U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 of incorporation) (I.R.S. Employer Identification Number)
462 Broadway, 6th Floor
New York, New York 10013
(Address of Principal Executive Officer and Zip Code)
(212) 219-8555
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
As of May 10, 2002, there were 18,337,164 shares of the registrant's
common stock outstanding.
Page
Number
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PART I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001....................................................................... 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001........................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001........................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 27
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................................... 27
Item 2: Changes in Securities and Use of Proceeds............................................... 28
Item 6: Exhibits and Report on Form 8-K......................................................... 28
2
Item 1. Financial Statements (Unaudited)
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001*
--------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents .................................................. $ 9,644,808 $ 6,782,051
Restricted cash............................................................. 284,503 184,419
Accounts receivable, net of allowances of $1,330,536 and $1,010,615 at
March 31, 2002 and December 31, 2001, respectively..................... 4,284,301 5,011,930
Inventories................................................................. 810,193 729,285
Deferred production and marketing costs..................................... 106,628 293,529
Other current assets........................................................ 732,344 778,775
------------ ------------
Total current assets........................................................... 15,862,777 13,779,989
Property and equipment, net.................................................... 2,642,452 2,923,100
Intangible assets, net......................................................... 8,909,136 8,934,136
Other assets................................................................... 351,374 372,874
------------ ------------
Total assets................................................................... $ 27,765,739 $ 26,010,099
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses....................................... $ 3,510,073 $ 3,599,195
Short-term borrowings....................................................... - 1,384,470
Deferred revenue............................................................ 5,250,050 4,682,893
Current portion of long-term debt........................................... 313,267 323,709
------------ ------------
Total current liabilities...................................................... 9,073,390 9,990,267
Long-term debt................................................................. 310,816 372,234
Other liabilities.............................................................. 359,652 327,423
------------ ------------
Total liabilities.............................................................. 9,743,858 10,689,924
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized;
18,337,164 shares and 14,736,053 shares issued and outstanding
at March 31, 2002 and December 31, 2001, respectively....................... 183,371 147,360
Additional paid-in-capital.................................................. 64,432,971 59,512,193
Deferred compensation....................................................... (182,219) (254,983)
Deferred sales and marketing................................................ (489,905) (653,213)
Accumulated deficit......................................................... (45,922,337) (43,431,182)
------------ ------------
Total stockholders' equity..................................................... 18,021,881 15,320,175
------------ ------------
Total liabilities and stockholders' equity..................................... $ 27,765,739 $ 26,010,099
============ ============
*The condensed consolidated balance sheet as of December 31, 2001 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 March 31,
2002 2001
---- ----
Net revenues....................................................... $ 6,132,173 $ 5,222,991
Cost of revenues................................................... 2,392,635 2,215,362
----------- -----------
Gross profit....................................................... 3,739,538 3,007,629
Operating expenses:
Product and content development................................. 1,033,769 1,335,275
Sales and marketing............................................. 2,615,188 4,404,725
General and administrative...................................... 2,037,620 2,304,303
Non-cash compensation........................................... 53,930 118,950
Non-cash sales and marketing.................................... 163,308 163,308
Depreciation and amortization................................... 342,207 682,824
----------- -----------
Total operating expenses........................................... 6,246,022 9,009,385
----------- -----------
Loss from operations............................................... (2,506,484) (6,001,756)
Interest income, net............................................... 15,329 152,609
----------- -----------
Net loss........................................................... $(2,491,155) $(5,849,147)
=========== ===========
Net loss per share - basic and diluted............................. $ (0.15) $ (0.40)
=========== ===========
Weighted average number of shares used in calculating
basic and diluted net loss per share............................ 16,540,836 14,692,411
=========== ===========
See accompanying notes.
4
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2002 2001
---- ----
Operating activities
Net loss ............................................................. $(2,491,155) $(5,849,147)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 317,207 327,000
Amortization of intangibles........................................ 25,000 355,824
Amortization of deferred compensation.............................. 53,930 118,950
Amortization of deferred sales and marketing....................... 163,308 163,308
Reserve for returns................................................ 391,829 350,407
Allowance for doubtful accounts.................................... 290,951 538,170
Other non-cash charges............................................. 3,973 80,095
Changes in operating assets and liabilities
Restricted cash.................................................... (100,084) (289,248)
Accounts receivable................................................ 44,849 1,128,981
Inventories........................................................ (84,881) (118,575)
Deferred production and marketing.................................. 186,901 246,170
Other current assets............................................... 46,431 336,676
Other assets....................................................... 21,500 22,883
Accounts payable and accrued expenses.............................. (76,624) 527,830
Deferred revenue................................................... 567,157 106,867
Other liabilities.................................................. 32,229 34,729
----------- ----------
Net cash used in operating activities................................. (607,479) (1,919,080)
Investing activities
Purchases of property and equipment................................... (49,059) (96,412)
Acquisition of businesses, net of acquired cash....................... (38,400) (186,905)
----------- ----------
Net cash used in investing activities................................. (87,459) (283,317)
Financing activities
Repayment of short-term borrowings.................................... (1,417,930) (280,431)
Financing costs....................................................... (33,000) -
Proceeds from issuance of common stock................................ 5,008,625 20,539
Proceeds from exercise of stock options............................... - 417
----------- ----------
Net cash provided by (used in) financing activities................... 3,557,695 (259,475)
Increase (Decrease) in cash and cash equivalents...................... 2,862,757 (2,461,872)
Cash and cash equivalents at beginning of period...................... 6,782,051 15,859,624
----------- -----------
Cash and cash equivalents at end of period............................ $ 9,644,808 $13,397,752
=========== ===========
See accompanying notes.
