<PAGE> 1
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 SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28271
THE KNOT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3895178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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 November 10, 2000, there were 14,676,253 shares of the
registrant's common stock outstanding.
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Page
Number
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PART I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999....................................................................... 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and 1999....................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 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... 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 27
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................................... 27
Item 2: Changes in Securities and Use of Proceeds............................................... 27
Item 3: Defaults Upon Senior Securities......................................................... 27
Item 4: Submission of Matters to a Vote of Security Holders..................................... 28
Item 5: Other Information....................................................................... 28
Item 6: Exhibits and Reports on Form 8-K........................................................ 28
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999*
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 19,325,822 $ 40,006,175
Short-term investments ........................................................ -- 501,000
Accounts receivable, net of allowances of $1,341,595 and $133,000, respectively 7,350,141 1,333,158
Inventories ................................................................... 698,575 478,345
Deferred production and marketing costs ....................................... 1,971,775 --
Other current assets .......................................................... 1,006,083 671,519
------------ ------------
Total current assets ............................................................. 30,352,396 42,990,197
Property and equipment, net ...................................................... 4,017,921 1,554,373
Intangible assets, net ........................................................... 10,136,947 541,638
Other assets ..................................................................... 485,046 399,792
------------ ------------
Total assets ..................................................................... $ 44,992,310 $ 45,486,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable and accrued expenses ......................................... $ 3,923,989 $ 1,444,578
Note payable .................................................................. 1,850,000 --
Deferred revenue .............................................................. 4,450,807 408,934
Current portion of long term debt ............................................. 147,548 --
------------ ------------
Total current liabilities ........................................................ 10,372,344 1,853,512
Long term debt ................................................................... 569,020 --
Other liabilities ................................................................ 161,280 57,093
------------ ------------
Total liabilities ................................................................ 11,102,644 1,910,605
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 14,650,982 and
14,510,612 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively ............................................ 146,509 145,106
Additional paid-in-capital .................................................... 59,734,069 60,206,664
Deferred compensation ......................................................... (1,001,435) (2,262,974)
Deferred sales and marketing .................................................. (1,469,753) (1,959,677)
Accumulated deficit ........................................................... (23,519,724) (12,553,724)
------------ ------------
Total stockholders' equity ....................................................... 33,889,666 43,575,395
------------ ------------
Total liabilities and stockholders' equity ....................................... $ 44,992,310 $ 45,486,000
============ ============
</TABLE>
*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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<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 6,656,455 $ 1,897,453 $ 17,232,284 $ 2,635,430
Cost of revenues 1,740,796 662,545 4,752,081 903,990
------------ ------------ ------------ ------------
Gross profit 4,915,659 1,234,908 12,480,203 1,731,440
Operating expenses:
Product and content development 1,420,776 820,379 3,956,816 1,685,057
Sales and marketing 4,585,557 1,419,415 11,835,244 2,913,246
General and administrative 2,460,463 1,153,313 6,206,218 2,194,582
Non cash compensation 149,322 374,460 651,632 716,719
Non cash sales and marketing 163,308 127,016 489,924 127,016
Depreciation and amortization 665,211 171,721 1,502,026 346,461
------------ ------------ ------------ ------------
Total operating expenses 9,444,637 4,066,304 24,641,860 7,983,081
------------ ------------ ------------ ------------
Loss from operations (4,528,978) (2,831,396) (12,161,657) (6,251,641)
Interest income, net 280,202 143,612 1,195,657 243,281
------------ ------------ ------------ ------------
Net loss $ (4,248,776) $ (2,687,784) $(10,966,000) $ (6,008,360)
============ ============ ============ ============
Net loss per share - basic and diluted: $ (0.29) $ (0.87) $ (0.75) $ (1.96)
============ ============ ============ ============
Weighted average number of shares
used in calculating basic and diluted
net loss per share 14,634,772 3,088,065 14,581,546 3,066,960
</TABLE>
See accompanying notes.
