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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
------------------- -----------------------
Commission file number: 0-30428
FINDWHAT.COM
(Exact name of registrant as specified in its charter)
NEVADA 88-0348835
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5220 SUMMERLIN COMMONS BOULEVARD, FORT MYERS, FLORIDA 33907
(Address of principal executive offices, including zip code)
(239) 561-7229
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 the
filing requirements for at least the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 21,392,203 shares of
Common Stock, $.001 par value, were outstanding at September 30, 2003.
FORM 10-Q
FINDWHAT.COM
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Condensed Consolidated Balance Sheets 3
December 31, 2002 and September 30, 2003
Unaudited Condensed Consolidated Statements of Income 4
For the Three and Nine Months Ended
September 30, 2002 and 2003
Unaudited Condensed Consolidated Statements of Cash Flows 5
For the Nine Months Ended
September 30, 2002 and 2003
Notes to Interim Condensed Consolidated Unaudited 6
Financial Statements For the Three and Nine Months Ended
September 30, 2002 and 2003
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. N/A
Item 4. Controls and Procedures. 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 30
Item 2. Changes in Securities and Use of Proceeds. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. 30
Item 6. Exhibits and Reports on Form 8-K. 31
Signature 33
2
ITEM 1. FINANCIAL STATEMENTS
FindWhat.com and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 54,004 $ 17,982
Short-term investments -- 3,157
Accounts receivable, less allowance for doubtful accounts of
$175 and $95 at September 30, 2003 and December 31, 2002,
respectively 3,258 1,920
Deferred tax asset -- 446
Note receivable 2,029 --
Prepaid expenses and other current assets 2,323 519
--------------- ---------------
Total current assets 61,614 24,024
EQUIPMENT AND FURNITURE - NET 4,277 3,121
OTHER ASSETS 156 167
--------------- ---------------
Total assets $ 66,047 $ 27,312
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 6,037 $ 3,809
Current portion of capital lease obligations -- 4
Deferred revenue 1,297 1,243
Other current liabilities 80 80
Taxes payable 259 --
--------------- ---------------
Total current liabilities 7,673 5,136
OTHER LIABILITIES 90 8
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized,
500 shares; none issued and outstanding -- --
Common stock, $.001 par value; authorized, 50,000 shares;
21,399 and 18,177, respectively, issued; and 21,392 and
18,170, respectively, outstanding 21 18
Additional paid-in capital 50,401 22,506
Treasury stock; 7 shares, at cost (82) (82)
Accumulated earnings (deficit) 7,944 (274)
--------------- ---------------
Total stockholders' equity 58,284 22,168
--------------- ---------------
Total liabilities and stockholders' equity $ 66,047 $ 27,312
=============== ===============
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
FindWhat.com and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues $ 51,202 $ 29,407 $ 17,841 $ 10,985
---------- ---------- ---------- ----------
Operating expenses
Search serving 2,046 1,416 714 466
Marketing, sales and service 29,282 16,184 10,222 6,076
General and administrative 5,871 4,153 2,073 1,426
Product development 1,094 396 416 169
---------- ---------- ---------- ----------
Total operating expenses 38,293 22,149 13,425 8,137
---------- ---------- ---------- ----------
Income from operations 12,909 7,258 4,416 2,848
Other income
Interest income, net 368 137 158 65
---------- ---------- ---------- ----------
Income before provision for income taxes 13,277 7,395 4,574 2,913
Income tax expense (benefit) 5,060 (668) 1,759 1,132
---------- ---------- ---------- ----------
Net income $ 8,217 $ 8,063 $ 2,815 $ 1,781
========== ========== ========== ==========
Net income per share
Basic $ 0.42 $ 0.48 $ 0.14 $ 0.10
========== ========== ========== ==========
Diluted $ 0.37 $ 0.42 $ 0.12 $ 0.09
========== ========== ========== ==========
Weighted-average number of common
shares outstanding
Basic 19,353 16,952 20,435 17,019
========== ========== ========== ==========
Diluted 22,149 19,084 23,338 19,121
========== ========== ========== ==========
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
FindWhat.com and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
2003 2002
---------- ----------
Cash Flows from Operating Activities
Net income $ 8,217 $ 8,063
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for doubtful accounts 80 74
Depreciation and amortization 1,245 645
Equity based compensation expense -- 15
Deferred income taxes (benefit) 446 (702)
Loss on sale of assets 11 --
Changes in operating assets and liabilities
Accounts receivable (1,418) (589)
Prepaid expenses and other current assets (1,804) (47)
Other assets 11 (84)
Deferred revenue 54 318
Accounts payable, accrued expenses and other liabilities 2,569 455
---------- ----------
Net Cash Provided by Operating Activities 9,411 8,148
---------- ----------
Cash Flows from Investing Activities
Advances under note receivable (2,029) --
Proceeds from the sale of assets 8 --
Proceeds from the sale of short-term investments 3,157 --
Purchase of short-term investments -- (9,655)
Purchase of equipment and furniture (2,420) (1,806)
---------- ----------
Net Cash Used in Investing Activities (1,284) (11,461)
---------- ----------
Cash Flows from Financing Activities
Payments made on capital leases (4) (9)
Net proceeds from private placements 20,001 --
Proceeds received from exercise of stock options and warrants 7,897 537
---------- ----------
Net Cash Provided by Financing Activities 27,894 528
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents 36,022 (2,785)
Cash and Cash Equivalents, Beginning of Period 17,982 5,498
---------- ----------
Cash and Cash Equivalents at End of Period $ 54,004 $ 2,713
========== ==========
Supplemental disclosures of cash flow information
Taxes paid $ 4,117 $-
Interest paid $ 3 $-
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
FindWhat.com and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(dollars in thousands)
(Unaudited)
NOTE A - NATURE OF BUSINESS
FindWhat.com was organized under the laws of the State of Nevada under
the name Collectibles America, Inc. and, in June 1999, merged with
BeFirst Internet Corporation, a Delaware corporation, which became a
wholly owned subsidiary. On June 17, 1999, the company changed its name
from Collectibles America, Inc. to BeFirst.com. In September 1999, the
company changed its name from BeFirst.com to FindWhat.com.