5
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying financial information as of December 31, 2001 is derived
from audited financial statements, and the financial statements as of
March 31, 2002 and for the three months ended March 31, 2002 and 2001 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 March 31, 2002, the results of operations for the three
months ended March 31, 2002 and 2001 and cash flows for the three months
ended March 31, 2002 and 2001.
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, 2001 included in the
Company's Form 10-K as filed with the Securities and Exchange Commission.
As a result of a weak national online advertising market in 2001, the
Company's national online sponsorship and advertising revenue declined to
approximately $1.7 million for the year ended December 31, 2001 from
approximately $8.8 million for the year ended December 31, 2000. For the
three months ended March 31, 2002, national online sponsorship and
advertising revenue decreased to $330,000, as compared to $656,000 for
the corresponding period in 2001. To respond to its liquidity needs, the
Company's management completed a number of cost reduction initiatives
during 2001 including reductions in staff, the restructuring of its
international anchor tenant agreement with America Online ("AOL"),
reductions in capital expenditures, as well as additional programs
resulting in savings in a number of other operating expense categories,
the full annual benefits of which will be realized in 2002. Further, in
2002, the Company is adding a number of category specific advertising
programs to its customized integrated marketing campaigns to broaden the
group of potential national advertisers who can benefit from targeting
the Company's audience. The Company is also supplementing its national
sales force in New York with independent sales representative agencies in
key markets across the United States. In addition, in February 2002, the
Company raised additional capital of $5.0 million, less related costs,
from the sale of common stock to May Bridal Corporation, a subsidiary of
May Department Stores Company ("May") and also entered into a Media
Services Agreement with May (see note 7).
We believe that our current cash and cash equivalents will be sufficient
to fund our working capital and capital expenditure requirements for at
least the next twelve months, and our management expects to achieve
positive EBITDA, or earnings before income taxes, depreciation and
amortization and positive cash flow prior to utilizing all of our current
funds. This expectation is primarily based on internal estimates of
revenue growth, which relate to expected increased advertising,
merchandising and publishing revenues as well as continuing emphasis on
controlling all operating expenses. However, there can be no assurance
that actual costs will not exceed amounts estimated, that actual revenues
will equal or exceed estimated amounts, or that we will achieve
profitable operations, due to significant uncertainties surrounding our
estimates and expectations.
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.
6
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 March 31, 2002 includes money held for letters of
credit securing certain inventory purchases and an amount held in escrow
with one of the Company's bankcard processing services providers.
NET REVENUES BY TYPE
Net revenues by type are as follows:
Three Months Ended March 31,
2002 2001
---- ----
Type
Sponsorship, advertising and production................ $1,313,219 $1,409,296
Merchandise............................................ 3,061,286 1,678,222
Publishing and other................................... 1,757,668 2,135,473
---------- ----------
Total.................................................. $6,132,173 $5,222,991
========== ==========
For the three months ended March 31, 2002 and 2001, merchandise
revenue included outbound shipping and handling charges of
approximately $351,000 and $195,000, respectively.
COST OF REVENUES
Cost of revenues by type are as follows:
Three Months Ended March 31,
2002 2001
---- ----
Type
Sponsorship, advertising and production................ $ 162,435 $ 191,862
Merchandise............................................ 1,548,643 968,960
Publishing and other................................... 681,557 1,054,540
---------- ----------
Total.................................................. $2,392,635 $2,215,362
========== ==========
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are
deposited with three major financial institutions. The Company's
customers are primarily concentrated in the United States. The Company
performs on-going credit evaluations, generally does not require
collateral, and establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical trends and
other information. To date, such losses have been within management's
expectations.
For the three months ended March 31, 2002 and 2001, no one customer
accounted for more than 2% of net revenues. At March 31, 2002 and
December 31, 2001, no single customer accounted for more than 3% and 4%,
respectively, of accounts receivable.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets, effective for fiscal years
7
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 guidance of the provisions of SFAS 142. Other intangible assets
will continue to be amortized over their respective useful lives to their
estimated residual values and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Company adopted the provisions of SFAS No. 141 and SFAS No.
