XO GROUP INC. - FORM 10-Q - November 9, 2010

Attached files

file filename
EX-32.2 - XO GROUP INC.v201545_ex32-2.htm
EX-31.1 - XO GROUP INC.v201545_ex31-1.htm
EX-31.2 - XO GROUP INC.v201545_ex31-2.htm
EX-32.1 - XO GROUP INC.v201545_ex32-1.htm
 
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, 2010
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
COMMISSION FILE NUMBER:   000-28271
 
THE KNOT, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
  
13-3895178
 (State of incorporation)
  
 (I.R.S. Employer Identification Number)
 
462 Broadway, 6th Floor
New York, New York 10013
(Address of Principal Executive Officer and Zip Code)
 
(212) 219-8555
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
   
Non-accelerated filer o (Do not check if a smaller reporting)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
 
As of October 29, 2010, there were 34,373,450 shares of the registrant’s common stock outstanding.
 
 
 
 
  
Page
Number
  
PART I FINANCIAL INFORMATION
      
         
ITEM 1:
Financial Statements (Unaudited):
      
         
 
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
      
        4  
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
        
        5  
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
        
        6  
 
Notes to Condensed Consolidated Financial Statements
     7  
 
 
        
ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     17  
           
ITEM 3:
Quantitative and Qualitative Disclosures About Market Risk
     29  
           
ITEM 4:
Controls and Procedures
     29  
           
PART II OTHER INFORMATION
        
           
ITEM 1:
Legal Proceedings
     30  
           
ITEM1A:
Risk Factors
     30  
           
ITEM 2:
Unregistered Sales of Equity Securities and Use of Proceeds
     31  
           
ITEM 6:
Exhibits
     31  
           
SIGNATURES
       32  
 
2
 
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements relating to future events and the future performance of The Knot, Inc. based on our current expectations, assumptions, estimates and projections about us and our industry.  These forward-looking statements involve risks and uncertainties.  Actual results or events could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in Item 1A (Risk Factors) in each of our most recent Annual Report on Form 10-K  and Part II of this report, 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.

WHERE YOU CAN FIND MORE INFORMATION

The Knot’s corporate website is located at www.theknotinc.com. The Knot makes available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing to, the Securities and Exchange Commission (“SEC”). Information contained on The Knot’s corporate website is not part of this report or any other report filed with the SEC.
 
Unless the context otherwise indicates, references in this report to the terms “The Knot,” “we,” “our” and “us” refer to The Knot, Inc., its divisions and its subsidiaries.
 
3
 
 
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except for share data)

   
September 30,
    
December 31,
  
   
2010
    
2009
  
   
(unaudited)
        
 ASSETS
            
 Current assets:
            
 Cash and cash equivalents
   $ 135,858     $ 94,993  
 Short-term investments
     -       36,498  
 Accounts receivable, net of allowances of $2,187 and $1,696 at September 30, 2010 and December 31, 2009, respectively
     10,242       8,704  
 Accounts receivable from affiliate
     973       444  
 Inventories
     4,094       2,708  
 Deferred production and marketing costs
     914       685  
 Deferred tax assets, current portion
     2,441       2,441  
 Other current assets
     3,972       2,948  
 Total current assets
     158,494       149,421  
                 
 Property and equipment, net
     5,761       6,148  
 Intangible assets, net
     8,978       10,341  
 Goodwill
     37,750       37,757  
 Deferred tax assets
     20,591       20,588  
 Investment in equity interest, net
     644       419  
 Other assets
     403       201  
 Total assets
   $ 232,621     $ 224,875  
                 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
                
 Current liabilities:
                
 Accounts payable and accrued expenses
   $ 10,527     $ 8,861  
 Deferred revenue
     11,543       10,190  
 Total current liabilities
     22,070       19,051  
 Deferred tax liabilities
     3,506       3,504  
 Other liabilities
     125       214  
 Total liabilities
     25,701       22,769  
                 
                 
 Stockholders’ equity:
                
Common stock, $.01 par value; 100,000,000 shares authorized and 34,285,081 and 33,707,358 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
     343       337  
        Additional paid-in-capital
     212,108       209,440  
        Accumulated deficit
     (5,531 )     (7,671 )
 Total stockholders’ equity
     206,920       202,106  
 Total liabilities and stockholders’ equity
   $ 232,621     $ 224,875  

See accompanying Notes to Condensed Consolidated Financial Statements
 
4
 
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except for per share data)
(unaudited)
 
 
 
   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
                         
Net revenue:
                        
 Online sponsorship and advertising
   $ 14,701     $ 14,122     $ 44,146     $ 41,162  
 Registry services
     2,196       3,445       5,851       8,144  
 Merchandise
     7,083       7,462       22,443       20,737  
 Publishing and other
     3,302       3,144       12,914       11,318  
 Total net revenue
     27,282       28,173       85,354       81,361  
                                 
Cost of revenue:
                                
 Online sponsorship and advertising
     370       844       1,284       2,075  
 Merchandise
     3,737       4,062       12,239       10,638  
 Publishing and other
     1,334       1,273       4,881       4,600  
 Total cost of revenue
     5,441       6,179       18,404       17,313  
                                 
 Gross profit
     21,841       21,994       66,950       64,048  
                                 
Operating expenses:
                                
    Product and content development
     5,526       5,010       16,778       15,244  
    Sales and marketing
     8,483       8,116       26,325       23,775  
    General and administrative
     4,792       4,786       15,976       15,008  
    Depreciation and amortization
     1,207       2,489       3,947       7,670  
Total operating expenses
     20,008       20,401       63,026       61,697  
                                 
 Income from operations
     1,833       1,593       3,924       2,351  
 Loss in equity interest
     (63 )     (19 )     (275 )     (19 )
 Interest and other income, net
     21       93       106       613  
 Income before income taxes
     1,791       1,667       3,755       2,945  
 Provision for income taxes
     692       896       1,615       1,771  
 Net income
   $ 1,099     $ 771     $ 2,140     $ 1,174  
                                 
Net earnings per share:
                                
Basic
   $ 0.03     $ 0.02     $ 0.07     $ 0.04  
Diluted
   $ 0.03     $ 0.02     $ 0.06     $ 0.04  
                                 
Weighted average number of shares used in calculating net earnings per share
                                
Basic
     32,934       32,162       32,637       32,045  
Diluted
     33,642       33,361       33,589       33,039  
 
See accompanying Notes to Condensed Consolidated Financial Statements
 
5
 
THE KNOT, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
 
   
Nine Months Ended
September 30,
  
   
2010
    
2009
  
 CASH FLOWS FROM OPERATING ACTIVITIES
            
 Net income
   $ 2,140     $ 1,174  
 Adjustments to reconcile net income to net cash provided by operating activities:
                
 Depreciation and amortization
     2,536       3,844  
 Amortization of intangibles
     1,411       3,825  
 Stock-based compensation
     3,058       3,187  
 Deferred income taxes
     (2 )     1,611  
 Excess tax benefits from stock-based awards
     -       (892 )
 Reserve for returns
     3,668       2,136  
 Realized gain on value of auction rate securities
     (2 )     (124 )
 Allowance for doubtful accounts
     285       826  
 Other non-cash charges
     (10 )     (13 )
 Changes in operating assets and liabilities:
                
 Increase in accounts receivable
     (5,491 )     (2,587 )
 Increase in accounts receivable from affiliate
     (530 )     (595 )
 Increase in inventories
     (1,375 )     (450 )
 (Increase) decrease in deferred production and marketing costs
     (228 )     124  
 Increase in other current assets
     (1,024 )     (227 )
 Decrease in other assets
     238       13  
 Increase in accounts payable and accrued expenses
     1,666       299  
 Increase (decrease) in deferred revenue
     1,353       (186 )
 Decrease in other liabilities
     (89 )     (110 )
           Net cash provided by operating activities
     7,604       11,855  
                 
 CASH FLOWS FROM INVESTING ACTIVITIES
                
 Purchases of property and equipment
     (2,147 )     (1,772 )
 Proceeds from sales/maturities of short-term investments
     -       9,991  
 Proceeds from sales/maturities of long-term investments
     36,500       6,050  
 Investment in equity interest
     (500 )     (500 )
 Loan to foreign trustee
     (165 )     -  
 Acquisition of business, net of cash acquired
     (48 )     (5,882 )
           Net cash provided by investing activities
     33,640       7,887  
                 
 CASH FLOWS FROM FINANCING ACTIVITIES
                
 Proceeds from issuance of common stock
     1,125       312  
 Proceeds from exercise of stock options
     96       860  
 Excess tax benefits from stock-based awards
     -       892  
 Repurchase of common stock
     (1,606 )     (423 )
 Settlement of WedSnap escrow
     6       -  
           Net cash used in financing activities
     (379 )     1,641  
                 
 Increase in cash and cash equivalents
     40,865       21,383  
 Cash and cash equivalents at beginning of period
     94,993       61,488  
 Cash and cash equivalents at end of period
   $ 135,858     $ 82,871  
                 
 Supplemental information:
                
 Cash paid for interest
   $ -     $ -  
 Cash paid for income taxes
   $ 2,779     $ 1,141  
                 
 Cash paid for acquisitions
   $ (48 )   $ (6,594 )
 Cash acquired in acquisitions
     -       712  
    $ (48 )   $ (5,882 )
 
 See accompanying Notes to Condensed Consolidated Financial Statements
 
6
 
THE KNOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
Organization and Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements include (1) the accounts of The Knot, Inc. (“The Knot” or the “Company”) and all 100% owned subsidiaries and (2) 50% of the net income of an entity formed in July 2009 accounted for as an equity interest. The condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations.  The Company believes that the disclosures are adequate to make the information presented not misleading.  The financial statements contained herein should be read in conjunction with the consolidated and combined financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2009.