FindWhat.com and its subsidiary, who are collectively referred to as
the Company, are developers and providers of performance-based
marketing services for the Internet. FindWhat.com currently offers two
primary proprietary performance-based services: the FindWhat.com
Network, a keyword-targeted advertisement service that distributes
millions of advertisements throughout the Internet each day based on a
bid-for-position, pay-per-click pricing model; and a private label
service, which offers large portals, search engines, and high traffic
websites the opportunity to brand and sell their own pay-per-click,
keyword-targeted advertisement service using FindWhat.com's turn-key
operation.
NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly
FindWhat.com's financial position as of September 30, 2003, and the
results of its operations for the nine and three months ended September
30, 2003 and 2002, and the cash flows for the nine months ended
September 30, 2003 and 2002. Certain financial information which is
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States, but
which is not required for interim reporting purposes, has been
condensed or omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes for the year ended December 31, 2002,
which were included in the Company's Form 10-KSB/A, as filed with the
Securities and Exchange Commission, or SEC.
Results of the interim period are not necessarily indicative of results
that may be expected for the entire year.
Product Development: Product development expenses consist of expenses
incurred by the Company in the development, creation and enhancement of
our services. Product development expenses include compensation and
related expenses, costs of computer hardware and software, and costs
incurred in developing features and functionality of the service.
Product development costs are expensed as incurred or capitalized into
property and equipment in accordance with Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1). SOP 98-1 requires that cost incurred in
the preliminary project and post-implementation stages of an internal
use software project be expensed as incurred and that certain costs
incurred in the application development stage of a project be
capitalized.
6
FindWhat.com and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(dollars in thousands, except for per share amounts)
(Unaudited)
NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation: On December 31, 2002, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards, or SFAS, No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting
Principles Board, APB, Opinion No. 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial
information. We continue to account for stock-based compensation based
on the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees.
The following table summarizes our results as if we had recorded
stock-based compensation expense for the nine and three months ended
September 30, 2003 and 2002, based on the provisions of SFAS 123, as
amended by SFAS 148:
FOR THE NINE FOR THE NINE FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income, as reported $ 8,217 $ 8,063 $ 2,815 $ 1,781
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,928) (1,513) (865) (485)
------------- ------------- ------------- -------------
Pro forma net income (loss) $ 6,289 $ 6,550 $ 1,950 $ 1,296
============= ============= ============= =============
Earnings per share:
Basic - as reported $ 0.42 $ 0.48 $ 0.14 $ 0.10
============= ============= ============= =============
Basic - pro forma $ 0.32 $ 0.39 $ 0.10 $ 0.08
============= ============= ============= =============
Diluted - as reported $ 0.37 $ 0.42 $ 0.12 $ 0.09
============= ============= ============= =============
Diluted - pro forma $ 0.28 $ 0.34 $ 0.08 $ 0.07
============= ============= ============= =============
NOTE C - EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
Network equipment $ 5,994 $ 4,162
Furniture and fixtures 424 237
Office equipment 601 372
Leasehold improvements 37 62
Capitalized software development costs 127 --
--------------- ---------------
7,183 4,833
Less accumulated depreciation and amortization (2,906) (1,712)
--------------- ---------------
$ 4,277 $ 3,121
=============== ===============
7
FindWhat.com and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(dollars in thousands)
(Unaudited)
NOTE D - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------- -----------------
Accounts payable $ 1,482 $ 394
Revenue-sharing agreements 3,059 2,480
Accrued compensation 1,456 865
Miscellaneous accrued expenses 40 70
----------------- -----------------
$ 6,037 $ 3,809
================= =================
NOTE E - PER SHARE DATA
For the nine and three months ended September 30, 2003 there were
15,029 weighted outstanding stock options at an exercise price range of
$18.44 - $27.72, and 24,991 weighted outstanding plan options at an
exercise price range of $21.94 - $27.72, respectively, which were
excluded from the dilutive earnings per share calculation because the
effect would be anti-dilutive.
The following is a reconciliation of the number of shares used in the
basic and diluted computation of net income per share (in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted-average number of common
shares outstanding-basic 19,353 16,952 20,435 17,019
Dilution from stock options and
warrants 2,796 2,132 2,903 2,102
---------- ---------- ---------- ----------
Weighted-average number of common
shares and potential common shares
outstanding - diluted 22,149 19,084 23,338 19,121
========== ========== ========== ==========
8
FindWhat.com and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE F - LITIGATION
One of the Company's competitors, Overture Services, Inc., purports to
be the owner of a United States patent that was issued on July 31, 2001
entitled "System and method for influencing a position on a search
result list generated by a computer network search engine" (U.S. Patent
No. 6,269,361, "the '361 patent"). On January 17, 2002, the Company
filed a complaint to challenge the validity, enforceability, and assert
non-infringement of Overture's '361 Patent in the District Court for
the Southern District of New York. Subsequently, on January 25, 2002,
Overture commenced litigation against the Company in the District Court
for the Central District of California in Los Angeles, alleging that
the Company is infringing the '361 Patent. In the litigation, the
Company is seeking a declaration that the '361 Patent is invalid and
unenforceable and not infringed by the Company, and Overture is seeking
a permanent injunction against any act by the Company deemed by the
court to infringe Overture's '361 Patent, an award of unspecified
monetary damages, and attorney's fees, costs, and expenses. In an
Opinion and Order dated February 13, 2003, despite finding that
FindWhat.com's complaint was properly brought in New York, Judge
Mukasey in the Southern District of New York ordered the action
transferred to the Central District of California based largely on the
convenience of the expected witnesses in this case. As a result, the
Company has asserted its claims for declaratory judgment against
Overture for invalidity, unenforceability, and non-infringement of the
'361 Patent in an Answer the Company filed on March 25, 2003 in the
California action, and simultaneously dismissed the transferred New
York action without prejudice. All claims are now pending before the
District Court for the Central District of California in Los Angeles,
and the litigation is ongoing. A trial in this matter is not expected
before the second quarter of 2004.
The Company expenses all legal fees as incurred, and is a defendant in
various legal proceedings from time to time, regarded as normal to its
business and, in the opinion of management, the ultimate outcome of
such proceedings, including the Overture matter as discussed above, are
not expected to have a material adverse effect on the Company's
financial position or the results of its operations. As such, no
accruals have been made related to the Company's legal proceedings.