4
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THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
------------ ------------
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OPERATING ACTIVITIES
Net loss .................................................................. $(10,966,000) $ (6,008,360)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 730,814 192,459
Amortization of intangibles ............................................ 771,212 154,002
Amortization of deferred compensation .................................. 651,632 716,719
Amortization of deferred sales and marketing ........................... 489,924 127,016
Reserve for returns .................................................... 348,590 --
Allowance for doubtful accounts ........................................ 597,150 183,000
Other non cash charges ................................................. 22,849 12,576
Changes in operating assets and liabilities:
Accounts receivable .................................................... (3,608,756) (716,808)
Inventories ............................................................ (243,079) (401,132)
Deferred production and marketing expenses ............................. (762,503) --
Other current assets ................................................... (39,053) (645,551)
Other assets ........................................................... (70,699) (6,051)
Accounts payable and accrued expenses .................................. 1,293,004 788,088
Deferred revenue ....................................................... 2,038,924 788,224
Other liabilities ...................................................... 104,187 (10,000)
------------ ------------
Net cash used in operating activities ..................................... (8,641,804) (4,825,818)
INVESTING ACTIVITIES
Purchases of property and equipment ....................................... (2,692,151) (1,185,119)
Loan receivable ........................................................... -- (50,000)
Acquisition of businesses, net of acquired cash ........................... (9,728,445) (335,051)
Maturity of short term investments ........................................ 619,514 --
------------ ------------
Net cash used in investing activities ..................................... (11,801,082) (1,570,170)
FINANCING ACTIVITIES
Proceeds from short term borrowings ....................................... 666,468 750,000
Repayment of short term borrowings ........................................ (422,683) (750,000)
Financing costs ........................................................... (515,088) (339,731)
Proceeds from issuance of convertible preferred stock ..................... -- 15,000,000
Proceeds from exercise of stock options ................................... 33,836 --
------------ ------------
Net cash (used in) provided by financing activities ....................... (237,467) 14,660,269
Increase/(decrease) in cash and cash equivalents .......................... (20,680,353) 8,264,281
Cash and cash equivalents at beginning of period .......................... 40,006,175 1,037,589
------------ ------------
Cash and cash equivalents at end of period ................................ $ 19,325,822 $ 9,301,870
============ ============
</TABLE>
See accompanying notes.
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THE KNOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial information as of December 31, 1999
are derived from audited financial statements, and the financial
statements as of September 30, 2000 and for the three and nine
months ended September 30, 1999 and 2000, are unaudited. The
unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion
of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly our financial
position, as of September 30, 2000, the results of operations for
the three and nine months ended September 30, 1999 and 2000 and
cash flows for the nine months ended September 30, 1999 and 2000.
Certain historical financial information has been reclassified to
conform with current presentation. These financial statements
should be read in conjunction with the Company's audited
financial statements and accompanying notes for the year ended
December 31, 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. The
condensed consolidated financial statements for the three and nine
months ended September 30, 2000 includes the operations of
Weddingpages subsequent to its acquisition as of March 29, 2000.
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 PRODUCTION AND MARKETING COSTS
Deferred revenue includes 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 related to book publishing contracts. In
addition, revenue and certain related production and marketing
costs from producing magazines are deferred until publication, at
which time all material services relating to the magazine have
been performed.
NET REVENUES BY TYPE
Net revenues by type are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TYPE
Sponsorship, advertising
and production $ 2,942,773 $ 1,178,946 $ 7,985,393 $ 1,724,154
Merchandise 1,437,904 611,809 3,566,818 694,119
Publishing, travel and other 2,275,778 106,698 5,680,073 217,157
----------- ----------- ----------- -----------
Total $ 6,656,455 $ 1,897,453 $17,232,284 $ 2,635,430
=========== =========== =========== ===========
</TABLE>
For the three months ended September 30, 2000 and 1999,
merchandise revenue included outbound shipping and handling
charges of approximately $158,000 and $64,000, respectively. For
the nine months ended September 30, 2000 and 1999, merchandise
revenue included outbound shipping and handling charges of
approximately $388,000 and $71,000, 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.
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,
"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 $10.0 million consisted of
approximately $9.2 million for the Common Stock and related Common
Stock 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 $775,000 of
other costs associated with the acquisition. Results of operations
for Weddingpages have been included with those of the Company
subsequent to the acquisition date.
Unaudited pro forma data for the Company for the nine months
ended September 30, 2000 and 1999 which gives effect to the
acquisition of Weddingpages as if it had occurred on January 1,
1999, are shown below. The pro forma data 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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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
IN THOUSANDS,
EXCEPT PER SHARE DATA
-------------------------------
<S> <C> <C>
Net revenue $ 17,939 $ 10,462
Net loss $ (11,744) $ (6,994)
Net loss per share $ (0.81) $ (2.28)
</TABLE>
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 $1,850,000 as of September 30, 2000.
