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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 000-28271
THE KNOT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3895178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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462 BROADWAY, 6TH FLOOR
NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICER AND ZIP CODE)
(212) 219-8555
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No |_|
As of May 12, 2000, there were 14,591,057 shares of the registrant's
common stock outstanding.
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Number
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PART I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999...................................................................... 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999.......................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999.......................................................... 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk............................. 26
PART II OTHER INFORMATION
Item 1: Legal Proceedings...................................................................... 27
Item 2: Changes in Securities and Use of Proceeds.............................................. 27
Item 3: Defaults Upon Senior Securities........................................................ 27
Item 4: Submission of Matters to a Vote of Security Holders.................................... 27
Item 5: Other Information...................................................................... 27
Item 6: Exhibits and Reports on Form 8-K....................................................... 27
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2000 1999*
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 27,483,267 $ 40,006,175
Short-term investments ..................................................... 118,514 501,000
Accounts receivable, net of allowance of $912,000 and $133,000, respectively 5,920,894 1,333,158
Inventories ................................................................ 505,108 478,345
Deferred marketing costs ................................................... 2,772,963 -
Other current assets ....................................................... 1,110,499 671,519
------------ ------------
Total current assets ........................................................... 37,911,245 42,990,197
Property and equipment, net .................................................... 2,920,873 1,554,373
Intangible assets, net ......................................................... 8,695,265 541,638
Other assets ................................................................... 398,158 399,792
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Total assets ................................................................... $ 49,925,541 $ 45,486,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ...................................... $ 3,878,678 $ 1,444,578
Note payable ............................................................... 1,867,862 -
Current portion of long term debt .......................................... 75,489 -
Deferred revenue ........................................................... 2,469,059 408,934
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Total current liabilities ...................................................... 8,291,088 1,853,512
Long term debt ................................................................. 420,692 -
Other liabilities .............................................................. 91,822 57,093
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Total liabilities .............................................................. 8,803,602 1,910,605
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 14,531,342 and
14,510,612 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively .................. 145,313 145,106
Additional paid-in-capital ................................................. 60,023,776 60,206,664
Deferred compensation ...................................................... (1,805,510) (2,262,974)
Deferred sales and marketing ............................................... (1,796,369) (1,959,677)
Accumulated deficit ........................................................ (15,445,271) (12,553,724)
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Total stockholders' equity ..................................................... 41,121,939 43,575,395
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Total liabilities and stockholders' equity ..................................... $ 49,925,541 $ 45,486,000
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* The condensed consolidated balance sheet as of December 31, 1999 has been
derived from the audited financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
3
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THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
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2000 1999
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Net revenues .............................................................................. $ 3,719,032 $ 194,431
Cost of revenues............................................................................ 1,154,828 53,220
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Gross profit ............................................................................... 2,564,204 141,211
Operating expenses:
Product and content development......................................................... 945,011 400,367
Sales and marketing..................................................................... 2,830,700 706,347
General and administrative.............................................................. 1,570,484 420,280
Non-cash compensation................................................................... 264,418 128,912
Non-cash sales and marketing............................................................ 163,308 -
Depreciation and amortization........................................................... 254,281 69,137
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Total operating expenses.................................................................... 6,028,202 1,725,043
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Loss from operations........................................................................ (3,463,998) (1,583,832)
Interest income (expense), net.............................................................. 572,451 (9,719)
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Net loss ............................................................................... $ (2,891,547) $ (1,593,551)
============= =============
Net loss per share - basic and diluted...................................................... $ (0.20) $ (0.53)
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Weighted average number of shares used in calculating
basic and diluted net loss per share.................................................... 14,518,954 3,034,104
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See accompanying notes.
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THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
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2000 1999
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OPERATING ACTIVITIES
Net loss .................................................................. $ (2,891,547) $ (1,593,551)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 170,632 32,016
Amortization of goodwill................................................... 83,649 37,121
Amortization of deferred compensation...................................... 264,418 128,912
Amortization of deferred sales and marketing............................... 163,308 -
Allowance for doubtful accounts............................................ 25,000 45,875
Changes in operating assets and liabilities:
Accounts receivable........................................................ (1,154,938) (116,975)
Inventories................................................................ (26,763) (30,257)
Other current assets....................................................... (143,470) (101,671)
Other assets............................................................... 1,634 (50)
Accounts payable and accrued expenses...................................... 1,155,257 98,411
Deferred revenue........................................................... 178,088 131,056
Other liabilities.......................................................... 34,729 -
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Net cash used in operating activities.......................................... (2,140,003) (1,369,113)
INVESTING ACTIVITIES
Purchases of property and equipment............................................ (1,079,922) (190,730)
Maturity of short term investments............................................. 501,000 -
Acquisition of businesses, net of acquired cash................................ (9,299,260) -
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Net cash used in investing activities.......................................... (9,878,182) (190,730)
FINANCING ACTIVITIES
Proceeds from short term borrowings............................................ - 750,000
Financing costs................................................................ (515,088) -
Proceeds from exercise of stock options........................................ 10,365 -
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Net cash (used in) provided by financing activities............................ (504,723) 750,000
Decrease in cash and cash equivalents.......................................... (12,522,908) (809,843)
Cash and cash equivalents at beginning of period............................... 40,006,175 1,037,589
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Cash and cash equivalents at end of period..................................... $ 27,483,267 $ 227,746
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See accompanying notes.