142 effective January 1, 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This standard addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company
is required to adopt SFAS No. 143 effective January 1, 2003. The adoption
of this new statement is not expected to have a material impact on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This standard supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The standard retains the previously
existing accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held and used
while expanding the measurement requirements of long-lived assets to be
disposed of by sale to include discontinued operations. It also expands
on the previously existing reporting requirements for discontinued
operations to include a component of an entity that either has been
disposed of or is classified as held for sale. The Company adopted the
provisions of SFAS No. 144 effective January 1, 2002. The adoption of
this new statement did not have a material impact on the Company's
financial statements for the three months ended March 31, 2002.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, December 31,
2002 2001
---- ----
Goodwill............................................................... $10,912,347 $10,912,347
Less accumulated amortization...................................... (2,503,211) (2,503,211)
----------- -----------
Net.................................................................... 8,409,136 8,409,136
Covenant not to compete................................................ 700,000 700,000
Less accumulated amortization...................................... (200,000) (175,000)
----------- -----------
Net.................................................................... 500,000 525,000
----------- -----------
Total.................................................................. $ 8,909,136 $ 8,934,136
=========== ===========
During the first quarter of 2002, the Company completed an initial
goodwill impairment test as of January 1, 2002. The test involved the
assessment of the fair market value of the Company as the single
reporting unit. No impairment of goodwill was indicated at that time.
Under SFAS No. 142, the Company is required to perform goodwill
impairment tests on at least an annual basis or more frequently if
circumstances dictate. There can be no assurance that future goodwill
impairment tests will not result in a charge to income. As of March 31,
2002, the Company had unamortized goodwill of $8.4 million. A
reconciliation of reported net income to net income adjusted to reflect
the impact of the discontinuance of the amortization of goodwill for the
three months ended March 31, 2001 is as follows:
Three months ended
March 31,
2001
----
Reported net loss...................................................... $(5,849,147)
Goodwill amortization.................................................. 330,824
-----------
Adjusted net loss...................................................... $(5,518,323)
===========
Reported basic and diluted net loss per share.......................... $ (0.40)
Goodwill amortization.................................................. $ 0.02
-----------
Adjusted basic and diluted net loss per share.......................... $ (0.38)
===========
8
The covenant not to compete is being amortized over the related
contractual period of seven years.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31, December 31,
2002 2001
---- ----
Accounts payable....................................................... $ 624,784 $ 772,695
Distribution and other service fees.................................... 1,728,763 1,378,020
Compensation and related benefits...................................... 521,508 892,122
Deposits from customers................................................ 7,697 54,404
Other accrued expenses................................................. 627,321 501,954
---------- ----------
Total.................................................................. $3,510,073 $3,599,195
========== ==========
5. SHORT-TERM BORROWINGS
The Company's subsidiary, Weddingpages, Inc., had a line of credit with a
bank that expired February 1, 2002. The remaining outstanding borrowings
under this line of credit of $1,245,668 were repaid on February 22, 2002.
6. LONG-TERM DEBT
Long-term debt as of March 31, 2002 consists of the following:
Note due in annual installments of $60,000 through October 2008,
based on imputed interest of 8.75%.................................................. $304,527
9.0% equipment installment note, due in monthly installments
of $4,566 through December 2002..................................................... 37,374
10.0% equipment installment note, due in monthly installments
of $8,131 through August 2003....................................................... 128,582
Termination liability, due in monthly installments
of $12,800 through March 2003....................................................... 153,600
--------
Total long-term debt................................................................ 624,083
Less current portion of long-term debt.............................................. 313,267
--------
Long term-debt, excluding current portion........................................... $310,816
========
Maturities of long-term obligations for the five years ending March 31,
2007 are as follows: 2003, $313,267; 2004, $75,915; 2005, $39,446; 2006,
$42,898; 2007, $46,651 and $105,906 thereafter.
7. INVESMENT BY MAY DEPARTMENT STORES COMPANY
On February 19, 2002, the Company entered into a Common Stock Purchase
Agreement (the "Agreement") with May Bridal Corporation ("May Bridal"),
an affiliate of May Department Stores Company ("May"), pursuant to which
the Company sold 3,575,747 shares of its common stock to May
9
Bridal for $5,000,000 in cash. The Agreement provides that if the Company
proposes to sell, transfer or otherwise issue any common or preferred
stock or other interest convertible into common stock ("equity
interests") to any third party, (other than shares previously reserved or
certain shares which shall be reserved for future issuance pursuant to
Stock Incentive Plans approved by the Board of Directors or stockholders
of the Company) and which transaction would dilute May Bridal's interest
in the common stock or voting power of the Company prior to such
transaction by more than one percentage point, then the Company shall
offer May Bridal the right to acquire a similar equity interest, on the
same terms and conditions as offered to the third party, in such amount
as to preserve its percentage interest in the common stock and voting
power of the Company. If the Company proposes to acquire any equity
interest from a third party, which transaction would result in May
Bridal's interest in the common stock or voting power of the Company
exceeding 20%, then the Company shall offer to acquire equity interests
from May Bridal on the same terms as offered to the third party, to
permit May Bridal to own less than 20% of the common stock or voting
power of the Company after the transaction. In addition, so long as May
Bridal owns more than 15% of the common stock or voting power of the
Company, May Bridal shall have the right to designate one member of the
Board of Directors of the Company and to nominate and submit such person
for election by the stockholders of the Company.