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5. LONG TERM DEBT
Long-term debt as of September 30, 2000:
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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.......................................................108,192
10.0% equipment installment note, due in monthly installments
of $8,131 through August 2003.........................................................244,994
-------
Total long-term debt..................................................................716,568
Less current portion of long-term debt................................................147,548
Long term debt, excluding current portion............................................$569,020
========
</TABLE>
Maturities of long-term obligations for the five years ending
September 30, 2005 are as follows: 2001, $147,548; 2002, $165,930;
2003, $131,917; 2004, $36,272; 2005, $39,446 and $195,455
thereafter.
6. RELATED PARTY TRANSACTIONS
On May 1, 2000, the Company entered into an International Anchor
Tenant Agreement with America Online, Inc. ("AOL"), whereby the
Company received distribution within AOL and its affiliates within
international markets. The agreement 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.
8
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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. Our
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. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
OVERVIEW
The Knot (www.theknot.com, AOL keyword: weddings) is a global life
events media and services company. As 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, The Knot combines comprehensive content and an active 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
this significant life event.
We also service the wedding market through a series of books, a wedding
fashion magazine called Wedding Gowns and The Knot Membership Kit. During
February 2000, we launched the premiere issue of Wedding Gowns, which was sold
on newsstands across the nation. In March 2000, we launched The Knot Membership
Kit, a direct marketing tool that is shipped at no charge to our eligible
members. The Knot Membership Kit contains a Knot-branded three-ring binder
designed to help newly-engaged couples organize their wedding ideas, vendor
contacts, and other wedding-related paperwork; in addition, The Knot Membership
Kit contains marketing collateral provided by our participating advertisers.
These offline 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 we launched our website
in July 1997. We launched The Knot Registry, our online gift registry, in
November 1998. 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. In addition, in July 1999, we entered into a strategic
alliance with Weddingpages, Inc., to provide local vendor listings to our
audience of brides and grooms. In August 1999, we acquired the assets of Wedding
Photographers Network, an online searchable database of local wedding
photographers.
In March 2000, we acquired Weddingpages, Inc., the leading publisher of
regional wedding magazines, which provides us with a veteran sales force in over
50 company-owned and franchised major U.S. markets. To further emphasize its
local dominance, Weddingpages belongs to many industry associations and attends
over 2,000 local and national bridal shows annually.
We support our offline local efforts through integration with our Web
site. Through our subsidiary Weddingpages, Inc., we offer detailed online vendor
listings throughout the United States and have launched several comprehensive
local content areas, such as The Knot New York. The Knot New York was the first
in-depth local area on our Web site dedicated to providing extensive services
and content for region-specific wedding planning. We plan to roll out
comprehensive local content areas similar to The Knot New York over the coming
months. Through our local market expansion, we are able to influence many of the
wedding-related decisions and purchases made on the local level.
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 named The Knot Brasil. The new company is working on the
launch of a Portuguese-language wedding Website targeting Brazil's annual
to-be-wed market of over one million couples.
In May 2000, we expanded our long-term relationship with America Online
globally. The Knot will have the premier presence in the weddings areas across
the AOL International online services, including those in Brazil, the U.K.,
France, Germany, Hong Kong, Japan, Australia and Canada, as well as some of
AOL's other international
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brands. As part of our global strategy, we plan to feature our joint ventures'
sites on the AOL International online services as each site is launched.
Also in May 2000, we announced a European joint venture with Gerard
Bedouk Holding (GBH), the largest wedding media company in Europe, to launch
several wedding Websites in the French-speaking countries within Europe. GBH
publishes a bi-monthly wedding trade magazine and three consumer wedding
magazines, Mariee in France and Wedding Dresses in the U.K. and the U.S. GBH
also produces two annual wedding shows in Paris. This joint venture, which is
based outside of Paris, plans to launch its first site in France located at
www.Mariee.fr and will feature interactive planning tools, extensive bridal gown
search, and editorial content from The Knot. Through our relationship with GBH,
we expect The Knot brand will gain broad exposure in Europe. GBH will also
promote the joint venture in its consumer and trade publications and bridal
shows.
In September 2000, we signed a Letter of Intent with Fortunoff, a home
furnishing and fine jewelry retailer, making Fortunoff the premier provider of
china, crystal, and silver on The Knot Gift Registry. This relationship will
enable The Knot to offer an even greater selection of formal and casual china,
glassware, crystal, flatware, and silver on our gift registry. In addition,
Fortunoff will provide in-store and offline promotion of The Knot and will
feature links to our etiquette advice and wedding planning tools. Fortunoff will
also sell wedding supplies from The Knot online.