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THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The information presented as of March 31, 2000 and for the three month
period ended March 31, 2000 and 1999, is unaudited, but, in the opinion
of management of The Knot, Inc. ("Company"), contain all adjustments
(consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the financial position
as of March 31, 2000, the consolidated results of its operations for the
three month period ended March 31, 2000 and 1999 and its cash flows for
the three month period ended March 31, 2000 and 1999. The financial
statements included herein have been prepared in accordance with
generally accepted accounting principles. All information includes
adjustments to historical results (consisting only of normal recurring
entries) necessary for a fair presentation and, in our opinion, have been
prepared on the same basis as the audited financial statements. Certain
historical financial information has been reclassified to conform with
current presentation. These financial statements should be read in
conjunction with the Company's audited financial statements and
accompanying notes for the year ended December 31, 1999 included in the
Company's Form 10-K as filed with the Securities and Exchange Commission.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
The Knot and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results may differ from these estimates.
Interim results are not necessarily indicative of results for a full
year.
DEFERRED REVENUE AND DEFERRED MARKET COSTS
Amounts billed and related costs from producing the Weddingpages book are
deferred until publication, at which time all material services relating
to the book have been substantially performed.
NET REVENUES BY TYPE
Net revenues by type are as follows:
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THREE MONTHS ENDED MARCH 31,
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2000 1999
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TYPE
Sponsorship, advertising and production..................................... $ 2,574,757 $ 129,749
Merchandise................................................................. 887,168 11,199
Publishing, travel and other................................................ 257,107 53,483
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Total....................................................................... $ 3,719,032 $ 194,431
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For the three months ended March 31, 2000 and 1999, merchandise revenue
included outbound shipping and handling charges of approximately $78,000
and $1,000, respectively.
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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.
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3. ACQUISITIONS
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"),
dated as of February 1, 2000, by and among the Company, Knot Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of the
Company ("Buyer") and Weddingpages, Inc., a Delaware corporation
("Weddingpages"), Buyer merged with and into Weddingpages on March 29,
2000, with Weddingpages as the surviving Corporation (the "Merger.")
The Merger was affected through the conversion of each share of common
stock and Class A common stock of Weddingpages (each, a "Common Stock")
outstanding immediately prior to the consummation of the Merger into the
right to receive in cash an amount equal to $1.78. Of that $1.78 per
share, $0.10 per share is held in an escrow account pursuant to the terms
of an escrow arrangement described in the Merger Agreement. The amount
retained in the escrow account is subject to certain deductions in the
event of third party claims against certain indemnified parties. The
aggregate purchase price of $10.1 million consisted of approximately $9.2
million for the common stock and related common stock options of
Weddingpages, inclusive of $700,000 paid to the former Chief Executive
Officer of Weddingpages in consideration for the execution of a
non-compete agreement and approximately $876,000 of other costs
associated with the acquisition.
The difference between the purchase price and the fair value of the
acquired assets in Weddingpages was recorded as intangible assets and
will be amortized over the periods of expected benefit, which are
estimated to range from seven to ten years. The intangible assets were
calculated as shown below:
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Cash paid for acquisition $ 9,188,000
Acquisition costs 876,000
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Purchase price $ 10,064,000
Fair value of net tangible assets acquired 1,827,000
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Intangible assets $ 8,237,000
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Unaudited pro forma data for the Company for the three months ended March
31, 2000 and for the year ended December 31, 1999 given effect to the
acquisition of Weddingpages, as if it had occurred on January 1, 1999,
are shown below. The pro forma information does not necessarily reflect
the actual results that would have been achieved, nor is it necessarily
indicative of future consolidated results of the Company.
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MARCH 31, DECEMBER 31,
2000 1999
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in thousands,
except per share data
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Net revenue $ 4,426 $ 16,053
Net loss $ (3,669) $ (9,383)
Net loss per share $ (0.25) $ (2.36)
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4. NOTE PAYABLE
The Company has a $2,500,000 line of credit with a bank that expires
December 2000 and bears an interest rate equal to prime plus 0.5%. There
was an outstanding balance of $1,825,000 and $1,625,000 as of March 31,
2000 and December 31, 1999, respectively.
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5. LONG TERM DEBT
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Long-term debt as of March 31, 2000:
Market purchase note due in annual installments of $60,000 through October 2008,
based on imputed interest of 8.75% .................................................. $363,400
9.0% equipment installment note, due in monthly
installments of $4,566 through December 2002, secured
by short-term investments of $34,504 ................................................ 132,781
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Total long-term debt .......................................................... $496,181
Less current portion of long-term debt ................................................... 75,489
Long-term debt, excluding current portion ................................................ $420,692
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Maturities of long-term obligations for the five years ending March 31, 2005 are as follows: 2001,
$75,489; 2002, $80,120; 2003, $81,002; 2004, $37,069; 2005, $40,009 and $182,492 thereafter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included elsewhere in this report.
This discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about the Company and our
industry. These forward-looking statements involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this report. The Company undertakes
no obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
OVERVIEW
The Knot is the leading 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.
We also service the wedding market through a series of books and a
semiannual magazine called Wedding Gowns. During February 2000, we launched the
premiere issue of Wedding Gowns for Spring 2000, which is being sold on
newsstands across the nation. These traditional forms of media provide
cross-promotional opportunities and assist us in increasing our brand awareness
and our online audience.
The Knot commenced operations in May 1996 and recorded our first revenues
in September 1996, immediately following the launch of our first online
property. Our Web site was launched in July 1997. We launched The Knot Registry,
our online gift registry, in November 1998 and significantly expanded our
registry product offerings in July 1999. In July 1999, we acquired the assets of
Bridalink.com, an Internet wedding supply store and the common stock of Click
Trips, Inc., an online travel agency. Also in July 1999, we entered into a
strategic alliance with Weddingpages, Inc. In August 1999, we acquired the
assets of Wedding Photographers Network, a searchable database of local wedding
photographers.
