<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1999
REGISTRATION NO. 333-87345
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE KNOT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 13-3895178
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) CLASSIFICATION CODE NUMBER)
</TABLE>
------------------------
462 BROADWAY
6TH FLOOR
NEW YORK, NY 10013
TELEPHONE: (212) 219-8555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID LIU
CHIEF EXECUTIVE OFFICER
THE KNOT, INC.
462 BROADWAY
6TH FLOOR
NEW YORK, NY 10013
(212) 219-8555
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. JOHN M. HESSION, ESQ.
BRIAN B. MARGOLIS, ESQ. JOCELYN M. AREL, ESQ.
BROBECK, PHLEGER & HARRISON LLP TESTA, HURWITZ & THIBEAULT, LLP
1633 BROADWAY, 47TH FLOOR 125 HIGH STREET
NEW YORK, NY 10019 BOSTON, MA 02110
(212) 581-1600 (617) 248-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 27, 1999
SHARES
[LOGO]
THE KNOT, INC.
COMMON STOCK
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $
and $ per share. We intend to apply to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "KNOT."
The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS THE KNOT
------------ ---------------- ------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
SALOMON SMITH BARNEY
The date of this prospectus is , 1999.
<PAGE> 3
INSIDE FRONT COVER:
- Background: photo of bride and groom.
- Bottom half of page contains centered text reading: "How do I get her
ring size?"; "Where do I seat my father's 2nd wife's children?"; "How can
I find a photographer from 1,500 miles away?"; "Can my brother be my
bridesmaid?"; "How can we combine Jewish and Swedish tradition?"; When do
we send out the invitations?"; "Is anyone else having cold feet?"; "What
if we want fishing rods instead of flatware?"; "Have any exotic
honeymoons for under $3,000?"; "How do you tie a bow tie?"; "How do we
tell guests where we're registered?"; and "How do I make this feeling
last forever?"
- At bottom of page: "the knot, the new word in weddings; advice. ideas.
relief. shopping."
GATEFOLD:
- Title text reading "the new word in weddings . . . the knot" (across top
of both pages of gatefold).
- Centered on gatefold is The Knot's home page screen shot displaying a
link to The Knot's Ultimate Checklist, links to The Knot's areas, links
to The Knot Registry, links to "This Week's Features", links to planning
tools, and a link to The Knot Shop.
- Surrounding The Knot's home page screen are overlays of photos of brides,
grooms, friends and family, interspersed with statements of what The Knot
Web site enables viewers to do (text reads: "find a gown", "make a
wedding web page", "get personal advice", "find a photographer", "chat
with other to-be-weds", "make a checklist", "register for gifts", "make a
budget", and "book a honeymoon".
- Right side of gatefold lists services and information provided by The
Knot Web site. Text reads: "Online and Offline All The Time", "Inspiring
Ideas", "Up-to-date Etiquette", "Online/800# Gift Registry", "Personal
Planning Tools", "Nationwide Vendor Listings", "Active Chat Rooms",
"Wedding Supply Shopping", "Honeymoon Travel Agent", "Thousands of
Editorial Articles", "15,000 Gown Pictures", "10,000 Gown Gifts", and
"395,000 Registered Couples".
- Bottom right hand corner contains The Knot's Web site address and the
words "open all night".
<PAGE> 4
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 5
FORWARD-LOOKING STATEMENTS.......... 19
USE OF PROCEEDS..................... 20
DIVIDEND POLICY..................... 20
CAPITALIZATION...................... 21
DILUTION............................ 22
SELECTED FINANCIAL DATA............. 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 24
BUSINESS............................ 37
MANAGEMENT.......................... 55
CERTAIN TRANSACTIONS................ 62
PRINCIPAL STOCKHOLDERS.............. 64
DESCRIPTION OF CAPITAL STOCK........ 66
SHARES ELIGIBLE FOR FUTURE SALE..... 69
UNDERWRITING........................ 71
NOTICE TO CANADIAN RESIDENTS........ 74
LEGAL MATTERS....................... 76
EXPERTS............................. 76
WHERE YOU CAN FIND ADDITIONAL
INFORMATION....................... 77
INDEX TO FINANCIAL STATEMENTS....... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND IN CONNECTION WITH UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 5
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should read the entire prospectus, including
"Risk Factors" and the financial statements and the notes to the financial
statements, before deciding to invest in our common stock. Information contained
on our online sites does not constitute part of this prospectus. References in
this prospectus to "The Knot," "we," "our" and "us" refer to The Knot, Inc.
THE KNOT, INC.
OUR BUSINESS
The Knot is the leading online destination targeting the wedding market.
Weddings are major milestone events and consumers tend to allocate significant
budgets to their weddings and related purchases. According to an independent
research report, the domestic wedding market generates over $45 billion in
retail sales annually.
Our easy-to-use online sites provide full-service offerings for couples
planning their weddings. We provide future brides and grooms with comprehensive
content, including thousands of articles on wedding planning organized by topic
and a database of local wedding vendors nationwide. Our sites also feature
numerous interactive services and personalized planning tools. By providing
hosted chats and message boards, we create an online community where brides and
grooms can interact. We offer consumers a convenient place to purchase a broad
range of wedding-related items through our online gift registry, shops for
wedding supplies and travel agency. We also author a series of books and publish
a semiannual gown guide that provide cross-promotional opportunities and
increase our brand awareness and our online audience.
We provide advertisers and vendors with targeted access to couples actively
seeking information and making meaningful buying decisions relating to all
aspects of their weddings. We receive revenue primarily from sponsorship,
advertising and production contracts. We also generate revenue from the sale of
merchandise, publishing and the sale of travel packages. For the nine months
ended September 30, 1999, sponsorship, advertising and production revenues
represented 65% of our net revenues.
In September 1999, we generated over 15.4 million page views on our Web
site compared to 2.5 million page views in December 1998. We are currently
enrolling as members an average of over 1,000 new couples per day.
OUR STRATEGY
Our strategy is to expand our position as the leading online resource
providing comprehensive wedding planning information, products and services by:
- building strong brand recognition of The Knot;
- aggressively growing our membership base and increasing member usage;
- providing a full-service shopping solution to make the wedding planning
process more convenient, efficient and enjoyable;
- generating multiple revenue streams; and
- pursuing strategic alliances and acquisitions.
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<PAGE> 6
OUR OFFICES
Our business was incorporated on May 2, 1996. Our principal executive
offices are located at 462 Broadway, 6th Floor, New York, New York 10013. Our
telephone number is (212) 219-8555. The address of our Web site is
www.theknot.com. We are also located on America Online (keywords "Knot" and
"wedding").
OUR TRADEMARKS
The Knot is a registered trademark and/or service mark of The Knot, Inc. We
have applied for federal registration of the marks The Knot Ultimate Wedding
Checklist, Wedding Photographers Network, WPN, The Knot Wedding Gift Registry,
The Knot Registry, Click Trips and Bridalink Store. Other trademarks and service
marks appearing in this prospectus are the property of their respective holders.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered................................. shares
Common stock to be outstanding after this offering... shares
Use of proceeds...................................... For general corporate purposes, capital
expenditures and working capital.
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on our shares outstanding as of October 25, 1999. This information
excludes shares of common stock reserved for issuance under our 1999
Stock Incentive Plan, of which 1,717,665 shares are issuable upon the exercise
of stock options outstanding as of October 25, 1999 and 2,066,667 shares of
common stock issuable upon the exercise of warrants outstanding as of October
25, 1999.
2
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2, 1996 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------- -----------------------
1996 1997 1998 1998 1999
-------------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues....................... $ 71 $ 596 $ 1,040 $ 826 $ 2,635
Cost of revenues................... 9 67 131 82 904
--------- --------- --------- --------- ---------
Gross profit....................... 62 529 909 744 1,731
Total operating expenses........... 768 1,425 2,823 1,935 7,982
Loss from operations............... (706) (896) (1,914) (1,191) (6,251)
Net loss........................... $ (752) $ (1,095) $ (1,509) $ (830) $ (6,008)
========= ========= ========= ========= =========
Basic and diluted net loss per
share............................ $ (0.46) $ (0.67) $ (0.60) $ (0.35) $ (1.96)
========= ========= ========= ========= =========
Weighted average number of shares
used in calculating basic and
diluted net loss per share....... 1,625,410 1,625,410 2,497,065 2,344,126 3,066,960
========= ========= ========= ========= =========
Pro forma basic and diluted net
loss per share................... $ (0.46) $ (0.67) $ (0.32) $ (0.19) $ (0.67)
========= ========= ========= ========= =========
Pro forma weighted average number
of shares used in calculating
basic and diluted net loss per
share............................ 1,625,410 1,625,410 4,780,024 4,264,126 8,932,455
========= ========= ========= ========= =========
</TABLE>
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all previously outstanding preferred stock
into common stock, as if the shares had converted immediately upon their
issuance. See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing basic and diluted net
loss per share.
The unaudited pro forma data for the year ended December 31, 1998 shown
below gives effect to the acquisition of Bridal Search as if the acquisition had
occurred at the beginning of 1998.
<TABLE>
<S> <C>
Net revenues................................................ $ 1,046
Loss before extraordinary item.............................. (2,063)
Net loss.................................................... (1,673)
Basic and diluted net loss per share........................ (0.66)
Pro forma basic and diluted net loss per share.............. (0.35)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 9,302 $ 9,302 $
Working capital...................................... 9,257 9,257
Total assets......................................... 13,846 13,846
Convertible preferred stock.......................... 17,901 --
Total stockholders' equity........................... 11,524 11,524
</TABLE>
3
<PAGE> 8
The pro forma balance sheet data reflect the automatic conversion into
common stock of all outstanding convertible preferred stock upon the closing of
this offering. The pro forma as adjusted data reflect our receipt of the
estimated net proceeds from the sale of the shares of common stock
offered by us at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
Unless otherwise indicated, all information in this prospectus reflects the
automatic conversion of all outstanding shares of convertible preferred stock
into 7,360,000 shares of our common stock upon the closing of this offering,
assumes the filing of our amended and restated certificate of incorporation upon
the closing of this offering and assumes no exercise of the underwriters'
over-allotment option.
For more information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes included elsewhere in this prospectus.
4
<PAGE> 9
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide to
buy our common stock. If any of the following events actually occurs, our
business and financial results may suffer. In such event, the market price of
our common stock could decline, and you could lose all or part of your
investment in our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE AN UNPROVEN BUSINESS MODEL AND IT IS UNCERTAIN WHETHER ONLINE
WEDDING-RELATED SITES CAN GENERATE SUFFICIENT REVENUES TO SURVIVE.
Our model for conducting business and generating revenues is new and
unproven. Our business model depends upon our ability to generate revenue
streams from multiple sources through our online sites, including:
- Internet sponsorship and advertising fees from third parties; and
- online sales of wedding gifts and supplies.
It is uncertain whether wedding-related online sites that rely on
attracting sponsors and advertisers, as well as people to purchase wedding gifts
and supplies, can generate sufficient revenues to survive. For our business to
be successful, we must provide users with an acceptable blend of products,
information, services and community offerings that will attract wedding
consumers to our online sites frequently. In addition, we must provide sponsors,
advertisers and vendors the opportunity to reach these wedding consumers. We
provide our services to users without charge and we may not be able to generate
sufficient revenues to pay for these services. Accordingly, we are not certain
that our business model will be successful or that we can sustain revenue growth
or be profitable.
WE HAVE A LIMITED OPERATING HISTORY AND EXPECT TO ENCOUNTER DIFFICULTIES FACED
BY EARLY STAGE COMPANIES IN THE INTERNET ADVERTISING AND ONLINE WEDDING MARKETS.
We commenced operations in May 1996 and recorded our first revenues in
September 1996, immediately following the launch of our first online property.
Accordingly, we have only a limited operating history with which you can
evaluate our business and prospects. An investor in our common stock must
consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets, such as the Internet advertising
and online wedding markets. These risks include our ability to:
- increase the audience on our sites;
- broaden awareness of our brand;
- strengthen user-loyalty;
- offer compelling content;
- maintain our leadership in generating traffic;
- maintain our current, and develop new, strategic relationships;
- attract a large number of advertisers from a variety of industries;
5
<PAGE> 10
- respond effectively to competitive pressures;
- generate revenues from the sale of merchandise and e-commerce;
- integrate our recent acquisitions into our existing operations;
- continue to develop and upgrade our technology; and
- attract, integrate, retain and motivate qualified personnel.
As a result of our limited operating history, we do not have historical
financial data for a significant number of periods upon which to forecast our
revenues and results of operations.
These risks could negatively impact our financial condition if left
unaddressed. For more information on the effects of some of these risks, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE HAVE A HISTORY OF SIGNIFICANT LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
We have not achieved profitability and expect to continue to incur
significant losses and negative cash flow for the foreseeable future. We
incurred net losses of $752,000 for the period from May 2, 1996 (inception)
through December 31, 1996, $1.1 million for the year ended December 31, 1997,
$1.5 million for the year ended December 31, 1998, and $6.0 million for the nine
months ended September 30, 1999. As of September 30, 1999, our accumulated
deficit was $9.4 million. We also expect to continue to incur significant
operating expenses and capital expenditures and, as a result, we will need to
generate significant revenues to achieve and maintain profitability. Even if we
do achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. Failure to achieve
or maintain profitability may materially and adversely affect the market price
of our common stock. For more information on our losses and the effects of our
expenses on our financial performance, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
WE LACK SIGNIFICANT REVENUES AND MAY BE UNABLE TO ADJUST SPENDING QUICKLY ENOUGH
TO OFFSET ANY UNEXPECTED REVENUE SHORTFALL.
Our revenues for the foreseeable future will remain dependent on user
traffic levels and advertising activity on our sites and the expansion of our
e-commerce activity. In addition, we plan to expand and develop content and to
upgrade and enhance our technology and infrastructure to support our growth. We
incur a significant percentage of our expenses, such as employee compensation
and rent, prior to generating revenues associated with those expenses. Moreover,
our expense levels are based, in part, on our expectation of future revenues. We
may be unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. If we have a shortfall in revenues in relation to our growth in
expenses, then our business, results of operations and financial condition would
be materially and adversely affected. For more information on our net revenues
and the effects of our expenses on our financial performance, see "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
6
<PAGE> 11
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATION AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR
COMMON STOCK.
Our quarterly revenues and operating results have fluctuated significantly
in the past and are expected to continue to fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. These factors include:
- the level of online usage;
- the level of traffic on our online sites;
- demand for online advertising;
- seasonal trends in both online usage and advertising placements;
- the addition or loss of advertisers;
- the advertising budgeting cycles of specific advertisers;
- the number of users that purchase merchandise from us;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our operations, including those related to acquisitions;
- the introduction of new sites and services by us or our competitors;
- changes in our pricing policies or the pricing policies of our
competitors;
- general economic conditions; and
- economic conditions specific to the Internet, electronic commerce and
online media.
We do not believe that period-to-period comparisons of our operating
results are necessarily meaningful and you should not rely upon these
comparisons as indicators of our future performance.
Due to the foregoing factors, it is possible that our results of operations
in one or more future quarters may fall below the expectations of securities
analysts and investors. In such event, the trading price of our common stock is
likely to decline. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations Data" for
detailed information on our quarterly operating results.
OUR FINANCIAL CONDITION AND REVENUES WOULD BE ADVERSELY AFFECTED IF TRAFFIC ON
OUR AOL SITE DECREASED OR IF CARRIAGE OF OUR SITES ON AOL WAS DISCONTINUED.
AOL has accounted for a significant portion of our online traffic to date.
In 1999, approximately 40% of our users were customers of AOL's Internet
services. If the financial condition and operations of AOL were to deteriorate
significantly, or if the traffic on our AOL site were to substantially decrease,
our revenues could be adversely affected.
In addition, our anchor tenant agreement with AOL expires on January 6,
2003. AOL may extend it for an additional two years, but does not have any
obligation to extend or renew the agreement. Through the AOL agreement, we
provide content on America Online, AOL.com, AOL Hometown, Netscape and
CompuServe. Under the terms of the agreement, AOL may terminate the agreement
without cause only with respect to our carriage on AOL Hometown, Netscape, and
CompuServe upon 30 days' prior written
7
<PAGE> 12
notice. If the carrying of our sites on AOL is discontinued, our business,
results of operations and financial condition would be materially and adversely
affected. For more information about our relationship with AOL, see
"Business -- Relationship with AOL."
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS.
Seasonal and cyclical patterns may affect our revenues. In 1997, 19% of
weddings occurred in the first quarter, 28% occurred in the second quarter, 30%
occurred in the third quarter and 23% occurred in the fourth quarter. Because we
launched The Knot Registry in November 1998 and acquired Bridalink in July 1999,
we have limited experience generating merchandise revenues. Therefore, we have
been unable to determine whether our merchandise revenues are affected by
seasonal fluctuations in the number of weddings. In addition, we believe that
advertising sales in traditional media, such as television and radio, generally
are lower in the first and third calendar quarters of each year. Historically,
we have experienced increases in our traffic during the first and second
quarters of the year. As a result of these factors, we may experience
fluctuations in our revenues, which could have a material adverse effect on our
business and results of operations.
WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE KNOT BRAND NAME.
Building recognition of our brand is critical to attracting and expanding
our online user base. Because we plan to continue building brand recognition, we
may find it necessary to accelerate expenditures or our sales and marketing
efforts or otherwise increase our financial commitment to creating and
maintaining brand awareness among potential users. Our failure to successfully
promote and maintain our brand would adversely affect our financial condition
and cause us to incur significant expenses in promoting our brand without an
associated increase in our net revenues.
IF WE CANNOT PROTECT OUR DOMAIN NAMES, IT WILL IMPAIR OUR ABILITY TO BRAND
SUCCESSFULLY THE KNOT.
We currently hold various Web domain names, including www.theknot.com. The
acquisition and maintenance of domain names generally is regulated by Internet
regulatory bodies. The regulation of domain names in the United States and in
foreign countries is subject to change. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may be unable
to acquire or maintain relevant domain names in all countries in which we
conduct business. Furthermore, it is unclear whether laws protecting trademarks
and similar proprietary rights will be extended to protect domain names.
Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. We may not successfully carry out our
business strategy of establishing a strong brand for The Knot if we cannot
prevent others from using similar domain names or trademarks. This could impair
our ability to increase market share and revenues.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO SUCCESSFULLY
INTEGRATE OUR RECENT AND ANY FUTURE ACQUISITIONS.
In July 1999, we acquired Bridalink.com, an Internet wedding supply store,
and Click Trips, Inc., an online travel agency. In August 1999, we acquired
Wedding Photographers Network, an online searchable database of wedding
photographers. We may encounter
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<PAGE> 13
difficulty integrating the personnel, operations, technology and software of
these acquired businesses. In addition, one or more of the key personnel of the
acquired businesses may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees, increase
our expenses and adversely affect our results of operations.
In the future, we may acquire, or invest in, complementary companies,
products or technologies. Acquisitions and investments involve numerous risks,
including:
- difficulties in integrating operations, technologies, products and
personnel;
- diversion of financial and management resources from existing operations;
- risks of entering new markets;
- potential loss of key employees; and
- inability to generate sufficient revenues to offset acquisition or
investment costs.
THE COSTS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR STRATEGIC ALLIANCES COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION.
To pay for an acquisition or to enter into a strategic alliance, we might
use equity securities, debt, cash, including the proceeds from this offering, or
a combination of the foregoing. If we use equity securities, our stockholders
may experience dilution. In addition, an acquisition may involve non-recurring
charges or involve amortization of significant amounts of goodwill that could
adversely affect our results of operations. Any such acquisitions or strategic
alliances may require us to obtain additional equity or debt financing, which
may not be available on commercially acceptable terms, if at all.
IF THE USE OF THE INTERNET AS AN ADVERTISING AND MARKETING MEDIUM FAILS TO
DEVELOP OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR BUSINESS WILL BE MATERIALLY
AND ADVERSELY AFFECTED.
Our future success depends in part on a significant increase in the use of
the Internet as an advertising and marketing medium. Sponsorship, advertising
and production revenues constituted 65% of our net revenues for the nine months
ended September 30, 1999 and 82% of our net revenues for the year ended December
31, 1998. The Internet advertising market is new and rapidly evolving, and it
cannot yet be compared with traditional advertising media to gauge its
effectiveness. As a result, demand for and market acceptance of Internet
advertising solutions are uncertain. Many of our current and potential customers
have little or no experience with Internet advertising and have allocated only a
limited portion of their advertising and marketing budgets to Internet
activities. The adoption of Internet advertising, particularly by entities that
have historically relied upon traditional methods of advertising and marketing,
requires the acceptance of a new way of advertising and marketing. These
customers may find Internet advertising to be less effective for meeting their
business needs than traditional methods of advertising and marketing.
Furthermore, there are software programs that limit or prevent advertising from
being delivered to a user's computer. Widespread adoption of this software by
users would significantly undermine the commercial viability of Internet
advertising. If these markets fail to develop or develop more slowly than we
expect, our business, results of operations and financial condition would be
materially and adversely affected.
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WE HAVE A SMALL NUMBER OF SPONSORS AND ADVERTISERS AND THE LOSS OF A NUMBER OF
THESE COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We derive sponsorship revenues from contracts ranging up to three years and
advertising revenues principally from short-term advertising contracts. We
depend on a limited number of sponsors and advertisers for a significant part of
our net revenues. Consequently, the loss of any of these sponsors or advertisers
could materially and adversely affect our business, results of operations and
financial condition. For the nine months ended September 30, 1999, no single
sponsor or advertiser accounted for 10% or more of our net revenues. For the
year ended December 31, 1998, Banfi Products Corp. accounted for 19% of our net
revenues. During the nine months ended September 30, 1999, we did not generate
net revenues from the sale of sponsorships or advertisements to Banfi Products
Corp.
We anticipate that our future results of operations will continue to depend
to a significant extent upon revenues from a small number of sponsors and
advertisers. In addition, we anticipate that such sponsors and advertisers will
continue to vary over time. For example, although Banfi Products accounted for a
large percentage of our revenues in 1998, different sponsors and advertisers
will account for a large percentage of our revenues this year. To achieve our
long-term goals, we will need to attract additional significant sponsors and
advertisers on an ongoing basis. Our failure to enter into a sufficient number
of large contracts during a particular period may have a material adverse effect
on our business, results of operations and financial condition. For more
information on our advertising revenues, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS.
We rely solely upon copyright, trade secret and trademark law and
assignment of invention and confidentiality agreements to protect our
proprietary technology, processes, content and other intellectual property to
the extent that protection is sought or secured at all. We cannot assure you
that any steps we might take will be adequate to protect against infringement
and misappropriation of our intellectual property by third parties. Similarly,
we cannot assure you that third parties will not be able to independently
develop similar or superior technology, processes, content or other intellectual
property. The unauthorized reproduction or other misappropriation of our
intellectual property rights could enable third parties to benefit from our
technology without paying us for it. If this occurs, our business, results of
operations and financial condition would be materially and adversely affected.
In addition, disputes concerning the ownership or rights to use intellectual
property could be costly and time consuming to litigate, may distract management
from other tasks of operating the business, and may result in our loss of
significant rights and the loss of our ability to operate our business.
OUR PRODUCTS AND SERVICES MAY INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES.
Although we avoid infringing known proprietary rights of third parties,
including licensed content, we may be subject to claims alleging infringement of
third-party proprietary rights. If we are subject to claims of infringement or
are infringing the rights of third parties, we may not be able to obtain
licenses to use those rights on commercially reasonable terms, if at all. In
that event, we would need to undertake substantial reengineering to continue our
online offerings. Any effort to undertake such reengineering
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might not be successful. Furthermore, a party making such a claim could secure a
judgement that requires us to pay substantial damages. A judgment could also
include an injunction or other court order that could prevent us from selling
our products. Any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid, and could
distract our management from our business.
WE DEPEND UPON QVC TO PROVIDE US WAREHOUSING, FULFILLMENT AND DISTRIBUTION
SERVICES, AND SYSTEM FAILURES OR OTHER PROBLEMS AT QVC COULD CAUSE US TO LOSE
CUSTOMERS AND REVENUES.
We have a services agreement with QVC to warehouse, fulfill and arrange for
distribution of most of our products which expires on the fourth anniversary of
this offering. QVC does not have any obligation to renew this agreement. If
QVC's ability to provide us with these services in a timely fashion or at all is
impaired, whether through labor shortage, slow down or stoppage, deteriorating
financial or business condition, Year 2000 problems or other system failures or
for any other reason, or if the services agreement is not renewed, we would not
be able, at least temporarily, to sell or ship our products to our customers. We
may be unable to engage alternative warehousing, fulfillment and distribution
services on a timely basis or upon terms favorable to us.
Our experience with QVC as a warehousing, fulfillment and distribution
service provider is limited. In connection with our transition to QVC as our
primary fulfillment provider, we have experienced system failures and other
problems resulting in duplicate orders and billing, delivery mistakes and
damaged products. We are unable to predict whether we will have similar problems
in the future. Any of these problems could cause us to lose customers and
revenues.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING NECESSARY TO EXECUTE OUR
BUSINESS STRATEGY.
We currently believe that the net proceeds from this offering, together
with our current cash and cash equivalents, will be sufficient to fund our
working capital and capital expenditure requirements for at least the next 12
months. To the extent we require additional funds to support our operations or
the expansion of our business, we may need to sell additional equity, issue debt
or convertible securities or obtain credit facilities through financial
institutions. We cannot assure you that additional funding, if required, will be
available to us in amounts or on terms acceptable to us. If sufficient funds are
not available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of acquisition opportunities, develop or enhance our
services or products, or otherwise respond to competitive pressures would be
significantly limited.
OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY INCREASED
COMPETITION.
The Internet advertising and online wedding markets are new, rapidly
evolving and intensely competitive, and we expect such competition to intensify
in the future.
We face competition for members, users and advertisers from the following
areas:
- online services or Web sites targeted at brides and grooms as well as the
online sites of retail stores, manufacturers and regional wedding
directories;
- bridal magazines, such as Bride's and Modern Bride; and
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- online and retail stores offering gift registries, especially from
retailers offering specific bridal gift registries.
We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Our competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user or membership
bases than we have and, therefore, have a significantly greater ability to
attract advertisers and users. In addition, many of our competitors may be able
to respond more quickly than we can to new or emerging technologies and changes
in Internet user requirements, as well as devote greater resources than we can
to the development, promotion and sale of services.
There can be no assurance that our current or potential competitors will
not develop products and services comparable or superior to those that we
develop or adapt more quickly than we do to new technologies, evolving industry
trends or changing Internet user preferences. Increased competition could result
in price reductions, lower margins or loss of market share, any of which would
materially and adversely affect our business, results of operations and
financial condition. In addition, if we expand internationally, we may face
additional competition. There can be no assurance that we will be able to
compete successfully against current and future competitors.
OUR RESULTS OF OPERATIONS FOR A PARTICULAR PERIOD MAY BE MATERIALLY AND
ADVERSELY AFFECTED IF SALES TO ADVERTISERS OR SPONSORS FORECASTED IN A
PARTICULAR PERIOD ARE DELAYED OR DO NOT OTHERWISE OCCUR.
The time between the date of initial contact with a potential sponsor or
advertiser and the execution of a contract with the sponsor or advertiser is
often lengthy, typically ranging from six weeks for smaller agreements to six
months for larger agreements, and is subject to delays over which we have little
or no control, including:
- customers' budgetary constraints;
- customers' internal acceptance reviews;
- the success and continued internal support of advertisers' and sponsors'
own development efforts; and
- the possibility of cancellation or delay of projects by advertisers or
sponsors.
During the sales cycle, we may expend substantial funds and management
resources in advance of generating sponsorship or advertising revenues.
Accordingly, if sales to advertisers or sponsors forecasted in a particular
period are delayed or do not otherwise occur, our revenues and results of
operations would be adversely affected.
OUR POTENTIAL INABILITY TO COMPETE EFFECTIVELY IN OUR INDUSTRY FOR QUALIFIED
PERSONNEL COULD HINDER THE SUCCESS OF OUR BUSINESS.
Competition for personnel in the Internet and wedding industries is
intense. We may be unable to retain those employees who are important to the
success of our business. We may also face difficulties attracting, integrating
or retaining other highly qualified employees in the future. We have
experienced, and expect to continue to experience,
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difficulty in hiring and retaining highly-skilled employees with appropriate
qualifications as a result of our rapid growth and expansion. If we cannot
attract new personnel or retain and motivate our current personnel, our business
may not succeed.
SYSTEMS DISRUPTIONS AND FAILURES COULD CAUSE ADVERTISER OR USER DISSATISFACTION
AND COULD REDUCE THE ATTRACTIVENESS OF OUR SITES.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our advertisers and sponsors, users and members may
become dissatisfied by any systems failure that interrupts our ability to
provide our services and content to them. Substantial or repeated system
failures would reduce the attractiveness of our online sites significantly.
Substantially all of our communications hardware and some of our other computer
hardware operations are located at Exodus Communications' facilities in Jersey
City, New Jersey. Fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events could damage these systems. Computer
viruses, electronic break-ins or other similar disruptive problems could also
adversely affect our online sites. Our business could be materially and
adversely affected if our systems were affected by any of these occurrences. We
do not presently have any secondary "off-site" systems or a formal disaster
recovery plan. Our sites must accommodate a high volume of traffic and deliver
frequently updated information. Our sites have in the past experienced slower
response times or decreased traffic. These types of occurrences in the future
could cause users to perceive our sites as not functioning properly and
therefore cause them to use another online site or other methods to obtain
information or services. In addition, our users depend on Internet service
providers, online service providers and other site operators for access to our
online sites. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. Although we carry general liability insurance, our
insurance may not cover any claims by dissatisfied providers or subscribers or
may not be adequate to indemnify us for any liability that may be imposed in the
event that a claim were brought against us. Our business, results of operations
and financial condition could be materially and adversely affected by any system
failure, security breach or other damage that interrupts or delays our
operations.
WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE
RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US.
We are dependent on various third parties for software, systems and related
services in connection with our hosting and accounting software, data
transmission and security systems. Several of the third parties that provide
software and services to us have a limited operating history and have relatively
new technology. These third parties are dependent on reliable delivery of
services from others. If our current providers were to experience prolonged
systems failures or delays, we would need to pursue alternative sources of
services. Although alternative sources of these services are available, we may
be unable to secure such services on a timely basis or on terms favorable to us.
As a result, we may experience business disruptions if these third parties fail
to provide reliable software, systems and related services to us.
WE MAY BE LIABLE IF THIRD PARTIES MISAPPROPRIATE OUR USERS' PERSONAL
INFORMATION.
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal or credit card information, we could be
subject to liability. Our
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liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims as well as for other
misuses of personal information, such as for unauthorized marketing purposes.
These claims could result in costly and time-consuming litigation which could
adversely affect our financial condition. In addition, the Federal Trade
Commission and state agencies have been investigating various Internet companies
regarding their use of personal information. We could have additional expenses
if new regulations regarding the use of personal information are introduced or
if our privacy practices are investigated.
WE MAY SUFFER DISRUPTION TO OUR BUSINESS AND WE COULD INCUR MATERIAL EXPENSES IF
ANY OF THE COMPUTER SYSTEMS OR SOFTWARE WE RELY ON FAIL TO BE YEAR 2000
COMPLIANT.