NOTE G - MERGER - ESPOTTING
On June 17, 2003, the Company entered into an agreement to merge with
Espotting Media Inc., a leading provider of performance based internet
marketing services in Europe. Under the terms of the Espotting
transaction, Espotting's stockholders will receive approximately 8.1
million shares of FindWhat.com common stock and $27 million in cash,
subject to adjustment. Additionally, the agreement calls for the
Company to issue options and warrants to purchase approximately 2.1
million shares of FindWhat.com common stock to Espotting's option and
warrant holders. On September 19, 2003, the Company announced that it
was engaged in negotiations with Espotting as a result of
FindWhat.com's post-signing examination of Espotting's historical and
projected financial performance. The parties are reserving their rights
under the existing merger agreement, and depending on the outcome of
FindWhat.com's review of Espotting's financial performance, the parties
may negotiate to modify the terms of the transaction. The Company
believes that, at a minimum, any successful renegotiation of the terms
will include a reduction of the purchase consideration, along with
other material changes to the existing Merger Agreement. The Espotting
transaction is subject to a number of contingencies, including receipt
of stockholder and regulatory approvals, and it is possible that
mutually agreeable terms will not be reached, and therefore the merger
may not be consummated. In the event the Espotting transaction is not
consummated, it could have a material adverse effect on FindWhat.com's
results of operations, stock price, business, and prospects.
9
FindWhat.com and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE G - MERGER - ESPOTTING (continued)
Also on June 17, 2003, FindWhat.com loaned Espotting $2.0 million in
exchange for a promissory note. The loan to Espotting is
interest-bearing and must be paid in full at closing or upon
termination of the merger agreement, whichever occurs first. If the
merger is consummated, the loan shall be repaid by reducing the cash
obligation payable by FindWhat.com to Espotting on the closing date.
Additionally, as of September 30, 2003, the Company had incurred and
capitalized approximately $1.8 million in legal, advisory and
transaction costs associated with its announced merger agreement with
Espotting. Upon the successful closing of the merger, these and any
additional deal costs will be considered part of the purchase price.
But if the merger agreement is terminated, these and any additional
costs will be written off as a one-time expense on the date of the
termination.
NOTE H - EQUITY
On July 15, 2003 the Company completed the sale of 1,000,000 shares of
common stock to selected institutional investors in a private
placement. FindWhat.com received $20 million of net proceeds, which it
intends to use for general corporate purposes and to fund the general
growth of its business.
The securities sold have not been registered under the Securities Act
of 1933, as amended, or state securities laws and may not be offered or
sold in the United States absent registration or an applicable
exemption from the registration requirements. The sale and issuance of
these securities was, in our opinion, exempt from registration pursuant
to Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder due to the fact the securities were sold to less than 35
purchasers all of whom were accredited investors. FindWhat.com has
filed with the SEC a registration statement for the resale of the
shares, but the registration statement is not yet effective.
NOTE I - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board Interpretation, or FIN, No.
46, "Consolidation of Variable Interest Entities", is effective
immediately for all enterprises with variable interests in variable
interest entities acquired subsequent to February 1, 2003. The
provisions of FIN 46 must be applied by the end of 2003. If an entity
is determined to be a variable interest entity, it must be consolidated
by the enterprise that absorbs the majority of the entity's expected
losses if they occur, receives a majority of the entity's expected
residual returns if they occur, or both. Where it is reasonably
possible that the company will consolidate or disclose information
about a variable interest entity, the company must disclose the
company's maximum exposure to loss as a result of its involvement with
the variable interest entity in all financial statements issue after
January 31, 2003. We do not believe that FIN 46 has any impact on our
financial statements currently. However, if the Company enters into
certain types of transactions in the future, including special purpose
entities, then consolidation of that entity with the Company might be
required.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". Statement 149 amends and clarifies
the definition of a derivative, expands the nature of exemptions from
Statement 133, clarifies the application of hedge accounting when using
certain instruments, clarifies the application of Statement 133 to
embedded derivatives and modifies the cash flow presentation of
derivative instruments containing financing elements. Statement 149 is
effective for contracts entered into or modified after June 30, 2003.
The adoption of this Statement, effective July 1, 2003, had no impact
on the Company's consolidated financial statements.
10
FindWhat.com and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE I - NEW ACCOUNTING PRONOUNCEMENTS (continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with characteristics of both Liabilities and
Equity", to establish standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. An issuer is required to classify a financial
instrument that is within such standard's scope as a liability (or an
asset in some circumstances). The requirements of this Statement apply
to freestanding financial instruments, including those that comprise
more than one option or forward contract. This Statement does not apply
to features that are embedded in a financial instrument that is not a
derivative in its entirety. This Statement is generally effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this Statement,
effective July 1, 2003, had no impact on the Company's consolidated
financial statements.
In July 2003, the EITF reached a consensus on Issue 03-5,
"Applicability of AICPA Statement of Position 97-2 "Software Revenue
Recognition", or SOP 97-2, to Non-Software Deliverables", or EITF 03-5.
The consensus was reached that non-software deliverables are included
within the scope of SOP 97-2 if they are included in an arrangement
that contains software that is essential to the non-software
deliverables' functionality. This consensus is to be applied to fiscal
periods beginning after August 13, 2003. We do not expect the adoption
of EITF 03-5 to have a material impact on our financial position, cash
flows, or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management's discussion and analysis or plan of operation contains
forward-looking statements, the accuracy of which involves risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "projects," and similar expressions to identify
forward-looking statements. This management's discussion and analysis also
contains forward-looking statements attributed to certain third-parties relating
to their estimates regarding the growth of the Internet, Internet advertising,
and online commerce markets and spending. Readers should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this report. Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons.
OVERVIEW
We are a leading developer and provider of performance-based marketing
services for the Internet. Our clients only pay us for each Internet user we
deliver to their websites. We currently offer two primary proprietary
performance-based services: the FindWhat.com Network, a keyword-targeted
advertisement service that distributes millions of advertisements throughout the
Internet each day based on a bid-for-position, pay-per-click pricing model; and
a private label service, which offers large portals, search engines, and other
high traffic websites the opportunity to brand and sell their own pay-per-click,
keyword-targeted advertisement service using our turn-key operation.
Additionally, on September 25, 2003 we announced the signing of an agreement
with Mitsui & Co., Ltd. to power a keyword-targeted advertisement service in
Japan, which is expected to launch in early 2004.