In March 2000, we announced our first international alliance with H.
Stern, a major international jeweler and specialty retailer to create a new
50/50 joint venture to be named The Knot Brazil. The new company will launch a
Portuguese-language wedding Web site and gift registry in Brazil, where H.
Stern's headquarters is based, targeting the country's annual to-be-wed market
of over one million couples.
Also in March 2000, we completed our acquisition of Weddingpages, Inc.
Weddingpages, Inc. is a publisher of regional wedding magazines serving engaged
couples and wedding professionals in over 50 major U.S. markets. To further
emphasize its local dominance, Weddingpages belongs to many industry
associations and attends over 3,000 local and national bridal shows annually.
Through Weddingpages, we will develop integrated marketing programs for local
advertisers combining our online and offline resources to provide them with
extensive exposure to brides and grooms nationwide.
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 thirty-six months. 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
that typically range from one month up to one year. Advertising contracts
include banner advertisements and listings for local wedding vendors.
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Sponsorship and advertising contracts provide for the delivery of a
minimum number of impressions. Impressions are the featuring of a sponsor's
advertisement, banner, link or other form of content on our sites. To date, we
have recognized our sponsorship and advertising revenues over the duration of
the contracts on a straight line basis as we have exceeded minimum guaranteed
impressions. To the extent that minimum guaranteed impressions are not met, we
are generally obligated to extend the period of the contract until the
guaranteed impressions are achieved. If this were to occur, we would defer and
recognize the corresponding revenues over the extended period.
Production revenues are derived from the development of online sites and
tools. Production revenues are recognized when the development is completed and
the online sites and tools are delivered.
To promote our brand on third-party sites, we produce online sites for
third parties featuring both The Knot and the third party. The cost of
production of these sites is included in our operating expenses. In return, we
receive distribution and exposure to their viewers, outbound links to our sites
and, in some circumstances, offline brand marketing. We do not recognize
revenues with respect to these barter transactions.
Sponsorship, advertising and production revenues amounted to 69% of our
net revenues for the quarter ended March 31, 2000 and 67% for the quarter ended
March 31, 1999.
For the quarters ended March 31, 2000 and 1999, our top seven advertisers
accounted for 45% and 66% of our net revenues, respectively. 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, The Knot Shop and The Knot Registry. Merchandise revenues include
outbound shipping and handling charges. Merchandise revenues are recognized when
products are shipped to customers, reduced by an allowance for estimated sales
returns. Merchandise revenues amounted to 24% of our net revenues for the
quarter ended March 31, 2000 and 6% of our net revenues for the quarter ended
March 31, 1999.
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, or sales of our gown magazine. 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 and magazines
are recognized when the products are shipped, reduced by an allowance for
estimated sales returns. 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. Publishing, travel and other revenues accounted for
7% and 27% for the quarters ended March 31, 2000 and 1999, respectively.
Commencing in the quarter ended June 30, 2000, publishing revenue will include
advertising revenue derived from the publication of regional wedding magazines
by Weddingpages as well as service fees and royalty fees from producing the
Weddingpages magazine for certain franchisees. These revenues and fees are
recognized upon the publication of the magazine at which time all material
services related to the magazine have been performed.
We record deferred compensation, net of reversals related to stock
options forfeited, primarily as a result of the issuance of stock options to
employees with exercise prices per share determined for financial
reporting purposes to be below the fair market value per share of our common
stock at the dates of grant. The difference is recorded as a reduction of
stockholders' equity and amortized as non-cash compensation expense on an
accelerated method over the four-year vesting period of the related options.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
Net Revenues
Net revenues increased to $3.7 million for the quarter ended March 31,
2000 from $194,000 for the quarter ended March 31, 1999. Sponsorship,
advertising and production revenues increased to $2.6 million for the quarter
ended March 31, 2000 from $130,000 for the quarter ended March 31, 1999,
primarily due to a $2.0 million increase
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in revenues generated from additional sponsorship and production contracts and a
$458,000 increase in revenues from local vendor advertising programs.
Merchandise revenues amounted to $887,000 for the quarter ended March 31,
2000, resulting primarily from a $683,000 increase in the sale of wedding
supplies through Bridalink.com and The Knot Shop and a $193,000 increase in
sales related to The Knot Registry. There was $11,000 in The Knot Registry
merchandise revenues for the quarter ended March 31, 1999.
Publishing, travel and other revenues increased to $257,000 for the
quarter ended March 31, 2000 from $53,000 for the quarter ended March 31, 1999.
The increase is primarily attributable to sales of our gown magazine which was
shipped to newsstands at the end of February 2000 and travel commissions earned
by Click Trips.
Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, 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 $1.2 million for the quarter ended March
31, 2000 from $53,000 for the quarter ended March 31, 1999. The increase was
primarily due to an increase in the sale of merchandise through Bridalink.com
and The Knot Shop of $470,000 and through The Knot Registry of $173,000, the
cost of publishing our gown magazine and an increase in the cost of producing
online sites and tools. As a percentage of our net revenues, cost of revenues
increased to 31% for the quarter ended March 31, 2000 from 27% for the quarter
ended March 31, 1999.
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 $945,000 for the
quarter ended March 31, 2000 from $400,000 for the quarter ended March 31, 1999.
The increase was primarily attributable to a $485,000 increase resulting from
hiring additional staff to enhance the content and functionality of our sites.
As a percentage of our net revenues, product and content development expenses
decreased to 25% for the quarter ended March 31, 2000 from 206% for the quarter
ended March 31, 1999. 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, sales
commissions, advertising and promotional activities and fulfillment and
distribution of merchandise.