Also in September 2000, we signed a Letter of Intent for a similar gift
registry partnership with Linens n' Things, a national specialty retailer of
home textiles, housewares and decorating accessories, whereby Linens 'n Things
will be the premier provider of linens on The Knot Registry. Guests will be able
to purchase items from The Knot Registry at any of the 244 Linens 'n Things
stores as well as on the Linens 'n Things website. In addition, Linens 'n Things
will provide in-store and offline promotion for The Knot and its website will
feature links to The Knot's popular wedding planning tools, wedding supplies and
honeymoon trips.
The Knot derives revenues from the sale of online sponsorship,
advertising and production contracts. We also derive revenues from the sale of
merchandise, from publishing and from the sale of travel packages.
Sponsorship revenues are derived principally from contracts currently
ranging up to thirty-nine months. Sponsorships are designed to integrate
advertising with specific online editorial content. Sponsors can purchase the
exclusive right to promote products or services on a specific 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 online listings for local wedding vendors.
Certain 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.
Merchandise revenues are derived from the sale 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.
Commencing in the quarter ending June 30, 2000, publishing revenue
includes 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
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magazine at which time all material services related to the magazine have been
performed. Additionally, publishing revenues are derived from author royalties
paid to us related to our book publishing contract and from sales of magazines.
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 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. These revenues
are recognized when the customer commences travel.
We record deferred compensation, net of reversals related to stock
options forfeited, primarily as a result of the issuance of stock options to
employees with exercise prices per share determined for financial reporting
purposes to be below the fair market value per share of our common stock at the
dates of grant. The difference is recorded as a reduction of stockholders'
equity and amortized as non-cash compensation expense on an accelerated method
over the four-year vesting period of the related options.
RESULTS OF OPERATIONS
Net Revenues
Net revenues were $6.7 million and $17.2 million for the three and nine
months ended September 30, 2000, respectively, which represents an increase of
$4.8 million and $14.6 million when compared with the corresponding periods in
1999.
Sponsorship, advertising and production revenues increased to $2.9
million and $8.0 million for the three and nine months ended September 30, 2000,
respectively, as compared to $1.2 million and $1.7 million for the corresponding
periods in 1999. Additional sponsorship and production contracts contributed
$1.5 million and $5.0 million of the increase for the three and nine months
ended September 30, 2000, respectively. We commenced the launch of local vendor
advertising programs in July 1999. Local advertising contributed revenue of
$551,000 and $1.5 million for the three and nine months ended September 30,
2000, respectively. For the three and nine months ended September 30, 1999,
local vendor advertising contributed $250,000 of revenue. Sponsorship,
advertising and production revenues amounted to 44% of our net revenues for the
quarter ended September 30, 2000 and 62% for the quarter ended September 30,
1999. For the nine months ended September 30, 2000 and 1999, sponsorship,
advertising and production revenues amounted to 46% and 65%, respectively. For
the quarters ended September 30, 2000 and 1999, our top seven advertisers
accounted for 17% and 46% of our net revenues, respectively. For the nine months
ended September 30, 2000 and 1999, our top seven advertisers accounted for 20%
and 41% of our net revenues, respectively. For the three months ended September
30, 1999, two advertisers accounted for 22% of our total advertising revenue.
Merchandise revenues increased to $1.4 million and $3.6 million for the
three and nine months ended September 30, 2000, respectively, as compared to
$612,000 and $694,000 for the corresponding periods in 1999. The increase was
primarily from an increase in the sales of wedding supplies through
Bridalink.com and The Knot Shop of $580,000 and $2.2 million for the three and
nine month periods, respectively, compared to the corresponding periods in 1999.
Sales from The Knot Registry increased $247,000 and $715,000 for the three and
nine month periods ended September 30, 2000, respectively, as compared to the
corresponding periods in 1999. Merchandise revenues amounted to 22% of our net
revenues for the quarter ended September 30, 2000 and 32% of our net revenues
for the quarter ended September 30, 1999. For the nine months ended September
30, 2000 and 1999, merchandise revenue was 21% and 26% of our net revenue,
respectively.
Publishing, travel and other revenues increased to $2.3 million and
$5.7 million for the three and nine months ended September 30, 2000,
respectively, as compared to $107,000 and $217,000 for the corresponding periods
in 1999. The increase is primarily attributable to 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 commenced in the quarter ending
June 30,2000. Publishing, travel and other revenues accounted for 34% and 6% for
the quarters ended September 30, 2000 and 1999, respectively, and 33% and 8% for
the nine months ended September 30, 2000 and 1999, respectively.