Our main focus is the operation of online marketplaces that connect the
prospects that are most likely to purchase specific goods and services to the
advertisers that provide those goods and services. Advertisers create
advertisements, or keyword-targeted ads, which are comprised of titles,
descriptions, URL links, and relevant keywords or keyword phrases. For each
keyword, the advertisers determine what price they are willing to pay for a
qualified click-through. The pricing process is an open, automated,
bid-for-position system. The highest bidder for a particular keyword or phrase
receives the first place position, with all other bidders on that same keyword
or phrase listed in descending bid order. Through our Account Management Center,
or similar centers created for the paid listings services of third parties which
are powered by FindWhat.com, advertisers can sign-up and manage their accounts
themselves, 24 hours a day, seven days a week. They can control and track their
bids, the placement of their keyword ads, their total expenditures, their cost
per visitor, and their return on investment, all in a real-time environment. As
a result, they can easily determine and work to improve the value they derive
from FindWhat.com's services. Our editors review every keyword to ensure that
the ad is appropriate for that advertiser's website. This methodology produces
extremely relevant commercial listings for Internet users looking for products
and services, and drives highly qualified traffic to our managed advertisers.
Along with our private label partner Terra Lycos's Lycos.com and
HotBot, we distribute advertisements to millions of Internet users each day,
often in direct response to search or directory queries. The FindWhat.com
Network includes hundreds of distribution partners, including search engines
like CNET's Search.com, Excite, Webcrawler, MetaCrawler, Dogpile, and Microsoft
Internet Explorer Auto Search. We recognize 100% of the revenue from paid
click-throughs on the sites in the FindWhat.com Network, and then share that
revenue with those sites. We recognize only our share of the revenue generated
from third-party initiatives which are powered by us. With both the FindWhat.com
Network and the third-party offerings, our services are a source of revenue and
relevant keyword-targeted ads for our partners, while providing our managed
advertisers with exposure to potential customers across the Internet. As with
the Yellow Pages in the offline world, our managed advertisers get their message
in front of prospects at the exact time they are looking for the advertisers'
products and services. Unlike the Yellow Pages, advertisers only pay for those
visitors that "walk" into their virtual stores.
On June 17, 2003, we entered into an agreement to merge with Espotting
Media Inc., a leading provider of performance based internet marketing services
in Europe. Under the terms of the Espotting transaction, Espotting's
stockholders will receive approximately 8.1 million shares of our common stock
and $27 million in cash, subject to adjustment. Additionally, the agreement
calls for FindWhat.com to issue options and warrants to purchase approximately
2.1 million shares of our common stock to Espotting's option and warrant
holders. On September 19, 2003, we announced that we were engaged in
negotiations with Espotting as a result of our post-signing examination of
Espotting's historical and projected financial performance. The parties are
reserving their rights under the existing merger agreement, and depending on the
outcome of our review of Espotting's financial performance, the parties
12
may negotiate to modify the terms of the transaction. We believes that, at a
minimum, any successful renegotiation of the terms will include a reduction of
the purchase consideration, along with other material changes to the existing
Merger Agreement. The Espotting transaction is subject to a number of
contingencies, including receipt of stockholder and regulatory approvals, and it
is possible that mutually agreeable terms will not be reached, and therefore the
merger may not be consummated. In the event the Espotting transaction is not
consummated, it could have a material adverse effect on our results of
operations, stock price, business, and prospects.
Also on June 17, 2003, FindWhat.com loaned Espotting $2.0 million in
exchange for a promissory note. The loan to Espotting is interest-bearing and
must be paid in full at closing or upon termination of the merger agreement,
whichever occurs first. If the merger is consummated, the loan shall be repaid
by reducing the cash obligation payable by FindWhat.com to Espotting on the
closing date.
Additionally, as of September 30, 2003, the Company had incurred and
capitalized approximately $1.8 million in legal, advisory and transaction costs
associated with its announced merger agreement with Espotting. Upon the
successful closing of the merger, these and any additional deal costs will be
considered part of the purchase price. But if the merger agreement is
terminated, these and any additional costs will be written off as a one-time
expense on the date of the termination.
In September 2003, we announced the signing of an agreement to acquire
Miva Corporation, a leading supplier of e-commerce software and services to
small and medium-sized businesses, for $5.5 million in a combination of cash and
stock, plus the assumption of approximately $2.5 million in notes and other
liabilities. Assuming the closing of the transaction, we believe that we can
combine our paid listings services with Miva's e-commerce software and services
to better serve small and medium-sized businesses, with FindWhat.com delivering
qualified prospects to a Miva client's online store, and the Miva Merchant
software aiding that online store to make a successful sale. The Miva
transaction is subject to a number of contingencies, including receipt by Miva
of stockholder and regulatory approvals; and there is no guarantee that the
transaction will be consummated.
Among other things, our growth rate and results depend on the
successful completion and integration of our announced transactions with
Espotting Media Inc. and Miva Corporation, and on our ability to continue to
increase the number of advertisers who use our services, the amount our managed
advertisers spend on our services, and the number of Internet users who have
access to our advertisers keyword ads. We anticipate these variables to
fluctuate, affecting our growth rate and our financial results. In particular,
it is difficult to project how many click-throughs we will deliver to our
managed advertisers and how much advertisers' will spend with us, and even more
difficult to anticipate the average revenue per click-through, because our
advertisers are solely responsible for determining the prices they pay via an
automated bidding environment. In addition, we believe we will experience
seasonality. Although seasonality is difficult to predict, we expect that the
fourth quarter of the calendar year will realize more activity than the first
quarter, with the second and third quarters being the least active, due to lower
usage of the Internet during warmer weather months.
FindWhat.com Network click-through revenue, private label revenue, and
other third-party initiative revenue are recognized when earned, which is based
on the actual click-through activity, and then only to the extent that the
advertiser has deposited sufficient funds with us, or collection is probable.
In order to increase revenue from our current services, we must
increase one or more of the following: the number of managed advertisers, the
number of click-throughs, average revenue per click-through, and the number and
quality of our distribution partners and private label partners. We believe
these elements are complementary, meaning adding distribution partners and
private label partners can lead to increased managed advertisers, which can lead
to higher average revenue per click-through, and, subsequently, more
distribution partners and private label partners. For example, we inherently
increase the number of keyword-targeted ads and related keyword coverage as we
increase the number of overall managed advertiser accounts. An increase in the
number of managed advertisers can lead to greater competition among advertisers,
which we believe can lead to increases in average revenue per click-through.