Sales and marketing expenses increased to $2.8 million for the quarter
ended March 31, 2000 from $706,000 for the quarter ended March 31, 1999. The
increase was primarily due to a $595,000 increase in personnel costs related to
the hiring of additional sales, marketing and customer service personnel, a
$563,000 increase in commissions and expenses related to our increased
sponsorship, advertising and production revenues and to the launch of our local
advertising sales efforts, and a $455,000 increase in promotion expense. As a
percentage of our net revenues, sales and marketing expenses decreased to 76%
for the quarter ended March 31, 2000 from 363% for the quarter ended March 31,
1999.
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.
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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 $1.6 million for the
quarter ended March 31, 2000 from $420,000 for the quarter ended March 31, 1999.
The increase was primarily due to a $462,000 increase in personnel costs, a
$140,000 increase in expenses related to the build out of our facilities, and a
$213,000 increase in professional fees and insurance. As a percentage of our net
revenues, general and administrative expenses decreased to 42% for the quarter
ended March 31, 2000 from 216% for the quarter ended March 31, 1999.
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 no deferred compensation during the quarter ended March 31,
2000 and $1.4 million of deferred compensation for the quarter ended March 31,
1999. Amortization of deferred compensation increased to $264,000 million for
the quarter ended March 31, 2000 from $129,000 for the quarter ended March 31,
1999.
Non-Cash Sales and Marketing
We recorded deferred sales and marketing of $2.3 million, related to the
issuance of a warrant to AOL in connection with our amended anchor tenant
agreement in July 1999. Amortization of deferred sales and marketing was
$163,000 or 4% of net revenues for the quarter ended March 31, 2000.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment and amortization of intangible assets
related to acquisitions.
Depreciation and amortization expenses increased to $254,000 for the
quarter ended March 31, 2000 from $69,000 for the quarter ended March 31, 1999.
This increase was primarily due to a $96,000 increase in depreciation as a
result of an increase in property and equipment purchases and leasehold
improvements, an additional $46,000 of amortization of intangible assets related
to acquisitions, and an increase in amortization of capitalized software of
$43,000. As a percentage of net revenues, depreciation and amortization expense
decreased to 7% for the quarter ended March 31, 2000 from 36% for the quarter
ended March 31, 1999.
Interest Income (Expense)
Interest income net of interest expense increased to $572,000 for the
quarter ended March 31, 2000, as compared to $10,000 of interest expense for the
quarter ended March 31, 1999, as a result of the investment of the net proceeds
from our initial public offering of common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, our cash and cash equivalents amounted to $27.5
million. We currently invest primarily in short-term debt instruments that are
highly liquid, of high-quality investment grade, and have maturities of less
than three months with the intent to make such funds readily available for
operating purposes.
Net cash used in operating activities was $2.1 million for the quarter
ended March 31, 2000. This resulted primarily from the loss for the period as
adjusted for depreciation and amortization of $682,000, increases in accounts
receivable of $1.2 million, and increases in other current and long-term
assets of $142,000, partially offset by increases in accounts payable and
accrued expenses of $1.2 million, deferred revenue of $178,000 and other
liabilities of $35,000. Net cash
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used in operating activities was $1.4 million for the quarter ended March 31,
1999 due primarily to the net loss for the quarter, as adjusted for
depreciation and amortization.
Net cash used in investing activities was $9.9 million for the quarter
ended March 31, 2000, primarily due to cash paid for the acquisition of
Weddingpages of $9.2 million and an increase in purchases of property and
equipment of approximately $1.1 million partially offset by the maturity of
short-term investments of $501,000. Net cash used in investing activities was
$191,000 for the quarter ended March 31, 1999 as a result of purchases of
property and equipment.
Net cash used in financing activities was $505,000 for the quarter ended
March 31, 2000, primarily due to the payment of expenses related to our initial
public offering partially offset by proceeds from the exercise of stock options.
Net cash provided by financing activities was $750,000 for the quarter ended
March 31, 1999, due to the proceeds from short term borrowings.
Although we have no material commitments for capital expenditures, our
capital expenditures have increased $890,000 to $1.1 million for the quarter
ended March 31, 2000 compared to the same period in 1999, consistent with the
growth of operations and staffing. We anticipate these increases in capital
expenditures will continue for the foreseeable future as a result of increased
growth.
As of March 31, 2000, we had commitments under non-cancelable operating
leases amounting to $6.3 million, of which $506,000 will be due on or before
March 31, 2001.
As of March 31, 2000, we had a commitment under our amended anchor tenant
agreement with AOL in the amount of $3.3 million of which approximately $1.2
million will be due on or before March 31, 2001.
On March 29, 2000, we completed our acquisition of Weddingpages through
the merger of a wholly-owned subsidiary of ours with and into Weddingpages, with
Weddingpages surviving the merger. Under the terms of the agreement, the merger
was affected through the conversion of each share of common stock and class A
common stock of Weddingpages outstanding into $1.78 for an aggregate purchase
price, including related costs, of approximately $10.1 million. We used a
portion of the proceeds received from our initial public offering to consummate
the acquisition.
We currently believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements for
at least the next 12 months. We intend to continue to pursue acquisitions of, or
investments in, complimentary businesses, services and technologies, expand our
sales and marketing programs and conduct more aggressive brand promotions. We
cannot assure you that additional funding, if required, will be available to us
in amounts or on terms acceptable to us. If sufficient funds are not available
or are not available on acceptable terms, our ability to fund our expansion,
take advantage of acquisition opportunities, develop or enhance our services or
products, or otherwise respond to competitive pressures would be significantly
limited. Those limitations would materially and adversely affect our business,
results of operations and financial condition.