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Cost of Revenues
Cost of revenues consists of the cost of merchandise sold, including
outbound shipping costs, the costs related to the production of regional wedding
magazines and the Wedding Gowns magazine, payroll and related expenses for our
personnel who are responsible for the production of customized online sites and
tools, and costs of Internet and hosting services.
Cost of revenues increased to $1.7 million and $4.8 million for the
three and nine months ended September 30, 2000 from $663,000 and $904,000 for
the corresponding periods in 1999. Cost of revenues related to the production of
regional wedding magazines, which commenced in the second quarter of 2000,
increased $585,000 and $1.3 million for the three and nine month period ending
September 30, 2000. Cost of revenues from the sale of wedding supplies was
$659,000 and $1.8 million for the three and nine month periods ended September
30, 2000, respectively. For the three and nine months ended September 30, 1999
cost of revenues was $317,000. The sale of wedding supplies initiated in July,
1999. Cost of revenues from the sales of merchandise through The Knot Registry
increased by $182,000 and $554,000 for the three and nine month periods ended
September 30, 2000, respectively, as compared to the corresponding periods in
1999, primarily due to increased sales. As a percentage of our net revenues,
cost of revenues decreased to 26% for the quarter ended September 30, 2000 from
35% for the quarter ended September 30, 1999. For the nine month period, cost of
revenues decreased to 28% from 34% of our net revenue for the corresponding
periods.
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 $1.4 million and
$4.0 million for the three and nine month periods ended September 30, 2000,
respectively, from $820,000 and $1.7 million for the corresponding periods in
1999. The increase for the three and nine months ended September 30, 2000 was
primarily attributable to a $560,000 and $1.8 million increase, respectively,
resulting from hiring additional staff to enhance the content and functionality
of our sites. In addition, for the three and nine months ended September 30,
2000, there was an increase of $222,000 and $417,000 respectively, in product
and content expenses relating primarily to personnel costs associated with our
Weddingpages subsidiary.
As a percentage of our net revenues, product and content development
expenses decreased to 21% for the quarter ended September 30, 2000 from 43% for
the quarter ended September 30, 1999. For the nine month period, product and
content development expenses decreased to 23% from 64%. 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 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 agreements,
advertising and promotional activities and fulfillment and distribution of
merchandise.
Sales and marketing expenses increased to $4.6 million and $11.8
million for the three and nine month periods ended September 30, 2000,
respectively, from $1.4 million and $2.9 million for the corresponding periods
in 1999. There was an increase in personnel and related costs of $2.0 million
and $5.0 million for the three and nine months ended September 30, 2000,
respectively, related to additional sales, marketing and customer service
personnel, and higher commissions as a result of increased revenues. For the
three and nine month period ending September 30, 2000 the increase in personnel
and related costs included $1.4 million and $3.0 million in expenses related to
the local sales force of Weddingpages. Additionally, there was an increase of
$681,000 and $1.7 million for the three and nine month periods ended September
30, 2000 in promotional expenses. As a percentage of our net revenues, sales and
marketing expenses decreased to 69% for the quarter ended September 30, 2000
from 75% for the quarter ended September 30, 1999. For the nine months ended
September 30, 2000 and 1999, sales and marketing expenses decreased to 69% from
111%, respectively.
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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 $2.5 million and $6.2
million for the three and nine months ended September 30, 2000, respectively,
from $1.2 million and $2.2 million for the corresponding periods in 1999.
Administrative personnel costs increased $321,000 and $1.2 million for the three
and nine month periods ended September 30, 2000, respectively, including
$140,000 and $258,000 in related expenses for Weddingpages personnel for the
corresponding periods. There was a $189,000 and $733,000 increase in
professional fees and insurance. In addition, for the three and nine month
periods ending September 30, 2000 there was an increase of $340,000 and $406,000
in bad debt expense compared to the corresponding periods in 1999. As a
percentage of our net revenues, general and administrative expenses decreased to
37% for the three months ended September 30, 2000 from 61% for the three months
ended September 30, 1999. General and administrative expenses decreased to 36%
from 83% for the nine months ended September 30, 2000 and 1999, respectively.
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 three and nine months
ended September 30, 2000. Amortization of deferred compensation decreased to
$149,000 and $652,000 during the three and nine months ended September 30, 2000
from $374,000 and $717,000 for the three and nine months ended September 30,
1999. Non-cash compensation decreased to 2% of net revenue from 20% for the
three months ended September 30, 2000 and 1999, respectively. For the nine
months ended September 30, 2000 and 1999, non-cash compensation was 4% and 27%
of our net revenues, respectively.