Increased advertiser competition can lead to a higher quality of paid keyword ad
displayed, including higher relevancy. As relevancy and coverage increases, we
are able to deliver higher revenue to our distribution partners and higher
returns on investment to our advertisers, thus adding value for both. We believe
these forces, or the absence of them, should lead to changes in revenue over
long periods of time, and may not be reflected in our near term results.
13
The largest component of our expenses relate to marketing costs
incurred to attract consumers and businesses to our advertisers' websites
through our distribution network. Our future success is dependent upon managing
our click-through acquisition costs and increasing the revenue we derive from
this traffic. In order to significantly increase revenues, we will be required
to incur a significant expansion of our operations, including hiring additional
management and staff, and enhancing our overall technical infrastructure and
plant facilities. The proposed increases in capital and expenditures will
significantly increase future operating expenses.
We were organized under the laws of the State of Nevada under the name
Collectibles America, Inc. and, in June 1999, we merged with BeFirst Internet
Corporation, a Delaware corporation. As a result of the merger, the stockholders
of BeFirst Internet Corporation acquired control of us and BeFirst Internet
Corporation became a wholly owned subsidiary. On June 17, 1999, we changed our
name from Collectibles America, Inc. to BeFirst.com. In September 1999, we
changed our name from BeFirst.com to FindWhat.com. We have offered our BeFirst
RankPro service, which provides search engine optimization services to Internet
advertisers, since March 1998, although it currently makes an insignificant
contribution to our operations. The FindWhat.com Network was commercially
launched in September 1999, and currently represents the vast majority of our
revenue. We launched our private label service in September 2002, providing a
bid-for-position, pay-per-click, keyword-targeted advertisement service for
Terra Lycos's Lycos and HotBot. In September 2003, we announced a license
agreement with Mitsui & Co., Ltd. to launch a bid-for-position keyword targeted
advertising service in Japan. Our limited operating history and the uncertain
nature of the markets we address or intend to address make prediction of our
future results of operations difficult.
RESULTS OF OPERATIONS
Nine and three months ended September 30, 2003 and 2002
Our fiscal year runs from January 1 through December 31. As previously
noted, we began offering our search engine optimization service in March 1998,
we commercially launched the FindWhat.com (SM) Network in September 1999, our
first private label service agreement commenced in September 2002, and Mitsui's
bid-for-position keyword targeted advertising service in Japan, which we intend
to power, has not yet launched. When making comparisons between the three and
nine months ending September 30, 2003 and the three and nine months ending
September 30, 2002 readers should note that we do not anticipate our historical
growth rate to continue.
REVENUE
Revenue was approximately $17.8 million for the three months ending
September 30, 2003, as compared to approximately $11.0 million for the three
months ending September 30, 2002. Revenue for the nine months ending September
30, 2003 was approximately $51.2 million, as compared to $29.4 million for the
nine months ending September 30, 2002. The increase in our overall revenue
relates to the increase in our FindWhat.com Network revenue as a result of:
adding new distribution partners; expanding our relationships with our existing
distribution partners; and increasing the amount advertisers spend with us for
traffic from our distribution partners.
No advertiser represented more than 3% of our total revenue during the
three and nine months ending September 30, 2003 and 2002. For the three and nine
months ending September 30, 2003 we had two distribution partners which each
generated more than 10% of our total revenue. For the three months ending
September 30, 2002 we had two distribution partners which each generated more
than 10% of our total revenue, and for the nine months ending September 30, 2002
we had one distribution partner which generated more than 10% of our total
revenue.
OPERATING EXPENSES
Search Serving. Search serving expense consists primarily of costs
associated with maintaining the FindWhat.com Network and the paid listings
services of third parties which are powered by FindWhat.com, providing our
search engine optimization service, and fees paid to telecommunications carriers
for Internet connectivity. Costs associated with maintaining the FindWhat.com
Network and the paid listings services of third parties which are powered by
FindWhat.com include salaries and benefits of related technical personnel,
depreciation of related computer equipment, co-location charges for our network
equipment, and software license fees.
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Search serving expense increased to approximately $714,000 for the
three months ending September 30, 2003, as compared to approximately $466,000
for the three months ending September 30, 2002. Search serving expense increased
to approximately $2.0 million for the nine months ending September 30, 2003, as
compared to approximately $1.4 million for the nine months ending September 30,
2002. The increase was primarily due to increases in Internet connectivity fees,
depreciation of equipment, and personnel expense. We anticipate search serving
expense will continue to increase.
Marketing, Sales and Service. Marketing, sales and service expense
consists primarily of:
o revenue-sharing or other arrangements with our FindWhat.com
distribution partners;
o advertising expenditures for the FindWhat.com Network, such
as, banner advertising campaigns and sponsorships;
o promotional expenditures such as sponsorships of seminars,
trade shows, and expos;
o referral fees and other expenses to attract advertisers to our
services;
o fees to marketing and public relations firms; and
o payroll and related expenses for personnel engaged in our
marketing, customer service, business development, corporate
development, and sales functions, as well as any related
travel and entertainment expenses incurred by these personnel.
Our marketing, sales and service expense increased to approximately
$10.2 million for the three months ending September 30, 2003, as compared to
$6.1 million for the three months ending September 30, 2002. Marketing, sales
and service expense increased to approximately $29.3 million for the nine months
ending September 30, 2003, as compared to $16.2 million for the nine months
ending September 30, 2002. The increase in marketing, sales and service expense
was related primarily to increases in: revenue-sharing payments and other fees
paid to our FindWhat.com distribution partners, which increase as our revenue
increases; personnel costs due to expanding the number of business development,
corporate development, marketing, customer service, and sales personnel;
consulting fees; and travel and other expenses related to our corporate
development initiatives. The increased costs relating to our corporate
development department are based on our concentrated effort to diversify our
revenue stream. Our corporate development department is responsible for
identifying new business initiatives, and searching for new sources of revenue
opportunities. It should be noted that the deliverables of the corporate
development team are longer term in nature, and as such we may not realize
substantial benefits in the short-term, if at all, from their strategic efforts.
Revenue sharing and other fees paid to distribution partners represent the
largest component of our marketing, sales and service expense. We believe that
continued investment in marketing, sales and service, including attracting
advertisers to utilize the FindWhat.com Network, attracting distribution
partners to display our keyword-targeted ads, and obtaining additional private
label partners or other third parties to provide paid listings powered by
FindWhat.com, is critical to attaining our strategic objectives. As a result, we
expect these costs to continue increasing in the future.
