decline.
Building recognition of our brand is critical to attracting and
expanding our online user base and our offline readership. Because we plan to
continue building brand recognition, we may find it necessary to accelerate
expenditures on our sales and marketing efforts or otherwise increase our
financial commitment to creating and maintaining brand awareness. Our failure to
successfully promote and maintain our brand would adversely affect our business
and cause us to incur significant expenses in promoting our brand without an
associated increase in our net revenues.
Our business could be adversely affected if we are not able to successfully
integrate our recent and any future acquisitions or successfully operate under
our strategic partnerships.
In March 2000, we acquired Weddingpages, a publisher of local wedding
publications. We may not be able to successfully integrate and expand the
Weddingpages business model. In addition, we may still encounter difficulty
integrating the personnel, operations, technology and software of this acquired
business. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations.
In the future, we may acquire, or invest in, complementary companies,
products or technologies or enter into new strategic partnerships. Acquisitions,
investments and partnerships involve numerous risks, including:
o difficulties in integrating operations, technologies, products and personnel;
o diversion of financial and management resources from existing operations;
o risks of entering new markets;
o potential loss of key employees; and
o inability to generate sufficient revenues to offset acquisition or investment
costs.
The costs associated with potential acquisitions or strategic alliances could
dilute your investment or adversely affect our results of operations.
To pay for an acquisition or to enter into a strategic alliance, we
might use equity securities, debt, cash, or a combination of the foregoing. If
we use equity securities, our stockholders may experience dilution. In addition,
an acquisition may involve non-recurring charges or involve amortization of
significant amounts of goodwill. The related increases in expenses could
adversely affect our results of operations. Any such acquisitions or strategic
alliances may require us to obtain additional equity or debt financing, which
may not be available on commercially acceptable terms, if at all.
If the use of the Internet as an advertising and marketing medium grows more
slowly than we expect or diminishes, our future revenues and prospects would be
materially and adversely affected.
Our future success depends in part on a significant increase in the use
of the Internet as an advertising and marketing medium. Sponsorship, advertising
and production revenues constituted 22% of our net revenues for the six months
ended June 30, 2001, 45% of our net revenues for the year ended December 31,
2000, 71% of our net revenues for the year ended December 31, 1999 and 82% of
our net revenues for the year ended December 31, 1998. The Internet 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.
20
Widespread adoption of this software by users would significantly undermine the
commercial viability of Internet advertising.
We depend on a limited number of online sponsors and advertisers and the loss of
a number of these would result in a decline in our revenues.
We depend on a limited number of online sponsors and advertisers for a
significant part of our net revenues. Although no single sponsor or advertiser
accounted for 5% or more of our net revenues, our seven largest sponsors and
advertisers accounted for 18% of our net revenues for the year ended December
31, 2000 and accounted for 7% of our net revenues for the six months ended June
30, 2001. Consequently, the loss of any of these online sponsors or advertisers
would cause our revenues to decline.
We anticipate that our future results of operations will continue to
depend to a significant extent upon revenues from a limited number of online
sponsors and advertisers. In addition, we anticipate that such online sponsors
and advertisers will continue to vary over time. To achieve our long-term goals,
we will need to attract additional significant online sponsors and advertisers
on an ongoing basis. If we fail to enter into a sufficient number of large
contracts during a particular period, our revenues for that period would be
adversely affected. For more information on our advertising revenues, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
International operations are subject to additional risks.
We may decide to further expand internationally. Prior to our recent
joint venture, we had no experience in developing localized versions of our
sites for international markets and in marketing and selling internationally.
Additionally, we have limited information available to evaluate our prospects
abroad.
International operations and business expansion plans are subject to
numerous additional risks, including the impact of foreign government
regulations, currency fluctuations, political uncertainties, social instability,
differences in business practices or other developments not typical of
investments in the United States. There can be no assurance that foreign
governments will not adopt regulations or take other actions that would have a
direct or indirect adverse impact on our business or market opportunities within
such governments' countries. Furthermore, there can be no assurance that the
political, cultural and economic climate outside the United States will be
favorable to our operations and business strategy.