On February 19, 2002, the Company entered into a Media Services Agreement
with May pursuant to which the Company and May will develop an integrated
marketing program to promote and support May department store companies,
which offer wedding registry services. The Media Services Agreement has
an initial term of three years, which may be extended under certain
conditions, and may be renewed by May for up to three additional one-year
terms.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis in conjunction
with our financial statements and related notes included elsewhere in this
report. This discussion contains forward-looking statements 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.
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 30
company-owned and franchised markets in the United States. We also author a book
series on wedding planning and a gift-book series on wedding gowns and wedding
flowers. Through a strategic services and marketing agreement with a travel
agency partner, we offer honeymoon booking and other travel services. We are
based in New York and have several other offices across the country.
We derive revenues from the sale of online sponsorship, advertising and
production contracts and from the sale of merchandise. We also derive revenue
from publishing and commissions from the sale of travel packages.
Sponsorship revenues are derived principally from contracts currently
ranging up to twenty-four months. Sponsorships are designed to integrate
advertising with specific online editorial content. Sponsors can purchase the
exclusive right to promote products or services on a specific online editorial
area and can purchase a special feature on our sites.
Online advertising revenues are derived principally from short-term
contracts that typically range from one month up to one year. These contracts
include online banner advertisements, direct e-mail marketing 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 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 March 31, 2002, our top seven advertisers
accounted for 5% of our net revenues. For the quarter ended March 31, 2001, our
top seven advertisers accounted for 10% 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 sites and, prior to
July 2001, through a co-branded site with QVC, Inc., as well as 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
11
recognized when products are shipped to customers, reduced by discounts as well
as an allowance for estimated sales returns.
Publishing revenue includes print 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 the publication of the WEDDINGPAGES magazine by 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 on newsstands, in bookstores and online 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.
Commissions earned on the sale of travel packages are recognized when
the customer commences travel.
Results of Operations
Net Revenues
Net revenues were $6.1 million and $5.2 million for the three months
ended March 31, 2002 and 2001, respectively.
Sponsorship, advertising and production revenues decreased to $1.3
million for the three months ended March 31, 2002, as compared to $1.4 million
for the three months ended March 31, 2001. A reduction in the number and average
value of national sponsorship contracts as a result of an overall downturn in
the national online advertising sector contributed to the decrease. Within
sponsorship, advertising and production revenues, revenue from local vendor
online advertising programs increased by approximately 30% to $983,000 for the
three months ended March 31, 2002 as a result of additional contracts sold.
Sponsorship, advertising and production revenues amounted to 21% of our net
revenues for the quarter ended March 31, 2002 and 27% for the three months ended
March 31, 2001.
Merchandise revenues increased to $3.1 million for the three months
ended March 31, 2002, as compared to $1.7 million for the corresponding period
in 2001. This increase was primarily due to an increase of $1.3 million in the
sales of wedding supplies through Bridalink.com and The Knot Shop due, in part,
to the expansion of product and service offerings. Merchandise revenues amounted
to 50% of our net revenues for the three months ended March 31, 2002 and 32% of
our net revenues for the three months ended March 31, 2001.
Publishing and other revenues decreased to $1.8 million for the three
months ended March 31, 2002, as compared to $2.1 million for the corresponding
period in 2001. These revenues are primarily attributed to print advertising and
newsstand revenues derived from the publication of regional wedding magazines by
Weddingpages, service fees and royalties from producing the WEDDINGPAGES
magazine for certain franchisees, as well as print advertising and newsstand
revenues from The Knot Wedding Gowns magazine. Print advertising revenue derived
from the Weddingpages operation decreased by $490,000 primarily due to the
timing of publication of the WEDDINGPAGES magazine in certain markets. This
decrease was offset, in part, by additional revenue from The Knot Wedding Gowns
magazine of $285,000 due to a larger number of print advertising contracts sold.
Publishing and other revenues accounted for 29% and 41% of our net revenues for
the three months ended March 31, 2002 and 2001, respectively.
Cost of Revenues
Cost of revenues consists primarily 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
online and offline media, and costs of Internet and hosting services.
Cost of revenues increased to $2.4 million for the three months ended
March 31, 2002, from $2.2 million for the three months ended March 31, 2001.
Cost of revenues from the sale of merchandise increased by $580,000 for the
three months ended March 31, 2002, as compared to the corresponding period in
2001, primarily as a result of an
12
increase in sales of wedding supplies. The increase in cost of revenues from
wedding supplies was offset, in part, by a reduction in cost of revenues related
to the production of regional wedding magazines as a result of the timing of
publication of the WEDDINGPAGES magazine in certain markets and by improved
margins, principally with respect to merchandise and publishing revenues. Our
margins on the sale of wedding supplies have improved as a result of sourcing
products at lower costs and the introduction of higher margin products.
Publishing margins have improved as a result of higher effective rates for print
advertising in our regional wedding magazines. As a percentage of our net
revenues, cost of revenues decreased to 39% for the three months ended March 31,
2002 from 42% for the three months ended March 31, 2001.