SUBSEQUENT EVENTS
On May 1, 2000 the Company entered into an International Anchor Tenant
Agreement with America Online, Inc. ("AOL"), whereby the Company received
distribution within AOL and its Affiliates within International Markets. The
agreement expires on May 1, 2003 and provides for quarterly carriage fees
payable over the term of the agreement in the amount of $215,000 per quarter
through February 1, 2001, increasing to $287,500 per quarter through February 1,
2002 and increasing to $372,500 per quarter through February 1, 2003.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Important Factors Regarding Forward-Looking Statements
In addition to other information in this Quarterly Report on Form 10-Q
and in the documents we are incorporating by reference, the following risk
factors should be carefully considered in evaluating our business because such
factors currently have a significant impact or may have a significant impact on
our business, operating results or financial condition. This Form 10-Q contains
forward-looking statements that have been made pursuant to the provisions of the
Private Securities Litigation Reform Act of 1995. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and elsewhere in this Form 10-Q.
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;
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- - 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, $9.2 million for the year
ended December 31, 1999 and $2.9 million for the quarter ended March 31, 2000.
As of March 31, 2000, our accumulated deficit was $15.4 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 results of operations would be materially and adversely
affected. For more information on our net revenues and the effects of our
expenses on our financial performance, see "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATION AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR
COMMON STOCK.
Our quarterly revenues and operating results have fluctuated
significantly in the past and are expected to continue to fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside our control. These factors include:
- - the level of online usage;
- - the level of traffic on our online sites;
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- - 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.
OUR FINANCIAL CONDITION AND REVENUES WOULD BE ADVERSELY AFFECTED IF TRAFFIC ON
OUR AOL SITE DECREASED OR IF CARRIAGE OF OUR SITES ON AOL WAS DISCONTINUED.
AOL has accounted for a significant portion of our online traffic to
date. During the first quarter of 2000, approximately 17% of our users were
customers of AOL's Internet services. If the financial condition and operations
of AOL were to deteriorate significantly, or if the traffic on our AOL site were
to substantially decrease, our revenues could be adversely affected.
In addition, our anchor tenant agreement with AOL expires on January 6,
2003. AOL may extend it for an additional two years, but does not have any
obligation to extend or renew the agreement. Through the AOL agreement, we
provide content on America Online, AOL.com, AOL Hometown, Netscape and
CompuServe. Under the terms of the agreement, AOL may terminate the agreement
without cause only with respect to our carriage on AOL Hometown, Netscape, and
CompuServe upon 30 days' prior written notice. If the carrying of our sites on
AOL is discontinued, we would lose members, sponsors and advertisers and our
business, results of operations and financial condition would be materially and
adversely affected.
BECAUSE WEDDINGS OCCUR MORE FREQUENTLY IN THE SECOND AND THIRD QUARTERS OF THE
CALENDAR YEAR, OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS.
Seasonal and cyclical patterns may affect our revenues. In 1998, 20% of
weddings occurred in the first quarter, 26% occurred in the second quarter, 30%
occurred in the third quarter and 24% occurred in the fourth quarter. Because we
launched The Knot Registry in November 1998 and acquired Bridalink in July 1999,
we have limited experience generating merchandise revenues. 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 from quarter to quarter.
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WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE KNOT BRAND NAME WHICH
WOULD NEGATIVELY IMPACT OUR BUSINESS AND CAUSE OUR SPONSORSHIP AND ADVERTISING
REVENUES TO DECLINE.
Building recognition of our brand is critical to attracting and expanding
our online user base. Because we plan to continue building brand recognition, we
may find it necessary to accelerate expenditures on our sales and marketing
efforts or otherwise increase our financial commitment to creating and
maintaining brand awareness. Our failure to successfully promote and maintain
our brand would adversely affect our business and cause us to incur significant
expenses in promoting our brand without an associated increase in our net
revenues.
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 March 2000, we acquired Weddingpages, Inc., a publisher of local
wedding publications. We may encounter difficulty integrating the personnel,
operations, technology and software of this acquired business. In addition,
one or more of the key personnel of the acquired business may decide not to
work for us. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations.
In the future, we may acquire, or invest in, complementary companies,
products or technologies. Acquisitions and investments involve numerous risks,
including:
- - difficulties in integrating operations, technologies, products and
personnel;
- - diversion of financial and management resources from existing operations;
- - risks of entering new markets;
- - potential loss of key employees; and
- - inability to generate sufficient revenues to offset acquisition or
investment costs.
THE COSTS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR STRATEGIC ALLIANCES COULD
DILUTE YOUR INVESTMENT OR ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
To pay for an acquisition or to enter into a strategic alliance, we might
use equity securities, debt, cash, or a combination of the foregoing. If we use
equity securities, our stockholders may experience dilution. In addition, an
acquisition may involve non-recurring charges or involve amortization of
significant amounts of goodwill. The related increases in expenses could
adversely affect our results of operations. Any such acquisitions or strategic
alliances may require us to obtain additional equity or debt financing, which
may not be available on commercially acceptable terms, if at all.