As a result of our recent joint venture, our operations have been
exposed to foreign competition. Many of these competitors have substantially
greater financial resources than we do and a significant operating history in
the jurisdictions in which we are seeking to establish ourselves. There can be
no assurance that we will be able to successfully compete in any foreign
jurisdiction or against such competitors.
If we cannot protect our domain names, it will impair our ability to brand
successfully The Knot.
We currently hold various Web domain names, including www.theknot.com.
The acquisition and maintenance of domain names generally is regulated by
Internet regulatory bodies. The regulation of domain names in the United States
and in foreign countries is subject to change. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may be unable
to acquire or maintain relevant domain names in all countries in which we
conduct business. Furthermore, it is unclear whether laws protecting trademarks
and similar proprietary rights will be extended to protect domain names.
Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. We may not successfully carry out our
business strategy of establishing a strong brand for The Knot if we cannot
prevent others from using similar domain names or trademarks. This could impair
our ability to increase market share and revenues.
Our business and prospects would suffer if we are unable to protect and enforce
our intellectual property rights.
We rely solely upon copyright, trade secret and trademark law and
assignment of invention and confidentiality agreements to protect our
proprietary technology, processes, content and other intellectual property to
the extent that protection is sought or secured at all. We cannot assure you
that any steps we might take will be
21
adequate to protect against infringement and misappropriation of our
intellectual property by third parties. Similarly, we cannot assure you that
third parties will not be able to independently develop similar or superior
technology, processes, content or other intellectual property. The unauthorized
reproduction or other misappropriation of our intellectual property rights could
enable third parties to benefit from our technology without paying us for it. If
this occurs, our business and prospects would be materially and adversely
affected. In addition, disputes concerning the ownership or rights to use
intellectual property could be costly and time consuming to litigate, may
distract management from other tasks of operating the business, and may result
in our loss of significant rights and the loss of our ability to operate our
business.
Our products and services may infringe on intellectual property rights of third
parties and any infringement could require us to incur substantial costs and
distract our management.
Although we avoid infringing known proprietary rights of third parties,
including licensed content, we may be subject to claims alleging infringement of
third-party proprietary rights. If we are subject to claims of infringement or
are infringing the rights of third parties, we may not be able to obtain
licenses to use those rights on commercially reasonable terms, if at all. In
that event, we would need to undertake substantial reengineering to continue our
online offerings. Any effort to undertake such reengineering might not be
successful. Furthermore, a party making such a claim could secure a judgment
that requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from selling our products.
Any claim of infringement could cause us to incur substantial costs defending
against the claim, even if the claim is invalid, and could distract our
management from our business.
We depend upon QVC to provide us warehousing, fulfillment and distribution
services, and system failures or other problems at QVC could cause us to lose
customers and revenues.
We have a services agreement with QVC to warehouse, fulfill and arrange
for distribution of approximately 75% of our products, excluding products sold
through our retail partner. Our agreement with QVC expires in December 2003. QVC
does not have any obligation to renew this agreement. If QVC's ability to
provide us with these services in a timely fashion or at all is impaired,
whether through labor shortage, slow down or stoppage, deteriorating financial
or business condition, system failures or for any other reason, or if the
services agreement is not renewed, we would not be able, at least temporarily,
to sell or ship our products to our customers. We may be unable to engage
alternative warehousing, fulfillment and distribution services on a timely basis
or upon terms favorable to us.
We may not be able to obtain additional financing necessary to execute our
business strategy.
We currently believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements
through the end of the first quarter of 2002. We expect to continue to evaluate
acquisitions of, or investments in, complimentary businesses, services and
technologies, expand our sales and marketing programs and conduct more
aggressive brand promotions. To the extent we require additional funds to
support our operations or the expansion of our business, we may need to sell
additional equity, issue debt or convertible securities or obtain credit
facilities through financial institutions. We cannot assure you that additional
funding, if required, will be available to us in amounts or on terms acceptable
to us. If sufficient funds are not available or are not available on acceptable
terms, our ability to fund our expansion, take advantage of acquisition
opportunities, develop or enhance our services or products, or otherwise respond
to competitive pressures would be significantly limited.