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 and $490,000 for the three and nine months ended September 30, 2000,
respectively, or 2% and 3% of respective net revenues.
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 $665,000 and $1.5
million for the three and nine month periods ended September 30, 2000 from
$172,000 and $346,000 for the corresponding periods in
1999.
This increase was primarily due to a $184,000 and a $409,000 increase
in depreciation as a result of an increase in property and equipment purchases
and leasehold improvements, an additional $271,000 and $617,000 of amortization
of intangible assets related to acquisitions, and an increase in amortization of
capitalized software of $38,000 and $129,000 respectively, for the three and
nine month periods. As a percentage of net revenues, depreciation and
amortization expense increased to 10% from 9% for the three month periods ending
September 30, 2000 and 1999, respectively, and decreased to 9% from 13% for the
nine months ended September 30, 2000 and 1999, respectively.
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Interest Income
Interest income net of interest expense increased to $280,000 and $1.2
million for the three and nine months ended September 30, 2000, as compared to
$144,000 and $243,000 for the corresponding periods in 1999. The increase is
primarily a result of the investment of the net proceeds from our initial public
offering of common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, our cash and cash equivalents amounted to
$19.3 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 $8.6 million for the nine
months ended September 30, 2000. This resulted primarily from the loss for the
period, as adjusted for depreciation and amortization of $2.6 million, increases
in accounts receivable of $3.6 million, and increases in deferred production and
marketing expenses of $763,000, partially offset by increases in deferred
revenue of $2.0 million and accounts payable and accrued expenses of $1.3
million. Net cash used in operating activities was $4.8 million for the nine
months ended September 30, 1999 due primarily to the net loss for the period, as
adjusted for depreciation and amortization of $1.2 million, an increase in
accounts receivable of $717,000, partially offset by increases in accounts
payable and accrued expenses of $788,000 and deferred revenue of $788,000.
Net cash used in investing activities was $11.8 million for the nine
months ended September 30, 2000, primarily due to cash paid for the acquisition
of Weddingpages of $9.6 million and purchases of property and equipment of
approximately $2.7 million partially offset by the maturity of short-term
investments of $620,000. Net cash used in investing activities was $1.6 million
for the nine months ended September 30, 1999 primarily as a result of purchases
of property and equipment.
Net cash used in financing activities was $237,000 for the nine months
ended September 30, 2000, primarily due to the payment of expenses related to
our initial public offering, partially offset by net increases in our short term
borrowings and proceeds from the exercise of stock options. Net cash provided by
financing activities was $14.7 million for the nine months ended September 30,
1999, due primarily to the proceeds from the issuance of convertible preferred
stock.
Although we have no material commitments for capital expenditures,
capital expenditures have increased by $1.5 million for the nine months ended
September 30, 2000 compared to the same period in 1999, consistent with the
growth of operations and staffing. We anticipate that increases in capital
expenditures will continue for the foreseeable future as a result of increased
growth.
As of September 30, 2000, we had commitments under non-cancelable
operating leases amounting to $6.7 million, of which $692,000 will be due on or
before September 30, 2001.
As of September 30, 2000, we had commitments under an amended anchor
tenant agreement with AOL and an additional anchor tenant agreement with AOL
International in the amount of $6.0 million of which approximately $2.4 million
will be due on or before September 30, 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 $10.0 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
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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.
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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 quarterly report on
Form 10-Q contains forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below and elsewhere in this
quarterly report.
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.
A majority of 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, supplies and honeymoon travel packages
It is uncertain whether wedding-related online sites that rely on
attracting sponsors and advertisers, as well as people to purchase wedding gifts
and supplies, can generate sufficient revenues to survive. For our business to
be successful, we must provide users with an acceptable blend of products,
information, services and community offerings that will attract wedding
consumers to our online sites frequently. In addition, we must provide sponsors,
advertisers and vendors the opportunity to reach these wedding consumers. We
provide our services to users without charge and we may not be able to generate
sufficient revenues to pay for these services. Accordingly, we are not certain
that our business model will be successful or that we can sustain revenue growth
or be profitable.