General and Administrative. General and administrative expense consists
primarily of payroll and related expenses for executive and administrative
personnel; credit card fees; costs related to leasing, maintaining, and
operating our facilities; insurance; recruiting fees; bad debt; fees for
professional services, including consulting, legal, and auditing fees; expenses
and fees associated with the reporting and other obligations of a public
company; travel and entertainment costs for our administrative personnel;
depreciation of furniture and equipment for non-technical employees; and other
general corporate expenses. General and administrative expenses increased to
approximately $2.1 million for the three months ending September 30, 2003, as
compared to approximately $1.4 million for the three months ending September 30,
2002. General and administrative expense increased to approximately $5.9 million
for the nine months ending September 30, 2003, as compared to $4.2 million for
the nine months ending September 30, 2002. The increase in general and
administrative expenses was primarily due to increases in credit card fees,
depreciation on furniture and equipment, compensation expense, rent expense,
travel costs, and expenses relating to being a public company. We expect
additional increases in general and administrative expenses in the future as we
continue to expand our staff and incur costs related to the growth of our
business, and as we litigate patent-related lawsuits with Overture Services,
Inc.
Product Development. Product development expense consists primarily of
payroll and related expenses for personnel responsible for the development and
maintenance of features and functionality for our services and depreciation for
related equipment used in product development. Product development expense was
approximately
15
$416,000 for the three months ending September 30, 2003, as compared to
approximately $169,000 for the three months ending September 30, 2002. Product
development expense was approximately $1.1 million for the nine months ending
September 30, 2003, as compared to $396,000 for the nine months ending September
30, 2002. The increase was primarily due to an increase in personnel expense. We
believe that continued investment in product development is critical to
attaining our strategic objectives and as a result, we expect product
development expenses to increase in the future.
We systematically evaluate our product development costs in accordance
with Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). For the three months ending
September 30, 2003 we capitalized approximately $127,000 of product development
costs, as compared to $0 for the three months ending September 30, 2002.
Capitalized product development costs for the nine months ending September 30,
2003 were approximately $127,000, as compared to $0 for the nine month period
ending September 30, 2002.
INTEREST INCOME, NET
Interest income, net, consists primarily of earnings on our cash and
cash equivalents, net of interest expense. Net interest income was approximately
$158,000 for the three months ending September 30, 2003, as compared to
approximately $65,000 for the three months ending September 30, 2002. Net
interest income was approximately $368,000 for the nine months ending September
30, 2003, as compared to $137,000 for the nine months ending September 30, 2002.
The increase in interest income was due to higher average cash and cash
equivalent balances offset in part by lower interest rates.
INCOME TAXES
For the three month period ending September 30, 2003 we recorded an
income tax provision of approximately $1.8 million, as compared to an income tax
provision of approximately $1.1 million for the three month period ending
September 30, 2002. For the nine months ending September 30, 2003 we recorded a
total income tax provision of approximately $5.1 million, as compared to an
income tax benefit of approximately $668,000 for the nine month period ending
September 30, 2002.
At 38%, our effective tax rate for 2003 approximates our statutory tax
rate. Our 2002 effective tax rate was lower than the statutory tax rate due to
our utilization of net operation losses.
NET INCOME
As a result of the factors described above, we generated net income of
$2.8 million, or $0.14 per basic, and $0.12 per diluted share, for the three
months ending September 30, 2003, as compared to net income of $1.8 million, or
$0.10 per basic, and $0.09 per diluted share, for the three months ending
September 30, 2002. For the nine months ending September 30, 2003, we generated
net income of $8.2 million, or $0.42 per basic, and $0.37 per diluted share, as
compared to net income of $8.1 million, or $0.48 per basic, and $0.42 per
diluted share, for the nine months ending September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
We historically have satisfied our cash requirements primarily through
private placements of equity securities, cash flows provided by operations, and
proceeds from the exercise of options and warrants. From inception through
September 30, 2003 we have raised net proceeds of approximately $33.6 million
through private equity financings, and received approximately $9.3 million in
proceeds from the exercise of warrants and options. The $33.6 million of net
proceeds received through private placements noted above includes our most
recent private placement which occurred on July 15, 2003 where we issued one
million shares of common stock to institutional investors, raising gross
proceeds of approximately $20.3 million. We plan to utilize the proceeds from
this private placement to fund future growth and capitalize new initiatives.
Beginning in Q2 2001, we began generating cash flows from operations. In 2001,
our cash flows provided by operations were approximately $4.1 million. We
continued to generate cash during 2002, with cash flows from operations of
approximately $11.7 million. For the nine months ending September 30, 2003 we
generated cash flows from operations of $9.4 million. We started to generate
positive cash flows from our operations primarily due to the increase in the
number of advertisers bidding
16
for keyword-targeted ads in the FindWhat.com Network, and the increase in the
number of distribution partners displaying our keyword ads, along with increases
in the number of paid click-throughs delivered by existing distribution
partners. If we fail to continue to provide our managed advertisers with high
quality click-throughs (or visitors to their websites), they may reduce or cease
their spending with us and our private label partners, which may lead to lower
average revenue per paid click-through, and our revenue and cash flows may
decline. If we fail to offer our distribution partners with competitive
keyword-targeted advertisements in terms of the average revenue per paid
click-through, the revenue share paid to the distribution partners, the
relevancy and coverage of our keyword ads, and the speed of delivery of such
ads, among other factors - they may display fewer FindWhat.com results, or stop
showing our keyword-targeted ads altogether, which would lead to lower revenue
and cash flows. The number and quality of providers of keyword-targeted ads is
increasing, which may adversely impact: our ability to keep or grow our
advertiser and distribution partner relationships, our average revenue per paid
click-through, and the amount of payments owed to, and the payment terms of our
contracts with, our distribution partners, all of which may reduce our revenue
and cash flows.
Net cash provided by operating activities totaled approximately $9.4
million for the nine months ending September 30, 2003 versus approximately $8.1
million for the nine months ending September 30, 2002.
For the nine months ending September 30, 2003 the net cash provided
was derived primarily on net income of approximately $8.2 million, plus an
increase in accounts payable and accrued expenses of approximately $2.6 million,
the recognition of non-cash depreciation and amortization expense for the period
of approximately $1.2 million, and a decrease in our deferred tax benefit of
approximately $446,000. The increase in cash provided for the period was
partially offset by an increase in accounts receivable of approximately $1.4
million and prepaid expenses and other current assets of $1.8 million.