The Year 2000 problem could harm our business and financial results. Many
currently installed computer systems and software products are coded to accept
or recognize only two-digit entries in the date code field. These systems may
interpret the date code "00" as the year 1900 rather than the year 2000. As a
result, computer systems and/or software used by many companies and governmental
agencies may need to be upgraded or replaced to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. Although we have completed testing of our systems,
including internally developed proprietary software, third-party software,
hardware and services, and believe that they are Year 2000 compliant, we have
not developed a contingency plan. Moreover, we may discover Year 2000 problems
that need to be upgraded, modified or replaced, which could be time consuming
and expensive. In addition there can be no assurance that our non-information
technology systems, including our telephone systems and utilities, are Year 2000
compliant and will not have to be upgraded, modified or replaced. Our failure to
fix or replace internally developed proprietary software, third-party software,
hardware or services on a timely basis could result in lost revenues, increased
operating costs, the loss of customers and other business interruptions.
We depend heavily on a number of third-party vendors to provide both
network services and equipment. A significant Year 2000-related disruption of
the network services or equipment that third-party vendors provide to us could
cause our sponsors, advertisers, members and visitors to consider seeking
alternate providers. Year 2000 issues could also cause an unmanageable burden on
our technical support personnel, which in turn could materially and adversely
affect our business, results of operations and financial condition.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers, including
AOL and QVC, and others outside of our control will be Year 2000 compliant. The
failure by such entities to be Year 2000 compliant could result in a systemic
failure such as a prolonged Internet, telecommunications or electrical failure.
These suppliers could also prevent us from delivering services to our customers,
decrease the use of the Internet or prevent users from accessing our sites.
IF THE ASSUMPTIONS THAT WE USE REGARDING THE GROWTH OF E-COMMERCE AND INTERNET
ARE INCORRECT, THEN THE FINANCIAL PROJECTIONS WE INCLUDE IN THIS PROSPECTUS MAY
BE MATERIALLY DIFFERENT FROM ACTUAL RESULTS.
This prospectus contains various third-party data and projections related
to our business and the Internet, including those relating to revenue generated
by e-commerce, the number of Internet users and the amount spent on Internet
advertising. These data and
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projections have been included in studies prepared by independent market
research firms, and the projections are based on surveys, financial reports and
models used by these firms, as well as a number of assumptions.
If the underlying data or one or more of the assumptions contained in these
reports turns out to be incorrect, actual results or circumstances may be
materially different from the projections included in this prospectus. Any
difference could reduce our revenue and harm our results of operations.
RISKS RELATED TO OUR INDUSTRY
WE ARE DEPENDENT ON CONTINUED GROWTH IN THE USE OF THE INTERNET AND COMMERCIAL
ONLINE SERVICES AS MEDIA FOR COMMERCE.
We cannot assure you that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and commercial online services as media
for commerce, particularly for purchases of wedding gifts and supplies. Even if
consumers adopt the Internet or commercial online services as a media for
commerce, we cannot be sure that the necessary infrastructure will be in place
to process such transactions. Our long-term viability depends substantially upon
the widespread acceptance and the development of the Internet or commercial
online services as effective media for consumer commerce and for advertising.
Use of the Internet or commercial online services to effect retail transactions
and to advertise is at an early stage of development. Convincing consumers to
purchase wedding gifts and supplies online may be difficult.
Demand for recently introduced services and products over the Internet and
commercial online services is subject to a high level of uncertainty. Few proven
services and products exist. The development of the Internet and commercial
online services into a viable commercial marketplace is subject to a number of
factors, including:
- continued growth in the number of users of such services;
- concerns about transaction security;
- continued development of the necessary technological infrastructure;
- development of enabling technologies;
- uncertain and increasing government regulation; and
- the development of complementary services and products.
WE DEPEND ON THE CONTINUED VIABILITY OF THE INFRASTRUCTURE OF THE INTERNET AND
OTHER COMMERCIAL ONLINE SERVICES.
To the extent that the Internet and other online services continue to
experience growth in the number of users and frequency of use by consumers
resulting in increased bandwidth demands, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. The Internet and other online services
have experienced outages and delays as a result of damage to portions of their
infrastructure. Outages or delays, including those resulting from Year 2000
problems, could adversely affect online sites, e-mail and the level of traffic
on all sites. We also depend on online access providers that provide our users
with access to our services. In the past, users have experienced difficulties
due to systems failures unrelated to our systems. In addition, the Internet or
other online services could lose their viability due to delays in the
development or adoption of new standards and protocols required to handle
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increased levels of Internet or other online service activity or to increased
governmental regulation. Insufficient availability of telecommunications
services to support the Internet or other online services also could result in
slower response times and negatively impact use of the Internet and other online
services generally, and our sites in particular. If the use of the Internet and
other online services fails to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services does not effectively
support growth that may occur or if the Internet and other online services do
not become a viable commercial marketplace, we may not achieve profitability.
WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY
AND THIS MAY HARM OUR BUSINESS.
If we are unable, for technological, legal, financial or other reasons, to
adapt in a timely manner to changing market conditions or customer requirements,
our business, results of operations and financial condition would be materially
and adversely affected. The Internet and e-commerce are characterized by rapid
technological change. Sudden changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices could
render our existing online sites and proprietary technology and systems
obsolete. The emerging nature of products and services in the online wedding
market and their rapid evolution will require that we continually improve the
performance, features and reliability of our online services. Our success will
depend, in part, on our ability:
- to enhance our existing services;
- to develop and license new services and technology that address the
increasingly sophisticated and varied needs of our prospective customers
and users; and
- to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of online sites and other proprietary technology entails
significant technological and business risks and requires substantial
expenditures and lead time. We may be unable to use new technologies effectively
or adapt our online sites, proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. Updating our
technology internally and licensing new technology from third parties may
require significant additional capital expenditures and could materially and
adversely affect our business, results of operations and financial condition.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. The governments of states and foreign countries might
attempt to regulate our transmissions or levy sales or other taxes relating to
our activities. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply
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to the Internet and Internet advertising services. In addition, the growth and
development of the market for e-commerce may prompt calls for more stringent
consumer protection laws, both in the United States and abroad, which may impose
additional burdens on companies conducting business online. Our business,
results of operations and financial condition could be materially and adversely
affected by the adoption or modification of laws or regulations relating to the
Internet and other online services.
WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR SITES.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
WE MAY INCUR POTENTIAL PRODUCT LIABILITY FOR PRODUCTS SOLD ONLINE.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user, or if consumers
experience problems with honeymoon packages purchased through our sites. To
date, we have had limited experience selling products online and developing
relationships with manufacturers or suppliers of such products. We plan to sell
a range of products targeted specifically at brides and grooms through The Knot
Registry, The Knot Shop, Bridalink.com, Click Trips and other e-commerce sites
that we may acquire in the future. Such a strategy involves numerous risks and
uncertainties. Although our agreements with manufacturers and providers of
travel services typically contain provisions intended to limit our exposure to
liability claims, these limitations may not prevent all potential claims.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could seriously damage our financial results, reputation and
brand name.
WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY.
We may decide to expand internationally. There are additional risks related
to doing business in international markets, such as changes in regulatory
requirements, tariffs and other trade barriers, fluctuations in currency
exchange rates, and adverse tax consequences. In addition, there are likely to
be different consumer preferences and requirements in such markets. Furthermore,
we may face difficulties in staffing and managing any foreign operations. We
cannot assure you that one or more of these factors would not harm any future
international operations.
WE MAY INCUR SIGNIFICANT EXPENSES RELATED TO THE SECURITY OF PERSONAL
INFORMATION ONLINE.
The need to transmit securely confidential information online has been a
significant barrier to e-commerce and online communications. Any well-publicized
compromise of security could deter people from using the Internet or other
online services or from using them to conduct transactions that involve
transmitting confidential information. Because our success depends on the
acceptance of online services and e-commerce, we may incur
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significant costs to protect against the threat of security breaches or to
alleviate problems caused by such breaches.
RISKS RELATED TO THIS OFFERING
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER
STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER ALL MATTERS REQUIRING A
STOCKHOLDER VOTE.
After this offering, our executive officers, directors and existing
stockholders who each own greater than 5% of the common stock that was
outstanding immediately before this offering and their affiliates will, in the
aggregate, beneficially own approximately % of our outstanding common
stock. As a result, these stockholders will be able to exercise control over all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of delaying or preventing a change in
control.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
Following this offering, we will have a large number of shares of common
stock outstanding and available for resale beginning at various points in time
in the future. The market price of our common stock could decline as a result of
sales of a large number of shares of our common stock in the public market or
the perception that such sales could occur.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, OUR STOCK PRICE MAY
EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS AND ANY VOLATILITY IN OUR STOCK
PRICE COULD RESULT IN CLAIMS AGAINST US.
Prior to this offering, investors could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. The market price of our common stock may decline below the initial
public offering price after this offering.
Fluctuations in market price and volume are particularly common among
securities of Internet and other technology companies. The market price of our
common stock may fluctuate significantly in response to the following factors,
some of which are beyond our control:
- variations in quarterly operating results;
- changes in market valuations of Internet and other technology companies;
- our announcements of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- failure to complete significant sponsorship, advertising and merchandise
sales;
- additions or departures of key personnel;
- future sales of common stock; and
- changes in financial estimates by securities analysts.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
common stock. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
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WE MAY SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT
AGREE.
The net proceeds of this offering are not allocated for specific uses. Our
management will have broad discretion to spend the net proceeds from this
offering in ways with which investors may not agree. The failure of our
management to apply these funds effectively could result in unfavorable returns.
This could have a material and adverse effect on our business, results of
operations and financial condition, and could cause the price of our common
stock to decline.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks and
uncertainties. These forward-looking statements, which are usually accompanied
by words such as "may," "might," "will," "should," "could," "intends,"
"estimates," "predicts," "potential," "continue," "believes," "anticipates,"
"plans," "expects" and similar expressions, relate to statements about our
market opportunities, our strategy, our competition, our projected expense
levels and the adequacy of our available cash resources. This prospectus also
contains forward-looking statements attributed to third parties relating to
their estimates regarding the wedding industry and the growth of Internet use.
These forward-looking statements are based on assumptions that may be incorrect
and there can be no assurance that the projections included in these
forward-looking statements will come to pass. Our actual results could differ
materially from those expressed or implied by these forward-looking statements
as a result of various factors, including the risk factors described above and
elsewhere in this prospectus. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
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USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the shares
of common stock in this offering of $ million, assuming an initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds will be $ million.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock and to facilitate future access
to public equity markets. As of the date of this prospectus, we have no specific
plans to use the net proceeds from this offering other than as set forth below.
We expect to use the proceeds for working capital, capital expenditures and
other general corporate purposes. The actual amounts expended for these purposes
will vary significantly depending on a number of factors, including revenue
growth, if any, and the extent and timing of our entry into target markets and
capital expenditures. We may also use a portion of the net proceeds to acquire
or invest in businesses, technologies or products that are complementary to our
business. However, we have no present plans or commitments and are not currently
engaged in any negotiations with respect to such transactions.
Pending our use of the net proceeds of this offering for these purposes, we
intend to invest the proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
our inception. We intend to retain future earnings, if any, to finance the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. Consequently, stockholders will need to
sell shares of common stock to realize a return on their investment, if any.
20
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the automatic conversion of
7,360,000 shares of outstanding preferred stock into 7,360,000 shares of
common stock upon the closing of this offering;
- on a pro forma as adjusted basis to give effect to the sale of
shares of common stock by us in this offering at an assumed initial
public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
This information should be read in conjunction with our financial
statements and the notes to those statements included in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt.............................................. $ -- $ -- $ --
Stockholders' equity:
Preferred Stock, $.001 par value, actual -- no shares
authorized, issued or outstanding; pro forma and pro
forma as adjusted -- 5,000,000 shares authorized and no
shares issued or outstanding............................ -- -- --
Series A convertible preferred stock, $.001 par value;
actual -- 3,360,000 shares authorized, issued and
outstanding; pro forma and pro forma as adjusted -- no
shares authorized, issued or outstanding................ 3,938 --
Series B convertible preferred stock, $.001 par value;
actual -- 4,000,000 shares authorized, issued and
outstanding; pro forma and pro forma as adjusted -- no
shares authorized, issued or outstanding................ 13,963 --
Common stock, $.01 par value; actual -- 14,640,000 shares
authorized and 3,093,608 shares issued and outstanding;
pro forma -- 100,000,000 shares authorized and
10,453,608 shares issued and outstanding; pro forma as
adjusted -- 100,000,000 shares authorized and
shares issued and outstanding................ 31 104
Additional paid-in-capital.................................. 7,796 25,624
Deferred compensation....................................... (2,716) (2,716)
Deferred sales and marketing................................ (2,123) (2,123)
Accumulated deficit......................................... (9,365) (9,365)
------- ------- ------
Total stockholders' equity.............................. $11,524 $11,524 $
======= ======= ======
Total capitalization................................. $11,524 $11,524 $
======= ======= ======
</TABLE>
The table above is based on shares outstanding as of September 30, 1999.
This table excludes:
- 1,762,968 shares of common stock issuable upon the exercise of stock
options outstanding as of September 30, 1999, with a weighted average
exercise price of $1.97 per share, which include 2,203 shares issuable
upon exercise of stock options not granted under our existing stock
option plan;
- 10,000 shares of common stock issuable upon the exercise of stock options
granted in connection with the Bridalink.com acquisition;
- 5,000 shares of common stock issued in connection with the Click Trips
acquisition and 10,000 shares of common stock issuable upon the exercise
of options to be granted upon achievement by Click Trips of
performance-based goals;
- 10,000 shares of common stock issued in connection with the Wedding
Photographers Network acquisition;
- 133,511 shares of common stock issuable to management of Bridal Search in
connection with their employment by us, on the second, third and fourth
anniversaries of the April 1998 acquisition of Bridal Search;
- 366,667 shares of common stock issuable upon the exercise of a warrant
with an exercise price of $7.20 per share held by AOL; and
- 1,700,000 shares of common stock issuable upon the exercise of a warrant
with an exercise price of $5.00 per share held by QVC Interactive
Holdings, LLC.
21
<PAGE> 26
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $10.9 million, or approximately $1.04 per share of common stock.
Pro forma net tangible book value per share is determined by dividing the amount
of our total tangible assets less total liabilities by the number of shares of
our common stock outstanding after giving pro forma effect to the conversion of
each share of preferred stock into one share of common stock upon the closing of
this offering. Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by investors in this
offering and the pro forma net tangible book value per share of common stock
immediately after the completion of this offering. After giving effect to our
sale of shares offered hereby at an assumed initial public offering price
of $ per share and after deducting estimated underwriting discounts and
estimated offering expenses payable by us, and the application of the estimated
net proceeds therefrom, our pro forma net tangible book value as of September
30, 1999 would have been $ , or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of
September 30, 1999...................................... $
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value per share after this
offering..................................................
-----
Dilution in pro forma net tangible book value per share to
new investors............................................. $
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, after giving effect to the automatic conversion of all outstanding shares
of preferred stock into common stock upon the closing of this offering, the
total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid to us by existing
stockholders and by new investors before deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us,
assuming an initial public offering price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ % $ % $
New investors................................
------- ----- ------- ------
Total.................................... 100.0% $ $100.0%
======= ===== ======= ======
</TABLE>
The foregoing tables and calculations exclude:
- 1,762,968 shares of common stock issuable upon the exercise of stock
options outstanding as of September 30, 1999, with a weighted average
exercise price of $1.97 per share, which include 2,203 shares issuable
upon exercise of stock options not granted under our existing stock
option plan;
- 10,000 shares of common stock issuable upon the exercise of stock options
granted in connection with the Bridalink.com acquisition;
- 5,000 shares of common stock issued in connection with the Click Trips
acquisition and 10,000 shares of common stock issuable upon the exercise
of options to be granted upon achievement by Click Trips of
performance-based goals;
- 10,000 shares of common stock issued in connection with the Wedding
Photographers Network acquisition;
- 133,511 shares of common stock issuable to management of Bridal Search in
connection with their employment by us, on the second, third and fourth
anniversaries of the April 1998 acquisition of Bridal Search;
- 366,667 shares of common stock issuable upon the exercise of a warrant
with an exercise price of $7.20 per share held by AOL; and
- 1,700,000 shares of common stock issuable upon the exercise of a warrant
with an exercise price of $5.00 per share held by QVC Interactive
Holdings, LLC.
To the extent that any of these options or warrants are exercised, there
will be further dilution to new investors.
22
<PAGE> 27
SELECTED FINANCIAL DATA
The selected balance sheet data as of December 31, 1997 and 1998 and as of
September 30, 1999 and the selected statement of operations data for the period
from May 2, 1996 (inception) through December 31, 1996, the years ended December
31, 1997 and 1998 and the nine months ended September 30, 1999 have been derived
from our audited financial statements included in this prospectus. Balance sheet
data as of December 31, 1996 have been derived from our audited financial
statements not included in this prospectus. The statement of operations data for
the nine months ended September 30, 1998 have been derived from unaudited
financial statements included in this prospectus. In the opinion of management,
the statement of operations data for the nine months ended September 30, 1998
have been prepared on the same basis as the audited financial statements
appearing in this prospectus and include all necessary adjustments, consisting
only of normal recurring adjustments, we believe to be necessary for a fair
presentation of the data. Unaudited pro forma basic and diluted net loss per
share have been calculated assuming the conversion of all previously outstanding
preferred stock into common stock, as if the shares had converted immediately
upon their issuance. The selected financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our financial statements and the notes to those
statements included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2, 1996 YEAR ENDED NINE MONTHS
(INCEPTION) TO DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 31, --------------------- ---------------------
1996 1997 1998 1998 1999
-------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 71 $ 596 $ 1,040 $ 826 $ 2,635
Cost of revenues............................. 9 67 131 82 904
--------- --------- --------- --------- ---------
Gross profit................................. 62 529 909 744 1,731
Operating expenses:
Product and content development............ 262 635 1,031 788 1,685
Sales and marketing........................ 255 503 768 476 2,913
General and administrative................. 242 265 809 539 2,194
Non-cash compensation...................... -- -- 93 57 717
Non-cash sales and marketing............... -- -- -- -- 127
Depreciation and amortization.............. 9 22 122 75 346
--------- --------- --------- --------- ---------
Total operating expenses..................... 768 1,425 2,823 1,935 7,982
Loss from operations......................... (706) (896) (1,914) (1,191) (6,251)
Interest income (expense), net............... (46) (199) 15 (29) 243
--------- --------- --------- --------- ---------
Loss before extraordinary items.............. (752) (1,095) (1,899) (1,220) (6,008)
Extraordinary items.......................... -- -- 390 390 --
--------- --------- --------- --------- ---------
Net loss..................................... $ (752) $ (1,095) $ (1,509) $ (830) $ (6,008)
========= ========= ========= ========= =========
Loss per share -- basic and diluted:
Loss before extraordinary items............ $ (0.46) $ (0.67) $ (0.76) $ (0.52) $ (1.96)
Extraordinary items........................ -- -- 0.16 0.17 --
--------- --------- --------- --------- ---------
Net loss per share........................... $ (0.46) $ (0.67) $ (0.60) $ (0.35) $ (1.96)
========= ========= ========= ========= =========
Weighted average number of shares used in
calculating basic and diluted net loss per
share...................................... 1,625,410 1,625,410 2,497,065 2,344,126 3,066,960
========= ========= ========= ========= =========
Pro forma basic and diluted net loss per
share...................................... $ (0.46) $ (0.67) $ (0.32) $ (0.19) $ (0.67)
========= ========= ========= ========= =========
Pro forma weighted average number of shares
used in calculating basic and diluted net
loss per share............................. 1,625,410 1,625,410 4,780,024 4,264,126 8,932,455
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1996 1997 1998 1999
----- ------- ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 16 $ 305 $1,038 $ 9,302
Working capital............................................. (84) 194 1,003 9,257
Total assets................................................ 194 1,153 1,950 13,846
Convertible preferred stock................................. -- -- 3,938 17,901
Total stockholders' equity.................................. (751) (1,017) 1,646 11,524
</TABLE>
23
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations together with our financial statements, the notes to those
statements and the other information in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. You
should consider carefully the information about these risks and uncertainties
contained in the section of this prospectus entitled "Risk Factors" before you
decide to buy our common stock.
OVERVIEW
The Knot is the leading online wedding destination on the World Wide Web
and the primary wedding content provider on America Online and several other of
AOL's leading brands, including AOL.com, Netscape Netcenter and CompuServe. We
commenced operations in May 1996, and recorded our first revenues in September
1996, immediately following the launch of our first online property. Our Web
site was launched in July 1997, giving us prominent distribution on both AOL and
the Web. We launched The Knot Registry, our online gift registry, in November
1998 and significantly expanded our registry product offerings in July 1999. In
July 1999, we acquired the assets of Bridalink.com, an Internet wedding supply
store and the common stock of Click Trips, Inc., an online travel agency. Also
in July 1999, we entered into a strategic alliance with Weddingpages, Inc. In
August 1999, we acquired the assets of Wedding Photographers Network, a
searchable database of local wedding photographers.
We derive revenues from the sale of sponsorship, advertising and production
contracts. We also derive revenues from the sale of merchandise, from publishing
and from the sale of travel packages.
Sponsorship revenues are derived principally from contracts currently
ranging up to three years. Sponsorships are designed to integrate advertising
with specific editorial content. Sponsors can purchase the exclusive right to
promote products or services on a specific editorial area and can purchase a
special feature on our sites.
Advertising revenues are derived principally from short-term contracts
which typically range from one month up to one year. Advertising contracts
include banner advertisements and listings for local wedding vendors.
Sponsorship and advertising contracts provide for the delivery of a minimum
number of impressions. Impressions are the featuring of a sponsor's
advertisement, banner, link or other form of content on our sites. To date, we
have recognized our sponsorship and advertising revenues over the duration of
the contracts on a straight line basis as we have exceeded minimum guaranteed
impressions. To the extent that minimum guaranteed impressions are not met, we
are generally obligated to extend the period of the contract until the
guaranteed impressions are achieved. If this were to occur, we would defer and
recognize the corresponding revenues over the extended period.
Production revenues are derived from the development of online sites and
tools. Revenues associated with this production are recognized when the
production is completed and the online sites and tools are delivered.
To promote our brand on third-party sites, we produce online sites for
third parties featuring both The Knot and the third party. The cost of
production of these sites is included in our operating expenses. In return, we
receive distribution and exposure to their viewers, outbound links to our sites
and, in some circumstances, offline brand marketing. We do not recognize
revenues with respect to these barter transactions.
24
<PAGE> 29
Sponsorship, advertising and production revenues amounted to $1.7 million,
or 65% of our net revenues, for the nine months ended September 30, 1999, and
$853,000 or 82% of our net revenues, for the year ended December 31, 1998.
For the nine months ended September 30, 1999, our top six advertisers
accounted for 39% of our net revenues. For the year ended December 31, 1998, a
different advertiser accounted for 19% of our net revenues. For the year ended
December 31, 1997, one advertiser accounted for 42% of our net revenues and
another advertiser accounted for 13% of our net revenues. From May 2, 1996 (our
inception date) through December 31, 1996, four advertisers accounted for 34%,
30%, 23% and 13% of net revenues. Our large advertisers generally differed from
period to period. We expect that our large advertisers will continue to differ
over time.
Merchandise revenues are derived from the sales of merchandise through
Bridalink.com, which was acquired in July 1999, The Knot Registry and The Knot
Shop. Merchandise revenues include outbound shipping and handling charges. For
the nine months ended September 30, 1999, merchandise revenues were derived
principally from Bridalink.com and The Knot Registry. Merchandise revenues are
recognized when products are shipped to customers, reduced by an allowance for
estimated sales returns. Merchandise revenues amounted to 26% of our net
revenues for the nine months ended September 30, 1999 and 2% of our net revenues
for the year ended December 31, 1998.
Publishing revenues are derived from author royalties paid to us related to
our book publishing contract and from sales of books published by us, such as
our gown guide. Royalties are recognized when we have met all contractual
obligations, which typically include the delivery and acceptance of a final
manuscript. Revenues from the sale of books are recognized when the books are
shipped, reduced by an allowance for estimated sales returns. Publishing
revenues amounted to 6% of our net revenues for the nine months ended September
30, 1999 and 16% of our net revenues for the year ended December 31, 1998.
Travel revenues are derived from commissions earned on the sale of travel
packages by our online travel agency, Click Trips, Inc., which we acquired on
July 31, 1999. These revenues are recognized when the customer commences travel.
Travel commission revenues amounted to 2% of our net revenues for the nine
months ended September 30, 1999.
We generated revenues for the nine months ended September 30, 1998 and for
the year ended December 31, 1997, through usage fees paid by AOL based on the
number of customers visiting our AOL site. Usage fees were recognized as they
were earned based upon user time spent on our AOL site. After September 30,
1998, we signed an anchor tenant agreement with AOL which eliminated usage
revenues receivable from, and commissions payable to, AOL. Under this anchor
tenant agreement with AOL, we pay carriage fees to AOL. We generated $47,000 and
$74,000 of commission revenues from AOL which represented 5% and 13% of our net
revenues for the years ended December 31, 1998 and 1997, respectively. We paid
$16,000 and $68,000 in commissions to AOL for the years ended December 31, 1998
and 1997, respectively.
We recorded deferred compensation of approximately $3.3 million through
September 30, 1999, primarily as a result of the issuance of stock options to
employees with exercise prices per share subsequently determined for financial
reporting purposes to be below the fair market value per share of our common
stock at the dates of grant. The
25
<PAGE> 30
difference is recorded as a reduction of stockholders' equity and amortized as
non-cash compensation expense on an accelerated method over the four-year
vesting period of the related options.
In July 1999, we amended our anchor tenant agreement with AOL and recorded
deferred sales and marketing of $2.3 million as a result of the issuance of a
warrant to AOL in connection with that amendment. Deferred sales and marketing
is being amortized as non-cash sales and marketing expense on a straight-line
basis over the life of the agreement.
Extraordinary items for the year ended December 31, 1998 consist of a gain
of $1.1 million, representing the forgiveness of a portion of a note payable to
AOL including interest accrued on this note, and a loss of $719,000,
representing the write-off of unamortized deferred financing costs associated
with such note payable.
We have incurred net losses of $9.4 million from our inception on May 2,
1996 through September 30, 1999. We have historically relied on advances under a
retired note payable to AOL and on private sales of equity securities to fund
our operations. We expect operating and net losses to continue for the
foreseeable future as we continue to incur significant expenses while pursuing
our business strategy.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented certain data from
our statement of operations, expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2, 1996 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------- --------------------
1996 1997 1998 1998 1999
-------------- ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................... 12.8 11.2 12.6 9.9 34.3
-------- ------ ------ ------ ------
Gross profit....................... 87.2 88.8 87.4 90.1 65.7
Operating expenses:
Product and content
development................... 371.2 106.6 99.1 95.5 63.9
Sales and marketing.............. 361.2 84.4 73.9 57.7 110.5
General and administrative....... 343.1 44.4 77.9 65.2 83.3
Non-cash compensation............ -- -- 9.0 6.9 27.2
Non-cash sales and marketing..... -- -- -- -- 4.8
Depreciation and amortization.... 12.9 3.7 11.7 9.1 13.1
-------- ------ ------ ------ ------
Total operating expenses........... 1,088.4 239.1 271.6 234.4 302.8
Loss from operations............... (1,001.2) (150.3) (184.2) (144.3) (237.1)
Interest income (expense), net..... (64.9) (33.4) 1.4 (3.6) 9.2
-------- ------ ------ ------ ------
Loss before extraordinary items.... (1,066.1) (183.7) (182.8) (147.9) (227.9)
Extraordinary items................ -- -- 37.5 47.2 --
-------- ------ ------ ------ ------
Net loss........................... (1,066.1)% (183.7)% (145.3)% (100.7)% (227.9)%
======== ====== ====== ====== ======
</TABLE>
26
<PAGE> 31
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Net revenues
Net revenues increased to $2.6 million for the nine months ended September
30, 1999 from $826,000 for the nine months ended September 30, 1998.
Sponsorship, advertising and production revenues increased to $1.7 million for
the nine months ended September 30, 1999 from $656,000 for the nine months ended
September 30, 1998, primarily due to revenues generated from additional
sponsorship and production contracts, and revenues from the launch of local
vendor advertising programs in July 1999. As a percentage of net revenues,
sponsorship, advertising and production revenues accounted for approximately 65%
and 79% for the nine months ended September 30, 1999 and 1998, respectively.
Merchandise revenues amounted to $694,000 for the nine months ended
September 30, 1999, resulting primarily from the acquisition of Bridalink.com in
July 1999 and the launch of The Knot Registry in November 1998. As a percentage
of net revenues, merchandise revenues accounted for 26% for the nine months
ended September 30, 1999. There were no merchandise revenues in the
corresponding period in 1998.
Publishing revenues increased to $160,000 for the nine months ended
September 30, 1999 from $143,000 for the nine months ended September 30, 1998.
The increase in publishing revenues was due to sales of our gown guide which was
published at the end of June 1999, partially offset by lower book publishing
revenues. As a percentage of net revenues, publishing revenues accounted for 6%
and 17% for the nine months ended September 30, 1999 and 1998, respectively.
Travel revenues accounted for $54,000 of our net revenues for the nine
months ended September 30, 1999, resulting from the acquisition of Click Trips,
Inc. in July 1999. As a percentage of net revenues, travel revenues accounted
for 2% for the nine months ended September 30, 1999. There were no travel
revenues in the corresponding period in 1998.
We anticipate that the components of our net revenues will continue to
fluctuate as our business continues to grow.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, payroll and
related expenses for our personnel who are responsible for the production of
customized online sites and tools, and costs of Internet and hosting services.
Cost of revenues increased to $904,000 for the nine months ended September
30, 1999 from $82,000 for the nine months ended September 30, 1998. The increase
was primarily due to an increase in the sale of merchandise through
Bridalink.com and The Knot Registry, and an increase in the cost of producing
online sites and tools. As a percentage of our net revenues, cost of revenues
increased to 34% for the nine months ended September 30, 1999 from 10% for the
nine months ended September 30, 1998.
We anticipate that the cost of revenues will continue to grow in absolute
dollars as we increase our merchandising efforts and expand our sponsorship and
production contracts. Sponsorship, advertising and production gross margins are
currently greater than merchandise gross margins. As our business continues to
grow and our net revenues continue to change, we expect our cost of revenues to
continue to fluctuate as a percentage of net revenues.
27
<PAGE> 32
Product and Content Development
Product and content development expenses consist of payroll and related
expenses for creative personnel, information technology, and expenses for
third-party software developers and contract programmers.
Product and content development expenses increased to $1.7 million for the
nine months ended September 30, 1999 from $788,000 for the nine months ended
September 30, 1998. The increase was primarily attributable to hiring additional
staff to enhance the content and functionality of our sites, partially offset by
a decrease in third-party programming and content licensing fees. As a
percentage of our net revenues, product and content development expenses
decreased to 64% for the nine months ended September 30, 1999 from 95% for the
nine months ended September 30, 1998.