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IF THE USE OF THE INTERNET AS AN ADVERTISING AND MARKETING MEDIUM FAILS TO
DEVELOP OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR FUTURE REVENUES AND
PROSPECTS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
Our future success depends in part on a significant increase in the use
of the Internet as an advertising and marketing medium. Sponsorship, advertising
and production revenues constituted 69% of our net revenue for the quarter ended
March 31, 2000, 71% of our net revenues for the year ended December 31, 1999 and
82% of our net revenues for the year ended December 31, 1998. The Internet
advertising market is new and rapidly evolving, and it cannot yet be compared
with traditional advertising media to gauge its effectiveness. As a result,
demand for and market acceptance of Internet advertising solutions are
uncertain. Many of our current and potential customers have little or no
experience with Internet advertising and have allocated only a limited portion
of their advertising and marketing budgets to Internet activities. The adoption
of Internet advertising, particularly by entities that have historically relied
upon traditional methods of advertising and marketing, requires the acceptance
of a new way of advertising and marketing. These customers may find Internet
advertising to be less effective for meeting their business needs than
traditional methods of advertising and marketing. Furthermore, there are
software programs that limit or prevent advertising from being delivered to a
user's computer. Widespread adoption of this software by users would
significantly undermine the commercial viability of Internet advertising.
WE HAVE A SMALL NUMBER OF SPONSORS AND ADVERTISERS AND THE LOSS OF A NUMBER OF
THESE WOULD RESULT IN A DECLINE IN OUR REVENUES.
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
would cause our revenues to decline. For the quarter ended March 31, 2000,
Mondera accounted for approximately 11% of our net revenue. For the year ended
December 31, 1999, no single sponsor or advertiser accounted for 10% or more of
our net revenues.
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. To achieve our long-term goals, we will need to
attract additional significant sponsors and advertisers on an ongoing basis. If
we fail to enter into a sufficient number of large contracts during a particular
period, our revenues for that period would be adversely affected. For more
information on our advertising revenues, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OUR BUSINESS AND PROSPECTS WOULD SUFFER IF WE ARE UNABLE TO PROTECT AND ENFORCE
OUR INTELLECTUAL PROPERTY RIGHTS.
We rely solely upon copyright, trade secret and trademark law and
assignment of invention and confidentiality agreements to protect our
proprietary technology, processes, content and other intellectual property to
the extent that protection is sought or secured at all. We cannot assure you
that any steps we might take will be adequate to protect against infringement
and misappropriation of our intellectual property by third parties. Similarly,
we cannot assure you that third parties will not be able to independently
develop similar or superior technology, processes, content or other intellectual
property. The unauthorized reproduction or other misappropriation of our
intellectual property rights could enable third parties to benefit from our
technology without paying us for it. If this occurs, our business and prospects
would be materially and adversely affected. In addition, disputes concerning the
ownership or rights to use intellectual property could be costly and time
consuming to litigate, may distract management from other tasks of operating the
business, and may result in our loss of significant rights and the loss of our
ability to operate our business.
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OUR PRODUCTS AND SERVICES MAY INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES AND ANY INFRINGEMENT COULD REQUIRE US TO INCUR SUBSTANTIAL COSTS AND
DISTRACT OUR MANAGEMENT.
Although we avoid infringing known proprietary rights of third parties,
including licensed content, we may be subject to claims alleging infringement of
third-party proprietary rights. If we are subject to claims of infringement or
are infringing the rights of third parties, we may not be able to obtain
licenses to use those rights on commercially reasonable terms, if at all. In
that event, we would need to undertake substantial reengineering to continue our
online offerings. Any effort to undertake such reengineering might not be
successful. Furthermore, a party making such a claim could secure a judgment
that requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from selling our products.
Any claim of infringement could cause us to incur substantial costs defending
against the claim, even if the claim is invalid, and could distract our
management from our business.
WE DEPEND UPON QVC TO PROVIDE US WAREHOUSING, FULFILLMENT AND DISTRIBUTION
SERVICES, AND SYSTEM FAILURES OR OTHER PROBLEMS AT QVC COULD CAUSE US TO LOSE
CUSTOMERS AND REVENUES.
We have a services agreement with QVC to warehouse, fulfill and arrange
for distribution of approximately 97% of our products. Our agreement with QVC
expires in December, 2003. QVC does not have any obligation to renew this
agreement. If QVC's ability to provide us with these services in a timely
fashion or at all is impaired, whether through labor shortage, slow down or
stoppage, deteriorating financial or business condition, system failures or for
any other reason, or if the services agreement is not renewed, we would not be
able, at least temporarily, to sell or ship our products to our customers. We
may be unable to engage alternative warehousing, fulfillment and distribution
services on a timely basis or upon terms favorable to us.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING NECESSARY TO EXECUTE OUR
BUSINESS STRATEGY.
We currently believe that the net proceeds from our initial public
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.
INCREASED COMPETITION IN OUR MARKETS COULD REDUCE OUR MARKET SHARE, THE NUMBER
OF OUR ADVERTISERS, OUR ADVERTISING REVENUES AND OUR MARGINS.
The Internet advertising and online wedding markets are new, 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
- - online and retail stores offering gift registries, especially from
retailers offering specific bridal gift registries.
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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. 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.
IF SALES TO SPONSORS OR ADVERTISERS FORECASTED IN A PARTICULAR PERIOD ARE
DELAYED OR DO NOT OTHERWISE OCCUR, OUR RESULTS OF OPERATIONS FOR A PARTICULAR
PERIOD WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
The time between the date of initial contact with a potential sponsor or
advertiser and the execution of a contract with the sponsor or advertiser is
often lengthy, typically ranging from six weeks for smaller agreements to 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, we would generate less sponsorship
and advertising revenues during that period and our results of operations for
that period would suffer.
OUR POTENTIAL INABILITY TO COMPETE EFFECTIVELY IN OUR INDUSTRY FOR QUALIFIED
PERSONNEL COULD HINDER THE SUCCESS OF OUR BUSINESS.