    In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial condition, results of operations and changes in cash flows of the Company for the interim periods presented.  The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the entire calendar year.

Segment Information
 
The Company operates in one reportable segment because it is organized around its online and offline media and e-commerce service lines.  These service lines do not have operating managers who report to the chief operating decision maker. The chief operating decision maker generally reviews financial information at a consolidated result of operations level but does not review revenue and cost of revenue results of the individual service lines.  A considerable amount of shared expenses for the revenue and cost of revenue categories are shown as operating expenses.
 
Recently Adopted Accounting Pronouncements

The adoption of the following accounting standards and updates did not result in a material impact to the Company’s condensed consolidated financial statements:
 
On June 12, 2009, the accounting standard relating to the transfers and servicing of financial assets and extinguishment of liabilities was updated to require additional information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. This standard update is effective as of January 1, 2010.

On June 12, 2009, the accounting standard regarding the requirements of consolidation accounting for variable interest entities was updated to require an enterprise to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling interest in a variable interest entity. This standard update is effective for all interim and annual reporting periods as of January 1, 2010.

On January 21, 2010, the accounting standard relating to fair value measurements was updated to require additional new disclosures for transfers in and out of Levels 1 and 2 and activity in Level 3.  This update also amends the standard by requiring an entity to provide fair value measurement disclosures for each class of assets and liabilities as well as the inputs and valuation techniques.  This standard update is effective for all interim and annual reporting periods on or after December 15, 2009 excluding certain exceptions which will be effective for fiscal years beginning after December 15, 2010.
 
7
 
2.
Fair Value Measurements

Cash and cash equivalents, investments and investment receivables consist of the following:

   
September 30,
    
December 31,
  
   
2010
    
2009
  
   
(in thousands)
  
Cash and cash equivalents
            
Cash
   $ 6,925     $ 6,007  
Money market funds
     128,933       88,986  
Subtotal cash and cash equivalents
     135,858       94,993  
                 
Short-term investments
                
Auction rate securities
     -       36,498  
                 
Total cash and cash equivalents, investments and investment receivables
   $ 135,858     $ 131,491  

The inputs to the valuation techniques used to measure fair value are classified into the following categories:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities
 
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable
 
Level 3 — Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

As of September 30, 2010, the Company’s investment in cash and cash equivalents of $135.9 million was measured at fair value using Level 1 inputs.  On June 30, 2010, we exercised our right to receive cash from UBS for the remaining $9.6 million in par value of auction rate securities.  We received the $9.6 million on July 1, 2010.

The carrying amount of the Company’s auction rate securities at September 30, 2010 is as follows:

   
Amount
  
   
(in thousands)
  
Balance at December 31, 2009
   $ 36,498  
Redemptions, at par
     (26,900 )
Change in fair value of ARS portfolio
     -  
Change in fair value of ARS Right
     2  
Exercise of ARS Right
     (9,600 )
Balance at September 30, 2010
   $ -  
 
8
 
3.
Stock-Based Compensation
 
The Company maintains several stock-based compensation plans which are more fully described below. Total stock-based compensation expense related to all of the Company’s stock awards was included in various operating expense categories for the three and nine months ended September, 2010 and 2009, as follows:

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(in thousands)
  
                         
Product and content development
   $ 330     $ 369     $ 1,053     $ 999  
Sales and marketing
     297       272       886       802  
General and administrative
     325       465       1,119       1,386  
                                 
Total stock-based compensation
   $ 952     $ 1,106     $ 3,058     $ 3,187  
 
The Knot Stock-Based Incentive Plans
 
The 2009 Stock Incentive Plan (the “2009 Plan”) was adopted by the Board of Directors, and became effective in May 2009 following approval by the stockholders, as a successor plan to the Company’s 1999 Stock Incentive Plan (the “1999 Plan”). All incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as “options”), stock appreciation rights, stock issuances which may be subject to the attainment of designated performance goals or service requirements (“restricted stock”), or any combination thereof outstanding under the 1999 Plan have been incorporated into the 2009 Plan. Under the terms of the 2009 Plan 1,000,000 shares of common stock of the Company were initially reserved for issuance in addition to the 3,190,737 shares which were incorporated from the 1999 Plan. The 2009 Plan provides that awards may be granted to such non-employee directors, officers, employees and consultants of the Company as the Compensation Committee of Board of Directors shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options. Options are granted at the fair market value of the stock on the date of grant. Options vest over periods up to four years and have terms not to exceed 10 years. Restricted stock awards vest over periods ranging from one to five years.
 
The 2000 Non-Officer Stock Incentive Plan (the “2000 Plan”) was approved by the Board of Directors in June 2000. Under the terms of the 2000 Plan, 435,000 shares of common stock of the Company have been reserved for nonqualified stock options, stock issuances (which may be restricted stock) or any combination thereof. Awards may be granted to employees (other than officers or directors of the Company) and consultants and other independent advisors who provide services to the Company. Options are granted at the fair market value of the stock on the date of grant. Generally, options have vested over a four-year period and have terms not to exceed 10 years. Currently, there are no unvested options outstanding under the 2000 Plan. The 2000 Plan expired as of June 30, 2010.
 
As of September 30, 2010, there were 3,828,728 shares available for future grants under the 2009 Plan.
 
9
 
Options
 
The following table represents a summary of the Company’s stock option activity under the 2009 and 2000 Plans and related information, without regard for estimated forfeitures, for the nine months ended September 30, 2010:

   
Shares
    
Weighted Average Exercise Price
  
   
(in thousands)
        
Options outstanding at December 31, 2009
     895     $ 5.29  
Options granted
     -       -  
Options exercised
     (500 )     2.04  
Options forfeited
     (2 )     3.72  
Options outstanding at September 30, 2010
     393     $ 9.43  

The intrinsic value of options exercised during the three months ended September 30, 2010 and 2009 was $18,000 and $42,000, respectively.  The intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $2.8 million and $1.9 million, respectively.

The following table summarizes information about options outstanding at September 30, 2010:

             
Options Outstanding
    
Options Exercisable
  
 
Range of
Exercise Price
    
Number
Outstanding as
of September 30,
2010
    
Weighted
Average
Remaining
Contractual Life
(in Years)
    
Weighted
Average
Exercise
Price
    
Number
Exercisable as
of September 30,
2010
    
Weighted
Average
Exercise
Price
  
       
(in thousands)
                
(in thousands)
        
  $ 0.42 to $1.03       15       0.72     $ 0.75       15     $ 0.75  
  $ 1.37 to $4.10       218       3.36       3.54       218       3.54  
  $ 18.26       160       1.66       18.26       160       18.26  
                                               
            393       2.57     $ 9.43       393     $ 9.43  

The weighted average remaining contractual life of options exercisable as of September 30, 2010 was 2.57 years. The aggregate intrinsic value of stock options outstanding at September 30, 2010 was $1.3 million, all of which relates to vested awards. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted closing price of the Company’s common stock as of September 30, 2010.
 
10
 
The following table summarizes non-vested stock option activity for the nine months ended September 30, 2010:
 
   
Shares
    
Weighted Average Exercise Price
  
   
(in thousands)
        
Nonvested options outstanding at December 31, 2009
     53     $ 18.26  
Vested
     (53 )     18.26  
Canceled
     -          
                 
Nonvested options outstanding at September 30, 2010
     -     $ -  
 
During the three months ended September 30, 2010, there were no stock options that vested.  During the nine months ended September 30, 2010, 53,000 stock options vested.  During the nine months ended September 30, 2010 and 2009, the weighted average fair value of options that vested was $5.95.  
 