We believe that significant investments in product and content development
are required to remain competitive and, therefore, expect that our product and
content development expenses will continue to increase in absolute dollars for
the foreseeable future.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses for sales and marketing, customer service and public relations
personnel, as well as expenditures for our AOL anchor tenant agreement,
advertising and promotional activities, and fulfillment and distribution of
merchandise.
Sales and marketing expenses increased to $2.9 million for the nine months
ended September 30, 1999, from $476,000 for the nine months ended September 30,
1998. The increase was primarily due to carriage fees paid under our anchor
tenant agreement with AOL, which went into effect on January 1, 1999, increased
personnel costs related to the hiring of additional sales and marketing
personnel and increased sales commissions. As a percentage of our net revenues,
sales and marketing expenses increased to 111% for the nine months ended
September 30, 1999 from 58% for the nine months ended September 30, 1998.
We believe that significant investments in sales and marketing personnel
and programs are required to remain competitive and to build our brand both
online and offline, and, therefore, that our sales and marketing expenses will
continue to increase in absolute dollars for the foreseeable future.
General and Administrative
General and administrative expenses consist primarily of payroll and
related expenses for our executive management, finance and administrative
personnel, legal and accounting fees, facilities costs and insurance expenses.
General and administrative expenses increased to $2.2 million for the nine
months ended September 30, 1999 from $539,000 for the nine months ended
September 30, 1998. This increase was primarily due to increased personnel costs
and professional fees. As a percentage of our net revenues, general and
administrative expenses increased to 83% for the nine months ended September 30,
1999 from 65% for the nine months ended September 30, 1998.
28
<PAGE> 33
We expect our general and administrative expenses to increase in absolute
dollars for the foreseeable future as we continue to hire personnel and incur
expenses to build our administrative infrastructure to support the growth of our
business and our operations as a public company.
Non-Cash Compensation
We recorded $3.0 million of deferred compensation during the nine months
ended September 30, 1999 and $268,000 of deferred compensation for the nine
months ended September 30, 1998. Amortization of deferred compensation increased
to $695,000 for the nine months ended September 30, 1999 from $57,000 for the
nine months ended September 30, 1998. As a percentage of our net revenues,
amortization of deferred compensation increased to 26% for the nine months ended
September 30, 1999 from 7% of our net revenues for the nine months ended
September 30, 1998.
Non-Cash Sales and Marketing
We recorded $2.3 million of deferred sales and marketing during the nine
months ended September 30, 1999, related to the issuance of a warrant to AOL in
connection with our amended anchor tenant agreement in July 1999. Amortization
of deferred sales and marketing was $127,000 for the nine months ended September
30, 1999. As a percentage of net revenues, amortization of deferred sales and
marketing amounted to 5% for the nine months ended September 30, 1999.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and amortization of goodwill related to
acquisitions.
Depreciation and amortization expenses increased to $346,000 for the nine
months ended September 30, 1999 from $75,000 for the nine months ended September
30, 1998. This increase was primarily due to increased depreciation due to the
increase in property and equipment purchases and additional amortization of
goodwill related to acquisitions. As a percentage of net revenues, depreciation
and amortization expense increased to 13% for the nine months ended September
30, 1999 from 9% for the nine months ended September 30, 1998.
INCEPTION (MAY 2, 1996) THROUGH DECEMBER 31, 1996 AND YEARS ENDED DECEMBER 31,
1997 AND 1998
Net Revenues
Net revenues increased to $1.0 million for the year ended December 31, 1998
from $596,000 for the year ended December 31, 1997 and from $71,000 in the
period from inception through December 31, 1996. The increase for each period
was due primarily to an increase in the average dollar value of sponsorship
programs and in the number of sponsors and advertisers. As a percentage of net
revenues, sponsorship and advertising revenues accounted for approximately 82%,
100%, and 100% for the years ended December 31, 1998 and 1997 and for the period
from inception through December 31, 1996, respectively.
29
<PAGE> 34
Merchandise revenues were $17,000, or 2% of our net revenues, for the year
ended December 31, 1998 as a result of the launch of The Knot Registry in
November 1998. There were no merchandise revenues for the year ended December
31, 1997 or for the period from inception through December 31, 1996.
Net revenues from the delivery and acceptance of the first book under our
book publishing contract were $143,000, or 14% of our net revenues, for the year
ended December 31, 1998. There were no publishing revenues for the year ended
December 31, 1997 or for the period from inception through December 31, 1996.
Cost of Revenues
Cost of revenues increased to $131,000 for the year ended December 31,
1998, from $67,000 for the year ended December 31, 1997 and from $9,000 in the
period from inception through December 31, 1996. The increase in cost of
revenues for each period was primarily due to the increased number of sponsors
and advertisers. Cost of revenues for the year ended December 31, 1998 included
the cost of merchandise sold as a result of the launch of The Knot Registry in
November 1998. Internet access and hosting services expenses also increased in
each period. As a percentage of net revenues, cost of revenues remained
relatively constant at 13%, 11% and 13% for the years ended December 31, 1998
and 1997, and for the period from inception through December 31, 1996,
respectively.
Product and Content Development
Product and content development expenses increased to $1.0 million for the
year ended December 31, 1998, from $635,000 for the year ended December 31, 1997
and from $262,000 for the period from inception through December 31, 1996. The
increase for each period was primarily attributable to increased personnel costs
related to enhancing the content and functionality of our sites. As a percentage
of net revenues, product and content development expenses decreased to 99% from
107% and from 371% for the years ended December 31, 1998 and 1997, and for the
period from inception through December 31, 1996, respectively. The percentage
decreases for each period were primarily attributable to the higher growth rate
in our net revenues as compared to the growth rate associated with these
expenses.
Sales and Marketing
Sales and marketing expenses increased to $768,000 for the year ended
December 31, 1998, from $503,000 for the year ended December 31, 1997 and from
$255,000 for the period from inception through December 31, 1996. The increases
for each period were primarily a result of the retention of an outside public
relations firm and higher sales commissions paid as a result of increased
sponsorship and advertising sales. As a percentage of net revenues, sales and
marketing expenses decreased to 74% from 84% and from 361% for the years ended
December 31, 1998 and 1997 and for the period from inception through December
31, 1996, respectively. The percentage decreases for each period were primarily
attributable to the higher growth rate in our net revenues as compared to the
growth rate associated with these expenses.
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<PAGE> 35
General and Administrative
General and administrative expenses increased to $809,000 for the year
ended December 31, 1998, from $265,000 for the year ended December 31, 1997 and
from $242,000 for the period from inception through December 31, 1996. The
increase for each period was primarily due to an increase in personnel costs and
facilities expenses resulting from an increase in the number of personnel hired
to support the growth of our business. As a percentage of net revenues, general
and administrative expenses increased to 78% for the year ended December 31,
1998 from 44% for the year ended December 31, 1997 and decreased from 343% for
the period from inception through December 31, 1996. The percentage increase
from 1997 to 1998 was primarily attributable to increased personnel costs, while
the percentage decrease from 1996 to 1997 was primarily attributable to the
higher growth rate in our net revenues as compared to the growth rate in general
and administrative expenses.
Non-Cash Compensation
We recorded $480,000 in deferred compensation for the year ended December
31, 1998. Amortization of deferred compensation was $93,000, or 9% of our net
revenues, for the year ended December 31, 1998.
Depreciation and Amortization
Depreciation and amortization expenses increased to $122,000 for the year
ended December 31, 1998, from $22,000 for the year ended December 31, 1997 and
from $9,000 in the period from inception through December 31, 1996. The increase
for each period was primarily due to increased depreciation resulting from
increased purchases of property and equipment to support the growth of our
business. Also included in depreciation and amortization for the year ended
December 31, 1998 was approximately $54,000 of goodwill amortization related to
the acquisition of Bridal Search in April 1998. As a percentage of net revenues,
depreciation and amortization remained relatively constant at 12%, 4% and 13% of
net revenues for the years ended December 31, 1998 and 1997, and for the period
from inception through December 31, 1996, respectively.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for each of the seven quarters ended September 30, 1999. We have
prepared these data on the same basis as our audited financial statements in
this prospectus and have included all necessary adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of our results
of operations for these interim periods. You should read these interim financial
data together with our audited financial statements and the notes to those
statements in this prospectus. Our historical results of operations do not
necessarily indicate the results of operations we will achieve in the future,
and our results of
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<PAGE> 36
operations for interim periods do not necessarily indicate the results of
operations for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........... $ 226 $ 439 $ 161 $ 214 $ 194 $ 544 $ 1,897
Cost of revenues....... 33 28 21 49 53 188 663
------- ------- ------- ------- ------- ------- -------
Gross profit........... 193 411 140 165 141 356 1,234
Operating expenses:
Product and content
development....... 166 290 333 242 401 464 820
Sales and
marketing......... 94 144 238 292 706 788 1,419
General and
administrative.... 83 153 302 271 420 621 1,153
Non-cash
compensation...... -- 22 35 36 129 213 375
Non-cash sales and
marketing......... -- -- -- -- -- -- 127
Depreciation and
amortization...... 7 31 38 46 69 106 171
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 350 640 946 887 1,725 2,192 4,065
Loss from operations... (157) (229) (806) (722) (1,584) (1,836) (2,831)
Interest income
(expense), net....... (49) 4 16 44 (10) 110 143
------- ------- ------- ------- ------- ------- -------
Loss before
extraordinary
items................ (206) (225) (790) (678) (1,594) (1,726) (2,688)
Extraordinary items.... -- 390 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net loss............... $ (206) $ 165 $ (790) $ (678) $(1,594) $(1,726) $(2,688)
======= ======= ======= ======= ======= ======= =======
</TABLE>
Net revenues for the three months ended September 30, 1999 increased by
$1.4 million as compared to the three months ended June 30, 1999 primarily as a
result of revenues generated from additional sponsorship and production
contracts, the launch of local vendor advertising programs in July 1999, as well
as merchandise revenues generated through Bridalink.com which was acquired in
July 1999. There was a corresponding increase in both cost of revenues and sales
and marketing expenses during the three months ended September 30, 1999.
Net revenues for the three months ended June 30, 1999 increased from the
prior three month period as a result of an increase in the average dollar value
of sponsorship agreements and in the number of sponsors and advertisers. Net
revenues for the three months ended September 30, 1998 decreased from the prior
three month period as a result of lower sponsorship revenues as well as
decreased publishing revenues. Net revenues for the three months ended June 30,
1998 increased from the prior three month period primarily as a result of
publishing revenues recognized from the delivery and acceptance of the first
book under our book publishing contract.
Sales and marketing expenses for the three months ended March 31, 1999
increased from the prior three month period as a result of carriage fees under
our new anchor tenant agreement with AOL which went into effect on January 1,
1999.
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LIQUIDITY AND CAPITAL RESOURCES
We funded our operations from our inception on May 2, 1996 through April
1998 primarily with advances under a retired note payable to AOL. Subsequent to
April 1998, we have funded our operations primarily through private sales of
preferred equity securities totaling $18.0 million. As of September 30, 1999, we
had $9.3 million in cash and cash equivalents.
Net cash used in operating activities was $4.8 million for the nine months
ended September 30, 1999. This resulted primarily from the net loss for the
period as adjusted for depreciation and amortization and an increase in accounts
receivable, other current assets and inventories, partially offset by increases
in accounts payable and accrued expenses and deferred revenue. Net cash used in
operating activities was $1.7 million for the year ended December 31, 1998,
$837,000 for the year ended December 31, 1997 and $625,000 for the period from
May 2, 1996 (inception) through December 31, 1996, primarily as a result of the
net loss for the periods, adjusted for depreciation and amortization.
Net cash used in investing activities was $1.6 million for the nine months
ended September 30, 1999, primarily due to the purchase of property and
equipment and cash paid for business acquisitions. Net cash used in investing
activities was $305,000 for the year ended December 31, 1998, $24,000 for the
year ended December 31, 1997 and $58,000 for the period from inception through
December 31, 1996, primarily due to the purchase of property and equipment and,
in 1998, cash paid for a business acquisition.
Net cash provided by financing activities was $14.7 million for the nine
months ended September 30, 1999 primarily resulting from the issuance of Series
B Preferred Stock in April 1999. Financing activities provided $2.8 million for
the year ended December 31, 1998 from the sale of Series A Preferred Stock.
Financing activities for the year ended December 31, 1997 provided $1.2 million
and for the period from inception through December 31, 1996 provided $700,000,
representing borrowings under a note payable to AOL.
Although we have no material commitments for capital expenditures, our
capital expenditures have increased from $58,000 for the period from inception
through December 31, 1996 to over $1.1 million for the nine months ended
September 30, 1999, consistent with the growth in our operations and staffing.
We anticipate that this will continue for the foreseeable future. We intend to
continue to pursue acquisitions of, or investments in, complementary businesses,
services and technologies, expand our sales and marketing programs and conduct
more aggressive brand promotions.
As of September 30, 1999, we had commitments under non-cancelable operating
leases amounting to $6.1 million, of which $374,000 will be due on or before
September 30, 2000.
We currently believe that the net proceeds from this offering, together
with our current cash and cash equivalents, will be sufficient to fund our
working capital and capital expenditure requirements for at least the next 12
months. We cannot assure you that additional funding, if required, will be
available to us in amounts or on terms acceptable to us. If sufficient funds are
not available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of acquisition opportunities, develop or enhance our
services or products, or otherwise respond to competitive pressures would be
significantly
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<PAGE> 38
limited. Those limitations would materially and adversely affect our business,
results of operations and financial condition.
RECENT ACQUISITIONS
On July 6, 1999, we purchased all of the assets of Bridalink.com for
approximately $124,000 in cash and the issuance of immediately vested stock
options to purchase up to 10,000 shares of our common stock at an exercise price
$1.50 per share. Bridalink.com operates www.bridalink.com, an Internet wedding
supply store located in Northern California.
On July 31, 1999, we acquired all of the capital stock of Click Trips, Inc.
for 5,000 shares of common stock. Under the terms of the acquisition agreement,
the 5,000 shares of common stock will be held in escrow for six months for the
purpose of indemnifying us against any potential liabilities of Click Trips.
Click Trips has the right to receive options to purchase up to an additional
10,000 shares of our common stock upon the attainment of $1.2 million in
commission revenue for the year ended December 31, 2000. The exercise price
related to the options will be equal to the fair market value of our common
stock on the date of grant. Click Trips operates www.clicktrips.com, an online
travel agency and is located in Warminster, Pennsylvania.
On August 18, 1999, we acquired the assets of Wedding Photographers
Network, a division of The Denis Reggie Company, for 10,000 shares of our common
stock. Wedding Photographers Network is a searchable database of local wedding
photographers and is located in Atlanta, Georgia.
We have accounted for these acquisitions using the purchase method of
accounting. Goodwill resulting from these acquisitions is being amortized using
the straight line method over three years. The results of operations for each
acquisition are included in the period subsequent to the date of each
acquisition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two-digit entries in the date code field. These
systems and software products will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software may need to be upgraded, redesigned or replaced to
comply with such Year 2000 requirements to avoid system failure or
miscalculations causing disruptions of normal business activities.
Our business, results of operations and financial condition would suffer if
the systems on which we depend to conduct our business are not Year 2000
compliant. Our potential areas of exposure include products purchased from third
parties, information technology that we use for internal operations including
computers and software, and non-information technology systems and services
including telephone systems, electricity and other items that we use for
internal operations.
STATE OF READINESS
We are not currently aware of any Year 2000 compliance problems relating to
our systems that would have a material adverse effect on our business, results
of operations and financial condition. We have made a preliminary assessment of
the Year 2000 readiness of
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<PAGE> 39
our operating, financial and administrative systems, including hardware and
software. All of the internally developed production systems for our sites are
Year 2000 compliant. We have received and have on file Year 2000 readiness
statements from AOL, QVC and each of our current third-party technology vendors.
In each case, these technology vendors state that the Year 2000 date change will
not result in a significant interruption in critical services or negatively
impact their clients in any material way. With respect to information technology
we addressed Year 2000 compliance issues primarily through commercially
available patches or upgrades in the ordinary course of business. We have
completed integrated testing of our systems, including internally developed
proprietary software, third-party software, hardware and services, and have
found no Year 2000 compliance problems.
We have contacted our principal vendors of material non-information
technology systems and services used by us, such as our telephone system and
utility providers, and requested confirmation of the Year 2000 compliance of
their systems and services. We have received notification from some of these
vendors that the systems and services that they provide to us are Year 2000
compliant. We have replaced the systems and services of non-compliant vendors
with compliant alternatives.
COSTS
To date, we have spent an immaterial amount on Year 2000 compliance issues,
and we expect to incur additional costs not to exceed $200,000 in connection
with identifying, evaluating and addressing Year 2000 compliance issues. Most of
our expenses for the Year 2000 have related to, and are expected to continue to
relate to, the operating costs associated with time spent by employees and
consultants in the evaluation process and execution of Year 2000 compliance.
Such expenses, if higher than anticipated, could have a material adverse effect
on our business, results of operations and financial condition.
RISKS
We believe, based upon our investigations and testing to date, that the
Year 2000 issue will not have a material adverse effect on our business, results
of operations or financial condition. However, despite all of our efforts to
date towards insuring Year 2000 compliance, latent issues may still surface in
the future that require upgrades, modifications, or replacement, all of which
could be time-consuming and expensive. Our failure to fix or replace internally
developed proprietary software, third-party software, hardware, or services on a
timely basis could result in lost revenues, increased operating costs, the loss
of customers and other business interruptions.
We depend heavily on a number of third-party vendors to provide both
network services and equipment. A significant Year 2000-related disruption of
the network, services or equipment that third-party vendors provide to us could
cause our sponsors, advertisers, members and visitors to consider seeking
alternate providers. Year 2000 issues could also cause an unmanageable burden on
our technical support personnel, which in turn could materially and adversely
affect our business, results of operations and financial condition.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers, including
AOL and QVC, and others outside of our control will be Year 2000 compliant. The
failure by such entities to be Year 2000 compliant could result in a systemic
failure such as a prolonged Internet, telecommunications or electrical failure.
These suppliers could also prevent us from delivering services to our customers,
decrease the use of the Internet or prevent users from
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<PAGE> 40
accessing our sites which could have a material adverse effect on our business,
results of operations and financial condition.
CONTINGENCY PLAN
Because no systems have been found to be non-compliant, we have determined
that a contingency plan is not required. We are unable to provide for
contingencies arising as a result of large scale or Internet-wide failure
because we are not aware of any adequate replacement service for the Internet.
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<PAGE> 41
BUSINESS
OVERVIEW
The Knot is the leading online wedding destination on the World Wide Web
and the primary wedding content provider on America Online and several other of
AOL's leading brands, including AOL.com, Netscape Netcenter and CompuServe. We
combine comprehensive content and an online community with wedding-related
commerce. Our online sites provide full-service offerings targeted at the
planning needs of today's brides and grooms. We believe that our sites enable
our users to overcome the many challenges of the wedding planning process by
providing a one-stop solution. In addition, we provide advertisers and vendors
with targeted access to couples actively seeking information and making
meaningful buying decisions relating to all aspects of their weddings.
Located at www.theknot.com on the Web and on AOL at keywords "Knot" and
"wedding", our sites provide future brides and grooms with useful information
and resources. We offer:
- - a searchable database that draws on more than 5,000 articles on wedding
planning,
- - a database of more than 14,000 local vendors in 52 markets nationwide,
- - a searchable bridal gown database with more than 15,000 gown images from over
140 bridal designers,
- - a searchable database with more than 750 bridal accessories, including
headpieces, shoes and purses,
- - 45 weekly hosted chats,
- - nine integral tools for planning the wedding,
- - an online gift registry with more than 10,000 gifts,
- - an online shop of over 450 wedding supplies and gifts, and
- - honeymoon travel packages.
We also service the wedding market through a series of books and a semiannual
gown guide. These traditional forms of media provide cross-promotional
opportunities and assist us in increasing our brand awareness and our online
audience.
Engaged couples are increasingly turning to The Knot. In September 1999, we
generated over 15.4 million page views on our Web site compared to 2.5 million
in December 1998. As of September 30, 1999, more than 395,000 couples had
enrolled on our site to become members, and we are currently enrolling an
average of over 1,000 new couples per day.
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Internet has emerged as a global medium that allows millions of people
worldwide to obtain information, communicate and conduct business. In its June
1999 report, International Data Corporation estimates that the number of
Internet users
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worldwide will grow from approximately 142 million users in 1998 to 502 million
by the end of 2003. Additionally, worldwide commerce revenues on the Internet
are expected to grow from approximately $50 billion at the end of 1998 to
approximately $1.3 trillion by the end of 2003. The Internet has also become an
attractive medium for advertising. Advertisers can utilize the Internet to
target specific groups based on consumer tastes and buying patterns. Forrester
Research estimates that the dollar volume of online advertising will increase
from $1.5 billion in 1998 to $15.3 billion in 2003.
The Wedding Industry
Each year approximately 2.4 million couples get married in the United
States. According to an independent research report, the domestic wedding market
generates approximately $45 billion in retail sales annually. Presumed to be a
once-in-a-lifetime occasion, a wedding is a major milestone event and,
therefore, consumers tend to allocate significant budgets to the wedding and
related purchases. According to a 1997 survey of readers of Bride's magazine,
the average amount spent on a wedding was $19,104, excluding the honeymoon.
Planning a wedding can be a stressful and confusing process. Engaged
couples must make numerous decisions and expensive purchases. A typical wedding
requires decisions and planning relating to bridal registry, invitations,
wedding gowns and wedding party attire, wedding rings, photographers, music,
caterers, flowers and honeymoons. In addition to the number of decisions faced
by engaged couples, the fixed date and the emotional significance of the event
intensify the stress. For the majority of engaged couples, the process of
planning a wedding is an entirely new one. They do not know where to find the
necessary information and services, how much services or goods should cost or
when decisions need to be made. These planning decisions are further complicated
because many couples choose to have their weddings in locations other than where
they live. Researching and soliciting local wedding services from distant
locations without traveling and making an enormous time commitment is extremely
difficult. Today's to-be-weds are seeking reliable resources and information to
assist in their planning and purchase decisions.
Vendors and advertisers highly value to-be-weds as a consumer group.
Replenished on an annual basis, wielding substantial budgets and facing a firm
deadline, engaged couples are ideal recipients of advertisers' messages and
vendors' products and services. According to Modern Bride, during the six months
prior to and the six months following a wedding, the average couple will make
more buying decisions and purchase more products and services than at any other
time in their lives. The challenges and obstacles that engaged couples face make
them especially receptive to marketing messages. A disproportionate amount of
advertising revenues are generated per subscriber by bridal magazines. According
to Advertising Age, in 1998 the top three bridal magazines generated an average
of $190.74 in revenues per reader, compared to an average of $75.50 in revenues
per reader in the top three travel magazines and an average of $53.63 in
revenues per reader in the top three women's magazines.
The wedding market also represents significant opportunities for the retail
industry. Over 91% of all to-be-weds register for gifts. According to a 1997
report by Bride's magazine, engaged couples receive gifts from an average of 200
guests, most of whom are spending between $70 and $100. Because items are
selected by the engaged couple but paid for by their guests, price sensitivity
is minimal and registry products are rarely discounted by retailers. Registry
for products in all categories has grown, prompting many
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national retailers -- previously without registries -- to enter the gift
registry market. Weddings also generate substantial revenues for travel services
companies. Honeymoon travel generates an estimated $4.5 billion annually.
According to a 1997 Bride's survey, over 99% of all newlyweds go on a honeymoon
with an average cost of $3,657 per couple.
Traditional Wedding Resources Fail to Adequately Service Today's Engaged Couples
The wedding market is highly fragmented and wedding resources are widely
dispersed. In addition, to-be-weds face difficulty in locating wedding planning
information. Traditionally, to-be-weds have relied upon many different resources
when planning their weddings, including family and friends, bridal magazines,
books, bridal registries, wedding consultants and travel agents. Because the
traditional providers of wedding resources are single-service/product focused,
to-be-weds must manage multiple providers. Consequently, to-be-weds find wedding
planning to be stressful, time consuming and inconvenient.
Seeking information and ideas, most engaged couples turn to bridal
magazines for assistance. Many couples, however, find that the sheer volume of
gown ad pages, scarcity of editorial content, the lack of organization of these
magazines and their infrequent publishing schedules make them an inefficient and
insufficient source of timely and relevant wedding planning information.
In addition, the registry process is equally burdensome. Increasingly,
to-be-weds supplement department store bridal registries, the customary source
of wedding gifts, to satisfy their gift preferences. Despite the inconvenience,
a significant portion of today's engaged couples register at two or more stores
and increasingly turn to specialty and discount stores to obtain the product
variety they desire.
The Internet and the Wedding Industry
To-be-weds are seeking a comprehensive resource to assist in their
preparation and planning for a wedding. Because of its global reach and capacity
to transmit information rapidly, the Internet represents an ideal medium over
which to-be-weds can easily access information and communicate with the
widely-dispersed providers of local wedding resources. We expect the impact of
the Internet on the wedding market to be significant.
In 1997, the median age was 26 for first-time brides and 28 for first-time
grooms, placing them in the demographic age group (18-34 yrs.) that currently
comprises approximately 41% of all home Web users. As Internet use continues to
increase, engaged couples are more likely to turn to online resources as the
first place they look for wedding products, information and registry services.
Recognizing this trend, traditional providers of wedding resources have begun to
offer their services and products online. Like their offline equivalents,
however, these online offerings are single-service/product focused. To-be-weds
continue to search for a comprehensive solution to their information, planning
and purchasing needs at a single destination.
THE KNOT SOLUTION
We are the leading online destination targeting the wedding market. We
focus on the needs of engaged couples and have created an online environment
that provides information, advice, community, tools and commerce in the areas of
wedding planning most important to couples including engagement, wedding day,
honeymoons and newlywed life. In addition, we provide vendors and advertisers
with targeted marketing opportunities
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due to the well-defined demographic profile of our users. Key components of our
solution include:
BENEFITS TO USERS
Relevant Wedding Content. We provide creative and up-to-date information
and resources to attract users to our sites. Weddings are information-intensive
events requiring extensive research, planning and decision-making. Our sites
provide future brides and grooms with a wide range of wedding-related
information and resources. We also provide offline information and services to
brides and grooms. We author books that serve as guides for wedding planning and
publish The Knot Ultimate Wedding Gown Guide, a semiannual publication
cataloguing wedding gowns from the top designers in the world.
Active Membership and Community Participation. Our online sites generate a
high degree of member involvement through chats, message boards and personalized
interactive services. To-be-weds actively seek forums to exchange ideas and ask
questions during the planning process. We encourage and promote active
participation within our online community. The Knot community allows our members
to interact with other couples, as well as our own experts, on wedding planning
issues and concerns. For example, our "Ask Carley" area is an interactive
service in which wedding etiquette and other questions are answered daily by our
experts on wedding planning. This area includes a searchable database that draws
from an archive of up-to-date answers to over 11,000 questions. We also send out
a weekly general newsletter and bi-weekly newsletters focused on specific
topics, such as registry and accessories to our subscribers updating them on new
articles, features and upcoming events on our site. Additionally, our
interactive services allow users to prepare and modify their wedding budget and
create personalized checklists and Web pages.
Convenient, Comprehensive Shopping Experience. We integrate our
interactive services and informative content with comprehensive shopping
services, which range from wedding gifts and supplies to honeymoons. We have
developed The Knot Registry, which we believe is the Internet's most
comprehensive wedding gift registry. Unlike other online bridal registries which
link users to large retailers in exchange for a payment from the retailer, we
buy products directly from manufacturers. This enables us to provide our users
with a large selection of products from a wide range of categories, while
maintaining a high level of customer service. We offer registry gifts ranging
from fine china and blenders to mountain bikes and safaris. Our strategic
relationship with QVC facilitates our ability to offer a broad range of products
and enables products to be shipped generally within 48 hours of receipt of
order. Wedding guests can quickly and easily purchase gifts online or offline
via toll-free phone service, fax or mail, 24 hours a day.
Through our online wedding supply stores, to-be-weds can conveniently
purchase from one source a broad range of gifts for the wedding party and
supplies for the wedding ceremony, such as decorated disposable cameras, ring
pillows and unity candles. Many of these items are highly specialized and
difficult to find through traditional retail outlets.
Access to the Local Wedding Market. Through our strategic alliance with
Weddingpages, Inc., we offer an extensive database of local wedding vendors. In
July 1999, we entered into an 18-month exclusive agreement with Weddingpages, a
publisher of local wedding magazines across the United States and owner of a Web
site offering wedding-related services and information. Weddingpages Bride and
Home is published in 52 markets twice yearly. This magazine is distributed on a
continual roll-out basis with
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estimated newsstand circulation that exceeds the combined circulation of Bride's
and Modern Bride. Through this strategic alliance, we offer a national online
site with a local sales force in over 50 markets and an extensive database that
brides and grooms can search to find vendors at their wedding locations.
Categories in the local vendor database include wedding venues, caterers,
florists, bridal shops, photographers, musicians and limousine services.
Weddingpages sells online advertising to local wedding vendors on our behalf. We
receive the revenue from these sales and pay Weddingpages a 65% sales
commission. We also pay Weddingpages a monthly fee for related administrative
and operating functions, including customer service, ad production and
accounting services. In addition, in August 1999, we acquired Wedding
Photographers Network, a division of The Denis Reggie Company. Wedding
Photographers Network allows to-be-weds to search for local wedding
photographers meeting their specific needs.
BENEFITS TO ADVERTISERS, SPONSORS AND VENDORS
We provide advertisers, sponsors and vendors with targeted access to
couples actively seeking information and advice and making meaningful spending
decisions relating to all aspects of their weddings. We offer advertisers,
sponsors and vendors an opportunity to establish brand loyalty with first-time
purchasers of many products and services.
Advertisers and Sponsors. We are able to deliver to advertisers and
sponsors significant leads to potential purchasers. Editorial content and
advertising are often integrated on our sites. For example, an article about
honeymoons might feature an advertisement for a resort. Instead of traditional
banners or buttons, our sponsors usually select our custom-developed marketing
programs that offer special features, including tools. When a user clicks on an
advertisement positioned on our sites, a sponsor's site appears which showcases
the advertiser's products and services. These sites can provide relevant product
and contact information, electronic catalogues of products or hyperlinks to the
sponsor's Web site. Companies can also enter into longer term arrangements to
exclusively sponsor entire editorial areas or special features.
Vendors. We provide our vendors with a consumer group that will make more
buying decisions than at any other time in their lives. Our easy-to-use shopping
sites increasingly promote e-commerce. Vendors' products are attractively
displayed with color photographs and descriptions customized for the bridal
market. Through our interactive online features, such as chat rooms and message
boards, and by utilizing the creative content portions of our sites, we
encourage and assist our users in making purchasing decisions.
OUR STRATEGY
Our objective is to expand our position as the leading online resource
providing comprehensive wedding planning, information, products and services.
Key elements of our business strategy include the following:
Build Strong Brand Recognition. Building brand recognition of the Knot is
critical to attracting and expanding our online user base. We have secured the
leading position in the online wedding market. To maintain the focus on The Knot
brand, we will continue to emphasize our editorial and creative content. We
believe that our content and ability to make the wedding process easier, more
fun and convenient for today's busy couples will continue to build our brand.