Net cash used by investing activities totaled approximately $1.3
million for the nine months ending September 30, 2003 versus net cash used of
$11.5 million for the nine months ending September 30, 2002.
For the nine months ending September 30, 2003 the net cash used by
investing activities consisted primarily of an advance to Espotting under a note
receivable of approximately $2.0 million, and capital expenditures of
approximately $2.4 million. Net cash used was partially offset by proceeds from
the sale of short-term investments of approximately $3.2 million.
Net cash provided by financing activities totaled approximately $27.9
million for the nine months ending September 30, 2003 versus approximately
$528,000 for the nine months ending September 30, 2002.
Net cash provided by financing activities for the nine months ending
September 30, 2003 consisted of cash received of approximately $7.9 million from
the exercise of stock options and warrants, and net cash of $20 million, which
we received from institutional investors in July 2003, when we issued 1 million
shares of our common stock in a private placement.
Our principal sources of liquidity consisted of approximately $54
million of cash and cash equivalents as of September 30, 2003. Although we have
no material long-term commitments for capital expenditures, we anticipate an
increase in capital expenditures consistent with anticipated growth of
operations, infrastructure, and personnel. Our Fort Myers, Florida lease
represents our largest operating lease commitment; it is a 10-year obligation
with minimum lease payments of approximately $450,000 per year, plus our pro
rata share of the building's operating expenses. We do not believe we have any
other material operating leases. Our largest ongoing contractual cash payments
are to our distribution partners, which are funded by payments from our
advertisers for the paid click-throughs (visitors), delivered to them via our
distribution partners. We are engaged in patent litigation with our largest
competitor, Overture Services, Inc. We believe that the litigation will not be
resolved over the next 12 months, and will require a run-rate of approximately
$1.0 million per annum in legal expenses until it is resolved. Our patent
litigation with Overture Services may be time-consuming, expensive, and result
in the diversion of our time and attention. Accordingly, such patent litigation
could negatively impact our business and, consequently, our cash position, even
if we prevail. If it is determined that our bid-for-position business model
infringes one or more valid and enforceable claims of the patents held by
Overture Services, our business, prospects, financial condition and results of
operations could be materially and adversely affected and we could be subject to
damages and forced to obtain a license from Overture Services or revise our
business model. We can offer no assurance that a license
17
would be available on acceptable terms or at all, or that we will be able to
revise our business model economically, efficiently, or at all.
Additionally, on June 17, 2003, we entered into an agreement to merge
with Espotting Media Inc., a leading provider of performance based internet
marketing services in Europe. Under the terms of the Espotting transaction,
Espotting's stockholders will receive approximately 8.1 million shares of our
common stock and $27 million in cash, subject to adjustment. Additionally, the
agreement calls for FindWhat.com to issue options and warrants to purchase
approximately 2.1 million shares of our common stock to Espotting's option and
warrant holders. On September 19, 2003, we announced that we were engaged in
negotiations with Espotting as a result of our post-signing examination of
Espotting's historical and projected financial performance. The parties are
reserving their rights under the existing merger agreement, and depending on the
outcome of our review of Espotting's financial performance, the parties may
negotiate to modify the terms of the transaction. We believe that, at a minimum,
any successful renegotiation of the terms will include a reduction of the
purchase consideration, along with other material changes to the existing Merger
Agreement. The Espotting transaction is subject to a number of contingencies,
including receipt of stockholder and regulatory approvals, and it is possible
that mutually agreeable terms will not be reached, and therefore the merger may
not be consummated. In the event the Espotting transaction is not consummated,
it could have a material adverse effect on our results of operations, stock
price, business, and prospects. In the event that the Espotting transaction is
consummated, it may lower our current cash and cash equivalents significantly,
depending on the final terms.
Also on June 17, 2003, FindWhat.com loaned Espotting $2.0 million in
exchange for a promissory note. The loan to Espotting is interest-bearing and
must be paid in full at closing or upon termination of the merger agreement,
whichever occurs first. If the merger is consummated, the loan shall be repaid
by reducing the cash obligation payable by FindWhat.com to Espotting on the
closing date.
Additionally, as of September 30, 2003, the Company had incurred and
capitalized approximately $1.8 million in legal, advisory and transaction costs
associated with its announced merger agreement with Espotting. Upon the
successful closing of the merger, these and any additional deal costs will be
considered part of the purchase price. But if the merger agreement is
terminated, these and any additional costs will be written off as a one-time
expense on the date of the termination.
As part of the agreement, we advanced Espotting Media Inc. $2.0 million
in exchange for a note receivable. The advance to Espotting is interest bearing
and shall either be paid in full at closing or it shall reduce the cash
obligation payable by us to Espotting on the closing date. Additionally, as of
September 30, 2003, we capitalized approximately $1.8 million in transaction
expenses associated with its announced merger agreement with Espotting. Upon the
successful closing of the merger, these and any additional deal expenses would
be considered part of the transaction cost; however, in the event the merger
agreement is terminated, these and any additional expenses would be written off
as a one-time expense on the date of the termination.
Furthermore, in September 2003, we announced the signing of an
agreement to acquire Miva Corporation, a leading supplier of e-commerce software
and services to small and medium-sized businesses, for $5.5 million, plus the
assumption of approximately $2.5 million in notes and other liabilities. Under
the terms of the Miva transaction, Miva stockholders would receive $2.7 million
in cash and $2.7 million in FindWhat.com common stock. The Miva transaction is
subject to a number of contingencies, including receipt of by Miva of
stockholder and regulatory approvals; and there is no guarantee that the
transaction will be consummated. If the Miva transaction does close, it will
require a portion of our current cash and cash equivalents.