Increased competition in our markets could reduce our market share, the number
of our advertisers, our advertising revenues and our margins.
The Internet advertising and online wedding markets are new and rapidly
evolving. Additionally, both the Internet advertising and online wedding markets
and the wedding magazine publishing markets are intensely competitive, and we
expect such competition to intensify in the future.
We face competition for members, users, readers and advertisers from
the following areas:
o online services or Web sites targeted at brides and grooms as well as the
online sites of retail stores, manufacturers and regional wedding
directories;
22
o bridal magazines, such as Bride's (part of the Conde Nast family) and Modern
Bride (part of the Primedia family); and
o online and retail stores offering gift registries, especially from retailers
offering specific bridal gift registries.
We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Our competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user, membership or
readership bases than we have and, therefore, have a significantly greater
ability to attract advertisers, users and readers. In addition, many of our
competitors may be able to respond more quickly than we can to new or emerging
technologies and changes in Internet user requirements, as well as devote
greater resources than we can to the development, promotion and sale of
services.
There can be no assurance that our current or potential competitors
will not develop products and services comparable or superior to those that we
develop or adapt more quickly than we do to new technologies, evolving industry
trends or changing Internet user preferences. Increased competition could result
in price reductions, lower margins or loss of market share. There can be no
assurance that we will be able to compete successfully against current and
future competitors.
Our potential inability to compete effectively in our industry for qualified
personnel could hinder the success of our business.
Competition for personnel in the Internet and wedding industries is
intense. We may be unable to retain those employees who are important to the
success of our business. We may also face difficulties attracting, integrating
or retaining other highly qualified employees in the future. We have
experienced, and expect to continue to experience, difficulty in hiring and
retaining highly-skilled employees with appropriate qualifications as a result
of our rapid growth and expansion. If we cannot attract new personnel or retain
and motivate our current personnel, our business may not succeed.
Systems disruptions and failures could cause advertiser or user dissatisfaction
and could reduce the attractiveness of our sites.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our advertisers and sponsors, users and members may
become dissatisfied by any systems disruption or failure that interrupts our
ability to provide our services and content to them. Substantial or repeated
system disruption or failures would reduce the attractiveness of our online
sites significantly. Substantially all of our communications hardware and some
of our other computer hardware operations are located at Globix Corporation's
facilities in New York, New York. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect our online sites. Our business could be
materially and adversely affected if our systems were affected by any of these
occurrences. We do not presently have any secondary "off-site" systems or a
formal disaster recovery plan. Our sites must accommodate a high volume of
traffic and deliver frequently updated information. Our sites have in the past
experienced slower response times or decreased traffic. These types of
occurrences in the future could cause users to perceive our sites as not
functioning properly and therefore cause them to use another online site or
other methods to obtain information or services. In addition, our users depend
on Internet service providers, online service providers and other site operators
for access to our online sites. Many of them have experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system disruptions or failures unrelated to our systems. Although we
carry general liability insurance, our insurance may not cover any claims by
dissatisfied providers or subscribers or may not be adequate to indemnify us for
any liability that may be imposed in the event that a claim were brought against
us. Any system disruption or failure, security breach or other damage that
interrupts or delays our operations could cause us to lose users, sponsors and
advertisers and adversely affect our business and results of operations.
23
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 liability could include claims for
unauthorized purchases with credit card information, impersonation or other
similar fraud claims as well as for other misuses of personal information, such
as for unauthorized marketing purposes. These claims could result in costly and
time-consuming litigation which could adversely affect our financial condition.
In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. We could have additional expenses if new regulations regarding the
use of personal information are introduced or if our privacy practices are
investigated.
Our executive officers, directors and 5% or greater stockholders exercise
significant control over all matters requiring a stockholder vote.
As of June 30, 2001, our executive officers, directors and stockholders
who each owned greater than 5% of our common stock, and their affiliates, in the
aggregate, beneficially owned approximately 71% of our outstanding common stock.