WE HAVE A 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;
- respond effectively to competitive pressures;
- generate revenues from the sale of merchandise and e-commerce;
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- 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 $11.0 million for the nine months ended September
30, 2000. As of September 30, 2000, our accumulated deficit was $23.5 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 both online and offline and the
expansion of our e-commerce activity. In addition, we plan to expand and develop
content and to upgrade and enhance our technology and infrastructure to support
our growth. We incur a significant percentage of our expenses, such as employee
compensation and rent, prior to generating revenues associated with those
expenses. Moreover, our expense levels are based, in part, on our expectation of
future revenues. We may be unable to adjust spending quickly enough to offset
any unexpected revenue shortfall. If we have a shortfall in revenues in relation
to our growth in expenses, then our results of operations would be materially
and adversely affected. For more information on our net revenues and the effects
of our expenses on our financial performance, see "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 and traffic on our website;
- demand for online and offline advertising;
- seasonal trends in both online usage and advertising placements;
- the addition or loss of advertisers;
- the advertising budgeting cycles of specific advertisers;
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- the number of users that purchase merchandise from us;
- the magazine publishing cycle of Weddingpages;
- 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, online and offline media.
We do not believe that period-to-period comparisons of our operating
results are necessarily meaningful and you should not rely upon these
comparisons as indicators of our future performance.
Due to the foregoing factors, it is possible that our results of
operations in one or more future quarters may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock is likely to decline.
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 third quarter of 2000, approximately 16% 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, and print
generally are lower in the first and third calendar quarters of each year.
Historically, we have experienced increases in our traffic during the first and
second quarters of the year. As a result of these factors, we may experience
fluctuations in our revenues from quarter to quarter.
WE MAY BE UNABLE TO CONTINUE TO BUILD AWARENESS OF THE KNOT BRAND NAME WHICH
WOULD NEGATIVELY IMPACT OUR BUSINESS AND CAUSE OUR SPONSORSHIP AND ADVERTISING
REVENUES TO DECLINE.
Building recognition of our brand is critical to attracting and
expanding our online user base and our offline readership. Because we plan to
continue building brand recognition, we may find it necessary to accelerate
expenditures on our sales and marketing efforts or otherwise increase our
financial commitment to creating and maintaining brand awareness. Our failure to
successfully promote and maintain our brand would adversely affect our business
and cause us to incur significant expenses in promoting our brand without an
associated increase in our net revenues.
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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 not be able to successfully integrate and expand
the Weddingpages business model. In addition, we may still encounter difficulty
integrating the personnel, operations, technology and software of this acquired
business. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations.
In the future, we may acquire, or invest in, complementary companies,
products or technologies. 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.
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 46% of our net revenue for the nine months
ended September 30, 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
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business needs than traditional methods of advertising and marketing.
Furthermore, there are software programs that limit or prevent advertising from
being delivered to a user's computer. Widespread adoption of this software by
users would significantly undermine the commercial viability of Internet
advertising.
WE DEPEND ON A LIMITED NUMBER OF ONLINE SPONSORS AND ADVERTISERS AND THE LOSS OF
A NUMBER OF THESE WOULD RESULT IN A DECLINE IN OUR REVENUES.
We derive online 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 online sponsors and advertisers for
a significant part of our net revenues. Consequently, the loss of any of these
online sponsors or advertisers would cause our revenues to decline. For the nine
months ended September 30, 2000 and 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 limited number of online
sponsors and advertisers. In addition, we anticipate that such online sponsors
and advertisers will continue to vary over time. To achieve our long-term goals,
we will need to attract additional significant online sponsors and advertisers
on an ongoing basis. If we fail to enter into a sufficient number of large
contracts during a particular period, our revenues for that period would be
adversely affected. For more information on our advertising revenues, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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.
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 94% 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
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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 and rapidly
evolving. Additionally, both the internet advertising and online wedding markets
and the wedding magazine publishing markets are intensely competitive, and we
expect such competition to intensify in the future.
We face competition for members, users, readers and advertisers from
the following areas:
- 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.
We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Our competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user, membership or
readership bases than we have and, therefore, have a significantly greater
ability to attract advertisers, users and readers. In addition, many of our
competitors may be able to respond more quickly than we can to new or emerging
technologies and changes in Internet user requirements, as well as devote
greater resources than we can to the development, promotion and sale of
services.
There can be no assurance that our current or potential competitors
will not develop products and services comparable or superior to those that we
develop or adapt more quickly than we do to new technologies, evolving industry
trends or changing Internet user preferences. Increased competition could result
in price reductions, lower margins or loss of market share. In addition, as 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 nine
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
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- 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 not succeed.