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We will also strengthen brand awareness through our book series and gown
guide. Through our affiliation with Weddingpages, the largest local wedding
publication in the United States, we are increasing our brand awareness at the
local level. We plan to continue building brand recognition by leveraging our
membership base and creating innovative and integrated marketing solutions.
Aggressively Grow Membership. New member enrollment per month has grown
from 11,000 in December 1998 to over 36,000 in September 1999. We currently
enroll an average of over 1,000 new members per day. We intend to continue to
grow our membership base and increase member usage through our content
offerings, interactive services, active community participation and strategic
relationships.
Provide Full-Service Wedding Resources. We facilitate the wedding planning
process by providing what we believe is one of the most comprehensive package of
services, tools and commerce applications. By continuing to combine our
extensive wedding content and our active online community with a full-service
shopping solution, we plan to maintain our strong position and to make the
wedding planning process more convenient, efficient and enjoyable. We intend to
continue to expand the services we offer and the content we provide.
Capitalize on Multiple Revenue Opportunities. We intend to leverage the
size and favorable demographics of our online community to generate multiple
revenue streams. Our primary focus to date has been on national advertising
revenues and on providing our sponsors and advertisers with targeted access to
couples actively seeking information and making purchase decisions. We view our
relationships with our sponsors and advertisers as critical to our success. We
intend to continue to seek additional sponsorship contracts with longer terms
and higher dollar values for our contracts. We also intend to benefit from our
increased presence in the local wedding market. Our searchable database features
advertising in 52 local markets for local wedding vendors, such as
photographers, caterers and florists.
We expect to generate increasing online revenues from The Knot Registry and
our convenient gift and supply shops. We will continue to use our content to
promote e-commerce opportunities. Additionally, we expect to realize revenues
from publishing our books and semiannual gown guide. We will pursue additional
revenue opportunities, as appropriate, in connection with the needs of today's
engaged and newly married couples. We also intend to extend the relationship we
build with our users and provide access to additional products and services
relevant to newlyweds and growing families.
Continue to Pursue Strategic Alliances and Acquisitions. We plan to expand
our business through strategic alliances and acquisitions. Since April 1999, we
have entered into strategic relationships with QVC and Weddingpages, and we have
acquired Bridalink, Click Trips and Wedding Photographers Network. Our
relationship with QVC allows us to rapidly purchase, process and ship
merchandise for The Knot Registry, and our relationship with Weddingpages allows
us to provide our users with access to an extensive database of local vendors
and resources. The acquisitions of Bridalink, Click Trips and Wedding
Photographers Network expanded the resources available on our sites for to-be-
weds. We intend to seek other opportunities to acquire or form alliances with
other companies that will enhance our business.
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THE KNOT'S ONLINE NETWORK
Our sites allow users to access information, participate in interactive
chats and message boards, and purchase items online. The following is a brief
description of our online content:
EDITORIAL CONTENT
Engagement This area provides advice on proposing, choosing a
diamond ring, and throwing an engagement party. It
also includes steps to take after the bride and
groom are engaged.
Planning Advice This area informs couples on the business points
of planning a wedding. Topics include questions to
ask wedding vendors, points to be included in
contracts and tips for weddings on a budget.
Wedding Ideas Photos, stories, and creative ideas from weddings
around the country are featured in this area.
Additional topics include ethnic traditions,
second weddings and theme wedding ideas.
The Dress The articles and photo features in this area cover
all aspects of bridal fashion. Highlights include
the latest bridal gown trends, advice on choosing
accessories and advice on which gowns look good on
whom.
Big Day Beauty Articles and photos in this area advise brides on
the latest trends in bridal make-up and hair, as
well as recommend pre-wedding fitness and spa
treatments.
Grooms and Guys This area is devoted to grooms, groomsmen, dads
and ring bearers. Articles include topics from
wedding duties and toasts to groomsmen gifts and
bachelor parties.
Maids and Moms This area is devoted to helping bridesmaids, moms
and flowergirls sort out their wedding duties.
Also included are articles on throwing showers,
finding bridesmaid dresses and throwing
bachelorette parties.
Newlywed Nesting This area focuses on helping the bride and groom
set up house, including what to register for, how
to entertain, how to make post-wedding financial
decisions and how to maintain relationships after
the wedding.
Honeymoon Escapes Articles and photo features in this area cover
honeymoon destinations throughout the world.
Included in the area is advice on overseas travel,
resorts, packing tips and activities.
INTERACTIVE FEATURES AND TOOLS
Ask Carley In this area, the wedding editors provide answers
to couples' etiquette questions. Topics include
divorced families, second weddings, problem
bridesmaids, and general wedding etiquette.
Gown Search This database of wedding attire includes more than
15,000 wedding gown images from over 140 bridal
designers. A bride can search for gowns by price,
designer or silhouette and save results to her own
saved gown list to view later. In addition, this
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database features bridesmaid dresses, attire for
the mothers of the bride and groom, and flower
girl dresses.
Big Day Budgeter This personalized budget calculator creates a
category-by-category wedding budget. For each
category, the budgeter offers advice and explains
what the couple can afford in their price range.
The budgeter saves the couple's budget information
online, where they can update it 24 hours a day.
Local Vendor Finder In partnership with Weddingpages, we provide
listings of more than 14,000 wedding vendors in 52
local markets nationwide. Categories include
caterers, bakers, banquet halls, limousine
companies, musicians, and other wedding
professionals. Information includes contact
information, photos and service descriptions.
Personal Wedding Web Pages Couples can create a Web page for their wedding.
On these three-page Web sites couples can include
photos, personal stories, ceremony details such as
location and time, local lodging and activities
for guests, names and description of bridal party
members and a link to buy items on the couple's
registry list at The Knot.
The Ultimate Wedding
Checklist This checklist provides a personalized,
week-by-week wedding planning to-do list created
according to a couple's wedding date. Couples
visit the Web site for their daily to-dos and
check off items they have completed.
Wedding Photographers
Network This is a database of professional wedding
photographers that provides couples the ability to
search by date, location and price. Couples can
view online portfolios of the photographers' work.
Diamond Finder This database of diamond information helps couples
find an appropriate stone based on budget, cut,
quality and size requirements. This feature also
includes the ability to appraise a diamond or to
double-check a price.
Wedding Guest List Manager This online address book allows couples to manage
their guest list, invitations and seating. Couples
can track guest address information as well as the
total number of guests invited and guest
responses. Additionally, they can create a seating
chart and record gifts received and thank you
notes sent.
Accessory Search This database allows brides to search for bridal
accessories by designer name or category.
Categories include headpieces, shoes, purses,
gloves and jewelry. Brides can also search by
specific criteria such as price point. Search
results include photos, price, style number and
purchase information.
COMMUNITY FEATURES
Wedding Chat We have 24-hour chat rooms on both America Online
and the Web. We have 45 weekly hosted chats. Our
18 chat hosts, usually newlyweds, manage the room
to facilitate conversation flow and help brides
find information on The Knot that answers their
questions.
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Newsletters Couples can subscribe to a general weekly
newsletter featuring updates on current Knot
editorial articles, tips on using The Knot and
special promotions. Couples can also subscribe to
biweekly newsletters focused on topics such as
registry and accessories.
Discussion Groups The Knot message boards provide an area for
couples to exchange personal stories, creative
ideas and advice. Special board features include
the wedding dress resale classifieds board, and
the "vendor referral" board, where brides list
their favorite wedding professionals.
Wedding Announcements A database of wedding announcements that allows
visitors to The Knot to find couples marrying in a
specific area of the country or on a specific
wedding date. Photos and stories about the
couples' weddings are included in this area, which
also allows visitors to post good wishes for them.
SPONSORSHIP, ADVERTISING AND PRODUCTION
We have derived a significant amount of our revenues to date from the sale
of sponsorship, advertising and production contracts. For the nine months ended
September 30, 1999, sponsorship, advertising and production revenues represented
65% of our net revenues.
Our strategy is focused on generating a majority of our advertising
revenues from sponsors and advertisers who seek a cost-effective means to reach
the wedding market. Sponsors advertise on the editorial areas of our sites, and
can purchase special features in an area designated solely for them. These
programs are typically exclusive and are for a period of up to three years.
Sponsorships provide content while showcasing sponsors' products and
services, creating a relationship between our users and our sponsors. The
special feature programs typically include an exclusive Knot-designed online
site, as well as site-wide banners and links to the sponsor's Web site. In
addition, special features also include integrated marketing programs which may
include online promotional events, such as sweepstakes, or hosted chat sessions,
collection of user data for the sponsor, offline promotions, such as collateral
material distribution at bridal shows and links to other strategic areas of the
sponsor's Web site. For example, OurBeginning.com, a wedding invitation
supplier, is the exclusive sponsor of The Complete Guide to Invitations where we
publish articles about wording, addressing and assembling invitations as well as
an Invitation Q&A section. There are advertising banners and text that link to
OurBeginning.com's special feature area as well as to their site. The special
feature area also contains links to the OurBeginning.com Web site.
Both content specific area and special feature sponsorships may also
include interactive tools. For example, Mondera's Wedding Band Finder, which is
hosted on our Web site allows users to search for wedding bands by gender, price
or metal. If there are wedding bands available that meet the user's criteria, a
buy button appears on the screen. If the user clicks on the buy button, they
will be linked directly to Mondera's Web site where the user can make the
purchase.
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We offer short-term advertising contracts ranging from one month to one
year. For example, a local photographer can purchase a listing on our Wedding
Photographers Network which typically contains key contact information and may
also contain a portfolio sample of a photographer's work. Advertisers can also
purchase banner advertisements.
E-COMMERCE
The Knot Shop and Bridalink.com
We offer wedding supplies through The Knot Shop and Bridalink.com.
Bridalink.com is our separate online store for wedding supplies which we
maintain in order to attract new users and generate additional revenue. We offer
over 450 products, including decorated disposable cameras, wedding bubbles and
bells, ring pillows, toasting flutes, car decorating kits, table centerpieces,
goblets and glasses, garters and unity candles. These highly specialized items
are often difficult to find through traditional retail outlets, and the purchase
of these items is often left to the last minute. Consumers can place orders
online, through a toll-free number, fax or via mail, 24 hours a day. We fulfill
orders from our warehouse located in Redding, California.
The Knot Registry
The Knot Registry offers a broad selection of more than 10,000 products and
services from more than 500 well-recognized brands. Approximately 45% of our
products are supplied by QVC vendors. Wedding guests can quickly and easily
purchase gifts online or via phone or fax, 24 hours a day. We offer traditional
registry categories such as china, household appliances and electronics, in
addition to non-traditional categories, such as outdoor gear, dance lessons,
entertainment and travel. Couples also may register for services which are
typically not available from traditional bridal registries, such as home
mortgage down payments, car loans and leases and investment services such as
mutual funds.
The Knot Registry is designed to provide convenience for the engaged
couple, allowing them to:
- register from anywhere 24 hours a day;
- modify and monitor their registry selections at any time throughout their
engagement;
- arrange for custom announcements, including personalized e-mail and
registry announcement cards, to guests, notifying them of the couple's
registration;
- select a delivery date;
- elect to participate in completion programs after the wedding to purchase
registry gifts selected but not received; and
- interact with our shopping experts through e-mail, instant messenger or a
toll-free phone service to help them decide which products best suit
their needs.
Couples may browse products by traditional categories or price. To assist
registering couples through the difficult and time-consuming gift selection
process, The Knot Registry is also organized into custom groupings of products
and services designed to match the interests of particular lifestyles, such as
adventurous, romantic or cosmopolitan. This
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merchandising strategy is designed to save the registrant time and streamline
the registry process.
Through The Knot Registry, wedding guests can quickly and easily purchase
gifts online. The Knot Registry offers direct access to the couple's registry
list, a custom display of what remains to be purchased by category or price and
secure transactions to complete the order online. For guests lacking online
access, the couple's custom registry list is available for review via a
toll-free phone service, fax or mail, 24 hours a day.
In April 1999, we entered into a services agreement with QVC. Under this
agreement, QVC provides us warehousing, sales, fulfillment and distribution
services in connection with The Knot Registry. This services agreement was fully
implemented on September 7, 1999. Our strategic relationship with QVC affords us
the ability to purchase merchandise for The Knot Registry from QVC vendors at a
specified premium over QVC's volume discount rate. At the customer's request, a
product generally can be shipped within 48 hours of order. We utilize QVC to
process and ship all merchandise orders from The Knot Registry. Our services
agreement with QVC expires on the fourth anniversary of this offering. We have
the option to extend the term of the services agreement for an additional 180
days. QVC may terminate our services agreement if we fail to pay any amounts due
or otherwise breach the terms of the agreement, or if we are sold or become
bankrupt.
We believe The Knot Registry model offers several advantages over other
online retailers, traditional bridal registries or both. These advantages
include:
<TABLE>
<CAPTION>
ADVANTAGE OVER
TRADITIONAL ADVANTAGE OVER
BRIDAL REGISTRY ONLINE RETAILERS
--------------- ----------------
<S> <C> <C>
- - Items are registered weeks or even months prior X
to the desired shipment date. This allows us to
better plan our inventory needs and maximize
inventory turns.
- - The state-of-the-art fulfillment capabilities X X
of QVC allow us to implement a just-in-time
inventory strategy which reduces our inventory
carrying costs.
- - Since wedding guests often pay for gifts when X X
ordered and prior to procurement, we benefit
from the float on these funds.
- - Shipments are often bundled and shipped X X
together, reducing shipment costs.
- - The bride and groom may review their list of X X
gifts prior to shipment, enabling them to round
out sets or exchange gifts prior to shipment.
This review minimizes returns, while
representing an opportunity for us to sell them
additional products.
</TABLE>
CLICK TRIPS, INC.
On July 31, 1999, we acquired Click Trips, Inc., an online travel agency
located at www.clicktrips.com. Click Trips specializes in destination travel
packages to the Caribbean, Bermuda and Mexico. Click Trips closely monitors
honeymoon and leisure travel trends
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and is therefore able to offer a high level of customer service and great
knowledge of resorts. In addition, the live chat, past guest reviews, message
boards and travel articles available on Click Trips allow us to strengthen our
sense of community among our online audience. The Click Trips acquisition
advances our brand-building initiative by integrating the travel-related content
and commerce platform with our existing wedding-related offerings.
PUBLICATIONS
The Knot Book Series
Our book series consists of three books which are being published over
three years by Broadway Books, a division of Random House. We develop the
content of each book through the interaction between our users and our wedding
experts. This "real-world" approach, directed by our editorial team and based on
user experience and feedback, distinguishes us from the approach of traditional
wedding resources. Each book encourages readers to visit our sites. To date, we
have completed two of the books and a third is under development:
- The Knot's Complete Guide to Weddings in the Real World was published in
December 1998 and has gone to a second printing. This book is a detailed
wedding-planning resource for to-be-weds, offering the information a
bride and groom need to plan their wedding, from buying the ring to
crossing the threshold.
- The Knot Ultimate Wedding Planner, our second book, has been accepted by
the publisher and is scheduled to be published in January 2000. This book
includes worksheets, checklists, etiquette, tips, calendars and answers
to frequently-asked questions.
We sell our books on our online sites and through bookstores. We earn
royalties on sales of our books.
Wedding Gown Guide
We released The Knot Ultimate Wedding Gown Guide in June 1999. This guide
is an extensive catalogue of wedding gowns from the top designers in the world,
published without advertisements to be an attractive and efficient alternative
to traditional bridal magazines. With over 300 pages of color photos, the
publication provides in one resource information a bride needs to find the dress
of her dreams, including front, back and detail photos of over 1,000 gowns, full
descriptions and price information, and an index of designers and their
locations. The Ultimate Wedding Gown Guide also provides a buying checklist and
accessory and trend information. We intend to publish The Knot Ultimate Wedding
Gown Guide twice a year. We sell the gown guide on our Web site, through QVC's
television show and at bridal trade shows.
MEMBERSHIP
We believe a large and active membership base is critical to our success.
Membership enrollment is free. Our members enjoy the use of personal Web pages,
message boards, budgeting tools, wedding checklists and gown search. We
recognize the importance of maintaining confidentiality of member information
and we have established a privacy policy to protect personal information. Our
current privacy policy is set forth on our sites.
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Our policy is not to tell any third party any member's personal identifying
information, but we may share aggregated information about our members with
other pre-screened organizations who have specific direct mail product and
service offers we think may be of interest to our members. We may share
aggregated member information with third parties, such as a member's zip code or
gender. In addition, we may use information revealed by members and information
built from user behavior to target advertisements, content and e-mail.
RELATIONSHIP WITH AOL
On July 23, 1999, we entered into an amended anchor tenant agreement with
AOL, which extended the term of our existing agreement with AOL through January
6, 2003 and expanded our presence on AOL. Under the terms of the agreement, The
Knot is the primary wedding content provider on AOL and several other of AOL's
leading brands, including AOL.com, Netscape Netcenter and CompuServe. AOL
provides promotions and reserves programming areas for The Knot.
Under our original services agreement with AOL, we obtained usage fees from
AOL based on the number of customers visiting our AOL site, and we paid AOL
commissions on our advertising revenues. Under the new agreement, we now pay AOL
a quarterly carriage fee, with no obligation to pay AOL advertising commissions.
AOL may terminate the agreement regarding our carriage on specific properties
upon 30 days' prior written notice.
MARKETING
We utilize a number of strategies and programs to build awareness of The
Knot brand and to position The Knot as the definitive resource for wedding
planning and information. We employ an active press relations team, which
responds to numerous press inquiries. We promote our brand through television
and radio appearances by Carley Roney, our head wedding expert. In addition, we
actively encourage our promotions staff to speak at industry and corporate
events in order to enhance our reputation and promote our diverse products.
Our participation in wedding tradeshows and other industry events also
provides opportunities to promote The Knot brand. We are the exclusive online
sponsor of the Great Bridal Expo, the largest traveling consumer/trade show
dedicated to the wedding market. In exchange for our agreement to design,
promote and host the Great Bridal Expo Web site, the Great Bridal Expo has
agreed to distribute approximately 50,000 of The Knot branded shopping bags in
25 cities nationwide and will display two large banners featuring The Knot
throughout the trade shows. In addition, The Knot Ultimate Wedding Gown Guide
will be sold at the registration desks for the Great Bridal Expo, and a video
featuring The Knot will be displayed at each of the locations.
We also take advantage of cross-promotional opportunities among our
properties and services. For example, The Knot's online presence will introduce,
promote and sell our publications. These opportunities help increase our brand
awareness and online traffic.
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COMPETITION
The Internet advertising and online wedding markets are new, rapidly
evolving and intensely competitive, and we expect such competition to intensify
in the future. We face competition primarily from three separate areas: online
sites, magazines and gift registries.
There are many wedding-related sites on the Internet, developed and
maintained by online content providers. Retail stores, manufacturers, wedding
magazines and regional wedding directories also have online sites which compete
with us. We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry in our market. Moreover, we face competition for sponsorship
and advertising sales from other online content providers and advertisement
server companies that provide banner advertisement services that might be
considered an alternative marketing solution.
We also face competition for our services from bridal magazines. Bride's
and Modern Bride are the two dominant bridal publications in terms of revenue
and circulation. According to Advertising Age, these two magazines and Bridal
Guide, the third leading bridal magazine, generated gross advertising revenues
of $198.4 million in 1998.
The Knot Registry faces competition from online sources such as registry
aggregators. We also compete with retail stores offering gift registries,
especially from retailers offering specific bridal gift registries. These
stores, particularly national department store chains, have strong brand
awareness, many years of retailing experience, and most now have online
transactional capabilities.
We believe that the principal competitive factors in the online wedding
market are brand recognition, convenience, ease of use, information, quality of
service and products, member affinity and loyalty, reliability and selection. As
to these factors, we believe that we compete favorably. Our dedicated editorial,
sales and products staffs concentrate their efforts on producing the most
comprehensive online wedding resource available.
Generally, many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user or membership
bases than we have. Therefore, these competitors have a significantly greater
ability to attract advertisers and users. In addition, many of these competitors
may be able to respond more quickly than we can to new or emerging technologies
and changes in Internet user requirements and to devote greater resources than
we do to the development, promotion and sale of services. There can be no
assurance that our current or potential competitors will not develop products
and services comparable or superior to those developed by us or adapt more
quickly than we do to new technologies, evolving industry trends or changing
Internet user preferences. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which would
materially and adversely affect our business, results of operation and financial
condition. In addition, if we expand internationally, we may face additional
competition. There can be no assurance that we will be able to compete
successfully against current and future competitors, or that competitive
pressures faced by us would not have a material adverse effect on our business,
results of operations and financial condition.
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INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
Our technology infrastructure provides for continuous availability of our
online service. All of the critical components of the system are redundant,
allowing us to withstand unexpected component failure and to undergo maintenance
or upgrades. Our operation is dependent on the ability to maintain our computer
and telecommunications systems in effective working order and to protect our
systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Our system hardware is co-located
at Exodus Communications' Jersey City, New Jersey data center. Systems
administrators and network managers at Exodus monitor our servers, operate our
network and execute backups. Our servers have access to auxiliary power during
outages. Our systems are copied to backup tapes daily, which are in turn sent to
us for offsite storage. Database and Web servers are redundant and operate using
clustering technology for effective load-balancing and fault tolerance.
Regular capacity planning allows us to quickly upgrade existing hardware
and integrate new hardware to react quickly to a rapidly expanding member base
and increased traffic to our sites. We generally operate at 99.9% uptime and no
unexpected downtime. Key content management and e-commerce components are
designed, developed and deployed by our in-house technology group. We also
license commercially available technology when appropriate in lieu of dedicating
our own human or financial resources. Current examples include eShare
Expressions, our chat server and NetGravity, our ad server. Also, we use
MapQuest for geographical mapping applications.
We employ several layers of security to protect data transmission and
prevent unauthorized access. We keep all of our production servers behind
firewalls for security purposes and do not allow outside access, at the
operating systems level, except via special secure channels. Strict password
management and physical security measures are followed. Computer emergency
response team alerts are read, and, where appropriate, recommended action is
taken to address security risks and vulnerabilities. From time to time, we use
the services of third party computer security experts and penetration tests have
been performed to help improve security.
E-commerce transactions and browser-based administration screens employ
secure sockets layer encryption to secure data transmitted between clients and
servers. Credit card information captured during e-commerce transactions is
never shared with outside parties, and we provide shoppers with a toll-free
number to place orders by phone as an alternative to completing a transaction
online.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local regulation,
and laws or regulations applicable to access to or commerce over the Internet,
other than regulations applicable to businesses generally. Due to the increasing
popularity and use of the Internet and other online services, however, it is
possible that a number of laws and regulations may be adopted regarding the
Internet or other online services covering issues such as user privacy, freedom
of expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. The nature
of such legislation and the manner in which it may be interpreted and enforced
cannot be fully determined and, therefore, such legislation could subject us
and/or our customers to potential liability, which in turn could have an adverse
effect on our business, results of operations and financial condition. The
adoption of any such laws or regulations might also
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decrease the rate of growth of Internet use, which in turn could decrease the
demand for our service or increase the cost of doing business or in some other
manner have a material adverse effect on our business, results of operations and
financial condition. In addition, applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
The vast majority of such laws were adopted prior to the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
information is collected from users and provided to third parties. Changes to
existing laws or the passage of new laws intended to address these issues,
including some recently proposed changes, could create uncertainty in the
marketplace that could reduce demand for our services or increase the cost of
doing business as a result of litigation costs or increased service delivery
costs, or could in some other manner have a material adverse effect on our
business, results of operations and financial condition. In addition, because
our services are accessible throughout the United States, other jurisdictions
may claim that we are required to qualify to do business as a foreign
corporation in a particular state. We are qualified to do business in New York,
California, Texas and Virginia and our failure to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us to
taxes and penalties for the failure to qualify and could result in our inability
to enforce contracts in such jurisdictions. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, results of operations and financial condition.
To obtain membership on our sites, users must disclose their names,
addresses, e-mail addresses and roles in the wedding. Our members use budgeting
tools, wedding checklists, gown search, personal Web pages and message boards on
our sites. We do not currently sell any member's personal identifying
information to third parties unless the member has provided written consent. We
may share aggregated member information with third parties, such as a member's
zip code or gender. In addition, we may use information revealed by members and
information built from user behavior to target advertising, content and e-mail.
Privacy concerns may cause visitors to avoid online sites that collect
behavioral information and even the perception of security and privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of our services.
In addition, because we rely on the collection and use of personal data from our
members for targeting advertisements shown on our services, we may be harmed by
any laws or regulations that restrict our ability to collect or use this data.
The European Union recently enacted its own privacy regulations that may result
in limits on the collection and use of some user information. The FTC has begun
investigations into the privacy practices of companies that collect information
about individuals on the Internet. Although we are not currently subject to
direct regulation by the FTC, there can be no assurance that we will not become
subject to direct regulation in the future.
It may take years to determine how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could harm us. Additionally,
while we do not currently operate outside of the United
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States, the international regulatory environment relating to the Internet market
could have a material and adverse effect on our business, results of operations
and financial condition if we expand internationally.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property as critical to
our success, and rely on trademark and copyright law, trade secret protection,
confidentiality and assignment of invention agreements, and/or license
agreements with employees, customers, independent contractors, partners and
others to protect our proprietary rights. We strategically pursue the
registration of our trademarks and service marks in the United States, and have
applied for and obtained registration in the United States for some of our
trademarks and service marks, including "theknot". Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available online.
We have licensed in the past, and expect to license in the future, some of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our brand is maintained
by our licensees, there can be no assurance that our licensees will not take
actions that might materially adversely affect the value of our proprietary
rights or reputation, which could have a material adverse effect on our
business, financial condition and results of operations. There can be no
assurance that the steps we have taken to protect our proprietary rights will be
adequate or that third parties will not infringe or misappropriate our
copyrights, trademarks, trade secrets and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert claims of
infringement of intellectual property against us. Although we believe that our
products and services do not infringe upon the intellectual property rights of
others and that we have all rights necessary to utilize the intellectual
property employed in our business, we may be subject to claims alleging
infringement of third-party intellectual property rights. Any such claims could
require us to spend significant sums on litigation, pay damages, delay product
installments, develop non-infringing intellectual property or acquire licenses
to intellectual property that is the subject of any such infringement.
Therefore, such claims could have a material adverse effect on our business,
results of operations and financial condition.
EMPLOYEES
At October 25, 1999, we had a total of 106 employees, of which 50 were
involved in product and content development, 34 were involved in sales and
marketing, and 22 were involved in general and administrative functions. None of
our employees is represented by a labor union. We have not experienced any work
stoppages and we consider relations with our employees to be good. Competition
for qualified personnel in our industry is intense. We believe that we will need
to continue to attract, hire and retain qualified personnel to be successful in
the future.
FACILITIES
We currently lease approximately 20,000 square feet of space at our
headquarters in New York City. The lease expires on March 31, 2012. We lease
approximately 3,100 square feet of space for our customer service center and
merchandising operation in
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<PAGE> 58
Orange County, California. The lease for this space expires on August 31, 2002.
We also lease approximately 3,000 square feet of space for warehousing and
operations in Redding, California. This lease expires on May 31, 2001, with an
option to extend for an additional two years. Click Trips, our subsidiary in
Warminster, Pennsylvania, also leases approximately 1,100 square feet of office
space. The lease for this space expires on December 1, 2000, with an option to
extend for an additional year.
We currently anticipate that we will require additional space to
accommodate our growth as more personnel are hired.
LEGAL PROCEEDINGS
We are not presently a party to any material legal proceedings.
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<PAGE> 59
MANAGEMENT
OUR EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of The Knot, and their
ages and positions as of October 25, 1999, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ---- --------
<S> <C> <C>
David Liu(2)......................... 34 President, Chief Executive Officer and
Chairman of the Board
Sandra Stiles(1)..................... 49 Chief Operating Officer, Assistant
Secretary and Director
Richard Szefc........................ 50 Chief Financial Officer, Treasurer and
Secretary
Carlos Manuel Abreu.................. 40 Chief Technology Officer
Carley Roney......................... 31 Editor-in-Chief
Michael Wolfson...................... 33 Vice President, Distribution
Rob Fassino.......................... 32 Vice President, Business Integration
Russ Casenhiser...................... 34 Vice President of Retail Sales
Adam Sandow.......................... 31 Vice President of Sales
John Link(1)(2)...................... 57 Director
Ann Winblad(1)(2).................... 48 Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DAVID LIU is a co-founder of The Knot and has been our Chief Executive
Officer and a director since our inception in May 1996. From January 1993 to May
1996, Mr. Liu served as Director of Production of RunTime Inc., a CD-ROM
development firm that he co-founded with Ms. Roney. Prior to January 1993, Mr.
Liu was the Director of Production at VideOvation, a subsidiary of the Reader's
Digest. Mr. Liu received a B.F.A. in Film and Television from New York
University. Mr. Liu is married to Ms. Roney.
SANDRA STILES has been Chief Operating Officer since November 1998 and
Assistant Secretary since September 1999. From November 1998 to May 1999, she
served as our Chief Financial Officer. Ms. Stiles has served as a director of
The Knot since May 1998. From September 1994 to October 1998, she was the Senior
Vice President and Director of Operations for the Children's Book and Value
Publishing division of Random House. She also served as a Vice President and the
Corporate Comptroller of Random House from October 1990 to August 1994. Prior to
October 1990, Ms. Stiles held various positions at OmniCorp Holdings, Inc.,
Bertelsmann Inc. and Arthur Andersen & Co. She received a B.S. in Accounting
from New York University.
RICHARD SZEFC has been Chief Financial Officer since May 1999 and Treasurer
and Secretary since September 1999. From July 1998 to May 1999, Mr. Szefc was an
independent consultant. From April 1990 to July 1998, Mr. Szefc served as
Executive Vice President and Chief Financial Officer of Random House. Prior to
April 1990, Mr. Szefc
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<PAGE> 60
served as a partner in the audit practice of Arthur Andersen & Co. Mr. Szefc
received a B.S. in Economics from the University of Pennsylvania.
CARLOS MANUEL ABREU has served as our Chief Technology Officer since
February 1999. From March 1992 to January 1999, Mr. Abreu was the Chief
Executive Officer and Chief Technology Officer of Cyberphilia, Inc., a developer
of intranets, extranets and e-commerce solutions for advertising,
pharmaceutical, public relations, publishing, architectural, e-commerce and
other companies. Mr. Abreu received a B.S. in Computer Science from Rutgers
University.
CARLEY RONEY is a co-founder of The Knot. She has served as the
Editor-in-Chief since our inception in May 1996. From May 1996 to September
1999, she also served as Vice President of Creative Development. From January
1994 to May 1996, she served as President at RunTime Inc., a CD-ROM development
firm that she co-founded with David Liu. Ms. Roney received a M.A. in cultural
studies and a B.F.A. in Film and Television from New York University. Ms. Roney
is married to Mr. Liu.
MICHAEL WOLFSON is a co-founder of The Knot and has served as Vice
President of Distribution since our inception. From May 1996 to September 1999,
he served as our Secretary. From April 1998 to April 1999, he also served as the
Vice President of Membership Acquisition. From October 1994 to February 1996,
Mr. Wolfson served as Director of Development of the Digital Media Division of
Margeotes Fertitta and Partners, an advertising agency. In 1992, Mr. Wolfson
founded and served as President of Luna Pictures, a company providing Avid-based
editing facilities for television and movie production companies. Mr. Wolfson
received a B.F.A. in Film and Television from New York University.