As a result, these stockholders are able to exercise control over all matters
requiring approval by our stockholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
could also have the effect of delaying or preventing a change in control.
Anti-takeover provisions in our charter documents and Delaware law may make it
difficult for a third party to acquire us.
Provisions of our certificate of incorporation, our bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so might be beneficial to our stockholders.
Risks Related to the Securities Markets
Future sales of our common stock may negatively affect our stock price.
We have a large number of shares of common stock outstanding and
available for resale. The market price of our common stock could decline as a
result of sales of a large number of shares of our common stock in the public
market or the perception that such sales could occur.
Our stock price has been highly volatile and is likely to experience extreme
price and volume fluctuations in the future that could reduce the value of your
investment, subject us to litigation, cause us to be unable to maintain the
listing of our common stock on the Nasdaq National Market, and make obtaining
future equity financing more difficult for us.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile, with extreme price and volume
fluctuations. The Nasdaq National Market, where most publicly held Internet
companies are traded, has experienced substantial price and volume fluctuations.
These broad market and industry factors may harm the market price of our common
stock, regardless of our actual operating performance, and for this or other
reasons we could continue to suffer significant declines in the market price of
our common stock. In the past, companies that have experienced volatility in the
market price of their stock have been the object of securities class action
litigation. If we were to become the object of securities class
24
action litigation, it could result in substantial costs and a diversion of our
management's attention and resources.
Our common stock is currently listed on the Nasdaq National Market. We
must satisfy a number of requirements to maintain our listing on the Nasdaq
National Market, including maintaining a minimum bid price for our common stock
of $1.00 per share and maintaining a market value for our publicly-held shares
of at least $5 million. A company fails to satisfy these requirements if its
closing bid price remains below $1.00 per share or if the market value for the
publicly-held shares remain below $5 million, in each case for 30 consecutive
business days. On June 21, 2001, we received a letter from The Nasdaq Stock
Market, Inc. notifying us of our failure to comply with the minimum
bid price of $1.00 per share as required by Nasdaq's Marketplace Rule
4450(a)(5), and therefore, our common stock is subject to delisting from the
Nasdaq National Market. Further, on June 28, 2001, we received a letter from
Nasdaq notifying us of our failure to maintain the minimum market value of
public float required for continued listing set forth in Marketplace Rule
4450(a)(2). We appealed these Nasdaq determinations, and a Nasdaq listing
qualifications panel hearing was held on August 9, 2001. The outcome of this
hearing has not yet been determined, and we cannot assure you that our appeal of
these determinations will be successful. If our common stock loses its Nasdaq
National Market status, our common stock would likely trade on the Nasdaq
Over-the-Counter Bulletin Board, which is viewed by most investors as a less
desirable, less liquid marketplace. This outcome would be likely to adversely
affect the trading price of our common stock. In addition, further declines in
our stock price might harm our ability to issue, or significantly increase the
ownership dilution to stockholders caused by our issuing equity in financing or
other transactions. The price at which we issue shares in such transactions is
generally based on the market price of our common stock and a decline in our
stock price would result in our needing to issue a greater number of shares to
raise a given amount of funding or acquire a given dollar value of goods or
services.
Risks Related to the Internet Industry
If the use of the Internet and commercial online services as media for commerce
does not continue to grow, our business and prospects would be materially and
adversely affected.
We cannot assure you that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and commercial online services as media
for commerce, particularly for purchases of wedding gifts and supplies. Even if
consumers adopt the Internet or commercial online services as a media for
commerce, we cannot be sure that the necessary infrastructure will be in place
to process such transactions. Our long-term viability depends substantially upon
the widespread acceptance and the development of the Internet or commercial
online services as effective media for consumer commerce and for advertising.
Use of the Internet or commercial online services to effect retail transactions
and to advertise is at an early stage of development. Convincing consumers to
purchase wedding gifts and supplies online may be difficult.
Demand for recently introduced services and products over the Internet
and commercial online services is subject to a high level of uncertainty. Few
proven services and products exist. The development of the Internet and
commercial online services into a viable commercial marketplace is subject to a
number of factors, including:
o continued growth in the number of users of such services;
o concerns about transaction security;
o continued development of the necessary technological infrastructure;
o development of enabling technologies;
o uncertain and increasing government regulation; and
o the development of complementary services and products.