Restricted Stock
 
As of September 30, 2010 and 2009, there were 1,143,211 and 1,528,662 service-based restricted stock awards outstanding, respectively. During the three months ended September 30, 2010 and 2009, 48,000 and 17,000 shares, respectively, of restricted stock were awarded at weighted average grant-date fair values of $7.60 and $9.55, respectively. During the nine months ended September 30, 2010 and 2009, 233,000 and 1,054,500 shares, respectively, of restricted stock were awarded at weighted average grant-date fair values of $7.95 and $6.99, respectively. During the nine months ended September 30, 2010 and 2009, 443,232 and 147,813 shares of restricted stock, respectively, vested. During the nine months ended September 30, 2010 and 2009, 105,443 and 42,992 shares of restricted stock, respectively, were canceled. During the nine months ended September 30, 2010 and 2009, 180,736 and 49,290 shares of restricted stock, respectively, were repurchased by the Company in connection with the surrender of these shares by employees to satisfy tax withholding obligations related to the vesting of the stock awards. The aggregate intrinsic value of restricted shares as of September 30, 2010 and 2009 was $10.4 million and $16.7 million, respectively. The intrinsic value for restricted shares is calculated based on the par value of the underlying shares and the quoted price of the Company’s common stock as of September 30, 2010.
 
As of September 30, 2010, there was $8.2 million of total unrecognized compensation cost related to non-vested restricted shares, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.3 years. During the three months ended September 30, 2010 and 2009, the Company recorded $918,000 and $999,000, respectively, of compensation expense related to restricted shares.  During the nine months ended September 30, 2010 and 2009, the Company recorded $2.8 million and $2.9 million, respectively, of compensation expense related to restricted shares.

 
Employee Stock Purchase Plan
 
The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) was adopted by the Board of Directors, and was approved by the stockholders in May 2009, as a successor plan to the Company’s 1999 Employee Stock Purchase Plan (the “1999 ESPP”). The first offering period under the 2009 ESPP began August 1, 2009 and shares were first purchased under this plan on January 31, 2010. The Compensation Committee of the Board of Directors administers each ESPP. The ESPP permits a participating employee to make contributions to purchase shares of common stock by having withheld from his or her salary an amount between 1% and 15% of compensation. Under each ESPP, eligible employees of the Company may elect to participate before the start date of a semi-annual offering period. On each purchase date during an offering period, a participating employee’s contributions will be used to purchase up to 1,000 shares of the Company’s common stock for such participating employee at a 15% discount from the fair market value, as defined in each ESPP, of such stock. In addition to the 1,000 share purchase limit, the cost of shares purchased under the plan by a participating employee cannot exceed $25,000 in any plan year. The Company initially reserved 300,000 shares of common stock under the 1999 ESPP. The shares reserved under the 1999 ESPP automatically increased on the first trading day in January of each calendar year by the lesser of the (i) the number of shares of common stock issued under the 1999 ESPP in the immediately preceding calendar year, (ii) 300,000 shares or (iii) such other lesser amount approved by the Board of Directors.  For the nine months ended, September 30, 2010, 49,527 shares were issued under the 2009 ESPP.  The Company initially reserved 300,000 shares of common stock under the 2009 ESPP.
 
11
 
The weighted average grant-date fair value of ESPP rights arising from elections made by ESPP plan participants was $1.90 and $1.96 during the three and nine months ended September 30, 2010. The weighted average grant-date fair value of ESPP rights arising from elections made by ESPP plan participants was $2.11 and $1.98 during the three and nine months ended September 30, 2009.  The fair value of ESPP rights that vested during the three and nine months ended September 30, 2010 were $2.02 and $2.07, respectively.  The fair value of ESPP rights that vested during the three and nine months ended September 30, 2009 were $1.85 and $2.03, respectively.  On July 31, 2010, the Company issued 22,915 shares at a weighted average price of $7.00 under the 2009 ESPP.  On January 31, 2010, the Company issued 26,612 shares at a weighted average price of $7.43 under the 2009 ESPP.
  
The intrinsic value of shares purchased through the 2009 ESPP on January 31, 2010 and July 31, 2010 was $46,000 and $65,000, respectively. The intrinsic value of outstanding 2009 ESPP rights as of September 30, 2010 was $31,000. The intrinsic value of the shares of 2009 ESPP rights is calculated as the discount from the quoted price of the Company’s common stock, as defined in the 2009 ESPP, which was available to employees as of the respective dates.

As of September 30, 2010, there was $29,132 of unrecognized compensation cost related to 2010 ESPP rights, net of estimated forfeitures, which is expected to be recognized over a weighted average period of one month.
 
The fair value of ESPP rights have been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
 
   
Nine Months Ended September 30,
  
   
2010
    
2009
  
Weighted average expected lives
  
Six months
    
Six months
  
Risk-free rate
     0.20 %     0.26 %
Expected volatility
     30.7 %     34.4 %
Dividend yield
     0.0 %     0.0 %

Expected volatility is based on the historical volatility of the market price of the Company’s stock. The expected lives of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the expected option lives and the corresponding U.S. treasury yields in effect at the time of grant. The fair value for ESPP rights includes the option exercise price discount from market value provided for under the ESPP.

During the three months ended September 30, 2010 and 2009, the Company recorded $34,000 and $106,000, respectively, of compensation expense related to options and ESPP rights and received cash from the exercise of options, warrants and ESPP rights of $933,000 and $167,000 for the three months ended September 30, 2010 and 2009, respectively, for which the Company issued new shares of common stock.  During the nine months ended September 30, 2010 and 2009, the Company recorded $224,000 and $308,000, respectively, of compensation expense related to options and ESPP rights and received cash from the exercise of options and ESPP rights of $1.2 million for both the nine months ended September 30, 2010 and 2009, for which the Company issued new shares of common stock.

 
4.
Comprehensive Income

The Company’s comprehensive net income is equal to its net income for all periods presented.  
 
12
 
5.
Inventory

Inventory consists of the following:

   
September 30, 
2010
    
December 31,
2009
  
   
(in thousands)
  
Inventory
            
             
Raw materials
   $ 1,013     $ 606  
Finished goods
     3,081       2,102  
                 
Total inventory, net
   $ 4,094     $ 2,708  
 
6.
Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill at September 30, 2010 is as follows:

   
Amount
  
   
(in thousands)
  
Balance at December 31, 2009
   $ 37,757  
WedSnap goodwill adjustment, escrow settlement
     (7 )
         
Balance at September 30, 2010
   $ 37,750  

Other intangible assets consisted of the following:

   
September 30, 2010
    
December 31, 2009
  
   
Gross
Carrying
Amount
    
Accumulated Amortization
    
Net Cost
    
Gross
Carrying
Amount
    
Accumulated Amortization
    
Net Cost
  
   
(in thousands)
  
Indefinite lived intangible assets:
                                    
Tradenames
   $ 6,995     $ -     $ 6,995     $ 6,995     $ -     $ 6,995  
URLs
     77       -       77       64       -       64  
    Subtotal indefinite lived intangible assets
     7,072       -       7,072       7,059       -       7,059  
                                                 
Definite lived intangible assets:
                                                
Customer and advertiser relationships
     4,780       (4,457 )     323       4,780       (4,029 )     751  
Developed technology and patents
     10,265       (8,791 )     1,474       10,230       (7,904 )     2,326  
Trademarks and tradenames
     129       (127 )     2       129       (122 )     7  
Service contracts and other
     1,402       (1,295 )     107       1,402       (1,204 )     198  
    Subtotal definite lived intangible assets
     16,576       (14,670 )     1,906       16,541       (13,259 )     3,282  
                                                 
     Total intangible assets
   $ 23,648     $ (14,670 )   $ 8,978     $ 23,600     $ (13,259 )   $ 10,341  
 
13
 
Definite lived intangible assets are amortized over their estimated useful lives as follows:

Customer and advertiser relationships
2 to 10 years
Developed technology and patents
5 years
Trademarks and tradenames
3 to 5 years
Service contracts and other
1 to 7 years

Amortization expense was $369,000 and $1.4 million for the three months ended September 30, 2010 and 2009, and $1.4 million and $3.8 million for the nine months ended September 30, 2010 and 2009, respectively. Estimated annual amortization expense is $1.8 million in 2010, $984,000 in 2011, $187,000 in 2012, $187,000 in 2013, $60,000 in 2014 and $83,000, thereafter.
 
7.
Commitments and Contingencies
 
As described in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2010, the Company is a defendant in a complaint pending in the United States District Court for the Northern District of California captioned Balthaser Online, Inc. v. Art Star Design LLC et al.  On September 2, 2010, the defendants filed a motion for summary judgment.  On October 19, 2010, the court denied the motion, without prejudice to re-file. The Company intends to vigorously defend against the claims asserted by the plaintiff and pursue its counter-claims.

As of September 30, 2010, the Company was engaged in other legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations, financial position or cash flows.
 