Product and Content Development
Product and content development expenses consist primarily of payroll
and related expenses for editorial, creative and information technology
personnel.
Product and content development expenses decreased to $1.0 million for
the three months ended March 31, 2002 from $1.3 million for the corresponding
period in 2001. This decrease was primarily the result of cost reduction
initiatives which reduced personnel and related expenses by $200,000 and
generated a number of other cost savings aggregating approximately $100,000. As
a percentage of our net revenues, product and content development expenses
decreased to 17% for the three months ended March 31, 2002 from 26% for the
three months ended March 31, 2001.
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 the costs for AOL anchor tenant agreements, advertising
and promotional activities and fulfillment and distribution of merchandise.
Sales and marketing expenses decreased to $2.6 million for the three
months ended March 31, 2002 from $4.4 million for the corresponding period in
2001. The decrease is the result of various cost reduction initiatives which
reduced personnel and related expenses by approximately $515,000 and promotional
materials by $193,000, as well as smaller cost savings in a number of other
areas. In addition, there was a reduction in fees of $822,000 under our
international anchor tenant agreement with AOL. This agreement was amended
effective March 31, 2001 to limit to France the international markets which we
receive distribution from AOL. To effect this amendment with AOL, we incurred a
one-time restructuring fee in the first quarter of 2001. As a percentage of our
net revenues, sales and marketing expenses decreased to 43% for the three months
ended March 31, 2002 from 84% for the three months ended March 31, 2001.
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 decreased to $2.0 million for the
three months ended March 31, 2002 from $2.3 million for the corresponding period
in 2001, primarily due to reduced bad debt expense. As a percentage of our net
revenues, general and administrative expenses decreased to 33% for the three
months ended March 31, 2002 from 44% for the three months ended March 31, 2001.
Non-Cash Compensation
We recorded no deferred compensation during the three months ended
March 31, 2002. Amortization of deferred compensation decreased to $54,000
during the three months ended March 31, 2002 from $119,000 for the three months
ended March 31, 2001.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing costs 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 March 31, 2002 and 2001.
13
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and capitalized software and amortization
of goodwill and other intangible assets related to acquisitions.
Depreciation and amortization expenses decreased to $342,000 for the
three month period ended March 31, 2002 from $683,000 for the corresponding
period in 2001. This decrease was primarily due to the implementation of SFAS
No. 142, effective January 1, 2002, resulting in goodwill no longer being
amortized. For the three months ended March 31, 2001, we recorded goodwill
amortization of $331,000. We perform goodwill impairment tests on at least an
annual basis. There can be no assurance that future goodwill impairment tests
will not result in a charge to income. As a percentage of net revenues,
depreciation and amortization expense decreased to 6% from 13% for the three
months ending March 31, 2002 and 2001, respectively.
Interest Income
Interest income net of interest expense decreased to $15,000 for the
three months ended March 31, 2002, as compared to $153,000 for the corresponding
period in 2001. The decrease was primarily the result of lower amounts of cash
and cash equivalents available for investment and lower interest rates.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities on an on-going basis. We evaluate these estimates including
those related to the allowance for doubtful accounts, returns, inventory
reserves, impairment of intangible assets including goodwill, deferred taxes and
contingencies and litigation. Actual results may differ from these estimates
under different assumptions or conditions.
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. In
determining that allowance, we evaluate a number of factors, including the
credit risk of customers, historical trends and other relevant information. If
the financial condition of our customers were to deteriorate, additional
allowances may be required.
We have acquired businesses and invest in technologies and intangible
assets in areas within our strategic focus, some of which have highly volatile
fair values and uncertain profit potential. In our assessment of impairment of
goodwill as of January 1, 2002, we made estimates of fair value using several
approaches. In our ongoing assessment of impairment of goodwill and other
intangible assets, we consider whether events or changes in circumstances such
as significant declines in revenues, earnings or material adverse changes in the
business climate, indicate that the carrying value of the assets may be
impaired. As of March 31, 2002, no impairment has occurred. Future adverse
changes in market conditions or poor operating results of strategic investments
could result in losses or an inability to recover the carrying value of the
investments, thereby possibly requiring impairment charges in the future.
Liquidity and Capital Resources
As of March 31, 2002, our cash and cash equivalents amounted to $9.6
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 $607,000 for the three months
ended March 31, 2002. This resulted primarily from the loss for the period, as
adjusted for depreciation and amortization and other non-cash charges of $1.2
million, partially offset by a decrease in deferred production and marketing
expense of $187,000 and an increase in deferred revenue of $567,000. Net cash
used in operating activities was $1.9 million for the three months ended March
31, 2001. This resulted primarily from the loss for the period, as adjusted for
depreciation and amortization and
14
other non-cash charges of $1.9 million, partially offset by decreases in
accounts receivable of $1.1 million, decreases in other current assets of
$337,000 and increases in accounts payable and accrued expenses of $528,000.
Net cash used in investing activities was $87,000 for the three months
ended March 31, 2002, primarily due to purchases of property and equipment of
$49,000 and cash paid of $38,000 with respect to a termination liability
resulting from the acquisition of Weddingpages. Net cash used in investing
activities was $283,000 for the three months ended March 31, 2001, primarily due
to cash paid for the acquisition of a former franchise market by Weddingpages of
$140,000 and purchases of property and equipment of $96,000.