SYSTEMS DISRUPTIONS AND FAILURES COULD CAUSE ADVERTISER OR USER DISSATISFACTION
AND COULD REDUCE THE ATTRACTIVENESS OF OUR SITES.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our advertisers and sponsors, users and members may
become dissatisfied by any systems disruption or failure that interrupts our
ability to provide our services and content to them. Substantial or repeated
system disruption or failures would reduce the attractiveness of our online
sites significantly. Substantially all of our communications hardware and some
of our other computer hardware operations are located at Globix Corporation's
facilities in New York, New York. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect our online sites. Our business could be
materially and adversely affected if our systems were affected by any of these
occurrences. We do not presently have any secondary "off-site" systems or a
formal disaster recovery plan. Our sites must accommodate a high volume of
traffic and deliver frequently updated information. Our sites have in the past
experienced slower response times or decreased traffic. These types of
occurrences in the future could cause users to perceive our sites as not
functioning properly and therefore cause them to use another online site or
other methods to obtain information or services. In addition, our users depend
on Internet service providers, online service providers and other site operators
for access to our online sites. Many of them have experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system disruptions or failures unrelated to our systems. Although we
carry general liability insurance, our insurance may not cover any claims by
dissatisfied providers or subscribers or may not be adequate to indemnify us for
any liability that may be imposed in the event that a claim were brought against
us. Any system disruption or failure, security breach or other damage that
interrupts or delays our operations could cause us to lose users, sponsors and
advertisers and adversely affect our business and results of operations.
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
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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 September 30, 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.
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.
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ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our certificate of incorporation, our bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so might be beneficial to our stockholders.
RISKS RELATED TO THE INTERNET INDUSTRY
IF THE USE OF THE INTERNET AND COMMERCIAL ONLINE SERVICES AS MEDIA FOR COMMERCE
DOES NOT CONTINUE TO GROW, OUR BUSINESS AND PROSPECTS WOULD BE MATERIALLY AND
ADVERSELY AFFECTED.
We cannot assure you that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and commercial online services as media
for commerce, particularly for purchases of wedding gifts and supplies. Even if
consumers adopt the Internet or commercial online services as a media for
commerce, we cannot be sure that the necessary infrastructure will be in place
to process such transactions. Our long-term viability depends substantially upon
the widespread acceptance and the development of the Internet or commercial
online services as effective media for consumer commerce and for advertising.
Use of the Internet or commercial online services to effect retail transactions
and to advertise is at an early stage of development. Convincing consumers to
purchase wedding gifts and supplies online may be difficult.
Demand for recently introduced services and products over the Internet
and commercial online services is subject to a high level of uncertainty. Few
proven services and products exist. The development of the Internet and
commercial online services into a viable commercial marketplace is subject to a
number of factors, including:
- 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.
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WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN THE INTERNET
INDUSTRY AND THIS MAY HARM OUR BUSINESS.
If we are unable, for technological, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or customer
requirements, we could lose users and market share to our competitors. The
Internet and e-commerce are characterized by rapid technological change. Sudden
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices could render our existing online sites and
proprietary technology and systems obsolete. The emerging nature of products and
services in the online wedding market and their rapid evolution will require
that we continually improve the performance, features and reliability of our
online services. Our success will depend, in part, on our ability:
- 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.
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
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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 AS WE 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 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, result of operations, or cash flows of the company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
We are exposed to some market risk through interest rates related to
the investment of our current cash, cash equivalents and short-term investments
of approximately $19.3 million as of September 30, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 14, 2000, certain Weddingpages franchisees commenced
litigation in Supreme Court, New York County, New York against us and certain of
our officers, including David Liu, our Chairman and Chief Executive Officer. The
plaintiffs seek to enjoin us from taking actions, primarily relating to the sale
of advertising in certain local markets, which plaintiffs claim will damage the
value of their Weddingpages franchises and money damages in an unspecified
amount. On October 19, 2000, we filed our initial response. On October 27, 2000
the Supreme Court of the State of New York refused to grant preliminary
injunctions sought by certain Weddingpages franchisees. The court ordered that
the parties submit their dispute to a neutral mediator within the next 30 days.
We intend to contest vigorously the allegations which, we believe, are without
merit.
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 $22.6 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.
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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.
On August 30, 2000, we filed a Current Report on Form 8-K
disclosing the commencement of litigation by certain
franchisees of Weddingpages.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 2000 THE KNOT, INC.
By: /s/ RICHARD SZEFC
--------------------------------------
Richard Szefc
Chief Financial Officer (Principal
Financial Officer
and Duly Authorized Signatory)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
30