8.
Income Taxes
 
As of December 31, 2009, the Company had approximately $4.3 million in unrecognized tax benefits related to certain acquired net operating loss carryforwards of WeddingChannel arising from a tax position taken in the 2006 income tax filings related to losses associated with the dissolution of a subsidiary. This amount has been netted against the related deferred tax assets and, if recognized, would be reported as a reduction of income tax expense. However, a portion of these unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period. The Company had excess tax benefits of $374,000 related to the vesting of restricted stock for the nine months ended September 30, 2010.
 
The Company is subject to taxation in the United States and various state and local jurisdictions. In December 2007, the Internal Revenue Service completed its audit of the Company’s 2005 U.S. federal tax return with no adjustment. On June 17, 2009 the Company received notification that its New York State franchise tax returns would be audited for the year ended December 31, 2005. As of September 30, 2010, none of the Company’s other tax returns have been examined by any income taxing authority. As a result of the ongoing use of tax loss carryforwards, all of the Company’s U.S. federal tax returns from 1998 through 2004 and 2006, its more significant state and local returns, as well as all tax returns of WeddingChannel remain subject to examination. 
 
14
 
9.
Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of stock options, restricted common stock, warrants and other potentially dilutive financial instruments, only in the periods in which the effects are dilutive.

The following is a reconciliation of the weighted-average shares outstanding and calculation of basic and diluted earnings per share:

   
Three Months
    
Nine Months
  
   
Ended September 30,
    
Ended September 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(in thousands, except for per share data)
  
 Net income
   $ 1,099     $ 771     $ 2,140     $ 1,174  
                                 
  Total weighted-average basic shares 
     32,934       32,162       32,637       32,045  
                                 
  Dilutive securities: 
                                
     Restricted stock
     449       508       479       292  
     Employee Stock Purchase Plan
     22       12       21       16  
     Options/warrants
     237       679       452       686  
    
                                
  Total weighted-average diluted shares 
     33,642       33,361       33,589       33,039  
                                 
 Net earnings per share: 
                                
       Basic 
   $ 0.03     $ 0.02     $ 0.07     $ 0.04  
       Diluted 
   $ 0.03     $ 0.02     $ 0.06     $ 0.04  

The calculation of earnings per share excludes a weighted average number of stock options and restricted stock of 161,417 and 161,491 for the three and nine months ended September 30, 2010, respectively, and 165,812 and 258,100 for the three and nine months ended September 30, 2009, respectively, because to include them in the calculation would be antidilutive.
 
10.
Stock Repurchase Program

On February 22, 2010, the Company announced that its Board of Directors had authorized the repurchase of up to $50.0 million of the Company’s common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased will be determined by the Company’s management based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time. The repurchase program will be funded using the Company’s working capital.

During the three months and nine months ended September 30, 2010, the Company did not repurchase any shares under this program.
 
11.
New Registry Agreement-Macy’s

As of June 1, 1999, the Company’s subsidiary WeddingChannel.com, Inc. and Federated Department Stores, Inc., now known as Macy’s, Inc., entered into a registry agreement (the “Old Registry Agreement”). The Old Registry Agreement, as amended and supplemented, provided that WeddingChannel.com was responsible for the operation and maintenance of the website from which all bridal registries for the department stores owned by Macy’s could be accessed. WeddingChannel.com received a commission from the sale of Macy’s merchandise through this website.
 
15
 
On January 11, 2010, WeddingChannel.com and Macy’s entered into an agreement to terminate the Old Registry Agreement (the “Termination Agreement”), which had been scheduled to expire in January 2011, and entered into a new registry agreement (the “New Registry Agreement”). The initial term of the New Registry Agreement is three years from the last launch date of the new Macy’s and Bloomingdale’s online registry platforms, followed by an automatic renewal term of two additional years (subject to either party’s election not to renew with 90 days notice before the expiration of the initial term). Under the New Registry Agreement, WeddingChannel.com no longer hosts and manages the registry websites for Macy’s and Bloomingdale’s. Instead, the New Registry Agreement is similar to contracts that WeddingChannel.com has with its other retail partners, whereby the Company only receive a commission for purchases originating from its websites. The Old Registry Agreement terminated after a transition period to fully implement the launch of the new Macy’s and Bloomingdale’s online registry platforms under the New Registry Agreement, which began in February 2010. Under the Termination Agreement, Macy’s has agreed to spend $3,000,000 between February 1, 2010 and January 31, 2011 for advertising and sponsorship programs with the Company designed to promote the new Macy’s and Bloomingdale’s online registry platforms.  Pursuant to the Termination Agreement, Macy’s paid WeddingChannel.com $1,000,000 in February 2010 as a premium for agreeing to the early termination of the Old Registry Agreement. The impact of the New Registry Agreement on the Company’s 2010 results depends on multiple factors that cannot be reasonably predicted at this time. However, the Company believes that it is unlikely to generate the same level of revenue from the Macy’s relationship in 2010 as it did in 2009, primarily because it will no longer receive commissions on 100% of Macy’s and Bloomingdale’s online registry transactions.
 
12.
Subsequent Events

The Company has evaluated subsequent events up through the date the financial statements were issued, and determined there were no subsequent events to report as of that date.
 
16
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report.
 
Overview

The Knot, Inc. is the premier media company devoted to weddings, pregnancy, and everything in between, providing young women with the trusted information, products, and advice they need to guide them through the most transformative events of their lives. Our family of premium brands began with the industry’s #1 wedding brand, The Knot, and has grown to include WeddingChannel.com, The Nest, and The Bump. Our groundbreaking community platforms and incomparable content have ignited passionate communities across the country. The Knot, Inc. is recognized by the industry for being innovative in all media — from the web to social media and mobile, to magazines and books, television and video. For our advertisers and partners, The Knot, Inc. offers the consummate opportunity to connect with our devoted communities as they make the most important decisions of their lives. The Knot, Inc. is made up of four major revenue categories: online sponsorship and advertising, registry services, merchandise, and publishing.
 
In order to sustain growth within the customer groups we serve, we focus on our key growth strategy, which is to expand our position as a leading lifestage media company providing comprehensive information, services and products to couples from engagement through pregnancy on multiple platforms that remain relevant to the changing media landscape. To that end we are focused on the following objectives:

·
Upgrade our technology to increase our operational efficiency so that we can access a greater market share of advertising dollars and commerce revenue in the weddings portion of our business. We developed a new content management system that allows us to more efficiently maintain and organize information on our websites. Our new contract entry system and surrounding support applications have enabled us to implement greater pricing flexibility in all of our local markets, which we believe will allow us to expand our local vendor base, as well as achieve operational efficiencies, providing additional time for our local sales force to pursue new accounts. In addition to the new contract entry system, we have completed the process of converting our existing local art management application off of our legacy AS/400 system. In January 2010 we launched a self-service platform that will allow local vendors to automatically select their advertising programs. We anticipate launching an auction-based platform for selling featured vendor positions in the local areas on our websites. We are working to enhance the functionality of our patented gift registry application to encompass a wide selection of items and retailers. To this end, we believe our recently launched Gift Registry 360, a universal gift registry platform, improves the ability of our users to seamlessly add items from multiple retailers to their registry lists and complete transactions. We expect that these new programs will allow us to more effectively scale our local and registry business and drive further growth for local online and registry revenue.

·
Increase awareness of our brands and products.  We believe that we have generally excelled at marketing to our consumers with compelling brands, engaging content and products and a highly successful consumer public relations program, but we have not aggressively marketed our media offerings to advertisers. Accordingly, in 2008, we established a new marketing team to develop trade marketing programs and supporting research aimed at the local vendor community and national advertising marketplace as a foundation to drive further national and local advertising revenue growth. This team will also be involved in launching programs to increase registry searches and transactions from which we would derive commission revenue, as well as to increase revenue of our wedding supplies business through opportunistic acquisitions and improved conversion of our members to customers of our online stores.  In 2010 we are increasing the publication frequency of The Knot Weddings national magazine from semi-annually to quarterly.  We are also increasing the publication frequency of The Bump local market guides from annually to semi-annually
 
·
Expand our brands internationally.  We are focused on identifying opportunities in large international markets where we can use our brand recognition and editorial authority on the key lifestages of engagement, newlywed and first-time pregnancy to drive further growth. In 2009 we established a software development center in Guangzhou, China for the purposes of increasing technology development productivity without materially growing technology costs. The software development center will also serve as a development resource for expanding our business in China. With a large number of weddings and an affinity for western styles, we believe there is a substantial opportunity to serve Chinese couples with information and services about western-style weddings, through the office we opened in Beijing. In addition, we established an exclusive licensing arrangement for our brands in Australia in 2009.  To date, no revenue has been generated by our operations in China nor do we anticipate a material revenue contribution in 2010.  We expect to spend approximately $1.8 million in connection with our media operations in China.
 