Net cash provided by financing activities was $3,558,000 for the three
months ended March 31, 2002, primarily due to proceeds from May Bridal
Corporation in connection with the issuance of 3,575,747 shares of our common
stock for $5,000,000, less related costs, partially offset by the repayment of
the outstanding balance under Weddingpages' line of credit agreement on February
22, 2002 of $1,245,668. Net cash used in financing activities was $259,000 for
the quarter ended March 31, 2001, primarily due to the repayment of short-term
borrowings.
As of March 31, 2002, we had no material commitments for capital
expenditures.
As of March 31, 2002, we had commitments under non-cancelable operating
leases amounting to approximately $5.6 million, of which $597,000 will be due on
or before March 31, 2003, an aggregate of $1.7 million will be due in the three
years ended March 31, 2006, and $3.3 million will be due thereafter.
As of March 31, 2002, we had commitments under an amended anchor tenant
agreement with AOL in the amount of $900,000, all of which will be due on or
before October 1, 2002.
As a result of a weak national online advertising market in 2001, the
Company's national online sponsorship and advertising revenue declined to
approximately $1.7 million for the year ended December 31, 2001 from
approximately $8.8 million for the year ended December 31, 2000. For the three
months ended March 31, 2002, national online sponsorship and advertising revenue
decreased to $330,000, as compared to $656,000 for the corresponding period in
2001. To respond to its liquidity needs, the Company's management completed a
number of cost reduction initiatives during 2001 including reductions in staff,
the restructuring of its international anchor tenant agreement with AOL,
reductions in capital expenditures, as well as additional programs resulting in
savings in a number of other operating expense categories, the full annual
benefits of which will be realized in 2002. Further, in 2002, the Company is
adding a number of category specific advertising programs to its customized
integrated marketing campaigns to broaden the group of potential national
advertisers who can benefit from targeting the Company's audience. The Company
is also supplementing its national sales force in New York with independent
sales representative agencies in key markets across the United States. In
addition, as described above, in February 2002, the Company raised additional
capital of $5.0 million, less related costs, from the sale of common stock to
May Bridal Corporation, a subsidiary of May Department Stores Company ("May")
and also entered into a Media Services Agreement with May.
We believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements for
at least the next twelve months, and our management expects to achieve positive
EBITDA, or earnings before income taxes, depreciation and amortization and
positive cash flow prior to utilizing all of our current funds. This expectation
is primarily based on internal estimates of revenue growth, which relate to
expected increased advertising, merchandising and publishing revenues as well as
continuing emphasis on controlling all operating expenses. However, there can be
no assurance that actual costs will not exceed amounts estimated, that actual
revenues will equal or exceed estimated amounts, or that we will achieve
profitable operations, due to significant uncertainties surrounding our
estimates and expectations.
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
Annual Report.
Risks Related to Our Business
We have an unproven business model, and it is uncertain whether online
wedding-related sites can generate sufficient revenues to survive.
Our model for conducting business and generating revenues is unproven.
Our business model depends in large part on our ability to generate revenue
streams from multiple sources through our online sites, including:
o online sponsorship and advertising fees from third parties; and
o online sales of wedding gifts and supplies.
It is uncertain whether wedding-related online sites that rely on
attracting sponsors and advertisers, as well as people to purchase wedding gifts
and supplies, can generate sufficient revenues to survive. For our business to
be successful, we must provide users with an acceptable blend of products,
information, services and community offerings that will attract wedding
consumers to our online sites frequently. In addition, we must provide sponsors,
advertisers and vendors the opportunity to reach these wedding consumers. We
provide our services to users without charge and we may not be able to generate
sufficient revenues to pay for these services. Accordingly, we are not certain
that our business model will be successful or that we can sustain revenue growth
or be profitable.
We have a history of significant losses since our inception and may continue to
incur significant losses for the foreseeable future.
We have not achieved profitability and have continued to incur
significant losses and negative cash flow. We incurred net losses of $9.2
million for the year ended December 31, 1999, $15.8 million for the year ended
December 31, 2000, $15.1 million for the year ended December 31, 2001 and $2.5
million for the three months ended March 31, 2002. As of March 31, 2002, our
accumulated deficit was $45.9 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 or if
operating expenses exceed our expectations or cannot be adjusted accordingly,
then
16
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 "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;
o demand for online and offline advertising;
o seasonal trends in online usage, advertising placements and demand for
merchandise;
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, as well as 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
investors and/or securities analysts. 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 2000,
according to National Center of Health Statistics, 20% of weddings in the United
States occurred in the first quarter, 26% occurred in the second quarter, 30%
occurred in the third quarter and 24% occurred in the fourth quarter. Because we
launched The Knot Registry in November 1998 and acquired Bridalink in July 1999,
we have limited experience generating merchandise revenues. 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.