ROB FASSINO is a co-founder of The Knot. He has served as Vice President,
Business Integration since August 1999. He also served as Vice President of
Production from April 1999 to August 1999, and Vice President of Sales from June
1996 to April 1999. From October 1994 to June 1996, Mr. Fassino served as the
Director of the Digital Media Division of Margeotes Fertitta and Partners, an
advertising agency. Mr. Fassino received a B.F.A. in Film and Television from
New York University.
RUSS CASENHISER has served as Vice President of Retail Sales since May
1999. He has also served as Director of Registry Operations from April 1998 to
May 1999. From January 1996 to April 1998, Mr. Casenhiser was the President and
co-founder of Bridal Search, an online directory of bridal gowns. From September
1992 to December 1995, Mr. Casenhiser served as the President of La Galleria, a
high-end retail clothing store. Mr. Casenhiser received a B.S. in Economics from
Pepperdine University and a M.B.A from Pepperdine University.
ADAM SANDOW has served as Vice President of Sales since February 1999. From
December 1994 to January 1999, Mr. Sandow was President of Travel Publishing
Group, Inc., a consumer magazine publisher.
JOHN LINK has served as one of our directors since June 1999. Mr. Link has
been the Executive Vice President of Information Technology since January 1991
and Chief Information Officer of QVC since March 1994. He also served as Senior
Vice President of Information Technology from June 1989 to March 1994. Prior to
June 1989, Mr. Link held various senior technical management positions at Sun
Company. Mr. Link received a B.A. in Physics from the University of Delaware, a
Master of Science in Computer Science from the University of Pennsylvania and
completed the Program for Management
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<PAGE> 61
Development at Harvard Business School. He is a member of the Society for
Information Management.
ANN WINBLAD has served as one of our directors since April 1998. Ms.
Winblad has been a general partner of Hummer Winblad Venture Partners, a venture
capital investment firm, since 1989. She is a member of the board of trustees of
the University of St. Thomas and is an advisor to numerous entrepreneurial
groups such as the Software Development Forum, the Stanford/MIT Venture Forum
and the Massachusetts Computer Software Council, Software Industry Business
Practices. Ms. Winblad also serves on the boards of directors of Net Perceptions
Inc., a developer and supplier of realtime recommendation technology for the
Internet, Liquid Audio Inc., a provider of an open platform that enables the
digital delivery of music over the Internet, and several private companies. Ms.
Winblad received a B.S. in Mathematics and Business Administration from the
University of St. Thomas and an M.A. in Education with an Economics focus from
the University of St. Thomas.
COMPOSITION OF THE BOARD
Prior to the closing of this offering, we intend to file a revised
certificate of incorporation under which our board of directors will be divided
into three classes, each of whose members will serve for a staggered three-year
term. Upon the expiration of the term of a class of directors, directors in that
class will be elected for three-year terms at the annual meeting of stockholders
in the year in which their term expires. Our board of directors has resolved
that will be Class I Directors whose terms expire at the 2000
annual meeting of stockholders. will be Class II Directors whose
terms expire at the 2001 annual meeting of stockholders. will be
Class III Directors whose terms expire at the 2002 annual meeting of
stockholders. A director's term will be subject to the election and
disqualification of their successors, or their earlier death, resignation or
removal.
BOARD COMMITTEES
The Audit Committee of the board of directors reviews, acts on and reports
to the board of directors on various auditing and accounting matters, including
the recommendation of our auditors, the scope of the annual audits, fees to be
paid to the auditors, the performance of our independent auditors and the
accounting practices of The Knot. The members of the Audit Committee are John
Link, Sandra Stiles and Ann Winblad.
The Compensation Committee of the board of directors recommends, reviews
and oversees the salaries, benefits and stock option plans for our employees,
consultants, directors and other individuals whom we compensate. The
Compensation Committee also administers our compensation plans. The members of
the Compensation Committee are John Link, David Liu and Ann Winblad.
DIRECTOR COMPENSATION
Directors who are also employees of The Knot receive no additional
compensation for their services as directors. Directors who are not employees of
The Knot will not receive a fee for attendance in person at meetings of the
board of directors or committees of the Board of Directors, but they will be
reimbursed for travel expenses and other out-of-pocket costs incurred with in
connection with the attendance at meetings.
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<PAGE> 62
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
On April 12, 1999, we entered into an employment contract with Mr. Liu, our
Chief Executive Officer, for three years. The contract provides for salary and
the payment of one or more annual bonuses at the sole discretion of the board of
directors. In the event of his termination without cause before the end of the
contract term, Mr. Liu is entitled to one year's salary plus benefits. The
contract also contains a covenant by Mr. Liu not to compete for the term of the
contract and for one year after the term expires. As of August 1, 1999, Mr.
Liu's annual salary is $180,000.
On April 12, 1999, we entered into an employment contract with Ms. Roney,
our Editor-in-Chief, for three years. The contract provides for salary and the
payment of one or more annual bonuses at the sole discretion of the Board of
Directors. In the event of her termination without cause before the end of the
contract term, Ms. Roney is entitled to one year's salary plus benefits. The
contract also contains a covenant by Ms. Roney not to compete for the term of
the contract and for one year after the term expires. As of August 1, 1999, Ms.
Roney's annual salary is $120,000.
On November 2, 1998, we entered into an employment contract with Ms.
Stiles, our Chief Operating Officer, which is terminable at any time. In the
event of her termination without cause, Ms. Stiles is entitled to one year's
salary plus benefits. As of August 1, 1999, Ms. Stiles' annual salary is
$175,000.
On May 31, 1999, we entered into an employment contract with Mr. Szefc, our
Chief Financial Officer, which is terminable at any time. The contract provides
for an annual salary of $135,000 which has subsequently been increased to
$150,000, and, for termination without cause, one year's salary plus benefits.
In addition, in the event an individual or related group of persons acquires 50%
or more of our voting stock, at least 50% of Mr. Szefc's options will vest
immediately. As of July 16, 1999, Mr. Szefc's salary is $150,000.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned for all services
rendered to us in all capacities during 1998 by our Chief Executive Officer and
our most highly compensated executive officers, other than our Chief Executive
Officer, who earned more than $100,000 in 1998 on an annualized basis and who
served as executive officers at the end of 1998.
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<PAGE> 63
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS SECURITIES
------------------- UNDERLYING OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ------- ------- ----------------- ------------
<S> <C> <C> <C> <C>
David Liu...................... $94,833(1) $30,000 -- $ --
Chief Executive Officer
Sandra Stiles.................. 18,333(2) -- -- --
Chief Operating Officer
</TABLE>
- -------------------------
(1) During the first quarter of 1998, Mr. Liu received $21,500 of the $94,833 in
compensation from Element Studios, a corporation formed in connection with
our inception.
(2) Ms. Stiles did not receive salary prior to November 2, 1998. Total
annualized salary for 1998 equals $110,000.
OPTION GRANTS IN LAST YEAR
The following table sets forth information regarding exercisable and
unexercisable stock options granted to each of the named executive officers in
the last fiscal year. No options were exercised by the named executive officers
during the year ended December 31, 1998. There was no public trading market for
the common stock as of December 31, 1998. Potential realizable values are
computed by:
- multiplying the number of shares of common stock subject to a given
option by the assumed market value on the date of grant,
- assuming that the aggregate stock value derived from that calculation
compounds annually for the entire term of the option, and
- subtracting from that result the aggregate option exercise prices.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
------------------------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(2)
OPTIONS IN FISCAL PRICE PER EXPIRATION -----------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David Liu................. -- -- $ -- -- $ -- $ --
Sandra Stiles............. 380,000 65.2% 0.50 04/30/08 119,490 302,811
</TABLE>
- -------------------------
(1) Each option represents the right to purchase one share of common stock. The
options shown in these columns, which were originally granted under our 1997
Long Term Incentive Plan, vest according to the following schedule: (a)
twenty-five percent (25%) upon the one year anniversary of the grant and (b)
thereafter, ratably per month for the remaining 36 months. Total options
granted to employees in the last fiscal year were 583,000.
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<PAGE> 64
(2) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option term. The 5% and 10% assumed annual
rates of compounded stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of our future common stock prices. These amounts represent
assumed rates of appreciation in the value of our common stock from the fair
market value on the date of grant. Actual gains, if any, on stock option
exercise depend on the future performance of the common stock. The amounts
reflected in the table may not necessarily be achieved. The initial public
offering price is higher than the estimated fair market value on the date of
grant, and the potential realizable value of the option grants would be
significantly higher than the numbers shown in the table if future stock
prices were projected to the end of the option term by applying the same
annual rates of stock price appreciation to the initial public offering
price.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1998 AND YEAR-END
OPTION VALUES
The following table provides summary information concerning stock options
held as of December 31, 1998 by each of the named executive officers. No options
were exercised during fiscal 1998 by any of the named executive officers. The
value of unexercised in-the-money options has been calculated by determining the
difference between the exercise price per share payable upon exercise of such
options and the assumed initial offering price of $ per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
----------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
David Liu........................ -- -- $ -- $ --
Sandra Stiles.................... -- 380,000 --
</TABLE>
1999 STOCK INCENTIVE PLAN
We intend to adopt the 1999 Stock Incentive Plan, which is intended to
serve as the successor program to our 1997 Long Term Incentive Plan. The 1999
plan will become effective upon its adoption by our board of directors and
ratification by our stockholders. At that time, all outstanding options under
our existing plan will be transferred to the 1999 plan, and no further option
grants will be made under the 1997 Long Term Incentive Plan. The transferred
options will continue to be governed by their existing terms, unless our plan
administrator decides to extend one or more features of the 1999 plan to those
options. shares of our common stock have been authorized for issuance
under the 1999 plan. This share reserve consists of the number of shares we
estimate will be carried over from the 1997 plan plus an additional increase of
approximately shares. The share reserve under our 1999 plan will
automatically increase on the first trading day in January each calendar year,
beginning with calendar year 2000, by an amount equal to percent ( %)
of the total number of shares of our common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will this
annual increase exceed shares. In addition, no participant in the 1999
plan may be granted stock options or direct stock issuances for more than
shares of common stock in total in any calendar year. The individuals
eligible to participate in our 1999 plan
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<PAGE> 65
will include our officers and other employees, our board members and any
consultants we hire. Our board of directors may amend or modify the 1999 plan at
any time, subject to any required stockholder approval. The 1999 plan will
terminate no later than , 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN
We intend to adopt the 1999 Employee Stock Purchase Plan, which will become
effective upon its adoption by our board of directors and ratification by our
stockholders. The Purchase Plan is designed to allow our eligible employees and
the eligible employees of our participating subsidiaries to purchase shares of
common stock, at semiannual intervals, with their accumulated payroll
deductions. shares of our common stock will initially be reserved for
issuance. The reserve will automatically increase on the first trading day in
January each calendar year, beginning in calendar year 2000, by an amount equal
to percent ( %) of the total number of outstanding shares of our
common stock on the last trading day in in the prior calendar year. In no
event will any such annual increase exceed shares.
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CERTAIN TRANSACTIONS
SERIES A PREFERRED STOCK AND INVESTMENTS BY AOL
During 1996, AOL advanced $700,000 to us to fund the development of our
online property located on AOL. On January 17, 1997, AOL loaned us $1,150,000
under a promissory note bearing interest at the rate of 6.54% per year. In
addition, we granted AOL a warrant to purchase 3,250,820 shares of Series A
Preferred Stock at $0.38 per share. The promissory note and the warrant were
scheduled to expire on January 16, 2007. In connection with AOL's investment, we
entered into an interactive services agreement under which The Knot would be
featured on AOL. The interactive services agreement was later superseded by an
anchor tenant agreement as described below.
On April 28, 1998, we sold an aggregate of 3,360,000 shares of our Series A
Preferred Stock at a price of $1.172 per share to Hummer Winblad Venture
Partners III, L.P., Hummer Winblad Technology Fund III, L.P. and AOL for an
aggregate purchase price of $3.9 million. In connection with the sale of these
shares, AOL converted $937,600 of the principal outstanding under the promissory
note held by AOL into 800,000 shares of Series A Preferred Stock. The remaining
$912,400 balance of principal plus accrued interest was forgiven and the
aforementioned warrant was cancelled. In addition, the investors entered into an
investors rights agreement under which we granted the investors registration
rights for the shares underlying the Series A Preferred Stock. For more
information, see "Description of Capital Stock -- Registration Rights."
SERIES B PREFERRED STOCK
On April 13, 1999, we sold 4,000,000 shares of our Series B Preferred Stock
at a price of $3.75 per share to QVC. QVC paid an aggregate of $15.0 million for
the shares of Series B Preferred Stock and received a warrant to purchase
1,700,000 shares of our common stock at an exercise price of $5.00 per share.
The warrant becomes exercisable upon the earlier of the fourth anniversary of
the issuance of the warrant or our initial public offering of common stock. In
addition, QVC received registration rights in connection with their shares of
stock and the shares issuable upon the exercise of its warrant, and became a
party to the investor rights agreement. The Series B Preferred Stock and the
warrant have been assigned to QVC Interactive Holdings, LLC. We also entered
into a services agreement with QVC, which we believe is on terms and conditions
no less favorable to us than we could have obtained from unaffiliated third
parties.
AOL ANCHOR TENANT AGREEMENT
On July 23, 1999, we entered into an amended anchor tenant agreement with
AOL, which extended the term of our existing agreement with AOL through January
6, 2003. Under the terms of the agreement, The Knot continues to be the primary
wedding content provider on AOL and on several other of AOL's leading
properties, including AOL.com Netscape Netcenter and CompuServe. Under the terms
of the agreement, AOL may terminate the agreement without cause only with
respect to our carriage on AOL Hometown, Netscape and CompuServe upon 30 day's
prior notice. Advertisements and promotions are subject to AOL's approval, and
the advertisements may not promote AOL competitors such as other Internet
service providers or search engines. We believe the terms and conditions of our
anchor tenant agreement with AOL, taken as a whole, are no less favorable to us
than we could have obtained from unaffiliated third parties.
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<PAGE> 67
In consideration for AOL's agreement to extend the term of the agreement,
we granted to AOL a warrant, exercisable for eight years from the date of grant,
to purchase 366,667 shares of our common stock at a price equal to $7.20 per
share. The warrant is immediately exercisable and expires in July 2007. In
addition, AOL received registration rights with respect to the shares issuable
under the warrant.
BRIDAL SEARCH
On April 2, 1998, we acquired substantially all of the assets of Casenhiser
Clothing Company, Inc., d/b/a Bridal Search, for $50,000 and the issuance of
162,540 shares of our common stock. In addition, we agreed to issue up to
356,046 additional shares of common stock upon the achievement of future
performance criteria, of which 178,031 shares were issued in connection with the
launch of The Knot Registry in November 1998. In August 1999, we entered into a
settlement and release agreement under which Bridal Search agreed to forego its
rights to receive the remaining 178,015 shares associated with the achievement
of future performance criteria in exchange for a payment of $150,000. In
addition, in connection with their employment by us, we are required to issue
178,015 shares of common stock to under which former members of Bridal Search's
management upon the first, second, third and fourth anniversaries of their
employment, of which 44,504 shares were earned and issued in April 1999.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the common stock as of October 25, 1999, and as adjusted to reflect
the sale of the shares of common stock offered by this prospectus, by each
person or group of affiliated persons whom we know to beneficially own 5% or
more of the common stock, each of our directors and named executive officers and
all of our directors and executive officers as a group. Unless otherwise
indicated, the address of each beneficial owner listed below is c/o The Knot,
Inc., 462 Broadway, 6th Floor, New York, New York 10013.
The following table gives effect to the shares of common stock issuable
within 60 days of October 25, 1999 upon the exercise of all options and other
rights beneficially owned by the indicated stockholders on that date. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting and investment power of the to shares.
Unless otherwise indicated, the persons named in the table have sole voting and
sole investment control of all shares beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
NUMBER OF SHARES --------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------- --------------------- --------------- --------------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND
DIRECTORS:
David Liu(2)..................... 673,383 6.4%
Sandra Stiles(3)................. 150,417 1.4
John Link(4)..................... -- *
Ann Winblad(5)................... 2,560,000 24.4
OTHER 5% STOCKHOLDERS:
QVC Interactive Holdings,
Inc.(6)....................... 5,700,000 46.8
Hummer Winblad Funds(5).......... 2,560,000 24.4
America Online, Inc.(7).......... 1,166,667 10.8
Rob Fassino(2)................... 673,383 6.4
Carley Roney(2).................. 673,383 6.4
Michael Wolfson(2)............... 673,383 6.4
All directors and executive
officers as a group (6
persons)(8)...................... 3,375,883 31.9
</TABLE>
- -------------------------
* Less than 1%.
(1) Percentage of beneficial ownership is based on 10,473,103 shares of common
stock outstanding as of October 25, 1999 and shares of common
stock outstanding after this offering.
(2) Consists of 673,383 shares owned by each of the four founders of The Knot,
of which 505,037 shares are subject to repurchase under a vesting agreement
over the 36-month period beginning April 28, 1998, as long as each such
founder remains an employee of The Knot. As of October 25, 1999, 266,548 of
the 505,037 shares held by each founder subject to vesting, had vested. The
Knot has the right to repurchase all or any
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portion of the unvested shares for $0.01 per share for a period of 60 days
from the date of early termination.
(3) Consists of 134,583 shares of common stock issuable upon exercise of
presently exercisable options and 15,834 shares of common stock issuable
upon the exercise of options exercisable within 60 days. Does not include
229,583 shares of common stock issuable upon the exercise of options that do
not vest within 60 days of October 25, 1999.
(4) Mr. Link's address is c/o QVC, Studio Park, West Chester, PA 19830.
(5) Consists of common stock issuable upon automatic conversion of 2,432,000
shares of Series A Preferred Stock owned by Hummer Winblad Venture
Partners III, L.P., and 128,000 shares of Series A Preferred Stock owned by
Hummer Winblad Technology Fund III, L.P. John Hummer, Ann Winblad (one of
our directors) and Mark Gorenberg are general partners of Hummer Winblad
Equity Partners II, L.P., the general partner of each of the Hummer Winblad
Funds. Consequently, Hummer Winblad Equity Partners II and Mr. Hummer, Ms.
Winblad and Mr. Gorenberg may each be deemed to beneficially own all of the
shares held by the Hummer Winblad Funds. Hummer Winblad Equity Partners II,
Mr. Hummer, Ms. Winblad and Mr. Gorenberg each disclaim beneficial ownership
of such shares, except to the extent of their pecuniary interest. The
address of the Hummer Winblad Funds is 2 South Park, 2nd Floor, San
Francisco, CA 94107.
(6) Consists of common stock issuable upon automatic conversion of 4,000,0000
shares of Series B Preferred Stock owned by QVC Interactive
Holdings, LLC and 1,700,000 shares issuable upon the exercise of a currently
exercisable warrant at the time of the initial public offering. The address
of QVC Interactive Holdings, LLC is Studio Park, West Chester, PA 19830.
(7) Consists of common stock issuable upon automatic conversion of 800,000
shares of Series A Preferred Stock owned by AOL and 366,667 shares
issuable upon the exercise of a currently exercisable warrant. The address
of AOL is 22000 AOL Way, Dulles, Virginia 20166.
(8) Includes 150,417 shares of common stock issuable upon the exercise of
options which are currently vested or which vest within 60 days of October
25, 1999.
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<PAGE> 70
DESCRIPTION OF CAPITAL STOCK
GENERAL
Immediately prior to the closing of this offering, we intend to amend and
restate our certificate of incorporation and bylaws. Our amended and restated
certificate of incorporation and bylaws, summarized below, are included as
exhibits to the registration statement of which this prospectus forms a part.
Upon the closing of our offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.001 per share.
COMMON STOCK
As of October , 1999, there were shares of our common
stock outstanding held of record by stockholders. Holders of
common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably those
dividends, if any, as may be declared by our board of directors out of funds
legally available for that purpose, subject to any preferential dividend rights
of any outstanding preferred stock. Upon the liquidation, dissolution or winding
up of The Knot, the holders of our common stock are entitled to receive ratably
our net assets available, if any, after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of our common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of our common stock are, and the
shares offered in this offering will be, when issued and paid for, fully paid
and nonassessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future.
PREFERRED STOCK
Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Our board of directors will be authorized, without further
stockholder approval, to issue from time to time up to an aggregate of 5,000,000
shares of preferred stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designation of
series. For more information, see "-- Anti-Takeover Effects of Various
Provisions of Delaware Law and The Knot's Certificate of Incorporation and
Bylaws."
OPTIONS
We have 2,849,868 shares of our common stock reserved for issuance, upon
exercise of stock options, under our 1997 Long Term Incentive Plan. As of
October 25, 1999, there were outstanding options to purchase a total of
1,717,665 shares of common stock, of
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<PAGE> 71
which options to purchase approximately 211,572 will be exercisable upon the
closing of this offering. Since we intend to file a registration statement on
Form S-8 as soon as practicable following the closing of this offering, any
shares issued upon exercise of these options will be immediately available for
sale in the public market, subject to the terms of lock-up agreements entered
into with the underwriters. In addition, we have issued options to purchase
12,203 shares of common stock outside of our 1997 Stock Incentive Plan, all of
which are exercisable. For more information, see "Management -- 1999 Stock
Incentive Plan" and "Shares Eligible for Future Sale."
REGISTRATION RIGHTS
Under an investors' rights agreement, beginning six months after the
closing of this offering, the holders of 9,426,667 shares of common stock and
shares of common stock issuable upon the exercise of outstanding warrants will
be entitled to demand registration rights in connection with the registration of
their shares under the Securities Act of 1933. We are not required to effect
more than four registrations under these demand registration rights. In
addition, these holders will be entitled to piggyback registration rights in
connection with the registration of their shares under the Securities Act of
1933, subject to various limitations. Further, at any time after we become
eligible to file a registration statements on Form S-3, these holders may
require us to file registration statements under the Securities Act of 1933 on
Form S-3 in connection with their shares of common stock. These registration
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares of common stock held
by security holders with registration rights to be included in a registration.
Generally, we are required to bear all of the expenses of all of these
registrations, except underwriting discounts and selling commissions.
Registration of any shares of common stock held by security holders with
registration rights would result in shares becoming freely tradable without
restriction under the Securities Act of 1933 immediately upon effectiveness of
such registration.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to some exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
various exceptions, an "interested stockholder" is a person who, together with
his, her or its affiliates and associates, owns or, within three years did own,
15% or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control
attempts aimed at us and, accordingly, may discourage attempts to acquire us.
In addition, various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, which provisions will be in
effect upon the closing of the offering and are summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt
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<PAGE> 72
that a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.
BOARD OF DIRECTORS VACANCIES. Our amended and restated certificate of
incorporation authorizes our board of directors to fill vacant directorships or
increase the size of the board of directors. This may deter a stockholder from
removing incumbent directors and simultaneously gaining control of our board of
directors by filling the vacancies created by this removal with its own
nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our amended and
restated certificate of incorporation provides that stockholders may not take
action by written consent, but only at duly called annual or special meetings of
stockholders. Our amended and restated bylaws further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors, our chief executive officer or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS
NOMINATIONS. Our amended and restated bylaws provide that stockholders seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide us timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to or mailed and received at our principal executive
offices, not less than 90 days nor more than 120 days prior to the first
anniversary of the date of the preceding year's annual meeting provided
regarding the previous year's annual meeting of stockholders; provided, that if
no annual meeting of stockholders was held in the previous year or the date of
the annual meeting of stockholders has been changed to be more than 30 calendar
days earlier than or 70 calendar days after this anniversary, notice by the
stockholder, to be timely, must be so received not earlier than 120 days prior
to such annual meeting nor later than the later of:
- 90 days prior to the annual meeting of stockholders; or
- the close of business on the 10th day following the date on which notice
of the date of the meeting is given to stockholders or made public,
whichever occurs first.
Our amended and restated bylaws also specify requirements as to the form
and content of a stockholders' notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to various limitations imposed by the Nasdaq
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could make
more difficult or discourage an attempt to obtain control of The Knot by means
of a proxy contest, tender offer, merger or otherwise.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
a corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage.
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<PAGE> 73
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since no shares will be available for sale shortly after this offering because
of contractual and legal restrictions on resale described below, sales of
substantial amounts of common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon the closing of this offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act unless such shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. The following table illustrates the shares eligible for sale in
the public market:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----
<C> <S>
0 After the date of this prospectus, freely tradable
shares sold in this offering and shares saleable under
Rule 144(k) that are not subject to the 180-day lock-up
0 After 90 days from the date of this prospectus, shares
saleable under Rule 144 or Rule 701 that are not
subject to the 180-day lock-up
10,455,900 After 180 days from the date of this prospectus, the
180-day lock-up is released and these shares are
saleable under Rule 144 (subject, in some cases, to
volume limitations), Rule 144(k) or Rule 701
17,203 After 180 days from the date of this prospectus,
restricted securities that are held for less than one
year are not yet saleable under Rule 144
</TABLE>
LOCK-UP AGREEMENTS
All of our stockholders and option holders have signed lock-up agreements
under which they agreed not to transfer or dispose of, directly or indirectly,
any shares of our common stock or any securities convertible into or exercisable
or exchangeable for shares of our common stock for 180 days after the date of
this prospectus.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at
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<PAGE> 74
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after the offering,
or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 in connection with such sale. Sales under Rule 144 are
also subject to manner-of-sale provisions, notice requirements and the
availability of current public information about us.
RULE 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of any
prior owner other than an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise contractually
restricted, "144(k)" shares may be sold immediately upon completion of this
offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with restrictions, including the
holding period, contained in Rule 144.
REGISTRATION RIGHTS
After this offering, the holders of 9,426,667 shares of common stock and
shares of common stock issuable upon the exercise of outstanding warrants will
be entitled to rights in connection with the registration of those shares under
the Securities Act. For more information, see "Description of Capital
Stock -- Registration Rights." After such registration, these shares of our
common stock become freely tradeable without restriction under the Securities
Act. These sales could have a material adverse effect on the trading price of
our common stock.
STOCK PLANS
We intend to file a registration statement under the Securities Act
covering shares of common stock reserved for issuance under our
1999 Stock Incentive Plan, and our 1999 Employee Stock Purchase Plan and the
shares reserved for issuance upon exercise of outstanding non-plan options. We
expect this registration statement to be filed and to become effective as soon
as practicable after the effective date of this offering.
As of October 25, 1999, options to purchase 1,717,665 shares of common
stock were issued and outstanding. All of these shares will be eligible for sale
in the public market from time to time, subject to vesting provisions, Rule 144
volume limitations applicable to our affiliates and, in the case of some
options, the expiration of lock-up agreements.
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<PAGE> 75
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist
LLC and Salomon Smith Barney Inc. are acting as representatives, the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.....................
Hambrecht & Quist LLC......................................
Salomon Smith Barney Inc. .................................
--------
Total......................................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments in the sale of the common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions paid
by us............... $ $ $ $
Expenses payable by
us.................. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the number of shares of common stock being offered.
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<PAGE> 76
We, our officers and directors and substantially all of our existing
stockholders and option holders have agreed that we will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act of 1933 relating to, any additional debt securities shares of
our common stock or securities convertible into or exchangeable or exercisable
for any of our common stock, or publicly disclose the intention to make any such
offer, sale, pledge, disposition or filing, without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus, except in our case issuances under the exercise of employee
stock options outstanding on the date hereof.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for officers, directors,
employees, business associates and persons related to, or affiliated with, the
foregoing, who may have an interest in purchasing common stock in the offering.
The number of shares available for sale to the general public in the offering
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against specified liabilities
under the Securities Act of 1933, or to contribute to payments which the
underwriters may be required to make in respect thereof.
We will make application to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "KNOT."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include the following: the information
included in this prospectus and otherwise available to the representatives;
market conditions for initial public offerings; the history and the prospects
for the industry in which we will compete; the ability of our management; the
prospects for our future earnings; the present state of our development and our
current financial condition; the general condition of the securities markets at
the time of this offering; and the recent market prices of, and the demand for,
publicly traded common stock of generally comparable companies.
The representatives on behalf of the underwriters may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate
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<PAGE> 77
member are purchased in a stabilizing transaction or a syndicate covering
transaction to cover syndicate short positions.
Such stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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<PAGE> 78
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
- such purchaser is entitled under applicable provincial securities laws to
purchase such common stock without the benefit of a prospectus qualified
under such securities laws,
- where required by law, such purchaser is purchasing as principal and not
as agent, and
- such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION FOR ONTARIO PURCHASERS
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the British Columbia Securities Act
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be
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<PAGE> 79
obtained from us. Only one such report must be filed in respect of common stock
acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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<PAGE> 80
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Brobeck, Phleger & Harrison LLP, New York, New York. Various
legal matters in connection with the offering will be passed upon for the
underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and schedule for The Knot, Inc. as of
December 31, 1997 and 1998 and September 30, 1999 and for the period from its
inception on May 2, 1996 to December 31, 1996, the years ended December 31, 1997
and 1998 and the nine month period ended September 30, 1999, included in this
prospectus and elsewhere in the registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report appearing
elsewhere in this prospectus, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements for Casenhiser Clothing Company, Inc. d/b/a Bridal
Search as of December 31, 1997 and April 1, 1998 and for the year ended December
31, 1997 and for the period ended April 1, 1998, included in this prospectus and
elsewhere in the registration statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere in this
prospectus, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with exhibits and schedules, under the Securities Act with
respect to the common stock to be sold in this offering. This prospectus does
not contain all of the information set forth in this registration statement. For
further information about The Knot and the shares of common stock to be sold in
the offering, please refer to this registration statement. For additional
information, please refer to the exhibits that have been filed with our
registration statement on Form S-1.
You may read and copy all or any portion of the registration statement or
any other information we file at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C., 20549. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Our Securities and Exchange Commission filings, including the
registration statement, will also be available to you on the Securities and
Exchange Commission's Web site (http://www.sec.gov). As a result of this
offering, we will become subject to the information and reporting requirements
of the Securities Exchange Act of 1934, and will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
We intend to furnish our stockholders with annual reports containing
audited financial statements and to make available to our stockholders quarterly
reports for the first three quarters of each year containing unaudited financial
information.
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<PAGE> 81
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE KNOT, INC.
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999.................................... F-3
Consolidated Statements of Operations for the period from
May 2, 1996 (date of inception) to December 31, 1996 and
the years ended December 31, 1997 and 1998 and the nine
months ended September 30, 1998 (Unaudited) and 1999...... F-4
Consolidated Statements of Stockholders' (Deficit) Equity
for the period from May 2, 1996 (date of inception) to
December 31, 1996 and the years ended December 31, 1997
and 1998 and the nine months ended September 30, 1999..... F-5
Consolidated Statements of Cash Flows for the period from
May 2, 1996 (date of inception) to December 31, 1996 and
the years ended December 31, 1997 and 1998 and the nine
months ended September 30, 1998 (Unaudited) and 1999...... F-6
Notes to Consolidated Financial Statements.................. F-8
CASENHISER CLOTHING COMPANY, INC.