17
 
We believe the growth strategies outlined above will allow us to continue to increase consumer market share and deliver strong returns on our investments.
 
Competition

The Internet advertising and online markets in which our brands operate are rapidly evolving and intensely competitive, and we expect competition to intensify in the future. There are many wedding-related and baby related sites on the Internet, which are developed and maintained by online content providers. New media platforms such as blogs are proliferating rapidly. Retail stores, manufacturers, wedding magazines and regional wedding directories also have online sites that compete with us for online advertising and merchandise revenue. We expect competition to increase because of the business opportunities presented by the growth of the Internet and e-commerce. Competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry in our market.

In the wedding market, we also face competition for our services from bridal magazines. Bride’s magazine, published by Condé Nast, Bridal Guide, and Martha Stewart Weddings are dominant bridal publications in terms of revenue and circulation. We believe that the principal competitive factors in the wedding market are brand recognition, convenience, ease of use, information, quality of service and products, member affinity and loyalty, reliability and selection. As to these factors, we believe that we compete favorably. Our dedicated editorial, sales and product staffs concentrate their efforts on producing the most comprehensive wedding resources available.

Generally, many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources and high name recognition. Therefore, these competitors have a significant ability to attract advertisers and users. In addition, many independent or start-up competitors may be able to respond more quickly than we can to new or emerging technologies and changes in Internet user requirements, and other competitors may be able to devote greater resources than we do to the development, promotion and sale of services. There can be no assurance that our current or potential competitors will not develop products and services comparable or superior to those developed by us or adapt more quickly than we do to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, reduced margins or loss of market share, any of which would materially and adversely affect our business, results of operations and financial condition.
 
Third Quarter 2010
 
During the third quarter of 2010, our net revenue decreased and our net income increased compared to the same period in 2009. The highlights of the third quarter of 2010 were:

·
Total net revenue decreased 3.2% to $27.3 million over the corresponding 2009 period.  This decrease was driven by decreased registry services revenue and merchandise revenue offset by increases in national and local online advertising and publishing.  We anticipate that our total net revenue for the fourth quarter of 2010 revenue will approximate the amount for the third quarter.

·
National online advertising revenue increased 5.8% to $5.8 million over the corresponding 2009 period. We were expecting the increase to be around 10%.  However, the launches of some of our advertisers’ campaigns were delayed to the fourth quarter of this year.  As a result, we are anticipating over 20% growth in the fourth quarter of 2010 compared to the same period in 2009 based upon the campaigns already booked.  For the full year of 2010, we are anticipating growth of 16% for national online advertising compared to 2009.
 
·
Local online advertising revenue increased 3.0% to $8.9 million over the corresponding 2009 period.
 
·
Merchandise revenue decreased 5.1% to $7.1 million over the corresponding 2009 period primarily due to lower traffic and conversion at the e-commerce company we acquired in May 2009 and the WeddingChannel Shop.
 
·
Publishing and other revenue increased 5.0% to $3.3 million over the corresponding 2009 period primarily due to increased revenue in our national magazine publication.
 
·
Registry services revenue decreased by 36.3% to $2.2 million primarily due to the change in our registry relationship with Macy’s.
 
18
 
·
We had operating income of $1.8 million compared to $1.6 million in the prior year’s quarter. The year-over-year increase in operating income was primarily driven by higher revenue and gross profit from online sponsorship and advertising, publishing and other revenue.  The increase in operating income was also due to lower depreciation and amortization expense.  We had impairment charges in the fourth quarter of 2009 that led to intangible asset write-downs which resulted in lower intangible asset amortization.  We also had several assets that became fully depreciated at the end of 2009 and lower purchases of fixed assets in 2009 and 2010.  The increase in operating income was partially offset by higher operating expenses associated with our initiatives in Asia.  For the nine months ended September 30, 2010, we spent $1.0 million on The Knot China and we anticipate that total expenditures for the year ended December 31, 2010 will be $1.8 million.  We anticipate that operating expenses for the second half of the year will increase between 8% and 10% from our operating expenses excluding impairment charges of $39.4 million in the second half of 2009.  We had net income for the three months ended September 30, 2010 of $1.1 million, or $0.03 per basic and per diluted share compared to net income of $771,000, or $0.02 per basic and per diluted share for the three months ended September 30, 2009.
 
·
At September 30, 2010, we had total cash and cash equivalents of $135.9 million.  At the end of the second quarter, we exercised our right to receive cash from UBS for the $9.6 million of remaining auction rate securities.  We received the $9.6 million on July 1, 2010.
 
·
At September 30, 2010, we had no debt.
 
Results of Operations
 
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
 
The following table summarizes results of operations for the three months ended September 30, 2010 compared to the three months ended September 30, 2009:

   
Three Months Ended September 30,
  
   
2010
    
2009
  
   
Amount
    
% of Net
Revenue
    
Amount
    
% of Net
Revenue
  
   
(in thousands, except for per share data)
  
 Net revenue
   $ 27,282       100.0 %   $ 28,173       100.0 %
 Cost of revenue
     5,441       19.9       6,179       21.9  
                                 
 Gross profit
     21,841       80.1       21,994       78.1  
 Operating expenses
     20,008       73.3       20,401       72.4  
                                 
 Income from operations
     1,833       6.8       1,593       5.7  
 Loss in equity interest
     (63 )     (0.3 )     (19 )     (0.1 )
 Interest and other income, net
     21       0.1       93       0.3  
                                 
 Income before income taxes
     1,791       6.6       1,667       5.9  
 Provision for income taxes
     692       2.6       896       3.2  
                                 
 Net income
   $ 1,099       4.0 %   $ 771       2.7 %
                                 
 Net earnings per share:
                                
 Basic
   $ 0.03             $ 0.02          
 Diluted
   $ 0.03             $ 0.02          
 
19
 
Net Revenue
 
Net revenue decreased to $27.3 million for the three months ended September 30, 2010, from $28.2 million for the three months ended September 30, 2009.  The following table sets forth revenue by category for the three months ended September 30, 2010 compared to the three months ended September 30, 2009, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:

   
Three Months Ended September 30,
  
   
Net Revenue
    
Percentage Increase/
    
Percentage of
Total Net Revenue
  
   
2010
    
2009
    
(Decrease)
    
2010
    
2009
  
   
(in thousands)
                    
 National online sponsorship and advertising
   $ 5,753     $ 5,436       5.8 %     21.1 %     19.3 %
 Local online sponsorship and advertising
     8,948       8,686       3.0       32.8       30.8  
 Total online sponsorship and advertising
     14,701       14,122       4.1       53.9       50.1  
 Registry services
     2,196       3,445       (36.3 )     8.0       12.2  
 Merchandise
     7,083       7,462       (5.1 )     26.0       26.5  
 Publishing and other
     3,302       3,144       5.0       12.1       11.2  
 Total net revenue
   $ 27,282     $ 28,173       (3.2
)%
     100.0 %     100.0 %

Online sponsorship and advertising - The increase of 4.1% was driven by increased revenue from both national and local advertising programs.  National online sponsorship and advertising revenue increased 5.8%, driven by new and repeat advertisers to our network of websites.  A key driver in this increase was our registry agreement with Macy’s.  Under the terms of the termination of the old Macy’s registry contract Macy’s agreed to spend $3.0 million between February 1, 2010 and January 31, 2011 for advertising and sponsorship programs with us, designed to promote the new Macy’s and Bloomingdale’s online registry platforms.  Local online sponsorship and advertising revenue increased 3.0%, driven by an increased number of local vendors advertising with us on our network of websites.  As of September 30, 2010, we had over 17,000 local vendors who display over 21,000 profiles compared to over 16,000 vendors who displayed over 19,000 profiles as of September 30, 2009.
 
Registry services – The decrease of 36.3% was driven by lower commissions from Macy’s.  On January 11, 2010, we signed an agreement to terminate the old registry agreement with Macy’s. The original contract was scheduled to expire in January 2011.   Additionally, we entered into a new contract with Macy’s for registry services that commenced on February 1, 2010.  Under the old contract, WeddingChannel hosted and processed all of Macy’s registry transactions regardless of whether the transactions originated on Macy’s website or WeddingChannel’s website and received commission on 100% of registry sales.  Under the new contract, WeddingChannel's registry relationship with Macy’s is now similar to our other retail partners, and WeddingChannel receives a commission for registry purchases originating from the WeddingChannel and other The Knot affiliate websites. This resulted in lower commissions from Macy’s.   This decrease was partially offset by increased registry commissions from our new and historic registry retail partners.  The impact of the new registry agreement with Macy’s on our full-year 2010 results depends on multiple factors that cannot be reasonably predicted at this time. However, we believe that we are unlikely to generate the same level of revenue from the Macy’s relationship in 2010 as we did in 2009, primarily because we will no longer receive commissions on 100% of Macy’s and Bloomingdale’s online registry transactions.
 