17
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 the occurrence of extraordinary events, such as the attacks on
September 11, 2001;
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 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 March 31, 2002, 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 may face difficulties encountered in the new and rapidly evolving markets in
which we operate.
We face many of the risks and difficulties frequently encountered in
new and rapidly evolving markets, including the online advertising and
e-commerce 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;
18
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.
These risks could negatively impact our financial condition if left
unaddressed. For more information on the effects of some of these risks, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We may be unable to continue to build awareness of The Knot brand name which
would negatively impact our business and cause our sponsorship and advertising
revenues to decline.
Building recognition of our brand is critical to attracting and
expanding our online user base and our offline readership. Because we plan to
continue building brand recognition, we may find it necessary to accelerate
expenditures on our sales and marketing efforts or otherwise increase our
financial commitment to creating and maintaining brand awareness. Our failure to
successfully promote and maintain our brand would adversely affect our business
and cause us to incur significant expenses in promoting our brand without an
associated increase in our net revenues.
Our business could be adversely affected if we are not able to successfully
integrate our recent and any future acquisitions or successfully operate under
our strategic partnerships.
In March 2000, we acquired Weddingpages, a publisher of local wedding
publications. We may not be able to successfully integrate and expand the
Weddingpages business model. 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 similar to May
Department Stores Company. 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, including writedowns 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.
19
The market for Internet advertising is still developing, and if the Internet
fails to gain further acceptance as a media for advertising, we would experience
slower revenue growth than expected or a decrease in revenue and would incur
greater than expected losses.
Our future success depends in part on a significant increase in the use
of the Internet as an advertising and marketing medium. Sponsorship and
advertising revenues constituted 21% of our net revenues for the three months
ended March 31, 2002, 20% of our net revenues for the year ended December 31,
2001, 45% of our net revenues for the year ended December 31, 2000 and 71% of
our net revenues for the year ended December 31, 1999. Our national online
sponsorship and advertising revenue has declined from approximately $656,000 for
the three months ended March 31, 2001 to approximately $330,000 for the three
months ended March 31, 2002. The Internet advertising market is still
developing, and it cannot yet be compared with traditional advertising media to
gauge its effectiveness. As a result, demand for and market acceptance of
Internet advertising solutions are uncertain. Many of our current and potential
customers have little or no experience with Internet advertising and have
allocated only a limited portion of their advertising and marketing budgets to
Internet activities. The adoption of Internet advertising, particularly by
entities that have historically relied upon traditional methods of advertising
and marketing, requires the acceptance of a new way of advertising and
marketing. These customers may find Internet advertising to be less effective
for meeting their business needs than traditional methods of advertising and
marketing. Furthermore, there are software programs that limit or prevent
advertising from being delivered to a user's computer. Widespread adoption of
this software by users would significantly undermine the commercial viability of
Internet advertising.
We depend on our online sponsors and advertisers, and the loss of a number of
these would result in a decline in our revenues.
We depend on our 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 eight largest sponsors and advertisers
accounted for 6% of our net revenues for the year ended December 31, 2001 and
our seven largest sponsors and advertisers accounted for 5% of our net revenues
for the three months ended March 31, 2002. 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 joint
venture in France, 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 joint venture in France, 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.
20
If we cannot protect our domain names, it will impair our ability to
successfully brand 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 upon copyright, trade secret and trademark law, assignment of
invention and confidentiality agreements and license agreements to protect our
proprietary technology, processes, content and other intellectual property to
the extent that protection is sought or secured at all. The steps we might take
may not be adequate to protect against infringement and misappropriation of our
intellectual property by third parties. Similarly, third parties may 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 knowingly infringing intellectual 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 58% of our products, excluding products sold
through our retail partners. Our agreement with QVC expires in December 2003.
QVC does not have any obligation to renew this agreement. If QVC's ability to
provide us with these services in a timely fashion or at all is impaired,
whether through labor shortage, slow down or stoppage, deteriorating financial
or business condition, system failures or for any other reason, or if the
services agreement is not renewed, we would not be able, at least temporarily,
to sell or ship our products to our customers. We may be unable to engage
alternative warehousing, fulfillment and distribution services on a timely basis
or upon terms favorable to us.
We may not be able to obtain additional financing necessary to execute our
business strategy.
We currently believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements for
at least the next twelve months. Our ability to meet our obligations in the
ordinary course of business is dependent upon our ability to achieve profitable
operations and/or raise additional financing through public or private equity
financings, or other arrangements with corporate sources, or other sources
21
of financing to fund operations. However, there is no assurance that we will
achieve profitable operations or that additional funding, if required, will be
available to us in amounts or on terms acceptable to us.
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 still
developing. 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;
o bridal magazines, such as Bride's and Modern Bride (both part of the
Conde Nast 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 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. If we cannot attract
new personnel or retain and motivate our current personnel, our business may not
succeed.