Report of Independent Auditors.............................. F-25
Balance Sheets as of December 31, 1997 and April 1, 1998.... F-26
Statements of Operations for the year ended December 31,
1997 and the period ended April 1, 1997 (Unaudited) and
April 1, 1998............................................. F-27
Statements of Shareholder's (Deficit) Equity for the year
ended December 31, 1997 and the period ended April 1,
1998...................................................... F-28
Statements of Cash Flows for the year ended December 31,
1997 and the period ended April 1, 1997 (Unaudited) and
April 1, 1998............................................. F-29
Notes to Financial Statements............................... F-30
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
The Knot, Inc.
We have audited the accompanying consolidated balance sheets of The Knot,
Inc. (the "Company") as of December 31, 1997 and 1998 and September 30, 1999,
and the related consolidated statements of operations, stockholders' (deficit)
equity and cash flows for the period from May 2, 1996 (date of inception) to
December 31, 1996, the years ended December 31, 1997 and 1998, and the nine
month period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1997 and 1998, and September 30, 1999 and the consolidated results
of their operations and their cash flows for the period from May 2, 1996 (date
of inception) to December 31, 1996, the years ended December 31, 1997 and 1998,
and the nine month period ended September 30, 1999 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
October 26, 1999
F-2
<PAGE> 83
THE KNOT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDER'S
DECEMBER 31, EQUITY AT
------------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
----------- ----------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 305,375 $ 1,037,589 $ 9,301,870
Accounts receivable, net of allowance of
$133,000 in 1999............................. 39,480 189,545 1,078,808
Inventories.................................... -- 28,741 511,639
Other current assets........................... 1,667 32,018 677,931
----------- ----------- -----------
Total current assets............................. 346,522 1,287,893 11,570,248
Property and equipment, net...................... 51,144 243,044 1,281,714
Goodwill, net.................................... -- 349,677 622,199
Deferred financing costs, net.................... 747,029 -- 296,667
Other assets..................................... 8,149 69,293 75,344
----------- ----------- -----------
Total assets..................................... $ 1,152,844 $ 1,949,907 $13,846,172
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses.......... $ 104,385 $ 225,094 $ 1,424,341
Deferred revenue............................... 48,436 60,111 889,263
----------- ----------- -----------
Total current liabilities........................ 152,821 285,205 2,313,604
Note payable..................................... 2,016,770 -- --
Other liabilities................................ -- 18,800 8,800
----------- ----------- -----------
Total liabilities................................ 2,169,591 304,005 2,322,404
Commitments and contingencies
Stockholders' (deficit) equity:
Series A convertible preferred stock, $.001 par
value; 3,360,000 shares authorized, issued
and outstanding at December 31, 1998 and
September 30, 1999 (liquidation value of
$3,937,920 at September 30, 1999)............ -- 3,937,920 3,937,920
Series B convertible preferred stock, $.001 par
value; 4,000,000 shares authorized, issued
and outstanding at September 30, 1999
(liquidation value of $15,000,000 at
September 30, 1999).......................... -- -- 13,963,000
Common stock, $.01 par value; 14,640,000 shares
authorized; 1,625,410, 3,034,103 and
3,093,608 shares issued and outstanding at
December 31, 1997 and 1998 and September 30,
1999, respectively; 100,000,000 and
10,453,608 shares authorized and outstanding,
proforma, respectively....................... 16,254 30,341 30,936 $ 104,536
Additional paid-in-capital..................... 814,779 1,421,714 7,796,448 25,623,768
Deferred compensation.......................... -- (387,020) (2,716,139) (2,716,139)
Deferred sales and marketing................... -- -- (2,122,984) (2,122,984)
Accumulated deficit............................ (1,847,780) (3,357,053) (9,365,413) (9,365,413)
----------- ----------- ----------- -----------
Total stockholders' (deficit) equity............. (1,016,747) 1,645,902 11,523,768 $11,523,768
----------- ----------- ----------- ===========
Total liabilities and stockholders' (deficit)
equity......................................... $ 1,152,844 $ 1,949,907 $13,846,172
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 84
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2, 1996
(DATE OF NINE MONTHS ENDED
INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $ 70,567 $ 596,071 $ 1,039,584 $ 825,791 $ 2,635,430
Cost of revenues..................... 9,044 66,905 131,214 81,977 903,990
---------- ----------- ----------- ----------- -----------
Gross profit......................... 61,523 529,166 908,370 743,814 1,731,440
Operating expenses:
Product and content development.... 261,921 635,440 1,030,323 788,362 1,685,057
Sales and marketing................ 254,864 503,113 768,250 476,159 2,913,246
General and administrative......... 242,116 264,746 809,385 538,589 2,194,582
Non-cash compensation.............. -- -- 93,046 56,787 716,719
Non-cash sales and marketing....... -- -- -- -- 127,016
Depreciation and amortization...... 9,128 22,226 121,718 75,411 346,461
---------- ----------- ----------- ----------- -----------
Total operating expenses............. 768,029 1,425,525 2,822,722 1,935,308 7,983,081
Loss from operations................. (706,506) (896,359) (1,914,352) (1,191,494) (6,251,641)
Interest income (expense), net....... (45,780) (199,135) 14,968 (29,412) 243,281
---------- ----------- ----------- ----------- -----------
Loss before extraordinary items...... (752,286) (1,095,494) (1,899,384) (1,220,906) (6,008,360)
Extraordinary items.................. -- -- 390,111 390,111 --
---------- ----------- ----------- ----------- -----------
Net loss............................. $ (752,286) $(1,095,494) $(1,509,273) $ (830,795) $(6,008,360)
========== =========== =========== =========== ===========
Loss per share -- basic and diluted:
Loss before extraordinary items.... $ (.46) $ (.67) $ (.76) $ (.52) $ (1.96)
Extraordinary items................ -- -- .16 .17 --
---------- ----------- ----------- ----------- -----------
Net loss........................... $ (.46) $ (.67) $ (.60) $ (.35) $ (1.96)
========== =========== =========== =========== ===========
Weighted average number of shares
used in calculating basic and
diluted net loss per share......... 1,625,410 1,625,410 2,497,065 2,344,126 3,066,960
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 85
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- --------------------- PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE CAPITAL
--------- ---------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock at
inception, May 2, 1996............ -- $ -- -- $ -- 1,625,410 $16,254 $ (15,254)
Net loss for the period from May 2,
1996 (date of inception) to
December 31, 1996................. -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ------- ----------
Balance at December 31, 1996....... -- -- -- -- 1,625,410 16,254 (15,254)
Issuance of warrant in connection
with note payable................. -- -- -- -- -- -- 830,033
Net loss for the year ended
December 31, 1997................. -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ------- ----------
Balance at December 31, 1997....... -- -- -- -- 1,625,410 16,254 814,779
Issuance of common stock in
connection with acquisition....... -- -- -- -- 162,540 1,626 169,775
Deferred compensation related to
unvested common stock in
connection with acquisition....... -- -- -- -- -- -- 186,916
Issuance of common stock........... -- -- -- -- 1,068,122 10,681 (10,681)
Sale of Series A Convertible
Preferred Stock, net of costs..... 2,560,000 3,000,320 -- -- -- -- (217,378)
Conversion of note payable......... 800,000 937,600 -- -- -- -- --
Issuance of common stock........... -- -- -- -- 178,031 1,780 185,153
Deferred compensation related to
the issuance of stock options..... -- -- -- -- -- -- 293,150
Amortization of deferred
compensation...................... -- -- -- -- -- -- --
Net loss for the year ended
December 31, 1998................. -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ------- ----------
Balance at December 31, 1998....... 3,360,000 3,937,920 -- -- 3,034,103 30,341 1,421,714
Issuance of common stock........... -- -- -- -- 44,505 445 (445)
Sale of Series B Convertible
Preferred Stock, net of costs..... -- -- 4,000,000 15,000,000 -- -- (127,509)
Issuance of warrant in connection
with sale of Series B Convertible
Preferred Stock................... -- -- -- (1,037,000) -- -- 1,037,000
Issuance of common stock in
connection with acquisitions...... -- -- -- -- 15,000 150 114,850
Issuance of stock options in
connection with acquisitions...... -- -- -- -- -- -- 55,000
Issuance of warrant in connection
with distribution agreement....... -- -- -- -- -- -- 2,250,000
Amortization of deferred sales and
marketing......................... -- -- -- -- -- -- --
Deferred compensation related to
the issuance of stock options..... -- -- -- -- -- -- 3,045,838
Amortization of deferred
compensation...................... -- -- -- -- -- -- --
Net loss for the nine months ended
September 30, 1999................ -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ------- ----------
Balance at September 30, 1999...... 3,360,000 $3,937,920 4,000,000 $13,963,000 3,093,608 $30,936 $7,796,448
========= ========== ========= =========== ========= ======= ==========
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
DEFERRED SALES AND ACCUMULATED (DEFICIT)
COMPENSATION MARKETING DEFICIT EQUITY
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock at
inception, May 2, 1996............ $ -- $ -- $ -- $ 1,000
Net loss for the period from May 2,
1996 (date of inception) to
December 31, 1996................. -- -- (752,286) (752,286)
----------- ----------- ----------- -----------
Balance at December 31, 1996....... -- -- (752,286) (751,286)
Issuance of warrant in connection
with note payable................. -- -- -- 830,033
Net loss for the year ended
December 31, 1997................. -- -- (1,095,494) (1,095,494)
----------- ----------- ----------- -----------
Balance at December 31, 1997....... -- -- (1,847,780) (1,016,747)
Issuance of common stock in
connection with acquisition....... -- -- -- 171,401
Deferred compensation related to
unvested common stock in
connection with acquisition....... (186,916) -- -- --
Issuance of common stock........... -- -- -- --
Sale of Series A Convertible
Preferred Stock, net of costs..... -- -- -- 2,782,942
Conversion of note payable......... -- -- -- 937,600
Issuance of common stock........... -- -- -- 186,933
Deferred compensation related to
the issuance of stock options..... (293,150) -- -- --
Amortization of deferred
compensation...................... 93,046 -- -- 93,046
Net loss for the year ended
December 31, 1998................. -- -- (1,509,273) (1,509,273)
----------- ----------- ----------- -----------
Balance at December 31, 1998....... (387,020) -- (3,357,053) 1,645,902
Issuance of common stock........... -- -- -- --
Sale of Series B Convertible
Preferred Stock, net of costs..... -- -- -- 14,872,491
Issuance of warrant in connection
with sale of Series B Convertible
Preferred Stock................... -- -- -- --
Issuance of common stock in
connection with acquisitions...... -- -- -- 115,000
Issuance of stock options in
connection with acquisitions...... -- -- -- 55,000
Issuance of warrant in connection
with distribution agreement....... -- (2,250,000) -- --
Amortization of deferred sales and
marketing......................... -- 127,016 -- 127,016
Deferred compensation related to
the issuance of stock options..... (3,045,838) -- -- --
Amortization of deferred
compensation...................... 716,719 -- -- 716,719
Net loss for the nine months ended
September 30, 1999................ -- -- (6,008,360) (6,008,360)
----------- ----------- ----------- -----------
Balance at September 30, 1999...... $(2,716,139) $(2,122,984) $(9,365,413) $11,523,768
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 86
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2, 1996
(DATE OF NINE MONTHS ENDED
INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss before extraordinary items............ $(752,286) $(1,095,494) $(1,899,384) $(1,220,906) $(6,008,360)
Adjustments to reconcile net loss before
extraordinary items to net cash used in
operating activities
Depreciation and amortization................ 9,128 22,226 67,429 39,299 192,459
Amortization of goodwill..................... -- -- 54,289 36,112 154,002
Amortization of deferred financing costs..... -- 83,004 27,668 27,668 --
Amortization of deferred
compensation............................... -- -- 93,046 56,787 716,719
Amortization of deferred sales and
marketing.................................. 127,016
Noncash interest expense..................... 45,780 120,990 30,248 30,248 --
Allowance for doubtful accounts and loan
receivable................................. -- -- -- -- 183,000
Changes in operating assets and liabilities:
Accounts receivable........................ (40,567) 1,087 (150,065) (42,404) (716,808)
Inventories................................ -- -- (28,741) (33,719) (388,556)
Other current assets....................... (57,271) 56,604 (29,959) (11,007) (645,551)
Other assets............................... (29,485) 21,336 (61,144) (61,405) (6,051)
Accounts payable and accrued expenses...... 199,324 (94,939) 120,709 54,856 788,088
Deferred revenue........................... -- 48,436 11,675 23,168 788,224
Other liabilities.......................... -- -- 18,800 18,800 (10,000)
--------- ----------- ----------- ----------- -----------
Net cash used in operating activities.......... (625,377) (836,750) (1,745,429) (1,082,503) (4,825,818)
INVESTING ACTIVITIES
Purchases of property and equipment............ (58,231) (24,267) (255,299) (203,522) (1,185,119)
Loan receivable................................ -- -- -- (50,000) (50,000)
Acquisition of businesses, net of cash
acquired..................................... -- -- (50,000) -- (335,051)
--------- ----------- ----------- ----------- -----------
Net cash used in investing activities.......... (58,231) (24,267) (305,299) (253,522) (1,570,170)
FINANCING ACTIVITIES
Proceeds from note payable..................... 700,000 1,150,000 -- -- --
Proceeds from short term borrowings............ -- -- -- -- 750,000
Repayment of short term borrowings............. -- -- -- -- (750,000)
Financing costs................................ -- -- (217,378) (217,378) (339,731)
Proceeds from issuance of convertible preferred
stock........................................ -- -- 3,000,320 3,000,320 15,000,000
--------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities................................... 700,000 1,150,000 2,782,942 2,782,942 14,660,269
--------- ----------- ----------- ----------- -----------
Increase in cash and cash equivalents.......... 16,392 288,983 732,214 1,446,917 8,264,281
Cash and cash equivalents at beginning of
period....................................... -- 16,392 305,375 305,375 1,037,589
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period..... $ 16,392 $ 305,375 $ 1,037,589 $ 1,752,292 $ 9,301,870
========= =========== =========== =========== ===========
</TABLE>
F-6
<PAGE> 87
THE KNOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2, 1996
(DATE OF NINE MONTHS ENDED
INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
SUMMARY OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Issuance of warrant in connection with long
term debt.................................... $ -- $ 830,033 $ -- $ -- $ --
Issuance of common stock in connection with
recapitalization............................. -- -- 10,681 10,681 --
Issuance of common stock in connection with
acquisition.................................. -- -- 358,334 171,401 --
Accrued deferred financing costs............... -- -- -- -- 84,445
Conversion of loan payable into preferred
stock........................................ -- -- 937,600 937,600 --
--------- ----------- ----------- ----------- -----------
Total noncash investing and financing
activities................................... $ -- $ 830,033 $ 1,306,615 $ 1,119,682 $ 84,445
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 88
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION AND NATURE OF OPERATIONS
The Knot, Inc. (the "Company"), formerly Weddings.com, Inc., was
incorporated in the state of Delaware on May 2, 1996 ("Inception"). On June 18,
1996, the Company changed its name from Weddings.com, Inc. to The Knot, Inc.
The Company is a leading online wedding destination combining comprehensive
content and an online community with wedding-related commerce. The Company
provides wedding resources on the World Wide Web and is the primary wedding
content provider on America Online and several other of AOL's leading brands,
including AOL.com, Netscape Netcenter and CompuServe. The Company's online sites
provide articles on wedding planning, organized by topic, a database of local
wedding vendors nationwide, interactive services and personalized planning
tools, a searchable bridal gown database, various communities of hosted chats
and message boards, a gift registry, a wedding supply and gift store and
honeymoon travel packages. The Company also authors a series of books and
publishes a semiannual gown guide.
The accompanying financial statements include the accounts of Click Trips,
Inc., a wholly owned subsidiary from July 31, 1999 through September 30, 1999.
All intercompany transactions have been eliminated in consolidation.
In August 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering ("IPO"). Following the
closing of the Company's IPO, the Company will be authorised to issue
105,000,000 shares; 100,000,000 of these shares will be designated as common
stock having a par value of $.01, and 5,000,000 of these shares will be
undesignated preferred shares, having a par value of $.001. The Company will be
authorized to issue shares of undesignated preferred stock in one or more
classes or series without further stockholder approval. If the offering is
consummated under the terms presently anticipated, all the then outstanding
shares of the Company's convertible stock will automatically convert into shares
of common stock on a one-for-one basis upon the closing of the proposed IPO. The
conversion of all of the convertible preferred stock has been reflected in the
accompanying unaudited pro forma consolidated balance sheet as if it had
occurred on September 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates. The most
significant estimates included in the preparation of the financial statements
are related to asset lives, the valuation of common stock, preferred stock and
warrants.
F-8
<PAGE> 89
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the short-term nature of these
instruments. The carrying amounts of outstanding borrowings approximate fair
value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
were approximately $243,000, $1,003,000, and $9,039,000 at December 31, 1997 and
1998 and September 30, 1999, respectively. The market value of the Company's
cash equivalents approximates their cost plus accrued interest.
INVENTORY
Inventory consists of finished goods. Inventory costs are determined
principally by using the average cost method, and are stated at the lower of
such cost or net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets which range from three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the related lease agreement.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances such as significant
declines in revenues, earnings or cash flows or material adverse changes in the
business climate, indicate that the carrying amount of an asset may be impaired.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future estimated undiscounted net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. To date, no
impairment has occurred.
GOODWILL
Goodwill is being amortized over three years using the straight-line
method. Accumulated amortization of goodwill approximates $54,000 and $208,000
at December 31, 1998 and September 30, 1999, respectively.
F-9
<PAGE> 90
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes on the liability method as required
by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the future tax consequence attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax liabilities of a change
in tax rates is recognized in results of operations in the period that includes
the enactment date.
NET REVENUES BY TYPE
Net revenues by type are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------- ------------------------
TYPE 1996 1997 1998 1998 1999
- ---- ------------ -------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sponsorship,
advertising and
production........... $70,567 $596,071 $ 853,240 $656,117 $1,724,154
Merchandise............ -- -- 17,487 -- 694,119
Publishing, travel and
other................ -- -- 168,857 169,674 217,157
------- -------- ---------- -------- ----------
Total.................. $70,567 $596,071 $1,039,584 $825,791 $2,635,430
======= ======== ========== ======== ==========
</TABLE>
REVENUE RECOGNITION
Sponsorship and Advertising
Sponsorship revenues are derived principally from contracts currently
ranging up to three years. Sponsorships are designed to integrate advertising
with specific editorial content. Sponsors can purchase the exclusive right to
promote products or services on a specific editorial area and can purchase
special feature on our sites.
Advertising revenues are derived principally from short-term contracts
which typically range from one month up to one year. Advertising contracts
include banner advertisements and listings for local wedding vendors.
Sponsorship and advertising contracts provide for the delivery of a minimum
number of impressions. Impressions are the featuring of a sponsor's
advertisement, banner, link or other form of content on our sites. To date, the
Company has recognized sponsorship and advertising revenues over the duration of
the contracts on a straight line basis as the Company has exceeded minimum
guaranteed impressions. To the extent that minimum guaranteed impressions are
not met, the Company is generally obligated to extend the period of the contract
until the guaranteed impressions are achieved. If this were to occur,
F-10
<PAGE> 91
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company would defer and recognize the corresponding revenues over the
extended period.
Production revenues are derived from online sites and tools. Revenues
associated with this production are recognized when the production is completed
and the online sites and tools are delivered.
To promote the Company's brand on third-party sites, the Company produces
online sites for third parties featuring both The Knot and the third party. The
cost of production of these sites is included in operating expenses. In return,
the Company receives distribution and exposure to the viewers of such third
party sites, outbound links to its sites and, in some circumstances, offline
brand marketing. The Company does not recognize revenue with respect to these
barter transactions.
Usage revenues received from America Online, Inc. ("AOL") which totaled
approximately $74,000 for the year ended December 31, 1997 and $47,000
(unaudited) for the nine months ended September 30, 1998 were derived from AOL
customers visiting the Company's AOL site. Usage revenues were recognized as
they were earned based upon hours of viewership of the Company's site. As
discussed in Note 4, the Company signed a new agreement with AOL which
eliminated usage revenues from, and licensing fees to AOL, subsequent to
September 30, 1998.
Merchandise
Merchandise revenues are derived from sales of merchandise through
Bridalink.com, The Knot Registry and The Knot Shop. Merchandise revenues include
outbound shipping and handling charges. Merchandise revenues from product sales
are recognized when the products are shipped to customers. The Company provides
an allowance for estimated sales returns.
Publishing
Publishing revenues are derived from author royalties related to book
publishing contracts and sales of books published by the Company. Royalties
related to book publishing contracts are recognized when the Company has met all
contractual obligations, which typically includes the delivery and acceptance of
a final manuscript. Revenues related to the sale of books are recognized when
the books are shipped, reduced by an allowance for estimated returns.
Travel
Travel revenues are derived from commissions on the sale of travel packages
by the Company's online travel agency, Click Trips, Inc. Such revenues are
recognized when the customer commences travel.
DEFERRED REVENUE
Deferred revenue represents payments received or billings in excess of
revenue recognized related to sponsorship, advertising and production contracts,
as well as advances received against future royalties to be earned relating to
book publishing contracts.
F-11
<PAGE> 92
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COST OF REVENUES
Cost of revenues consists of the cost of merchandise sold, payroll and
related expenses for personnel who are responsible for the production of
customized online sites and tools, and costs of Internet and hosting services.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense totaled
approximately $69,000, $79,000, $46,000, $11,000 (unaudited) and $57,000 for the
period from inception through December 31, 1996 and for the years ended December
31, 1997 and 1998 and the nine months ended September 30, 1998 and 1999,
respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains a significant portion of its cash
and cash equivalents with one financial institution. The Company's customers are
primarily concentrated in the United States. The Company performs on-going
credit evaluations, generally does not require collateral, and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1998, one advertiser accounted for 19% of
our net revenues. For the year ended December 31, 1997, one advertiser accounted
for 42% of our net revenues and a different advertiser accounted for 13% of our
net revenues. From May 2, 1996 (our inception date) through December 31, 1996,
four advertisers accounted for 34%, 30%, 23% and 13% of our net revenues,
respectively.
At September 30, 1999, two advertisers accounted for 14% and 12% of
accounts receivable, respectively. At December 31, 1998, four advertisers
accounted for 26%, 16%, 13%, and 12% of accounts receivable, respectively. At
December 31, 1997, two advertisers accounted for 62% and 38% of accounts
receivable, respectively.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
STOCK SPLITS
On January 17, 1997 and April 27, 1998, the Company effected a 1,000 for 1
and a 16.2541 for 1 stock split, respectively. All share amounts have been
retroactively restated to reflect these events in the accompanying financial
statements.
F-12
<PAGE> 93
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL INFORMATION
The unaudited interim financial information as of September 30, 1998 and
for the nine months then ended has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management, contains
all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation. Operating results for any interim period are not necessarily
indicative of results to be expected for the entire year.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Basic net loss per share is computed by dividing net loss
by the weighted average number of common shares outstanding during the period.
Diluted net loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive financial
instruments, only in the periods in which such effect is dilutive. There were no
dilutive securities in any of the periods presented herein.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for the way
that a public enterprise reports information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company operates in a single segment. The chief operating decision maker
allocates resources and assesses the performance associated with sponsorship and
advertising, merchandise, publishing and travel on a single segment basis.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Since the Company's comprehensive net
loss is equal to its net loss for all periods presented, the adoption of this
standard has had no impact on the Company's financial statements.
SOFTWARE DEVELOPMENT COSTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP is effective for fiscal years beginning
after December 15,
F-13
<PAGE> 94
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998. The Company has adopted the provisions of SOP 98-1 during the nine months
ended September 30, 1999 with no material effect.
All projects are being amortized over their estimated useful lives, which
has been determined by management to be three years. Amortization on the
projects begins when the software is ready for its intended use.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Leasehold improvements...................... $ 8,200 $ 8,200 $ 100,109
Software.................................... -- 47,900 489,058
Furniture and fixtures...................... 3,761 14,222 28,785
Computer equipment.......................... 70,537 271,505 955,004
------- -------- ----------
82,498 341,827 1,572,956
Less accumulated depreciation and
amortization.............................. 31,354 98,783 291,242
------- -------- ----------
$51,144 $243,044 $1,281,714
======= ======== ==========
</TABLE>
4. RELATED PARTY TRANSACTIONS
AOL
During 1996, AOL advanced $700,000 to the Company to fund the development
of the Company's online property located on AOL. During 1996, the Company
entered into an Interactive Services Agreement with AOL whereby AOL agreed to
carry the Company's content for a period of three years. As a result of this
agreement, AOL paid the Company a usage fee based on hours of viewership of the
Company's site on AOL. AOL received a commission equal to a percentage of the
Company's advertising revenues, as defined, that were derived from its site.
This agreement was amended in 1998 eliminating usage fees paid to the Company
and eliminating commissions paid to AOL.
On January 17, 1997, the Company and AOL entered into a Note and Warrant
Purchase Agreement, whereby the Company issued to AOL a Secured Promissory Note
(the "AOL Note") and a Stock Subscription Warrant (the "AOL Warrant") to
purchase 3,250,820 shares of the Company's Series A Convertible Preferred Stock.
The AOL Warrant was valued at approximately $830,000, based on its estimated
fair value. Such value was recorded as deferred financing costs and was
amortized on a straight line basis over the life of the AOL Warrant.
The Company borrowed a total of $1,850,000 under the AOL Note, inclusive of
the $700,000 advanced in 1996. The AOL Note bore interest at 6.54% per annum and
was payable January 16, 2007.
F-14
<PAGE> 95
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 28, 1998, AOL converted $937,600 of the outstanding balance under
the AOL Note to 800,000 shares of Series A Convertible Preferred Stock (See Note
8). The remaining balance of $1,109,418 which included accrued interest of
$197,018, was forgiven and the AOL Note and AOL Warrant were canceled. The
forgiveness of debt and the write-off of the related unamortized deferred
financing costs at April 28, 1998 of $719,307 are included in extraordinary
items.
In October 1998, the Company entered into an Anchor Tenant Agreement with
AOL (the "AOL Agreement"), whereby the Company received distribution within the
AOL service. Beginning January 1, 1999, the Company was obligated to pay
carriage fees throughout the term of the AOL Agreement. This agreement
superseded any prior agreements between the Company and AOL.
In July 1999, the Company entered into an amended and restated Anchor
Tenant Agreement with AOL ("Restated AOL Agreement") which superseded the AOL
Agreement. The Restated AOL Agreement expires on January 6, 2003 and provides
for a quarterly carriage fee payable over the remaining term of the Restated AOL
Agreement.
Pursuant to the Restated AOL Agreement, the Company issued a warrant to
purchase 366,667 shares of the Company's common stock at $7.20 per share,
subject to certain anti-dilution provisions. The warrant is immediately
exercisable and expires in July 2007. The Company valued this warrant at
approximately $2,250,000, by using the Black-Scholes option pricing model with
an expected volatility factor of 55%, risk free interest rate of 5%, no dividend
yield, and a 2-year life, which will be recognized as non-cash sales and
marketing expense on the straight line basis over the term of the agreement.
QVC, INC. ("QVC")
On April 13, 1999, the Company sold 4,000,000 shares of Series B
Convertible Preferred Stock ("Series B") for $15,000,000 to QVC. In connection
with the sale of Series B Convertible Preferred Stock, the Company issued a
warrant to QVC to purchase 1,700,000 shares of common stock at $5.00 per share
subject to certain anti-dilution provisions. The warrant becomes exercisable
upon the earlier of the fourth anniversary of the issuance of the warrant or
upon the occurrence of certain events including the closing of an initial public
offering. At issuance, the fair value of the warrant was calculated to be
approximately $1,037,000 by using the Black-Scholes option pricing model with an
expected volatility factor of 55%, risk free interest rate of 5%, no dividend
yield, and a 2-year life.
In April 1999, the Company entered into a services agreement with QVC (the
"Services Agreement"), whereby QVC will provide warehousing, fulfillment and
distribution services with respect to the Company's registry and book products.
Additionally, the services agreement, which has a term of four years from the
date of this offering, provides for the Company to purchase certain merchandise
through QVC at amounts in excess of QVC's cost. The fees for such services were
negotiated on an arm's length basis.
The Company also has an agreement with QVC to sell merchandise through a
co-branded site accessible from within QVC's on-line site.
F-15
<PAGE> 96
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACQUISITIONS
CASENHISER CLOTHING COMPANY, INC. DBA BRIDAL SEARCH
On April 2, 1998, the Company acquired all of the assets of Bridal Search
for $50,000 in cash and 162,540 shares of the Company's common stock valued at
$1.05 per share for financial reporting purposes. In addition, the Company was
required to issue up to 356,046 additional shares to Bridal Search upon the
achievement of future performance criteria, of which 178,031 shares were issued
in connection with the launch of the Company's registry in November 1998 at a
value of $1.05 per share. The remaining 178,015 shares were issuable upon the
attainment of certain revenue based goals. In August 1999, the Company entered
into a Settlement and Release Agreement whereby Bridal Search agreed to forego
its rights to receive the remaining 178,015 shares related to revenue based
goals in exchange for a payment of $150,000. Such amount, representing
contingent purchase price, was recorded as additional goodwill. The purchase
price, net of tangible assets acquired, principally fixed assets of
approximately $4,000, was recorded as goodwill.
Under the agreement, the former owners of Bridal Search are also entitled
to receive an additional 178,015 shares of the Company's common stock,
contingent upon their employment by the Company and which vest over four years.
The value of these shares of $186,916 was recorded as deferred compensation. As
of September 30, 1999, 44,504 shares had vested pursuant to the agreement.
BRIDALINK.COM
In July 1999, the Company acquired all of the assets of Bridalink.com for
approximately $124,000 in cash and the issuance of 10,000 immediately vested
stock options to purchase common stock at an exercise price of $1.50 per share.
The common stock was valued at $7.00 per share for financial reporting purposes.
Bridalink.com operates an online wedding supply store located in Northern
California. The acquisition was accounted for under the purchase method of
accounting. The purchase price, including legal fees, of $191,000, net of
tangible assets acquired, principally inventory and fixed assets of $124,000 was
recorded as goodwill.
CLICK TRIPS, INC.
In July 1999, the Company acquired all of the capital stock of Click Trips,
Inc. ("Click Trips") for 5,000 shares of common stock. The common stock was
valued at $7.00 per share for financial reporting purposes. Such shares are
being held in escrow for six months for the purpose of indemnifying the Company
against any potential liabilities of Click Trips. Click Trips has the right to
receive options to purchase up to 10,000 shares of the Company's common stock
upon the attainment of $1,200,000 in commission revenues for the year ended
December 31, 2000. The exercise price related to such options will be equal to
the fair market value of the Company's common stock on the date of grant. Click
Trips operates an online travel agency. The acquisition was accounted for under
the purchase method of accounting. The purchase price, including legal fees, of
$67,000, net of tangible assets acquired, principally fixed assets of
approximately $16,000, was recorded as goodwill.
F-16
<PAGE> 97
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WEDDING PHOTOGRAPHERS NETWORK
In August 1999, the Company acquired all of the assets of Wedding
Photographers Network ("WPN"), a division of The Denis Reggie Company, for
10,000 shares of the Company's common stock. The common stock was valued at
$8.00 per share for financial reporting purposes. WPN offers a search engine to
obtain a listing of professional wedding photographers in various local areas.