Merchandise – The decrease of 5.1% was driven by lower revenue from the e-commerce company we acquired in May 2009 and the WeddingChannel Shop.  The decrease in revenue from the recently acquired e-commerce company was driven by declines in traffic to the site.  The decrease in the WeddingChannel Shop was caused by the decline in visitor traffic due primarily to the change in the Macy’s registry relationship which reduced visitor traffic to the WeddingChannel website.

Publishing and other – The increase of 5.0% was driven by increased adverting and newsstand revenues from our national publication due to increased advertising revenue.
 
20
 
Gross Profit/Gross Margin
 
Gross margin increased 2.0% to 80.1%, compared to 78.1% in 2009.  The following table presents the components of gross profit and gross margin for the three months ended September 30, 2010 compared to the three months ended September 30, 2009:

   
Three Months Ended September 30,
  
   
2010
    
2009
    
Increase/(Decrease)
  
   
Gross
Profit
  
Gross
Margin %
    
Gross
Profit
    
Gross
Margin %
    
Gross
Profit
    
Gross
Margin %
  
   
(in thousands)
  
 Online sponsorship and advertising (national & local)
   $ 14,331       97.5 %   $ 13,278       94.0 %   $ 1,053       3.5 %
 Registry
     2,196       100.0       3,445       100.0       (1,249 )     -  
 Merchandise
     3,346       47.2       3,400       45.6       (54 )     1.6  
 Publishing and other
     1,968       59.6       1,871       59.5       97       0.1  
                                                 
 Total gross profit
   $ 21,841       80.1 %   $ 21,994       78.1 %   $ (153 )     2.0 %
 
The increase in gross margin was primarily driven by increased gross margin for online sponsorship and advertising, merchandise and publishing and other.  The increase in online sponsorship and advertising margin was driven by higher advertiser revenue.  The increase in the merchandise margins was driven by improved product and shipping margins from the e-commerce company we acquired in May 2009. The increase in publishing and other gross margin was due to an increase in advertising pages sold as well as increased newsstand revenue from our national magazine.  Overall the gross margin improvement was partially offset by reduced registry revenue.
 
Operating Expenses

Operating expenses decreased 1.9% to $20.0 million, compared to $20.4 million in 2009, driven by lower depreciation and amortization expense due to intangible asset impairment charges in the fourth quarter of 2009.   This decrease was offset by incremental operating expenses related to our acquisition and expansion activities in 2009, as well as increased sales and marketing costs to enhance awareness of our brand and products.  As a percentage of net revenue, operating expenses were 73.3% and 72.4% during 2010 and 2009, respectively.
 
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the three months ended September 30, 2010 compared to the three months ended September 30, 2009:

   
Three Months Ended September 30,
  
   
Operating Expenses
    
Percentage Increase/
    
Percentage of
Total Net Revenue
  
   
2010
    
2009
    
(Decrease)
    
2010
    
2009
  
   
(in thousands)
                    
Product and content development
   $ 5,526     $ 5,010       10.3 %     20.2 %     17.8 %
Sales and marketing
     8,483       8,116       4.5       31.1       28.8  
General and administrative
     4,792       4,786       0.1       17.6       17.0  
Depreciation and amortization
     1,207       2,489       (51.5 )     4.4       8.8  
Total operating expenses
   $ 20,008     $ 20,401       (1.9 )%     73.3 %     72.4 %
 
21
 
Product and Content Development – The increase of 10.3% was primarily due to incremental operating expenses associated with the software development center we opened in Guangzhou, China in May 2009 and the opening of our Beijing, China office.  The expenses are primarily personnel and occupancy related.  
 
Sales and Marketing – The increase of 4.5% was primarily due to increased advertising and promotional initiatives to continue to raise awareness of our brands and products within the local vendor community and national advertising marketplace, to develop programs designed to promote registry searches from which we derive commission revenue and to improve the conversion rate of our membership base to customers of our e-commerce business.  Also included is increased headcount to support those initiatives.  

General and Administrative – Expenses were flat compared to prior year.  We had increased expenses in connection with our international expansion.  We opened an office in Beijing, China during the first quarter of 2010.  We established a reserve for a potential withholding tax obligation in the state of New York.  We also had increased employee compensation and temporary staff costs to support our growth initiatives.  These increases were partially offset by a decrease in stock compensation expense and lower bad debt expense.  The decrease in bad debt was due to lower specific customer reserves in 2010 compared to 2009.

Depreciation and Amortization –The decrease of 51.5% was primarily due to impairment charges in the fourth quarter of 2009 that led to intangible asset write-downs.  We also had several assets that became fully depreciated at the end of 2009 and lower purchases of fixed assets in 2009 and 2010.
 
Interest and Other Income
 
Interest and other income, net was $21,000 for the three months ended September 30, 2010 as compared to $93,000 for three months ended September 30, 2009. The decrease was due primarily to the impact of lower interest rates on our entire portfolio of cash, commercial paper, treasuries as well as a reduction in our auction rate securities portfolio which typically earned a slightly higher rate of interest than our other investments.  In November 2008 auction rate securities rights were issued to us by UBS.  The rights allowed us to sell our auction rate securities portfolio back to UBS at par, on June 30, 2010.  We periodically redeemed portions of these investments from 2008 to 2010.  On June 30, 2010 we exercised the right, thus redeeming all remaining auction rate securities held by us on June 30, 2010.
 
Loss in Equity Interest

Loss in equity interest for the three months ended September 30, 2010 and 2009 was $63,000 and $19,000, respectively.  The entity in which we have an equity interest was formed in July 2009.  Operations at the entity had just commenced in the third quarter of 2009.  Our equity loss for the three months ended September 30, 2010 represents our 50% share of the operating loss associated with incremental growth of the entity’s business.
 
Provision for Income Taxes
 
The effective tax rate for the three months ended September 30, 2010, was approximately 38.6% as compared to 53.7% for the three months ended September 30, 2009. 
 
22
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
The following table summarizes results of operations for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:
 
   
Nine Months Ended September 30,
  
   
2010
    
2009
  
   
Amount
    
% of Net Revenue
    
Amount
    
% of Net Revenue
  
   
(in thousands, except for per share data)
  
 Net revenue
   $ 85,354       100.0 %   $ 81,361       100.0 %
 Cost of revenue
     18,404       21.6       17,313       21.3  
                                 
 Gross profit
     66,950       78.4       64,048       78.7  
 Operating expenses
     63,026       73.8       61,697       75.8  
                                 
 Income from operations
     3,924       4.6       2,351       2.9  
 Loss in equity interest
     (275 )     (0.3 )     (19 )     -  
 Interest and other income, net
     106       0.1       613       0.8  
                                 
 Income before income taxes
     3,755       4.4       2,945       3.7  
 Benefit for income taxes
     1,615       1.9       1,771       2.3  
                                 
 Net income
   $ 2,140       2.5 %   $ 1,174       1.4 %
                                 
 Net earnings per share:
                                
 Basic
   $ 0.07             $ 0.04          
 Diluted
   $ 0.06             $ 0.04          
 
23
 
Net Revenue
 
Net revenue increased to $85.4 million for the nine months ended September 30, 2010, from $81.4 million for the nine months ended September 30, 2009.  The following table sets forth revenue by category for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:

   
Nine Months Ended September 30,
  
   
Net Revenue
    
Percentage Increase/
    
Percentage of
Total Net Revenue
  
   
2010
    
2009
    
(Decrease)
    
2010
    
2009
  
   
(in thousands)
                    
 National online sponsorship and advertising
   $ 17,456     $ 15,250       14.5 %     20.4 %     18.7 %
 Local online sponsorship and advertising
     26,690       25,912       3.0       31.3       31.9  
 Total online sponsorship and advertising
     44,146       41,162       7.2       51.7       50.6  
 Registry services
     5,851       8,144       (28.2 )     6.9       10.0  
 Merchandise
     22,443       20,737       8.2       26.3       25.5  
 Publishing and other
     12,914       11,318       14.1       15.1       13.9  
 Total net revenue
   $ 85,354     $ 81,361       4.9 %     100.0 %     100.0 %
 
Online sponsorship and advertising – The increase of 7.2% was driven by increased revenue from both national and local advertising programs.  National online sponsorship and advertising revenue increased 14.5%, driven by new and repeat advertisers to our network of websites.  A key driver in this increase was our registry agreement with Macy’s.  Under the terms of the termination of the old Macy’s registry contract Macy’s agreed to spend $3.0 million between February 1, 2010 and January 31, 2011 for advertising and sponsorship programs with us, designed to promote the new Macy’s and Bloomingdale’s online registry platforms.  Local online sponsorship and advertising revenue increased 3.0%, driven by an increased number of local vendors advertising with us on our network of websites.  As of September 30, 2010, we had over 17,000 local vendors who display over 21,000 profiles compared to over 16,000 vendors who displayed over 19,000 profiles as of September 30, 2009.
 