Terrorism and the uncertainty of war may have a material adverse effect on our
operating results.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, and other acts of violence or war may
affect the market on which our common stock will trade, the markets in which we
operate, our operations and profitability and your investment. Further terrorist
attacks against the United States or U.S. businesses may occur. The potential
near-term and long-term effect these attacks may have for our customers, the
market for our common stock, the markets for our services and the U.S. economy
are uncertain. The consequences of any terrorist attacks, or any armed conflicts
which may result, are unpredictable, and we may not be able to foresee events
that could have an adverse effect on our business or your investment.
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
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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, acts of terrorism 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.
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 March 31, 2002, our executive officers and directors and
stockholders who each owned greater than 5% of our common stock, and their
affiliates, in the aggregate, beneficially owned approximately 76% 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.
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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.
The delisting of our common stock from the Nasdaq National Market has resulted,
and could continue to result, in a limited public market for our common stock
and larger spreads in the bid and ask prices for shares of our common stock and
could result in lower prices for shares of our common stock and make obtaining
future equity financing more difficult.
On August 23, 2001, our common stock was delisted from the Nasdaq
National Market. Our common stock is currently available for quotation on the
OTC Bulletin Board. Selling our common stock has become, and may continue to be,
more difficult because smaller quantities of shares are bought and sold on the
OTC Bulletin Board, transactions could be delayed and news media coverage of us
has been reduced. These factors have resulted, and could continue to result, in
larger spreads in the bid and ask prices for shares of our common stock and
could result in lower prices for shares of our common stock.
The delisting of our common stock from the Nasdaq National Market and
any 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 prices 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.
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 and subject us to litigation.
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. These broad market and industry factors may harm the market price
of our common stock, regardless of our actual operating performance, and for
this or other reasons we could continue to suffer significant declines in the
market price of our common stock. In the past, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were to become the object of securities class
action litigation, it could result in substantial costs and a diversion of our
management's attention and resources.
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;
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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.
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.
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If we become subject to burdensome government regulation and legal uncertainties
related to doing business online, our sponsorship, advertising and merchandise
revenues could decline and our business and prospects could suffer.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. The governments of states and foreign countries might
attempt to regulate our transmissions or levy sales or other taxes relating to
our activities. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet and Internet advertising
services. In addition, the growth and development of the market for e-commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, which may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet and other online services could cause our sponsorship, advertising
and merchandise revenues to decline and our business and prospects to suffer.
We may be sued for information retrieved from our sites.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
We may incur potential product liability for products sold online.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user. 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 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, 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 $9.6
million as of March 31, 2002. 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 the Supreme Court, New York County, New York against The Knot and
certain officers, including David Liu, the Chairman and Chief Executive Officer.
The plaintiffs sought (1) to enjoin The Knot 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 (2) money
damages in an unspecified amount. On October 19, 2000, The Knot filed its
initial response.
On October 27, 2000, the Supreme Court of the State of New York refused
to grant preliminary injunctions sought by certain Weddingpages franchisees. The
court ordered that the parties submit their dispute to a neutral mediator. In
February, 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 The Knot
from, among other things, 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.
On August 22, 2001, the Court denied the remaining franchisees' request
for injunctive relief against The Knot, effectively ordered the franchisees to
arbitrate their claims against Weddingpages, and stayed the action against The
Knot pending the completion of such arbitration. In denying the remaining
franchisees' motion for injunctive relief, the Court agreed with The Knot's
legal arguments in every material respect. Most significantly, in a three-page
opinion, the Court held that the franchisees would be unlikely to succeed on the
merits of their claims against The Knot.
Despite the Court's order, the franchisees failed to take any action to
initiate arbitration of their dispute with Weddingpages. Thus, on January 25,
2002, Weddingpages commenced arbitration by filing a Demand for Arbitration
before the American Arbitration Association.
On April 17, 2002, the franchisees filed a motion to lift the stay in
favor of The Knot and for a preliminary injunction enjoining The Knot from
directly soliciting the franchisees' customers for The Knot's Internet website.
We are vigorously opposing the franchisees' most recent motion and their
overreaching claims.
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Item 2. Changes of Securities and Use of Proceeds
a) None.
b) None.
c) Recent Sales of Unregistered Securities
On February 19, 2002, we issued an aggregate of 3,575,747 shares of our
common stock to May Bridal Corporation, an affiliate of May Department Stores,
for $5.0 million in cash. No underwriters were involved in connection with the
issuance of these shares and there were no underwriting discounts or
commissions. The securities were issued in reliance upon the exemption from
registration provided under Regulation D of the Securities Act of 1933, as
amended, based on the fact that we issued the shares of common stock in a sale
to one accredited investor not involving a public offering. The sale was made
without general solicitation or advertising. We intend to use the proceeds from
the sale for general corporate purposes.
d) None.
Item 6. Exhibits and Report on Form 8-K
a) Exhibits
None.
b) Report on Form 8-K
We filed a current report on Form 8-K, item 5, on March 1, 2002,
reporting that May Department Stores Company has acquired a 19.5 percent
interest in The Knot for $5.0 million and also entered into a strategic
marketing alliance with us.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2002 THE KNOT, INC.
By: /s/ Richard Szefc
--------------------------------------------
Richard Szefc
Chief Financial Officer (Principal Financial
Officer and Duly Authorized Signatory)
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