If users experience difficulties because of capacity constraints of the
infrastructure of the Internet and other commercial online services, potential
users may not be able to access our sites and our business and prospects would
be harmed.
25
To the extent that the Internet and other online services continue to
experience growth in the number of users and frequency of use by consumers
resulting in increased bandwidth demands, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. The Internet and other online services
have experienced outages and delays as a result of damage to portions of their
infrastructure, power failures, telecommunication outages, network service
outages and disruptions, natural disasters and vandalism and other misconduct.
Outages or delays, could adversely affect online sites, e-mail and the level of
traffic on all sites. We depend on online access providers that provide our
users with access to our services. In the past, users have experienced
difficulties due to systems failures unrelated to our systems. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity or to increased
governmental regulation. Insufficient availability of telecommunications
services to support the Internet or other online services also could result in
slower response times and negatively impact use of the Internet and other online
services generally, and our sites in particular. If the use of the Internet and
other online services fails to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services does not effectively
support growth that may occur or if the Internet and other online services do
not become a viable commercial marketplace, we may not achieve profitability.
We may be unable to respond to the rapid technological change in the Internet
industry and this may harm our business.
If we are unable, for technological, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or customer
requirements, we could lose users and market share to our competitors. The
Internet and e-commerce are characterized by rapid technological change. Sudden
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices could render our existing online sites and
proprietary technology and systems obsolete. The emerging nature of products and
services in the online wedding market and their rapid evolution will require
that we continually improve the performance, features and reliability of our
online services. Our success will depend, in part, on our ability:
o to enhance our existing services;
o to develop and license new services and technology that address the
increasingly sophisticated and varied needs of our prospective customers and
users; and
o to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of online sites and other proprietary technology
entails significant technological and business risks and requires substantial
expenditures and lead time. We may be unable to use new technologies effectively
or adapt our online sites, proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. Updating our
technology internally and licensing new technology from third parties may
require significant additional capital expenditures.
If we become subject to burdensome government regulation and legal uncertainties
related to doing business online, our sponsorship, advertising and merchandise
revenues could decline and our business and prospects could suffer.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. The governments of states and foreign countries might
attempt to regulate our transmissions or levy sales or other taxes relating to
our activities. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet and Internet advertising
services. In addition, the growth and development of the market for e-commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, which may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the
26
Internet and other online services could cause our sponsorship, advertising
and merchandise revenues to decline and our business and prospects to suffer.
We may be sued for information retrieved from our sites.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
We may incur potential product liability for products sold online.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user, or if consumers
experience problems with honeymoon packages purchased through our sites. To
date, we have had limited experience selling products online and developing
relationships with manufacturers or suppliers of such products. We plan to sell
a range of products targeted specifically at brides and grooms through The Knot
Registry, The Knot Shop, Bridalink.com, Click Trips and other e-commerce sites
that we may acquire in the future. Such a strategy involves numerous risks and
uncertainties. Although our agreements with manufacturers and providers of
travel services typically contain provisions intended to limit our exposure to
liability claims, these limitations may not prevent all potential claims.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could seriously damage our financial results, reputation and
brand name.
We may incur significant expenses related to the security of personal
information online.
The need to transmit securely confidential information online has been
a significant barrier to e-commerce and online communications. Any
well-publicized compromise of security could deter people from using the
Internet or other online services or from using them to conduct transactions
that involve transmitting confidential information. Because our success depends
on the acceptance of online services and e-commerce, we may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by such breaches.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, result of operations, or cash flows of the company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
We are exposed to some market risk through interest rates related to
the investment of our current cash and cash equivalents of approximately $10.6
million as of June 30, 2001. These funds are generally invested in highly liquid
debt instruments with short-term maturities. As such instruments mature and the
funds are re-invested, we are exposed to changes in market interest rates. This
risk is not considered material and we manage such risk by continuing to
evaluate the best investment rates available for short-term high quality
investments.