Registry services – The decrease of 28.2% was driven by lower commissions from Macy’s.  On January 11, 2010, we signed an agreement to terminate the old registry agreement with Macy’s. The original contract was scheduled to expire in January 2011.   Additionally, we entered into a new contract with Macy’s for registry services that commenced on February 1, 2010.  Under the old contract, WeddingChannel hosted and processed all of Macy’s registry transactions regardless of whether the transactions originated on Macy’s website or WeddingChannel’s website and received commission on 100% of registry sales.  Under the new contract, WeddingChannel's registry relationship with Macy’s is now similar to our other retail partners, and WeddingChannel receives a commission for registry purchases originating from the WeddingChannel and other The Knot affiliate websites. This resulted in lower commissions from Macy’s.   This decrease was partially offset by increased registry commissions from our new and historic registry retail partners.  The impact of the new registry agreement with Macy’s on our full-year 2010 results depends on multiple factors that cannot be reasonably predicted at this time. However, we believe that we are unlikely to generate the same level of revenue from the Macy’s relationship in 2010 as we did in 2009, primarily because we will no longer receive commissions on 100% of Macy’s and Bloomingdale’s online registry transactions.
 
Merchandise – The increase of 8.2% was driven by incremental revenue from an e-commerce company that we acquired on May 1, 2009.  The acquired company contributed $2.3 million of net revenue during the year.  This increase was offset, in part, by declines in revenue from the WeddingChannel Shop which were impacted by the decline in visitor traffic due to the change in the Macy’s registry relationship which reduced visitor traffic to the WeddingChannel website.

Publishing and other – The increase of 14.1% was driven by increased advertising and newsstand revenue from our national magazine.  This increase was driven by an increase in the publication cycle from twice a year to four times a year.  We also received a termination fee of $1.0 million that Macy’s paid to WeddingChannel to terminate its old registry agreement.  These increases were offset, in part, by the discontinuation of The Knot Best of Weddings magazine that was published in the first quarter of 2009.
 
24
 
Gross Profit/Gross Margin
   
Gross margin decreased 0.3% to 78.4%, compared to 78.7% in 2009.  The following table presents the components of gross profit and gross margin for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

   
Nine Months Ended September 30,
  
   
2010
    
2009
    
Increase/(Decrease)
  
   
Gross Profit
  
Gross Margin %
    
Gross Profit
    
Gross Margin %
    
Gross Profit
    
Gross Margin %
  
   
(in thousands)
  
 Online sponsorship and advertising (national & local)
   $ 42,862       97.1 %   $ 39,087       95.0 %   $ 3,775       2.1 %
 Registry
     5,851       100.0       8,144       100.0       (2,293 )     -  
 Merchandise
     10,204       45.5       10,099       48.7       105       (3.2 )
 Publishing and other
     8,033       62.2       6,718       59.4       1,315       2.8  
                                                 
 Total gross profit
   $ 66,950       78.4 %   $ 64,048       78.7 %   $ 2,902       (0.3 )%
 
The decrease in gross margin was driven by lower gross margin for merchandise. The decrease in merchandise margin was driven by sales promotions, product mix within the gifts category and higher than planned personalization costs.  We also had increases in damaged inventory.  This decrease in margin was partially offset by increased margin in the online sponsorship and advertising and publishing and other revenue categories. The increase in online sponsorship and advertising margin was driven by higher advertiser revenue.  The increase in publishing and other revenue margin was due to the registry contract termination payment from Macy’s and increased advertising pages sold and increased newsstand revenue from our national magazine driven by our increased circulation from twice a year to four times and a year as well as savings in overall printing expenses.  Overall gross margin was also negatively impacted by reduced registry revenue.
 
Operating Expenses

Operating expenses increased 2.2% to $63.0 million, compared to $61.7 million in 2009, driven by incremental operating expenses related to our acquisition and expansion activities in 2009, as well as increased marketing and personnel related costs.  These increases were partially offset by lower depreciation and amortization expense due to impairment charges in the fourth quarter of 2009 that led to intangible asset write-downs.   As a percentage of net revenue, operating expenses were 73.8% and 75.8% during 2010 and 2009, respectively.
 
25
 
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

   
Nine Months Ended September 30,
  
   
Operating Expenses
    
Percentage Increase/
    
Percentage of
Total Net Revenue
  
   
2010
    
2009
    
(Decrease)
    
2010
    
2009
  
   
(in thousands)
                    
Product and content development
   $ 16,778     $ 15,244       10.1 %     19.7 %     18.7 %
Sales and marketing
     26,325       23,775       10.7       30.8       29.2  
General and administrative
     15,976       15,008       6.4       18.7       18.4  
Depreciation and amortization
     3,947       7,670       (48.5 )     4.6       9.5  
Total operating expenses
   $ 63,026     $ 61,697       2.2 %     73.8 %     75.8 %
 
Product and Content Development – The increase of 10.1% was primarily due to incremental operating expenses associated with the software development center we opened in Guangzhou, China in May 2009 and from our acquisition of WedSnap in January 2009.  The expenses are primarily personnel and occupancy related.  

Sales and Marketing – The increase of 10.7% was primarily due to increased advertising and promotional initiatives to continue to raise awareness of our brands and products within the local vendor community and national advertising marketplace, to develop programs designed to promote registry searches from which we derive commission revenue and to improve the conversion rate of our membership base to customers of e-commerce business.  We had incremental magazine fulfillment costs associated with increasing the frequency of our national magazine publication from two to four times a year.  Our nine month expenses include costs for one additional magazine.  Also included is increased headcount to support our marketing initiatives.  

General and Administrative – The increase of 6.4% was primarily due to reserves for a potential state sales tax liability related to our e-commerce business and a potential withholding tax obligation in the state of New York.  We also had increased expenses in connection with our international expansion.  We opened an office in Beijing, China during the first quarter of 2010.  We also had increased employee compensation to support our growth initiatives. These increases were partially offset by lower bad debt expense.  This was due to lower specific customer reserves in 2010 compared to 2009.

Depreciation and Amortization –The decrease of 48.5% was primarily due to impairment charges in the fourth quarter of 2009 that led to intangible asset write-downs.  We also had several assets that became fully depreciated at the end of 2009 and lower purchases of fixed assets in 2009 and 2010.
 
Interest and Other Income
 
Interest and other income, net was $106,000 for the nine months ended September 30, 2010 compared to $613,000 for nine months ended September 30, 2009. The decrease was due to the impact of lower interest rates on our entire portfolio of cash, commercial paper, treasuries as well as a reduction in our auction rate securities portfolio, which typically earned a slightly higher rate of interest than our other investments.  In November 2008 auction rate securities rights were issued to us by UBS.  The rights allowed us to sell the auction rate securities portfolio back to UBS at par, on June 30, 2010.  We periodically redeemed portions of these investments from 2008 to 2010.  On June 30, 2010 we exercised the right, thus redeeming all remaining auction rate securities held by us on June 30, 2010.
 
Loss in Equity Interest

Loss in equity interest was $275,000 for the nine months ended September 30, 2010 compared to $19,000 for the nine months ended September 30, 2009.  The entity in which we have an equity interest was formed in July 2009.  Operations at the entity had just commenced in the third quarter of 2009.  Our equity loss for the nine months ended September 30, 2010 represents our 50% share of the operating loss associated with incremental growth of the entity’s business.
 
26
 
Provision for Income Taxes
 
The effective tax rate for the nine months ended September 30, 2010, was approximately 43.0% as compared to 60.1% for the nine months ended September 30, 2009. 
 
Liquidity and Capital Resources

Cash Flow
 
Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition.  At September 30, 2010, we had $135.9 million in cash and cash equivalents compared to $82.9 million at September 30, 2009.
 