Competition for personnel in the Internet and wedding industries is
intense. We may be unable to retain those employees who are important to the
success of our business. We may also face difficulties attracting, integrating
or retaining other highly qualified employees in the future. We have
experienced, and expect to continue to experience, difficulty in hiring and
retaining highly-skilled employees with appropriate qualifications as a result
of our rapid growth and expansion. If we cannot attract new personnel or retain
and motivate our current personnel, our business may succeed.
SYSTEMS DISRUPTIONS AND FAILURES COULD CAUSE ADVERTISER OR USER DISSATISFACTION
AND COULD REDUCE THE ATTRACTIVENESS OF OUR SITES.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our advertisers and sponsors, users and members may
become dissatisfied by any systems disruption or failure that interrupts our
ability to provide our services and content to them. Substantial or repeated
system disruption or failures would reduce the attractiveness of our online
sites significantly. Substantially all of our communications hardware and some
of our other computer hardware operations are located at 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
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our online sites. Our business could be materially and adversely affected if our
systems were affected by any of these occurrences. We do not presently have any
secondary "off-site" systems or a formal disaster recovery plan. Our sites must
accommodate a high volume of traffic and deliver frequently updated information.
Our sites have in the past experienced slower response times or decreased
traffic. These types of occurrences in the future could cause users to perceive
our sites as not functioning properly and therefore cause them to use another
online site or other methods to obtain information or services. In addition, our
users depend on Internet service providers, online service providers and other
site operators for access to our online sites. Many of them have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system disruptions or failures unrelated to our systems.
Although we carry general liability insurance, our insurance may not cover any
claims by dissatisfied providers or subscribers or may not be adequate to
indemnify us for any liability that may be imposed in the event that a claim
were brought against us. Any system disruption or failure, security breach or
other damage that interrupts or delays our operations could cause us to lose
users, sponsors and advertisers and adversely affect our business and results of
operations.
WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE
RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US.
We are dependent on various third parties for software, systems and
related services in connection with our hosting and accounting software, data
transmission and security systems. Several of the third parties that provide
software and services to us have a limited operating history and have relatively
new technology. These third parties are dependent on reliable delivery of
services from others. To date, we have not experienced significant problems with
the services that these third parties provide to us. If our current providers
were to experience prolonged systems failures or delays, we would need to pursue
alternative sources of services. Although alternative sources of these services
are available, we may be unable to secure such services on a timely basis or on
terms favorable to us. As a result, we may experience business disruptions if
these third parties fail to provide reliable software, systems and related
services to us.
WE MAY BE LIABLE IF THIRD PARTIES MISAPPROPRIATE OUR USERS' PERSONAL
INFORMATION.
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal or credit card information, we could be
subject to liability. Our liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims as well as for other misuses of personal information, such as for
unauthorized marketing purposes. These claims could result in costly and
time-consuming litigation which could adversely affect our financial condition.
In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. We could have additional expenses if new regulations regarding the
use of personal information are introduced or if our privacy practices are
investigated.
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER STOCKHOLDERS EXERCISE
SIGNIFICANT CONTROL OVER ALL MATTERS REQUIRING A STOCKHOLDER VOTE.
As of March 31, 2000, our executive officers, directors and stockholders
who each owned greater than 5% of the common stock, and their affiliates, in the
aggregate, beneficially owned approximately 62% of our outstanding common stock.
As a result, these stockholders are able to exercise control over all matters
requiring approval by our stockholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
could also have the effect of delaying or preventing a change in control.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
We have a large number of shares of common stock outstanding and
available for resale 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.
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OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS AND ANY
VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US.
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.
WE MAY SPEND THE NET PROCEEDS OF OUR INITIAL PUBLIC OFFERING IN WAYS WITH WHICH
YOU MAY NOT AGREE.
The net proceeds of our initial public offering are not allocated for
specific uses. Our management has broad discretion to spend the net proceeds
from our initial public offering in ways with which investors may not agree. The
failure of our management to apply these funds effectively would result in
unfavorable returns, which 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.
RISKS RELATED TO OUR INDUSTRY
IF THE USE OF THE INTERNET AND COMMERCIAL ONLINE SERVICES AS MEDIA FOR COMMERCE
DOES NOT CONTINUE TO GROW, OUR BUSINESS AND PROSPECTS WOULD BE MATERIALLY AND
ADVERSELY AFFECTED.
We cannot assure you that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and commercial online services as media
for commerce, particularly for purchases of wedding gifts and supplies. Even if
consumers adopt the Internet or commercial online services as a media for
commerce, we cannot be sure that the necessary infrastructure will be in place
to process such transactions. Our long-term viability depends substantially upon
the widespread acceptance and the development of the Internet or commercial
online services as effective media for consumer commerce and for advertising.
Use of the Internet or commercial online services to effect retail transactions
and to advertise is at an early stage of development. Convincing consumers to
purchase wedding gifts and supplies online may be difficult.
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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.
If users experience difficulties because of capacity constraints of the
infrastructure of the Internet and other commercial online services, potential
users may not be able to access our sites and our business and prospects would
be harmed.
To the extent that the Internet and other online services continue to
experience growth in the number of users and frequency of use by consumers
resulting in increased bandwidth demands, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. The Internet and other online services
have experienced outages and delays as a result of damage to portions of their
infrastructure, power failures, telecommunication outages, network service
outages and disruptions, natural disasters and vandalism and other misconduct.
Outages or delays, could adversely affect online sites, e-mail and the level of
traffic on all sites. We 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
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, we could lose users and market share to our competitors. The
Internet and e-commerce are characterized by rapid technological change. Sudden
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices could render our existing online sites and
proprietary technology and systems obsolete. The emerging nature of products and
services in the online wedding market and their rapid evolution will require
that we continually improve the performance, features and reliability of our
online services. Our success will depend, in part, on our ability:
- - 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
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basis.