This acquisition was accounted for under the purchase method of accounting. The
purchase price of $159,000 which includes legal fees, and liabilities assumed of
approximately $38,000, was recorded as goodwill.
Unaudited pro forma data for the Company for the year ended December 31,
1998, and for the nine months ended September 30, 1999 giving effect to the
acquisitions of Bridal Search, Bridalink.com, Click Trips, Inc. and Wedding
Photographers Network as if these acquisitions had occurred at the beginning of
each period presented (with the exception of Bridal Search which is already
reflected in the Company's consolidated historical financial statements for the
nine months ended September 30, 1999) are shown below. Pro forma basic and
diluted net loss per share has been calculated assuming the conversion of all
convertible preferred stock on the date of issuance.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Net Revenues................................. $ 1,698,000 $ 3,665,025
Loss before extraordinary item............... (1,895,000) (5,865,000)
Net loss..................................... (1,505,000) (5,865,000)
Basic and diluted net loss per share......... (.59) (1.90)
Pro forma basic and diluted net loss per (.31) (.65)
share......................................
</TABLE>
6. ALLIANCE AGREEMENT WITH WEDDINGPAGES, INC.
In July 1999, the Company entered into an 18-month exclusive alliance
agreement with Weddingpages, Inc., ("Weddingpages"). Weddingpages sells online
advertising to local wedding vendors on our behalf. We receive the revenue from
the sale of advertisements and pay Weddingpages a 65% sales commission. We also
pay Weddingpages a monthly fee for related administration and operating
functions, including customer service, ad production, and accounting services.
7. SHORT TERM BORROWINGS
In July 1998, the Company entered into a short term borrowing agreement
with a bank whereby the Company was allowed to borrow up to $750,000 at an
interest rate equal to prime plus 2%. The agreement matured in April 1999. In
August 1999, this balance was paid in full.
F-17
<PAGE> 98
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CAPITAL STOCK
The Company's Amended and Restated Articles of Incorporation provides for
22,000,000 authorized shares of capital stock consisting of 14,640,000 shares of
common stock each having a par value of $.01 per share and 7,360,000 shares of
convertible preferred stock, each having a par value of $.001.
PREFERRED STOCK
On April 28, 1998, the Company sold 2,560,000 shares of Series A
Convertible Preferred Stock ("Series A") for $3,000,320. Simultaneously,
$937,600 of the AOL Note was converted into 800,000 shares of Series A
Convertible Preferred Stock (See Note 4).
On April 13, 1999, the Company sold 4,000,000 shares of Series B
Convertible Preferred Stock ("Series B") for $15,000,000 to QVC (see Note 4).
Each share of Series A and Series B Preferred Stock is convertible into one
share of the Company's common stock subject to certain anti-dilution provisions.
The Series A and Series B Convertible Preferred Stock will be automatically
converted into common stock upon completion of an initial public offering of the
Company's common stock with minimum net proceeds to the Company of $10,000,000
with a minimum price per share of $7.50.
The holders of the Series A and Series B Preferred Stock shall be entitled
to receive noncumulative annual dividends, at the rate of $.09 and $.30 per
share, respectively, if and when declared by the Board of Directors. The holders
of preferred stock are entitled to the number of votes equal to the number of
shares of common stock into which their preferred stock is convertible. Neither
series of preferred stock is redeemable.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A and B Preferred Stock shall be entitled to receive
$1.172 and $3.75 for each outstanding share of stock, respectively, plus
declared but unpaid dividends on such shares.
COMMON STOCK
From inception through April 24, 1998, all outstanding common shares of the
Company were owned by Element Studios, Inc. ("Element"), formerly MW
Entertainment, Inc. On April 24, 1998, in connection with a recapitalization of
the Company prior to the sale of Series A Preferred Stock, Element was
dissolved. The outstanding common shares of the Company owned by Element were
distributed equally to the four founders of Element. On April 28, 1998, the
Company issued an additional 1,068,122 common shares to the founders. Following
the recapitalization, each founder was the holder of 673,383 common shares.
F-18
<PAGE> 99
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the Series A issuance, the founders entered into
Vesting Agreements, whereby each founder granted the Company the right to
repurchase 505,037 shares of common stock for $.01, if the founder is no longer
employed by the Company. The amount of shares subject to the Vesting Agreements
are reduced ratably over thirty six months. Common shares subject to repurchase
are held in escrow and amounted to 392,807 and 266,544, per founder, at December
31, 1998, and September 30, 1999, respectively.
9. STOCK OPTIONS
Under the terms of the Company's 1997 Long Term Incentive Plan (the "1997
Plan"), 2,849,868 shares of common stock of the Company have been reserved for
incentive stock options, nonqualified stock options (incentive and nonqualified
stock options are collectively referred to as "Options"), restricted stock, or
any combination thereof. Awards may be granted to such directors, officers,
employees and consultants of the Company as the Board of Directors shall in its
discretion select. Only employees of the Company are eligible to receive grants
of incentive stock options.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1996.......................... -- $ --
Options granted....................................... 98,825 .01
Options canceled...................................... -- --
---------
Options outstanding at December 31, 1997.............. 98,825 .01
Options granted....................................... 583,000 .50
Options canceled...................................... (8,810) .01
---------
Options outstanding at December 31, 1998.............. 673,015 .93
Options granted....................................... 1,131,750 2.84
Options canceled...................................... (44,000) 1.77
---------
Options outstanding at September 30, 1999............. 1,760,765 $1.97
=========
</TABLE>
As of December 31, 1998 and September 30, 1999, 34,828 and 229,509,
respectively, of the above options were exercisable. Generally, options are
granted at the fair market value of the stock on the date of grant as determined
by the Board of Directors. Options vest up to a four year period and have terms
not to exceed 10 years.
Had compensation for the Plan been determined consistent with the
provisions of SFAS No. 123, the effect on the Company's net loss before
extraordinary items and basic
F-19
<PAGE> 100
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and diluted net loss before extraordinary items per share would have been
changed to the following pro forma amounts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss before extraordinary
items, as reported.......... $(1,095,494) $(1,899,384) $(1,220,906) $(6,008,360)
Net loss before extraordinary
items, pro forma............ (1,096,282) (1,988,488) (1,273,178) (6,341,133)
Basic and diluted loss before
extraordinary items per
share, as reported.......... (.67) (.76) (.52) (1.96)
Basis and diluted loss per
share, pro forma............ (.67) (.80) (.54) (2.07)
</TABLE>
The fair value of each option granted has been estimated on the date of
grant using the minimum value method option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Expected option lives......................... 4 years 4 years 4 years
Risk-free interest rates...................... 5.72% 4.64% 5.75%
Expected volatility........................... 0% 0% 0%
Dividend yield................................ 0% 0% 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period.
During the year ended December 31, 1998 and the nine months ended September
30, 1999, the Company granted options with exercise prices that were
subsequently determined to be less than the value for financial reporting
purposes on the date of grant. As a result, the Company has recorded deferred
compensation of approximately $293,000 during 1998 and $3,046,000 during the
nine months ended September 30, 1999. These amounts, together with deferred
compensation recorded in connection with the acquisition of Bridal Search, will
be recognized as noncash compensation expense on an accelerated basis over the
vesting period of the options consistent with the method described in FASB
Interpretation No. 28.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
F-20
<PAGE> 101
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------------
1997 1998 1998 1999
--------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.............. $ 804,600 $ 1,374,000 $ 1,030,200 $ 3,874,000
Deferred revenue.............. -- 5,800 4,300 2,900
Depreciation and
amortization............... 8,900 49,500 37,200 111,100
Other......................... 500 800 500 100
--------- ----------- ----------- -----------
Total deferred tax assets....... 814,000 1,430,100 1,072,200 3,988,100
Deferred tax liabilities:
Capitalized software costs.... -- -- -- (188,500)
--------- ----------- ----------- -----------
Net deferred tax assets......... 814,000 1,430,100 1,072,200 3,799,600
Valuation allowance........... (814,000) (1,430,100) (1,072,200) (3,799,600)
--------- ----------- ----------- -----------
Total deferred tax assets....... $ -- $ -- $ -- $ --
========= =========== =========== ===========
</TABLE>
Net deferred tax assets have been fully offset by a valuation allowance due
to the uncertainty of realizing such benefit.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $2,975,000 for federal and state income tax purposes which are set
to expire in years 2011 through 2018.
11. COMMITMENTS
OPERATING LEASES
The Company leases office facilities and certain warehouse space under
noncancelable operating lease agreements which expire at various dates through
2003. In October 1999, the Company entered into a lease amendment for additional
office space through March 31, 2012. Future minimum lease payments under
noncancelable operating leases including the lease amendment made in October
1999, are as follows:
<TABLE>
<S> <C>
Year ending September 30:
2000..................................... $ 374,000
2001..................................... 415,000
2002..................................... 416,000
2003..................................... 400,000
2004..................................... 450,000
Thereafter............................... 4,060,000
----------
Total...................................... $6,115,000
==========
</TABLE>
Rent expense for the period from Inception to December 31, 1996, the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1998
and 1999
F-21
<PAGE> 102
THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounted to approximately $30,000, $43,000, $183,000, $98,000 (unaudited) and
$198,000, respectively.
Sublease income for the year ended December 31, 1998 and the nine months
ended September 30, 1998 and 1999 amounted to $97,000, $66,000 (unaudited) and
$36,000, respectively.
OTHER
At September 30, 1999, the Company is obligated to pay certain fees as
follows:
<TABLE>
<S> <C>
Year ending September 30:
2000..................................... $1,150,000
2001..................................... 1,200,000
2002..................................... 1,200,000
2003..................................... 300,000
----------
Total...................................... $3,850,000
==========
</TABLE>
12. SUBSEQUENT EVENTS
COMMON STOCK
At October 26, 1999, the Company had reserved the following shares of
common stock for future issuance after giving effect to transactions in this
footnote:
<TABLE>
<S> <C>
Conversion of Series A and Series B Preferred Stock.... 7,360,000
Options under the 1997 Long Term Incentive Plan........ 2,849,868
Common stock warrant................................... 1,700,000
Common stock warrant................................... 366,667
Options related to the acquisition of Bridalink.com.... 10,000
Options related to the acquisition of Click Trips,
Inc.................................................. 10,000
Common Shares issuable in connection with employment of
certain management of Bridal Search.................. 133,511
----------
Total common stock reserved for future issuance........ 12,430,046
==========
</TABLE>
F-22
<PAGE> 103
REPORT OF INDEPENDENT AUDITORS
The Shareholder of
Casenhiser Clothing Company, Inc.
We have audited the accompanying balance sheets of Casenhiser Clothing
Company, Inc. (the "Company") as of December 31, 1997 and April 1, 1998, and the
related statements of operations, shareholder's equity and cash flows for the
year ended December 31, 1997 and the period ended April 1, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1997 and April 1, 1998 and the results of its operations and its cash flows for
the year ended December 31, 1997 and the period ended April 1, 1998 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
August 18, 1999
F-23
<PAGE> 104
CASENHISER CLOTHING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 1,
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 2,333 $ 3,249
Inventories......................................... 2,480 2,320
Other current assets................................ 1,750 850
--------- ---------
Total current assets.................................. 6,563 6,419
Property and equipment................................ 45,902 45,902
Less: accumulated depreciation........................ (39,436) (40,113)
--------- ---------
Property and equipment, net........................... 6,466 5,789
--------- ---------
Total assets.......................................... $ 13,029 $ 12,208
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $ -- $ 5,743
--------- ---------
Total current liabilities............................. -- 5,743
Commitments and contingencies
Shareholder's equity:
Common stock, $.01 par value; 100,000 shares
authorized; 10,000, shares issued and outstanding
at December 31, 1997 and April 1, 1998,
respectively..................................... 100 100
Additional paid-in-capital.......................... 172,578 172,578
Accumulated deficit................................. (159,649) (166,213)
--------- ---------
Total shareholder's equity............................ 13,029 6,465
--------- ---------
Total liabilities and shareholder's equity............ $ 13,029 $ 12,208
========= =========
</TABLE>
See accompanying notes.
F-24
<PAGE> 105
CASENHISER CLOTHING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED PERIOD ENDED
1997 APRIL 1, 1997 APRIL 1, 1998
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues.................................... $137,590 $11,908 $44,025
Operating expenses.............................. 75,898 18,810 48,402
-------- ------- -------
Income (loss) from operations................... 61,692 (6,902) (4,377)
Interest expense................................ (7,631) (1,149) (2,187)
-------- ------- -------
Net income (loss)............................... $ 54,061 $(8,051) $(6,564)
======== ======= =======
Income (loss) per share -- basic and diluted:
Net income (loss)............................. $ 5.41 $ (.81) $ (.66)
======== ======= =======
Weighted average number of shares used in
calculating basic and diluted net income
(loss) per share.............................. 10,000 10,000 10,000
======== ======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE> 106
CASENHISER CLOTHING COMPANY, INC.
STATEMENTS OF SHAREHOLDER'S (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID IN ACCUMULATED TOTAL (DEFICIT)
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... 10,000 $100 $172,578 $(213,710) $(41,032)
Net income for the year ended
December 31, 1997.............. -- -- -- 54,061 54,061
------ ---- -------- --------- --------
Balance at December 31, 1997..... 10,000 100 172,578 (159,649) 13,029
Net loss for the period ended
April 1, 1998.................. -- -- -- (6,564) (6,564)
------ ---- -------- --------- --------
Balance at April 1, 1998......... 10,000 $100 $172,578 $(166,213) $ 6,465
====== ==== ======== ========= ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 107
CASENHISER CLOTHING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, APRIL 1, APRIL 1,
1997 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ 54,061 $(8,051) $(6,564)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation expense..................... 4,311 1,078 677
Changes in operating assets and
liabilities:
Inventories........................... (2,480) -- 160
Other current assets.................. (1,750) -- 900
Accounts payable and accrued
expenses............................ (51,820) 6,973 5,743
-------- ------- -------
Net cash provided by operating
activities............................... 2,322 -- 916
Increase in cash........................... 2,322 -- 916
Cash at beginning of period................ 11 11 2,333
-------- ------- -------
Cash at end of period...................... $ 2,333 $ 11 $ 3,249
======== ======= =======
</TABLE>
See accompanying notes.
F-27
<PAGE> 108
CASENHISER CLOTHING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 1, 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
Casenhiser Clothing Company, Inc. dba Bridal Search built and maintained an
online database of wedding gowns, gown descriptions and photographs. This
database was licensed exclusively to The Knot, Inc. On April 2, 1998, The Knot,
Inc. acquired all of the assets of Bridal Search for $50,000 in cash and 162,540
shares of The Knot, Inc.'s common stock, and the licensing agreement was
terminated. In addition, The Knot, Inc. was required to issue up to 356,046
additional shares to Bridal Search upon the achievement of future performance
criteria, of which 178,031 shares were issued in November 1998. The remaining
178,015 shares were issuable upon the attainment of certain revenue based goals.
In August 1999, The Knot, Inc. entered into a Settlement and Release Agreement
whereby Bridal Search agreed to forego its rights to receive the remaining
178,015 shares related to revenue based goals in exchange for a payment of
$150,000.
Under the agreement, former management of Bridal Search are also entitled
to receive an additional 178,015 shares of The Knot, Inc.'s common stock,
contingent upon their employment by The Knot, Inc. which vest over four years.
As of June 30, 1999, 44,504 shares had vested pursuant to the agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates. The most
significant estimates included in the preparation of the financial statements
are related to asset lives.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and accounts payable approximate fair value
due to the short-term nature of these instruments.
INVENTORY
Inventory consists of finished goods. Inventory costs are determined
principally by using the first-in, first-out (FIFO) method, and are stated at
the lower of such cost or realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is comprised primarily of office and computer
equipment and is stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets, five years.
F-28
<PAGE> 109
CASENHISER CLOTHING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances such as significant declines in revenues, earnings or
cash flows or material adverse changes in the business climate, indicate that
the carrying amount of an asset may be impaired. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the assets
to future estimated undiscounted net cash flows expected to be generated by the
assets. If the assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. To date, no impairment has incurred.
INCOME TAXES
The Company accounts for income taxes on the liability method as required
by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". Under this method, deferred tax assets and liabilities are
recognized for the future tax consequence attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
The Company has elected to be taxed as an S Corporation for federal income
tax purposes. As such, the Company has not been subject to federal income tax
since the shareholder has included the corporation's taxable income or loss in
their individual income tax returns.
NET REVENUES BY TYPE
Net revenues by type are as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED APRIL 1,
DECEMBER 31, ----------------------
TYPE 1997 1997 1998
- ---- ------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C>
Licensing................................. $107,317 $ -- $37,157
Merchandise............................... 19,773 1,908 6,868
Advertising............................... 10,500 10,000 --
-------- ------- -------
Total..................................... $137,590 $11,908 $44,025
======== ======= =======
</TABLE>
REVENUE RECOGNITION
Licensing
Licensing revenue is recognized on a monthly basis in accordance with a
licensing agreement with The Knot, Inc.
F-29
<PAGE> 110
CASENHISER CLOTHING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Merchandise
Merchandise revenues are derived from the sale of wedding supply and
novelty items and are recognized when the products are shipped to customers.
Such revenues include outbound shipping and handling charges. The Company
provides an allowance for estimated sales returns.
Advertising
Advertising revenues are derived principally from short-term advertising
contracts and recognized on a straight-line basis over the duration of the
contract.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense
approximated $3,400, $100, and $2,800 (unaudited) for the year ended December
31, 1997 and the periods ended April 1, 1998 and 1997, respectively.
CONCENTRATION OF CREDIT RISK
For the year ended December 31, 1997 and the period ended April 1, 1998,
one customer (The Knot, Inc.) accounted for 78% and 84% of net revenues,
respectively.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. The adoption of this standard has had
no impact on the Company's financial statements. Accordingly, the Company's
comprehensive net loss is equal to its net loss for all periods presented.
3. COMMITMENTS
OPERATING LEASES
The Company leased office space in California on a month to month basis.
Rent expense for the years ended December 31, 1997 and the periods ended April
1, 1998 and 1997 amounted to $1,000, $2,000 and $0 (unaudited), respectively.
4. YEAR 2000 (UNAUDITED)
The Company currently operates numerous date-sensitive computer
applications and systems throughout its business. As the century change
approaches, it will be essential for the Company to ensure that these systems
properly recognize the year 2000 and continue to process critical operation and
financial information. The Company has established processes for evaluating and
managing the risks and costs associated with preparing the Company's systems and
applications for the year 2000 change. The Company has substantially completed
these modifications and costs to allow thorough testing before the year 2000.
F-30
<PAGE> 111
BACK INSIDE COVER:
- Center of page contains four photos from various weddings.
- Bottom of page contains The Knot's Web site address and lists The Knot's
AOL keyword ("weddings").
[LOGO]
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
the underwriting discounts and commissions, payable by the registrant in
connection with the sale of the common stock being registered.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee....................................... $ 12,788
NASD filing fee............................................ 5,100
Nasdaq National Market listing fee......................... 95,000
Legal fees and expenses.................................... 350,000
Accounting fees and expenses............................... 250,000
Printing and engraving..................................... 250,000
Blue Sky fees and expenses................................. 10,000
Transfer Agent and Registrar fees and expenses............. 15,000
Miscellaneous.............................................. 12,112
----------
Total................................................. $1,000,000
==========
</TABLE>
- ---------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's Certificate of Incorporation in effect as of the date
hereof, and the registrant's Amended and Restated Certificate of Incorporation
to be in effect upon the closing of this offering (collectively, the
"Certificate") provides that, except to the extent prohibited by the Delaware
General Corporation Law, as amended (the "DGCL"), the registrant's directors
shall not be personally liable to the registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors of the
registrant. Under the DGCL, the directors have a fiduciary duty to the
registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
registrant intends to obtain liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or
II-1
<PAGE> 113
status as directors and officers, provided that this provision shall not
eliminate or limit the liability of a director: (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the registrant shall fully indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the registrant, or is or was serving at the request of the registrant
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and executive
officers to give them additional contractual assurances regarding the scope of
the indemnification provided in our certificate of incorporation and to provide
additional procedural protections in the event of litigation. At present, there
is no pending litigation or proceeding involving any director, officer, employee
or agent as to which indemnification will be required or permitted under the
Certificate. The registrant is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
We intend to obtain liability insurance for our directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Common Stock. On April 2, 1998, November 13, 1998 and April 2, 1999, the
registrant issued 162,540, 178,031 and 44,504 shares of common stock,
respectively, valued at $1.05 for financial reporting purposes, to Casenhiser
Clothing Company, Inc. d/b/a Bridal Search and certain members of its management
in connection with the acquisition of the assets of Bridal Search. On April 28,
1998 the registrant issued to each of its four founders 267,030 shares of common
stock valued at $1.05 for financial reporting purposes, in connection with a
recapitalization of the company. On July 30, 1999, the registrant issued 5,000
shares of common stock valued at $7.00 per share for financial reporting
purposes, to Jack Benoff in connection with the acquisition of Click Trips,
Inc. On August 18, 1999, the registrant issued 10,000 shares of common stock
valued at $8.00 per share for financial reporting purposes, to Denis Reggie in
connection with the acquisition of Wedding Photographers Network.
Preferred Stock and Warrants. On April 28, 1998, the registrant sold an
aggregate of 3,360,000 shares of Series A Preferred Stock to Hummer Winblad
Venture Partners III, L.P., Hummer Winblad Technology Fund III, L.P. and America
Online for an aggregate purchase price of $3.9 million. Upon the closing of this
offering, all of the outstanding shares of Series A Preferred Stock will convert
into an aggregate of 3,360,000 shares of common stock.
II-2
<PAGE> 114
On April 13, 1999, the registrant sold 4,000,000 shares of Series B
Preferred Stock to QVC, Inc. for an aggregate of $15.0 million. Upon the closing
of this offering all of the outstanding shares of Series B Preferred Stock will
convert into an aggregate of 4,000,000 shares of common stock. In connection
with this sale, QVC received a warrant to purchase 1,700,000 shares of common
stock at an exercise price of $5.00 per share. The warrant becomes exercisable
upon the earlier of the fourth anniversary of the issuance of the warrant or the
initial public offering of the registrant's common stock.
On July 23, 1999, the registrant issued to America Online a warrant to
purchase 366,667 shares of common stock at a price equal to $7.20 per share, in
connection with the amended anchor tenant agreement between registrant and AOL.
The warrant is exercisable for eight years from the date of grant.
Options. The registrant from time to time has granted stock options to
employees, directors and consultants. The following table sets forth information
regarding such grants during the past three fiscal years.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICES
----------------- ---------------
<S> <C> <C>
May 2, 1996 (inception) to December 31, 1996........ 0 $ 0
January 1, 1997 to December 31, 1997................ 98,825 $ 0.01
January 1, 1998 to December 31, 1998................ 583,000 $ 0.50
</TABLE>
The above securities were offered and sold by the registrant in reliance
upon exemptions from registration pursuant either to (i) Section 4(2) of the
Securities Act of 1933, as transactions not involving any public offering, or
(ii) Rule 701 under the Securities Act of 1933. No underwriters were involved in
connection with the sales of securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation
3.2* Form of Amended and Restated Certificate of Incorporation to
be in effect upon the closing of this offering
3.3** Bylaws
3.4* Form of Amended and Restated Bylaws to be in effect upon the
closing of this offering
4.1* Specimen Common Stock certificate
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions defining
the rights of holders of common stock of the registrant
4.3** Common Stock Warrant Certificate of QVC Interactive
Holdings, Inc.
4.4** Warrant Agreement of America Online, Inc.
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1** Employment Agreement between The Knot, Inc. and David Liu
10.2** Employment Agreement between The Knot, Inc. and Carley Roney
</TABLE>
II-3
<PAGE> 115
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.3** Employment Agreement between The Knot, Inc. and Richard
Szefc
10.4** Employment Agreement between The Knot, Inc. and Sandra
Stiles
10.5* 1999 Stock Incentive Plan
10.6* 1999 Employee Stock Purchase Plan
10.7 Third Amended and Restated Investor Rights Agreement
10.8+** Services Agreement between The Knot, Inc. and QVC, Inc.
10.9+** Amended and Restated Anchor Tenant Agreement between The
Knot, Inc. and America Online, Inc.
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)
24.1** Powers of Attorney (See Signature Page)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be supplied by amendment.
** Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts, Nine Months Ended
September 30, 1999
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 116
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or
(4), or 497(h) under the Securities Act of 1933, shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 117
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in The
City of New York, State of New York, on this 27th day of October, 1999.
THE KNOT, INC.
By: /s/ DAVID LIU
------------------------------------
David Liu
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ DAVID LIU President, Chief Executive October 27, 1999
- --------------------------------------------------- Officer and Chairman of the
David Liu Board of Directors
(principal executive
officer)
/s/ RICHARD SZEFC Chief Financial Officer, October 27, 1999
- --------------------------------------------------- Treasurer and Secretary
Richard Szefc (principal financial and
accounting officer)
/s/ SANDRA STILES Chief Operating Officer, October 27, 1999
- --------------------------------------------------- Assistant Secretary and
Sandra Stiles Director
* Director October 27, 1999
- ---------------------------------------------------
John Link
* Director October 27, 1999
- ---------------------------------------------------
Ann Winblad
*By: /s/ DAVID LIU
----------------------------------------------
David Liu
as Attorney-in-Fact
</TABLE>
II-6
<PAGE> 118
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of The Knot, Inc. as
of December 31, 1997 and 1998 and September 30, 1999, and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for the period from May 2, 1996 (date of inception) to December 31, 1996,
the years ended December 31, 1997 and 1998, and the nine month period ended
September 30, 1999, and have issued our report thereon dated October 26, 1999.
Our audits also included the consolidated financial statement schedule listed in
Item 14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
October 26, 1999
S-1
<PAGE> 119
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING COSTS AND CHARGED TO NET OF SEPTEMBER 30,
OF YEAR EXPENSES OTHER ACCOUNTS RECOVERIES 1999
---------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
1999......................... $ -- $133,000 $ -- $ -- $133,000
Allowance for Loan Receivable
1999......................... $ -- $ 50,000 $ -- $ -- $ 50,000
</TABLE>
S-2
<PAGE> 120
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation
3.2* Form of Amended and Restated Certificate of Incorporation to
be in effect upon the closing of this offering
3.3** Bylaws
3.4* Form of Amended and Restated Bylaws to be in effect upon the
closing of this offering
4.1* Specimen Common Stock certificate
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions defining
the rights of holders of common stock of the registrant
4.3** Common Stock Warrant Certificate of QVC Interactive
Holdings, Inc.
4.4** Warrant Agreement of America Online, Inc.
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1** Employment Agreement between The Knot, Inc. and David Liu
10.2** Employment Agreement between The Knot, Inc. and Carley Roney
10.3** Employment Agreement between The Knot, Inc. and Richard
Szefc
10.4** Employment Agreement between The Knot, Inc. and Sandra
Stiles
10.5* 1999 Stock Incentive Plan
10.6* 1999 Employee Stock Purchase Plan
10.7 Third Amended and Restated Investor Rights Agreement
10.8+** Services Agreement between The Knot, Inc. and QVC, Inc.
10.9+** Amended and Restated Anchor Tenant Agreement between The
Knot, Inc. and America Online, Inc.
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)
24.1** Powers of Attorney (See Signature Page)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be supplied by amendment.
** Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
<PAGE> 1
Exhibit 10.7
THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of October ___, 1999, by and among The
Knot, Inc., a Delaware corporation (the "Company"), the holders of the Company's
Series A Preferred Stock (the "Series A Preferred Stock") listed on the
signature pages attached hereto (the " Series A Investors"), the holder of the
Company's Series B Preferred Stock (the "Series B Preferred Stock") listed on
the signature pages attached hereto (the "Series B Investor") and the holders of
the Company's Common Stock (the "Founders") listed on the signature pages
attached hereto (the "Founders"). The Company, the Series A Investors, the
Series B Investor and the Founders are individually referred to herein as a
"Party" and are collectively referred to herein as the "Parties." The Company's
Board of Directors is referred to in as the "Board."
RECITALS
WHEREAS, the Company, the Founders, the Series A Investors and the
Series B Investor are parties to that certain Second Amended and Restated
Investors' Rights Agreement dated as of April 13, 1999 (the "Existing
Agreement");
WHEREAS, the Parties have agreed to amend and restate the Existing
Agreement to include the Common Stock of the Company issuable upon exercise of
the AOL Warrant (as defined herein) and as contemplated by this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the Parties hereby agree that the Existing Agreement
shall be amended and restated in its entirety by this Agreement, and the Parties
hereto further agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Agreement:
(a) The term "Act" means the Securities Act of 1933, as
amended.
(b) The term "Affiliate" has the meaning given to such
term in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.
(c) The term "AOL Warrant" means that certain warrant,
dated July 23, 1999, to purchase 366,667 shares of the Company's Common Stock.
(d) The term "Form S-3" means such form under the Act as
in effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC that permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(e) The term "Founders" means collectively David Liu,
Carley Roney, Michael Wolfson and Rob Fassino.
<PAGE> 2
(f) The term "Holder" means any person owning or having
the right to acquire (i) Series A Preferred Stock or any assignee thereof in
accordance with Section 1.11 or (ii) Series B Preferred Stock or any assignee
thereof in accordance with Section 1.11.
(g) The term "1934 Act" means the Securities Exchange
Act of 1934, as amended.
(h) The term "Person" means an individual, a
corporation, a general or limited partnership, a limited liability company, an
association, a trust or any other entity or organization.
(i) The term "Qualified Public Offering" means the
Company's sale of its Common Stock in a firm commitment underwritten public
offering led by a nationally recognized underwriter pursuant to a registration
statement under the Act on Form S-1 or S-3 (or any successor form thereto) with
a per share purchase price greater than $7.50 (as such price may be subject to
adjustment in the same fashion as the conversion prices set forth in Section
4(d) of the Amended and Restated Certificate of Incorporation of the Company)
and aggregate proceeds in excess of $10,000,000.
(j) The term "QVC Warrant" means that certain warrant,
dated August 23, 1999, to purchase 1,700,000 shares of the Company's Common
Stock, held by the Series B Investor.
(k) The term "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Act, and the
declaration or ordering of effectiveness of such registration statement or
document.
(l) The term "Registrable Securities" means (i) the
Common Stock issuable or issued upon conversion of the Series A Preferred Stock
or Series B Preferred Stock, (ii) the Common Stock issuable upon exercise of the
AOL Warrant or the QVC Warrant and (iii) any Common Stock or other securities of
the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security that is issued as) a dividend or other
distribution with respect to, or in exchange for, or in replacement of, the
shares referenced in (i) and (ii) above, provided, however that Registrable
Securities shall not include any shares of Common Stock which have been
previously registered hereunder or which have been sold to the public.
(m) The term "SEC" shall mean the Securities and
Exchange Commission.
(n) The number of shares of "Registrable Securities"
outstanding shall be determined by the number of outstanding shares of Common
Stock that are, and the number of shares of Common Stock issuable pursuant to
the then exercisable or convertible securities that are, Registrable Securities.