We have no activities related to derivative financial instruments or
derivative commodity instruments, and we are not currently subject to foreign
currency exchange risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 14, 2000, certain Weddingpages franchisees commenced
litigation in Supreme Court, New York County, New York against us and certain of
our officers, including David Liu, our Chairman and Chief Executive Officer. The
plaintiffs seek to enjoin us from taking actions, primarily relating to the sale
of advertising in certain local markets, which plaintiffs claim will damage the
value of their Weddingpages franchises and money damages in an unspecified
amount. On October 19, 2000, we filed our initial response. On October 27, 2000,
the Supreme Court of the State of New York refused to grant preliminary
injunctions sought by certain Weddingpages franchisees. The court ordered that
the parties submit their dispute to a neutral mediator. In February, March and
April 2001, as a result of negotiations among the parties, with the assistance
of the mediator, non-monetary settlements were reached with seven of the
plaintiffs in the action. Six franchisees have not executed the settlement
agreement as negotiated. Five of those franchisees have since sought a temporary
restraining order and a preliminary injunction to keep us, among other things,
from soliciting Internet advertisement sales within those franchisees'
Weddingpages franchise territories. On May 31, 2001, the Court denied the
franchisees' motion for a temporary restraining order. On July 2, 2001, the
Court heard arguments on the franchisees' motion for a preliminary injunction.
At the same time, the Court heard arguments on Weddingpages' cross-motion to
compel arbitration and on the Knot's cross-motion to stay litigation pending
arbitration. The Court has not decided those motions. We intend to continue
vigorously opposing the franchisees' baseless lawsuit.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) Use of Proceeds.
On December 1, 1999, the Securities and Exchange Commission declared
effective our Registration Statement on Form S-1 (Registration No. 333-87345).
Pursuant to this Registration Statement, we completed our initial public
offering of 3,913,000 shares of our common stock. After deducting underwriting
discounts and commissions and other related expenses, net proceeds of the
offering were approximately $34.7 million. As of June 30, 2001, we have used
approximately $31.5 million of the proceeds from our initial public offering for
working capital purposes, capital expenditures and to fund acquisitions and
operating losses. Except for salaries and travel expenses paid in the normal
course of business or distribution and warehousing fees paid to QVC under our
services agreement, none of these expenses were direct or indirect payments to
our directors, officers, general partners or their associates, to persons owning
ten percent or more of any class of our equity securities or to our affiliates.
28
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2001 Annual Meeting of Stockholders on May 15, 2001. At
that meeting, our stockholders approved the following proposals: (i) election of
Alexander Lynch and Sandra Stiles as directors whose term expires in 2004, (ii)
amendment to our 1999 Stock Incentive Plan that increases the number of shares
of our common stock authorized for issuance under the plan to 5,143,393 and
(iii) ratification of Ernst & Young LLP as our independent auditors for the
fiscal year ending December 31, 2001.
There were 13,691,865 votes cast for, and 56,940 votes cast against, in
connection with the election of Alexander Lynch as a director. There were
13,691,865 votes cast for, and 56,940 votes cast against, in connection with the
election of Sandra Stiles as a director. The remainder of our board of directors
remains as previously reported. There were 9,592,644 votes cast for, 246,601
votes cast against and 5,600 abstentions in connection with the approval of the
amendment to our 1999 Stock Incentive Plan. There were 13,648,209 votes cast
for, 42,930 votes cast against and 726 abstentions in connection with the
ratification of Ernst & Young LLP as independent auditors.
Item 5. Other Information
On August 10, 2001, our Chief Technology Officer, Carlos Manuel Abreu,
resigned his position to pursue other interests. Mr. Abreu will continue to
service the company on a consulting basis.
Item 6. Exhibits and Report on Form 8-K
a. Exhibits
None.
b. Report on Form 8K
We filed a Current Report on Form 8-K, Item 5, on June 27, 2001,
reporting the receipt of a letter from Nasdaq.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2001 THE KNOT, INC.
By: /s/ Richard Szefc
------------------------------------
Richard Szefc
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Signatory)
30