The development of online sites and other proprietary technology entails
significant technological and business risks and requires substantial
expenditures and lead time. We may be unable to use new technologies effectively
or adapt our online sites, proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. Updating our
technology internally and licensing new technology from third parties may
require significant additional capital expenditures.
IF WE BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
RELATED TO DOING BUSINESS ONLINE, OUR SPONSORSHIP, ADVERTISING AND MERCHANDISE
REVENUES COULD DECLINE AND OUR BUSINESS AND PROSPECTS COULD SUFFER.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. Laws and regulations may
be adopted covering issues such as user privacy, pricing, content, taxation and
quality of products and services. Any new legislation could hinder the growth in
use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. The governments of states and foreign countries might
attempt to regulate our transmissions or levy sales or other taxes relating to
our activities. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet and Internet advertising
services. In addition, the growth and development of the market for e-commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, which may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet and other online services could cause our sponsorship, advertising
and merchandise revenues to decline and our business and prospects to suffer.
WE MAY BE SUED FOR INFORMATION RETRIEVED FROM OUR SITES.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our online sites. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. We could also be subject to claims based upon the
content that is accessible from our online sites through links to other online
sites or through content and materials that may be posted by members in chat
rooms or bulletin boards. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of claims.
WE MAY INCUR POTENTIAL PRODUCT LIABILITY FOR PRODUCTS SOLD ONLINE.
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user, or if consumers
experience problems with honeymoon packages purchased through our sites. To
date, we have had limited experience selling products online and developing
relationships with manufacturers or suppliers of such products. We plan to sell
a range of products targeted specifically at brides and grooms through The Knot
Registry, The Knot Shop, Bridalink.com, Click Trips and other e-commerce sites
that we may acquire in the future. Such a strategy involves numerous risks and
uncertainties. Although our agreements with manufacturers and providers of
travel services typically contain provisions intended to limit our exposure to
liability claims, these limitations may not prevent all potential claims.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could seriously damage our financial results, reputation and
brand name.
WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO FURTHER EXPAND INTERNATIONALLY.
We may decide to further expand internationally. To date, we have no
experience in developing localized versions of our sites for international
markets and in marketing and selling internationally. If we decide to further
expand internationally and we cannot overcome these challenges, our business
will suffer. There are additional risks related to doing business in
international markets, such as changes in regulatory requirements, tariffs and
other trade
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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 significant costs to
protect against the threat of security breaches or to alleviate problems caused
by such breaches.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, result of operations, or cash flows of the company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
We are exposed to some market risk through interest rates related to the
investment of our current cash, cash equivalents and short-term investments of
approximately $27.6 million as of March 31, 2000. These funds are generally
invested in highly liquid debt instruments with short-term maturities. As such
instruments mature and the funds are re-invested, we are exposed to changes in
market interest rates. This risk is not considered material and we manage such
risk by continuing to evaluate the best investment rates available for
short-term high quality investments.
We have no activities related to derivative financial instruments or
derivative commodity instruments, and we are not currently subject to foreign
currency exchange risk.
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<PAGE> 27
PART II. OTHER INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None.
(d) Use of Proceeds.
On December 1, 1999, the Securities and Exchange
Commission declared effective our Registration Statement
on Form S-1 (Registration No. 333-87345). Pursuant to
this Registration Statement, we completed our initial
public offering of 3,500,000 shares of our common stock
at an initial public offering price of $10.00 per share
on December 7, 1999. On December 31, 1999, an additional
413,000 shares of common stock subject to the
underwriters' over-allotment option were offered at
$10.00 per share. The aggregate gross proceeds of the
shares offered and sold was $39.1 million. After
deducting approximately $2.7 million in underwriting
discounts and commissions and $1.7 million in other
related expenses, net proceeds of the offering were
approximately $34.7 million. We have used approximately
$14.4 million of the proceeds from our initial public
offering for acquisitions, working capital purposes,
capital expenditures and to fund operating losses.
Except for salaries and travel expenses paid in the
normal course of business or distribution and
warehousing fees paid to QVC under our service
agreement, none of these expenses were direct or
indirect payments to our directors, officers, general
partners or their associates, to persons owning ten
percent or more of any class of our equity securities or
to our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K on February 11,
2000, announcing the execution of an Agreement and Plan
of Merger with Weddingpages, pursuant to which it was
agreed that we would acquire Weddingpages.
</TABLE>
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<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000 THE KNOT, INC.
By: /S/ RICHARD SZEFC
-----------------------------------------
Richard Szefc
Chief Financial Officer (Principal
Financial Officer and Duly Authorized
Signatory)
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<PAGE> 29
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ ------------
27.1 Financial Data Schedule
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 27,483,267
<SECURITIES> 118,514
<RECEIVABLES> 6,832,894
<ALLOWANCES> 912,000
<INVENTORY> 505,108
<CURRENT-ASSETS> 37,911,245
<PP&E> 3,476,740
<DEPRECIATION> 555,867
<TOTAL-ASSETS> 49,925,541
<CURRENT-LIABILITIES> 8,291,088
<BONDS> 0
0
0
<COMMON> 145,313
<OTHER-SE> 40,976,626
<TOTAL-LIABILITY-AND-EQUITY> 49,925,541
<SALES> 0
<TOTAL-REVENUES> 3,719,032
<CGS> 1,154,828
<TOTAL-COSTS> 6,028,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,463,998)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,463,998)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,891,547)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