The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods indicated:

   
For the Nine Months Ended
September 30,
  
   
2010
    
2009
  
   
(in thousands)
  
Net cash provided by operating activities
   $ 7,604     $ 11,855  
Net cash provided by investing activities
     33,640       7,887  
Net cash (used in) provided by financing activities
     (379 )     1,641  
Increase in cash and cash equivalents
   $ 40,865     $ 21,383  
 
Operating Activities

Net cash provided by operating activities was $7.6 million for the nine months ended September 30, 2010.  This was driven by our net income of $2.1 million adjusted for our non-cash items.  Non-cash items included depreciation, amortization, stock-based compensation, reserve for returns and other non-cash items of $10.9 million.  We had increased accounts payable and accrued expenses of $1.7 million driven by reserves for a potential state sales tax liability related to our e-commerce business and a potential withholding tax obligation as well as expenses in connection with our increased publication cycle.  We had increased deferred revenue of $1.4 million driven by advanced billings for our winter national and local print cycles.  These sources of cash were offset by increased trade accounts receivable and receivables from Macy’s of $5.5 million and $530,000, respectively for national and local advertising and registry revenue.  We also had increased inventory of $1.4 million in anticipation of higher seasonal sales of merchandise from our e-commerce business in the second and third quarters.
 
Net cash provided by operating activities was $11.9 million for the nine months ended September 30, 2009. This resulted primarily from net income for the period of $1.2 million and depreciation, amortization, stock-based compensation, deferred income taxes and other non cash items of $14.4 million.  These sources of cash were offset by increased trade accounts receivable and receivables from Macy’s of $2.6 million and $595,000, respectively for national and local advertising and registry revenue.  Additionally, we had increased inventory of $450,000 to support higher seasonal merchandise sales for our e-commerce business.
 
27
 
Investing Activities
 
Net cash provided by investing activities was $33.6 million for the nine months ended September 30, 2010.  This resulted from $36.5 million in proceeds from the redemptions of auction rate securities.  This source of cash was offset, in part, by capitalized expenditures and purchases of fixed assets of $2.1 million and our contribution of $500,000 to the entity in which we have an equity interest.
 
Net cash provided by investing activities was $7.9 million for the nine months ended September 30, 2009.  This resulted primarily from $10.0 million of proceeds related to the maturity of U.S. Treasury bills held by us during the quarter and $6.1 million of proceeds from the redemption of long-term auction rate securities.  These sources of cash were offset by business acquisitions of $5.9 million, net of cash acquired, the purchase of property and equipment of $1.8 million and our contribution of $500,000 to the entity in which we have an equity interest.
 
Financing Activities
 
Net cash used in financing activities was $379,000 for the nine months ended September 30, 2010.  This was primarily due to our repurchases of common stock in connection with the surrender of these shares by employees to satisfy tax withholding obligations related to the vesting of restricted stock awards of $1.6 million.  This use of cash was offset by the proceeds from the issuance of common stock in connection with the exercise of stock options and warrants and the employee stock purchase program of $1.2 million.

Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2009.  This was primarily due to excess tax benefits from stock-based awards of $892,000.  We had proceeds from the issuance of common stock in connection with the exercise of vested stock options and through our employee stock purchase plan of $1.2 million. These sources of cash were partially offset by common stock repurchases of $423,000 in connection with the surrender of restricted shares by employees to satisfy tax withholding obligations related to the vesting of the stock awards.  
 
Off-Balance Sheet Arrangements

As of September 30, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Seasonality
 
Seasonal and cyclical patterns may affect our revenue. Wedding-related merchandise revenue and registry sales generally are lower in the first and fourth quarters of each year. As a result of these factors, we may experience fluctuations in our revenue from quarter to quarter.
 
Critical Accounting Policies

Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty.  We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein.  While we believe that these accounting policies are based on sound measurement criteria, actual future events can result in outcomes that may be materially different from these estimates or forecasts.  
 
The accounting policies and related risks described in our Annual Report on Form 10-K for the year ended December 31, 2009 are those that depend most heavily on these judgments and estimates.  As of September 30, 2010, there have been no material changes to any of the critical accounting policies contained therein.
 
Recently Adopted Accounting Pronouncements

The adoption of the following accounting standards and updates did not result in a material impact to our condensed consolidated financial statements:
 
On June 12, 2009, the accounting standard relating to the transfers and servicing of financial assets and extinguishment of liabilities was updated to require additional information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. This standard update is effective as of January 1, 2010.
 
On June 12, 2009, the accounting standard regarding the requirements of consolidation accounting for variable interest entities was updated to require an enterprise to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling interest in a variable interest entity. This standard update is effective for all interim and annual reporting periods as of January 1, 2010.
 
28
 
On January 21, 2010, the accounting standard relating to fair value measurements was updated to require additional new disclosures for transfers in and out of Levels 1 and 2 and activity in Level 3.  This update also amends the standard by requiring an entity to provide fair value measurement disclosures for each class of assets and liabilities as well as the inputs and valuation techniques.  This standard update is effective for all interim and annual reporting periods on or after December 15, 2009 excluding certain exceptions which will be effective for fiscal years beginning after December 15, 2010.
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 
Market risk represents the risk of loss that may impact the financial position, results 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 market risk through interest rates related to the investment of our current cash and cash equivalents of $135.9 million as of September 30, 2010. These funds are generally invested in highly liquid debt instruments. 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.  
 
ITEM 4. Controls and Procedures
 
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2010 identified in connection with the evaluation thereof by the Company’s management, including the Chief Executive Officer and Chief Financial Officer, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective at that reasonable assurance level.
 
29
 
PART II – OTHER INFORMATION

ITEM 1.  Legal Proceedings
 
As described in our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2010, we are a defendant in a complaint pending in the United States District Court for the Northern District of California captioned Balthaser Online, Inc. v. Art Star Design LLC et al.  On September 2, 2010, the defendants filed a motion for summary judgment.  On October 19, 2010, the court denied the motion, without prejudice to re-file. We intend to vigorously defend against the claims asserted by the plaintiff and pursue our counter-claims.

We are engaged in other legal actions arising in the ordinary course of business and believe that the ultimate outcome of these actions will not have a material effect on our results of operations, financial position or cash flows.
 
ITEM 1A.  Risk Factors
 
Risks that could have a negative impact on our business, results of operations and financial condition include without limitation, (i) our online wedding-related and other websites may fail to generate sufficient revenue to survive over the long term, (ii) our history of losses, (iii) inability to adjust spending quickly enough to offset any unexpected revenue shortfall, (iv) delays or cancellations in spending by our advertisers and sponsors, (v) the significant fluctuation to which our quarterly revenue and operating results are subject, (vi) the seasonality of the wedding industry, (vii) our expectation that we will generate a lower level of revenue from the Macy’s relationship in 2010 compared to 2009, (viii) our expectation of a decline in WeddingChannel.com membership and traffic to the WeddingChannel.com online shop as a result of the termination of the old Macy’s registry services agreement, (ix) the dependence of WeddingChannel.com’s registry services business on third parties, and (x) other factors detailed in documents we file from time to time with the SEC. A more detailed description of each of these and other risk factors can be found under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed with the SEC on March 12, 2010. There have been no material changes to the risk factors described in our most recent Annual Report on Form 10-K.
 
30
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities

 Period
  
(a) Total Number of Shares Purchased
    
(b) Average Price Paid per Share
    
( c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
    
(d) Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
  
 July 1 to July 31, 2010
     42,137     $ 8.16       -     $ 50,000,000  
 August 1 to August 31, 2010
     3,553       7.66       -     $ 50,000,000  
 September 1 toSeptember 30, 2010
     4,178       7.93       -     $ 50,000,000  
 Total
     49,868     $ 8.10       -          
 
 (a)
None of these shares were purchased as part of publicly announced plans or programs.
 
The terms of certain awards granted under certain of the Company’s stock incentive plans allow participants to surrender or deliver shares of The Knot’s common stock to the Company to pay for the exercise price of those awards or to satisfy tax withholding obligations related to the exercise or vesting of those awards. All of the shares listed in column (a) in the table above represent the surrender or delivery of shares to the Company in connection with such exercise price payments or tax withholding obligations. For purposes of this table, the “price paid per share” is determined by reference to the closing sales price per share of The Knot’s common stock on The Nasdaq Global Market on the date of such surrender or delivery (or on the last date preceding such surrender or delivery for which such reported price exists).
 
 (c), (d) On February 22, 2010, the Company announced that its Board of Directors had authorized the repurchase of up to $50.0 million of the Company’s common stock from time to time on the open market or in privately negotiated transactions.  The repurchase program may be suspended or discontinued at any time, but does not have an expiration date. During the three months ended September 30, 2010, the Company did not repurchase any shares under this program.
 
ITEM 6. Exhibits
 
Incorporated by reference to the Exhibit Index immediately preceding the exhibits attached to this Quarterly Report on Form 10-Q.
 
31
 
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.
 
 
THE KNOT, INC.
  
       
Date:  November 9, 2010
By:
/s/ John P. Mueller
  
   
John P. Mueller
  
   
Chief Financial Officer
  
   
(Principal Financial Officer and Duly Authorized Officer)
  
 
32
 
EXHIBIT INDEX
              
Number
   Description
31.1
  
Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
  
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
  
Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
  
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
33

Stock widget

Investing forum

XO GROUP INC. Reports