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1.2 Request for Registration.
(a) Subject to the conditions of this Section 1.2, if
the Company shall receive at any time after the earlier of (i) March 23, 2003 or
(ii) six (6) months after the effective date of the Qualified Public Offering, a
written request from the Holders of twenty-five percent (25%) or more of the
then outstanding Registrable Securities owned by either the Series A or B
Investors (the "Initiating Holders") that the Company file a registration
statement under the Act covering the registration of Registrable Securities with
an anticipated aggregate offering price of at least $10,000,000, then the
Company shall:
(i) within ten (10) days of the receipt thereof,
give written notice of such request to all other Holders; and
(ii) subject to the limitations of this Section
1.2, use all reasonable efforts to effect, as soon as practicable, the
registration under the Act of all Registrable Securities that the Holders
request to be registered in a written request received by the Company within
fifteen (15) days after receipt of such written notice from the Company.
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 1.2 and the Company shall include such information in the written
notice referred to in Section 1.2(a). In such event the right of any Holder to
include its Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder) to
the extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company (which underwriter or underwriters shall be
nationally recognized and shall be reasonably acceptable to a majority in
interest of the Initiating Holders). Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Company that marketing factors
require a limitation of the number of securities underwritten (including those
Registrable Securities owned by the Initiating Holders) (the "Offering
Quantity"), then the Company shall so advise all Holders of Registrable
Securities that would otherwise be underwritten pursuant hereto, and the number
of shares that may be included in the underwriting shall be included in the
following priority:
(i) first, before including any securities that
are not Registrable Securities that derive from the same series as those then
owned by or initially owned by the Initiating Holder, the Company will include
all of the Registrable Securities that derive from the same series as those
owned by the Initiating Holder (the "Same Series Holders"), and if the number of
the Registrable Securities of the Same Series Holders requested to be included
exceeds the Offering Quantity, then the Company shall include only such
requesting Same Series Holder's pro rata share of the Offering Quantity, based
on the amount of Registrable Securities held by such Same Series Holder; and
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(ii) second, to the extent (and only to the
extent) that the Offering Quantity exceeds the aggregate amount of Registrable
Securities which are requested to be included in such registration, the Company
shall include in such registration, on a pro rata basis, the Registrable
Securities that derive from a different series than those owned by the
Initiating Holder.
(c) The Company shall not be required to effect a
registration pursuant to this Section 1.2:
(i) in any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, unless the Company is already subject to service in
such jurisdiction and except as may be required under the Act; or
(ii) after the Company has effected four (4)
demand registrations pursuant to this Section 1.2 (two (2) on behalf of the
Series A Investors and, two (2) on behalf of the Series B Investor and such
registrations have been declared or ordered effective and the Offering Quantity
of Registrable Securities shall have been sold thereunder (for purposes hereof,
a demand shall be deemed requested by the Initiating Holder(s)); or
(iii) during the period starting with the date
sixty (60) days prior to the Company's good faith estimate of the date of the
filing of, and ending on a date one hundred eighty (180) days following the
effective date of, a Company-initiated registration subject to Section 1.3
below, provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective; or
(iv) if the Initiating Holders propose to dispose
of Registrable Securities that may be registered on Form S-3 pursuant to Section
1.4 hereof; or
(v) if the Company shall furnish to the Initiating
Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the Company's Chief Executive Officer or Chairman of the
Board stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such registration statement to be effected at such time, in which event the
Company shall have the right to defer such filing for a period of not more than
ninety (90) days after receipt of the request of the Initiating Holders,
provided that such right to delay a request shall be exercised by the Company
not more than once in any twelve (12)-month period; or
1.3 Company Registration.
(a) If (but without any obligation to do so) the Company
proposes to register (including for this purpose a registration effected by the
Company for stockholders other than the Holders) any of its stock or other
securities under the Act in connection with the public offering of such
securities (other than a registration relating solely to the sale of securities
to participants in a Company stock plan, a registration relating to a corporate
reorganization or other transaction under Rule 145 of the Act, a registration on
any form that does not include substantially the same information as would be
required to be
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included in a registration statement covering the sale of the Registrable
Securities hereunder, or a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities that are
also being registered), the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of any
Holder given within twenty (20) days after receipt of such notice from the
Company in accordance with Section 3.5, the Company shall, subject to the
provisions of Section 1.3(c), use all reasonable efforts to cause to be
registered under the Act all of the Registrable Securities that each such Holder
has requested to be registered.
(b) Right to Terminate Registration. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 1.3 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration. The expenses
of such withdrawn registration shall be borne by the Company in accordance with
Section 1.7 hereof
(c) Underwriting Requirements. In connection with any
offering involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under this Section 1.3 to include any of the
Holders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
it (or by other persons entitled to select the underwriters) and enter into an
underwriting agreement in customary form with an underwriter or underwriters
selected by the Company, and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of the
offering by the Company. If the total number of securities, including
Registrable Securities, requested by stockholders to be included in such
offering exceeds the number of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
that the underwriters determine in their sole discretion will not jeopardize the
success of the offering. In such event the Company shall so advise all Holders
of Registrable Securities that would otherwise be underwritten pursuant hereto,
and the number of Registrable Securities that may be included in the
underwriting shall be determined by the following procedure. Each Holder may
include that number of Registrable Securities owned by such Holder that is the
product of multiplying the number of Registrable Securities owned by such Holder
by a fraction, the numerator of which shall be the number of the then
outstanding Registrable Securities owned by such Holder and the denominator of
which shall be the sum of the then outstanding Registrable Securities held by
all Holders, provided, however, if any Holder does not request inclusion of the
maximum number of Registrable Securities allocated to such Holder pursuant to
the above-described procedure, the remaining portion of such Holder's allocation
shall be reallocated among those requesting Holders whose allocations did not
satisfy their requests pro rata on the basis of the number of Registrable
Securities which are then held by such Holders. This reallocation procedure
shall be repeated until all Registrable Securities which may be included in the
registration on behalf of the Holders have been so allocated. Notwithstanding
the forgoing, except for the Company's initial public offering of its Common
Stock, in no event shall the amount of Registrable Securities owned by the
Series A Investors and Series B Investor which are included in the offering be
reduced below thirty percent (30%) of the total amount of securities included in
such offering with such inclusion to be determined on a pro rata basis among the
Holders requesting Registration.
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1.4 Form S-3 Registration. (a) In case the Company shall
receive written notice from the Holders of at least thirty percent (30%) of the
Registrable Securities owned by the Series A and/or B Investors requesting that
the Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company shall:
(i) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(ii) use all reasonable efforts to effect, as soon
as practicable, such registration and all such qualifications and compliances as
may be so requested and as would permit or facilitate the sale and distribution
of all or such portion of such Holders' Registrable Securities as are specified
in such request, together with all or such portion of the Registrable Securities
of any other Holders joining in such request as are specified in a written
request given within fifteen (15) days after receipt of such written notice from
the Company, provided, that if less than all of the Registrable Securities shall
be registered, Holders shall participate in such registration on the basis of
the procedure described in Section 1.3(c).
(b) The Company shall not be obligated to effect any
such registration, qualification or compliance, pursuant to this Section 1.4:
(i) if Form S-3 is not available for such offering
by the Holders;
(ii) if the Holders, together with the holders of
any other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public (net of any underwriters' discounts or
commissions) of less than $1,000,000;
(iii) if the Company shall furnish to the Holders
who request a registration hereunder a certificate signed by the Chief Executive
Officer or Chairman of the Board of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than ninety (90) days after receipt of the request of the Holder or Holders
under this Section 1.4; provided, however, that the Company shall not utilize
this right more than once in any twelve month period;
(iv) if the Company has, within the twelve (12)
month period preceding the date of such request, already effected one
registration on Form S-3 for the Holders of the class of Registrable Securities
requesting an additional registration hereunder pursuant to this Section 1.4; or
(v) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
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Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after
receipt of the request or requests of the Holders. Registrations effected
pursuant to this Section 1.4 shall not be counted as requests for
registration effected pursuant to Section 1.2.
1.5 Obligations of the Company. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration
statement with respect to the Registrable Securities and use all reasonable
efforts to cause such registration statement to become effective, and, upon the
request of the Holders of a majority of the Registrable Securities registered
thereunder keep such registration statement effective for a period of up to one
hundred twenty (120) days or, if earlier, until the distribution contemplated in
the registration statement has been completed;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement;
(c) furnish to the Holders such numbers of copies of the
registration statement, and any amendments and supplements thereto, and the
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them;
(d) use all reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions;
(e) in the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering;
(f) notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act or the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;
(g) cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed; and
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(h) provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
1.6 Information from the Holder(s). It shall be a condition
precedent to the obligations of the Company to take any action pursuant to this
Section 1 with respect to the Registrable Securities of any selling Holder that'
such Holder shall furnish to the Company such. information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
1.7 Expenses of Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Sections I.2, 1.3, and 1.4
including (without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the Company
and the reasonable fees and disbursements of one counsel for the selling Holders
shall be borne by the Company. Notwithstanding the foregoing, the Company shall
not be required to pay for any expenses of any registration proceeding begun
pursuant to Sections 1.2 or 1.4, if the registration request is subsequently
withdrawn at the request of the Holders of a majority of the Registrable
Securities to be registered (in which case all participating Holders shall bear
such expenses pro rata based upon the number of Registrable Securities that were
to be requested in the withdrawn registration) unless, in the case of a
registration requested under Section 1.2, the Holders of a majority of the
Registrable Securities agree to forfeit their right to one demand registration
pursuant to Section 1.2, provided, however, that if at the time of such
withdrawal, the Holders have learned of a material adverse change in the
condition or business of the Company from that known to the Holders at the time
of their request and have withdrawn the request with reasonable promptness
following disclosure by the Company of such material adverse change, then the
Holders shall not be required to pay any of such expenses and shall retain their
rights pursuant to Sections 1.2 or 1.4.
1.8 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.9 Indemnification. In the event any Registrable Securities
are included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners or members, or officers,
directors, employees and stockholders of each Holder, legal counsel and
accountants for each Holder, any underwriter (as defined in the Act) and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act or the 1934 Act, against any losses, claims, damages or liabilities
(joint or several) to which they may become subject under the Act, the 1934 Act
or any state securities laws, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a
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material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Act, the 1934 Act, any state securities laws or any rule or
regulation promulgated under the Act, the 1934 Act or any state securities laws;
and the Company will reimburse each such Holder, underwriter, or controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
subsection l.9(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation that occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, underwriter, or controlling person; provided further, however,
that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Holder or underwriter, or any
person controlling such Holder or underwriter, from whom the person asserting
any such losses, claims, damages or liabilities purchased shares in the
offering, if a copy of the prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Holder or underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the shares to such person, and if the prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability.
(b) To the extent permitted by law, each selling Holder
(each, an "Indemnifying Holder") will indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the registration
statement, each person, if any, who controls the Company within the meaning of
the Act, legal counsel and accountants for the Company, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Act, the 1934 Act or any state securities
laws, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Indemnifying Holder
expressly for use in connection with such registration; and each such
Indemnifying Holder will reimburse any person intended to be indemnified
pursuant to this subsection l.9(b), for any legal or other expenses reasonably
incurred by such person in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this subsection l.9(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Indemnifying Holder (which
consent shall not be unreasonably withheld), provided that in no event shall any
indemnity under this subsection l.9(b) exceed the gross proceeds from the
offering received by such Holder, less such Holder's pro rata share of any
underwriting discounts. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Holder, consent to entry
of any judgment or enter into any settlement that does not include as an
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unconditional term thereof the giving by the claimant or plaintiff to such
Holder of a release from all liability in respect to such claim or litigation.
(c) Promptly after receipt by an indemnified party under
this Section 1.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.9, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.9.
(d) If the indemnification provided for in this Section
1.9 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to herein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and the Holders under
this Section 1.9 shall survive the completion of any offering of the Registrable
Securities in a registration statement under this Section 1, and otherwise.
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1.10 Reports Under Securities Exchange Act of 1934. With a
view to making available to the Holders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after the
effective date of the Qualified Public Offering;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns
any Registrable Securities, forthwith upon request (i) a written statement by
the Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC that permits the
selling of any such securities without registration or pursuant to such form.
1.11 Assignment of Registration Rights. The rights to cause
the Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities that (i) is a subsidiary, parent, partner, limited
partner, retired partner, member, retired member or stockholder of a Holder or
an entity associated by common ownership or control and (ii) after such
assignment or transfer, holds at least 1,000,000 shares of Registrable
Securities (subject to appropriate adjustment for stock splits, stock dividends,
combinations and other recapitalizations), provided: (a) the Company is, within
a reasonable time after such transfer, furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned, (b) such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement, including without limitation the provisions of
Section 1.13 below, and (c) such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Act.
1.12 Limitations on Subsequent Registration Rights. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of the holders of a majority of the Series A and B Preferred
Stock, each voting separately as a series, enter into any agreement with any
holder or prospective holder of any securities of the Company, which does not at
the time own any Registrable Securities, that would allow such holder or
prospective holder (a) to include such securities in any registration filed
under Section 1.3 hereof, unless under the terms of such agreement, such holder
or prospective holder may include such securities in any such registration only
to the extent that the inclusion of such securities will not reduce the
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amount of the Registrable Securities that are included in such registration or
(b) to demand registration of their securities.
1.13 "Market Stand-Off" Agreement. Each Holder hereby agrees
that it will not, without the prior written consent of the managing underwriter,
during the period commencing on the date of the final prospectus relating to the
Company's initial public offering and ending on the date specified by the
Company and the managing underwriter (such period not to exceed one hundred
eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such Common Stock
or any such securities are then owned by the Holder or are thereafter acquired),
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise, provided, however, that the forgoing restrictions described in
clauses (i) and (ii) shall not apply to any transaction between a Holder and any
of its Affiliates.. The foregoing provisions of this Section 1.13 shall apply
only to the Company's initial public offering of equity securities, shall not
apply to the sale of any shares to an underwriter pursuant to an underwriting
agreement, and shall only be applicable to the Holders if all officers and
directors and greater than five percent (5%) stockholders of the Company enter
into similar agreements. The underwriters in connection with the Company's
initial public offering are intended third party beneficiaries of this Section
1.13 and shall have the right, power and authority to enforce the provisions
hereof as though they were a party hereto.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
1.14 Termination of Registration Rights. No Holder shall be
entitled to exercise any right provided for in this Section 1 after seven (7)
years following the closing of the Qualified Public Offering or, as to any
Holder, such earlier time at which all Registrable Securities held by such
Holder (and any affiliate of the Holder with whom such Holder must aggregate its
sales under Rule 144) can be sold in any three (3)-month period without
registration in compliance with Rule 144 of the Act.
2. Covenants of the Company.
2.1 Delivery of Financial Statements. The Company shall
deliver to each Holder:
(a) as soon as practicable, but in any event within
ninety (90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
stockholder's equity as of the end of such year, and a statement of cash flows
for such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles ("GAAP"),
and
12
<PAGE> 13
audited and certified by independent public accountants of nationally recognized
standing selected by the Company;
(b) as soon as practicable, but in any event within
forty-five (45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited income statement, statement of
cash flows for such fiscal quarter and an unaudited balance sheet as of the end
of such fiscal quarter.
(c) within thirty (30) days of the end of each month, an
unaudited income statement and statement of cash flows and balance sheet for and
as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event at least
thirty (30) days prior to the end of each fiscal year, a budget and business
plan for the next fiscal year, prepared on a monthly basis, including balance
sheets, income statements and statements of cash flows for such months and, as
soon as prepared, any other budgets or revised budgets prepared by the Company;
(e) with respect to the financial statements called for
in subsections (b)and (c) of this Section 2.1, an instrument executed by the
Chief Financial Officer or President of the Company certifying that such
financials were prepared in accordance with GAAP consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by GAAP) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to year-end audit
adjustment; and
(f) such other information relating to the financial
condition, business, prospects or corporate affairs of the Company as the Holder
or any assignee of the Holder may from time to time request, provided, however,
that the Company shall not be obligated under this subsection (fl or any other
subsection of Section 2.1 to provide information that it deems in good faith to
be a trade secret or similar confidential information.
2.2 Inspection. The Company shall permit each Holder that
holds at least 1,000,000 shares of Registrable Securities at such Holder's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Holder; provided, however, that the Company shall not be obligated pursuant to
this Section 2.2 to provide access to any information that it reasonably
considers to be a trade secret or similar confidential information.
2.3 Termination of Information and Inspection Covenants. The
covenants set forth in Sections 2.1 and 2.2 shall terminate as to the Holders
and be of no further force or effect when the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with the
firm commitment underwritten offering of its securities to the general public is
consummated or when the Company first becomes subject to the periodic reporting
requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall
first occur.
13
<PAGE> 14
2.4 Right of First Offer. Subject to the terms and conditions
specified in this Section 2.4 and Section 3(a), the Company hereby grants to
each Major Investor (as hereinafter defined) a right of first offer with respect
to future sales by the Company of its Shares (as hereinafter defined). A Series
A Investor, as well as any transferee of a Series A Investor, shall be a Major
Investor provided that such Person holds at least 500,000 shares of Registrable
Securities (as adjusted for stock splits, stock dividends, combinations and
other recapitalizations). The Series B Investor, as well as any transferee of
the Series B Investor, shall be a Major Investor provided that such Person holds
at least 400,000 shares of Registrable Securities (as adjusted for stock splits,
stock dividends, combinations and other recapitalizations). For purposes of this
Section 2.4, Major Investor includes any general partners and Affiliates of a
Holder. Each Holder shall be entitled to apportion the right of first offer
hereby granted it among itself and its partners and Affiliates in such
proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exchangeable or exercisable for any shares of, any class of
its capital stock ("Shares"), the Company first shall offer such Shares to each
Major Investor in accordance with the following provisions.
(a) The Company shall deliver a notice in accordance
with Section 3.5 (the "First Offer Notice") to the Major Investors stating (i)
its bona fide intention to offer such Shares, (ii) the number of such Shares to
be offered, and (iii) the price and terms upon which it proposes to offer such
Shares.
(b) By written notification received by the Company,
within twenty (20) calendar days after receipt of the notice, the Major Investor
may elect to purchase or obtain, at the price and on the terms specified in the
First Offer Notice, up to that portion of such Shares that equals the proportion
that the number of shares of Common Stock issued and held, or issuable upon
conversion of the Series A or B Preferred Stock then held, by such Major
Investor bears to the total number of shares of Common Stock of the Company then
outstanding (assuming full conversion of all convertible securities).
(c) If all Shares that Major Investors are entitled to
obtain pursuant to subsection 2.4(b) are not elected to be obtained as provided
in subsection 2.4(b) hereof, the Company may, during the ninety (90) day period
following the expiration of the period provided in subsection 2.4(b) hereof,
offer the remaining unsubscribed portion of such Shares to any person or persons
at a price not less than, and upon terms no more favorable to the offerer than
those specified in the First Offer Notice. If the Company does not enter into an
agreement for the sale of the Shares within such ninety (90) day period, or if
such agreement is not consummated within ninety (90) days of the execution
thereof, the right provided hereunder shall be deemed to be revived and such
Shares shall not be offered unless first reoffered to the Major Investors in
accordance herewith.
(d) The right of first offer in this paragraph 2.4 shall
not be applicable to (i) the issuance or sale of up to 2,849,868 shares of
Common Stock (pursuant to options granted) to employees, directors and
consultants for the primary purpose of soliciting or retaining their services or
any greater number unanimously approved by the Board, (ii) the
14
<PAGE> 15
issuance of securities pursuant to the Qualified Public Offering, (iii) the
issuance of securities pursuant to the conversion or exercise of convertible or
exercisable securities, including but not limited to the exercise of the AOL
Warrant and the QVC Warrant, (iv) the issuance of securities in connection with
a bona fide business acquisition of or by the Company, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise or (v) the
issuance of stock, warrants or other securities or rights to persons or entities
with which the Company has business relationships provided such issuances are
for other than primarily equity financing purposes and provided that at the time
of any such issuance, the aggregate of such issuance and similar issuances in
the preceding twelve month period do not exceed 1% of the then outstanding
Common Stock of the Company (assuming full conversion and exercise of all
convertible and exercisable securities).
2.5 Observer Rights. As long as America Online, Inc. owns not
less than 400,000 of the shares of the Series A Preferred Stock (or an
equivalent amount of Common Stock issued upon conversion thereof), the Company
shall invite a representative of America Online, Inc. to attend all meetings of
its Board of Directors in a nonvoting observer capacity and, in this respect,
shall give such representative copies of all notices, minutes, consents, and
other materials that it provides to its directors; provided, however, that any
representative granted observer rights by the Company, including but not limited
to those rights granted to America Online, Inc. above, shall agree to hold in
confidence and trust and to act in a fiduciary manner with respect to all
information so provided; and, provided further, that the Company reserves the
right to withhold any information and to exclude such representative from any
meeting or portion thereof if access to such information or attendance at such
meeting could adversely affect the attorney-client privilege between the Company
and its counsel or would result in disclosure of trade secrets to such
representative or if such Investor or its representative is a direct competitor
of the Company.
2.6 Termination of Certain Covenants. The covenants set forth
in Sections 2.4 and 2.5 shall terminate and be of no further force or effect
upon the closing of the sale of securities pursuant to the Qualified Public
Offering.
2.7 Acquisition Restrictions. Without the prior written
approval of the Series B Investor, the Company agrees that it shall not accept
any offer to purchase any of the capital stock or assets of the Company or from
any Person or any Affiliate of any Person that operates a 24-hour a day shopping
network on television.
15
<PAGE> 16
3. Standstill Agreement: Drag-Along Right. (a) The Series B Investor
hereby agrees that it will not nor will any of its Affiliates or possess rights
to acquire more than forty-three and one-half percent (43.5%) of the Company's
outstanding voting stock. (For the avoidance of doubt, the parties agree that
the QVC Warrant by its terms does not constitute "a right to acquire the
Company's outstanding voting stock" referred to in the previous sentence.) The
restriction set forth in this Section 3(a) shall terminate simultaneously with
the closing of (i) a Qualified Public Offering, (ii) a sale of all or
substantially all of the assets of the Company (a "Sale of Assets") or (iii) a
transaction or series of related transactions that results in the transfer of
fifty percent (50%) or more of the outstanding voting power of the Company (a
"Change of Control"). With respect to either a Change of Control or a Sale of
Assets, the Series B Investor and its Affiliates shall have voted their
respective shares in favor of such Change of Control or Sale of Assets, to the
extent a vote of the shareholders of the Company is necessary to permit the
consummation of such Change of Control (a "Qualified Change of Control") or Sale
of Assets (a "Qualified Sale of Assets"), respectively. The voting obligation of
the Series B Investor and its Affiliates described in the preceding sentence
shall only apply in the event that the Company has already received the minimum
number of votes necessary to authorize such Change of Control or Sale of Assets.
Neither the Series B Investor nor any of its Affiliates will be deemed to have
violated the restriction set forth in this Section 3(a) if their aggregate
ownership of the voting stock of the Company becomes greater than forty three
and one-half percent (43.5%) as a result of any redemptions by the Company of
any of its voting stock. For purposes of this Section 3(a), the exercise of the
QVC Warrant simultaneously with a Qualified Public Offering, a Qualified Change
of Control or a Qualified Sale of Assets (each, a "Trigger Event") shall mean
that the exercise of the QVC Warrant shall be deemed to have occurred
immediately prior to such Trigger Event for all purposes other than the voting
rights associated with the underlying shares of Common Stock issuable upon the
exercise of the QVC Warrant.
(b) In the event the holders of more than 50% of the
outstanding voting stock propose to enter into a Change of Control transaction
(a "Drag-Along Transaction"), the Series B Investor agrees, and shall cause its
Affiliates, to participate fully in such Drag-Along Transaction by (x) voting
all of their respective voting stock in favor of such transaction, to the extent
a vote of the shareholders is necessary for the consummation of the transaction
and (y) to the extent applicable, selling all of their respective shares to the
proposed transferee (including those shares of Common Stock that may be received
upon exercise of the QVC Warrant); provided that the per share purchase price to
be received by the Series B Investor and its Affiliates shall be at least $4.30
(as such price may be subject to adjustment in the same fashion as the
conversion prices set forth in Section 4(d) of the Amended and Restated
Certificate of Incorporation of the Company). The consideration received by the
Series B Investor and its Affiliates in connection with a Drag-Along Transaction
shall be on the same terms and conditions as that received by the other holders
of voting stock. The obligation of the Series B Investor and its Affiliates to
participate in Drag-Along Transactions shall terminate eighteen months after the
date hereof.
16
<PAGE> 17
4. Voting Agreements. Each of the Series A Investors, the Series B
Investor, and the Founders (collectively, the "Significant Stockholders") agrees
that neither it nor any of its Affiliates will enter into any voting trust or
any other voting agreement (each, a "Voting Agreement") with any other
Significant Stockholder. Each Significant Stockholder hereby further agrees that
a condition to any transfer of capital stock of the Company owned by such
Significant Stockholder shall be that the transferee agrees to be bound by the
restriction set forth in this Section 4; provided, however, that the restriction
set forth in this Section 4 shall not apply to any Voting Agreements entered
into by either the Series ~ Investor or any Series A Investor with its
respective Affiliates.
5. Miscellaneous.
5.1 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
5.2 Governing Law. This Agreement, including the validity
hereof and the rights and obligations of the parties hereunder, and all
amendments and supplements hereof and all waivers and consents hereunder, shall
be construed in accordance with and governed by the domestic substantive laws of
the State of New York without giving effect to any choice of law or conflicts of
law provision or rule that would cause the application of the domestic
substantive laws of any. other jurisdiction. Any action to enforce the terms of
this Agreement shall be brought in a New York State or United States Federal
District Court located in the City of New York, and each of the parties to this
Agreement hereby irrevocably consents to the jurisdiction of any such court over
its person, and waives any defenses based upon improper venue, inconvenient
forum or lack of jurisdiction.
5.3 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been received (a) upon hand delivery (receipt acknowledged) or delivery by telex
(with correct answer back received), telecopy or facsimile (with transmission
confirmation report) at the address or number designated below (if received by
8:00 p.m. E.S.T.), or the first business day following such delivery (if
delivered after 8:00 p.m. E.S.T.) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.
The addresses for such
17
<PAGE> 18
communications shall be those as set forth on the signature pages attached
hereto, or such other address as may be designated in writing hereafter, in the
same manner, by such parties.
5.6 Expenses. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
5.7 Entire Agreement: Amendments and Waivers. This Agreement
(including the Exhibits hereto, if any) constitutes the full and entire
understanding and agreement among the parties with regard to the subject matter
hereof and supersedes all prior agreements and understandings, including the
Existing Agreement, with regard to the subject matter hereof Other than Section
4, any term of this Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively), only with the prior written consent of
the Company and the holders of a majority of the Series A and Series B Preferred
Stock, each voting separately as a series. With respect to Section 4, such
provision may be amended and/or the observance of Section 4 may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the prior written consent of the Company, the Founders
and the holders of a majority of the Series A and B Preferred Stock, each voting
separately as a series. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any Registrable Securities, each
future holder of any such Registrable Securities and the Company.
5.8 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision was so excluded and shall be enforceable in
accordance with its terms.
5.9 Aggregation of Stock. All shares of Registrable Securities
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
5.10 Capacity; Authorization of Series A Investors and the
Series B Investor. Each Founder has all legal capacity to enter into this
Agreement and to carry out his or her obligations hereunder. Each Series A
Investor and Series B Investor represents that it has all necessary corporate or
other power and has taken all necessary corporate or other action required for
the due authorization, execution, delivery and performance of this Agreement,
and this Agreement constitutes its valid and legally binding obligation,
enforceable in accordance with its terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies.
18
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
COMPANY
THE KNOT, INC.
By:___________________________________________
David Liu
President and Chief Executive Officer
Address: The Knot, Inc.
462 Broadway, 6'h Floor
New York, NY 10013
Attention: President and Chief Executive
Officer
Fax: (212) 219-1929
FOUNDERS
DAVID LIU
By:___________________________________________
Address: 28 Old Fulton Street 7M
Brooklyn, NY 11201
CARLEY RONEY
By:___________________________________________
Address: 28 Old Fulton Street 7M
Brooklyn, NY 11201
MICHAEL WOLFSON
By:___________________________________________
Address: 344 Bowery, #3
New York, NY 10012
19
<PAGE> 20
ROB FASSINO
By:___________________________________________
Address: 16 First Avenue, Apt. 3
New York, NY 10009
SERIES A INVESTORS
HUMMER WINBLAD VENTURE PARTNERS III, L.P.
By:___________________________________________
Name:
Title:
Address: 2 South Park, 2nd Floor
San Francisco, CA 94107
Attention:
HUMMER WINBLAD TECHNOLOGY FUND III, L.P.
By:___________________________________________
Name:
Title:
Address: 2 South Park, 2nd Floor
San Francisco, CA 94107
Attention:
Fax:
AMERICA ONLINE, INC.
By:___________________________________________
Name:
Title:
20
<PAGE> 21
Address: 22000 AOL Way
Dulles, VA 20166
Attention:
Fax:
SERIES B INVESTOR
QVC INTERACTIVE HOLDINGS, LLC.
By:___________________________________________
Name:
Title:
Address: Studio Park
1200 Wilson Drive
West Chester, PA 19380
Fax: (610) 701-1490
Attention: Chief Information Officer
With a copy to: General Counsel
Fax: (610) 701-1380
21
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Click Trips, Inc.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated October 26, 1999 with respect to the financial
statements of The Knot, Inc. and our report dated August 18, 1999, with respect
to the financial statements of Casenhiser Clothing Company, Inc. included in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-87345) and
related Prospectus of The Knot, Inc. dated October 27, 1999.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
New York, New York
October 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from audited
financial statements as of and for the year ended 12/31/98 and as of and for the
nine month ended September30, 1999 and is qualified in its entirety by
reference to such S-1.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<EXCHANGE-RATE> 1 1
<CASH> 1,037,589 9,301,870
<SECURITIES> 0 0
<RECEIVABLES> 189,545 1,078,808
<ALLOWANCES> 0 133,000
<INVENTORY> 28,741 511,639
<CURRENT-ASSETS> 1,287,893 11,570,248
<PP&E> 341,827 1,573,234
<DEPRECIATION> 98,783 291,520
<TOTAL-ASSETS> 1,949,907 13,846,172
<CURRENT-LIABILITIES> 285,205 2,313,604
<BONDS> 0 0
0 0
3,937,920 3,937,920
<COMMON> 30,341 30,936
<OTHER-SE> (2,322,359) (6,408,088)
<TOTAL-LIABILITY-AND-EQUITY> 1,949,907 13,846,172
<SALES> 0 0
<TOTAL-REVENUES> 1,039,584 2,635,430
<CGS> 131,214 903,990
<TOTAL-COSTS> 2,822,722 7,983,081
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 183,000
<INTEREST-EXPENSE> 14,968 243,281
<INCOME-PRETAX> (1,899,384) (6,008,360)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,899,384) (6,008,360)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 390,111 0
<CHANGES> 0 0
<NET-INCOME> (1,509,273) (6,008,360)
<EPS-BASIC> (.60) (1.96)
<EPS-DILUTED> (.60) (1.96)
</TABLE>