We currently anticipate that our cash and cash equivalents as of
September 30, 2003, together with cash flows from operations, will be sufficient
to meet the anticipated liquidity needs for working capital and capital
expenditures over the next 12 months, including the cash to be used in our
planned merger with Espotting and acquisition of Miva. In the future, we may
seek additional capital through the issuance of debt or equity depending upon
results of operations, market conditions, or unforeseen opportunities. Our
future liquidity and capital requirements will depend upon numerous factors. The
pace of expansion of our operations will affect our capital requirements. We may
also have increased capital requirements in order to respond to competitive
pressures. In addition, we may need additional capital to fund acquisitions of
complementary products, technologies, or businesses. As we require additional
capital resources, we may seek to sell additional equity or debt securities or
18
obtain a bank line of credit. The sale of additional equity or convertible debt
securities could result in additional dilution to existing stockholders. There
can be no assurance that any financing arrangements will be available in amounts
or on terms acceptable to us, if at all. Our forecast of the period of time
through which our financial resources will be adequate to support our operations
is a forward-looking statement that involves risks and uncertainties and actual
results could vary materially as a result of the factors described above.
OFF BALANCE SHEET ARRANGEMENTS
Other than the Fort Myers operating lease described above, the Company
has no off-balance sheet arrangements or special purpose entities.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
This Management's Discussion and Analysis of Financial Condition and
Plan of Operation are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. When preparing our condensed
consolidated financial statements, we make estimates and judgments that affect
the reported amounts on our balance sheets and income statements, and our
related disclosure about contingent assets and liabilities. We continually
evaluate our estimates, including those related to allowance for doubtful
accounts, and our valuation allowance for deferred income tax assets. We base
our estimates on historical experience and on various other assumptions which we
believe to be reasonable in order to form the basis for making judgments about
the carrying values of assets and liabilities that are not readily ascertained
from other sources. Actual results may deviate from these estimates if
alternative assumptions or conditions are used.
Revenue
We derive revenue primarily from the following sources: through
click-throughs on keyword ads on the FindWhat.com Network, and from management
fees generated from click-throughs from our private label agreement. Revenue
from click-throughs is recognized when generated.
We have entered into agreements with various websites to display
FindWhat.com keyword-targeted ads. We pay a fee to the websites that list our
results for each click-through on a FindWhat.com advertiser listing. In
accordance with the guidance of Emerging Issue Task Force No. 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent," the revenues related to
these click-throughs on keyword ads are reported gross of the fees paid in the
Condensed Consolidated Financial Statements, as we are the primary obligor and
are responsible for the fulfillment of the services.
On our private label agreement we recognize revenue in accordance with
the contractual revenue share payment agreement. Following the guidance of
Emerging Issue Task Force No. 99-19, "Reporting Revenue Gross as a Principal
Versus Net as an Agent," FindWhat.com recognizes private label revenues at net.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from non-payments by our billable advertisers for services rendered.
The allowance for doubtful accounts was approximately $175,000 at September 30,
2003. If our billable advertisers were to contest amounts legitimately owed to
us, or if their ability to pay our invoices were to suffer, resulting in the
likelihood that we would not be paid for services rendered, additional
allowances may be necessary which would result in an additional general and
administrative expense in the period such determination was made.
Note Receivable and Deferred Costs
We have advanced approximately $2.0 million to Espotting and have
incurred transaction-related costs of approximately $1.8 million in anticipation
of our merger with Espotting and $0.2 million in anticipation of our acquisition
of Miva.We evaluate the recoverability of these amounts by monitoring the likely
outcome of the proposed merger or acquisition. If the Espotting merger is
consummated, the note would be recovered at closing and the transaction-related
costs would become part of the purchase price. If the Espotting merger is
terminated or
19
termination becomes probable, FindWhat.com would have to evaluate its ability to
collect the note from Espotting and the transaction-related costs would be
expensed, as a one-time charge. If the Miva acquisition is consummated, the
transaction-related costs would become part of the purchase price; if the Miva
acquisition is terminated or termination becomes probable, FindWhat.com would
expense these costs, as a one-time charge.
Income Taxes
Deferred income taxes are recognized for temporary differences between
our financial statement and income tax basis of assets and liabilities, loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized.
At September 30, 2003 we had utilized all of its historical net
operating loss carry-forwards. We anticipate a full effective tax rate of
approximately 38 - 40% in the foreseeable future.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. The following factors
have affected or could affect the Company's actual results and could cause such
results to differ materially from those expressed in any forward-looking
statements we may make. Investors should consider carefully the following risks
and speculative factors inherent in and affecting the business of the Company
and an investment in our common stock. Factors that might cause such a
difference include, but are not limited to, those discussed below.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY AND HAVE ONLY RECENTLY LAUNCHED OUR FINDWHAT.COM SERVICES.
We began offering search engine optimization marketing services through
our BeFirst.com service in March 1998, and in September 1999 we commercially
launched the FindWhat.com Network, our bid-for-position, keyword targeted
advertising service. In September 2002, we launched our private label service
and currently we have one private label partner. In September 2003, we announced
a license agreement with Mitsui & Co., Ltd. to launch a bid-for-position keyword
targeted advertising service in Japan. Accordingly, we have a limited relevant
operating history upon which an investor can make an evaluation of the
likelihood of our success. An investor in our securities must consider the
uncertainties, expenses, and difficulties frequently encountered by companies
such as ours that are in the early stages of development. An investor should
consider the likelihood of our future success to be highly speculative in light
of our limited operating history, as well as the problems, limited resources,
expenses, risks, and complications frequently encountered by similarly situated
companies in the early stages of development, particularly companies in new and
rapidly evolving markets, such as e-commerce. To address these risks, we must,
among other things:
o maintain and increase our client base;
o implement and successfully execute our business and marketing strategy;
o continue to develop and upgrade our technology;
o continually update and improve our service offerings and features;
o provide superior customer service;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks. If we are unable to do
so, our business, prospects, financial condition, and results of operations
would be materially and adversely affected.
20
WE HAVE LIMITED MARKETING EXPERIENCE; THE SUCCESS OF THE FINDWHAT.COM NETWORK IS
DEPENDENT UPON OUR ABILITY TO ESTABLISH ONLINE MARKETING RELATIONSHIPS.
We have limited marketing experience and limited financial, personnel,
and other resources to undertake extensive marketing activities. Our ability to
generate revenue from the FindWhat.com Network is dependent upon our ability to
attract advertisers and generate traffic to our advertisers' websites. If we are
unable to enter into additional agreements to generate significant traffic to
our advertisers' websites on commercially acceptable terms, or are unable to
implement successfully current agreements which drive traffic to our
advertisers' websites, it could have a material adverse effect on our business,
prospects, financial condition, and results of operations.
OUR PRINCIPAL COMPETITOR MAY HAVE PATENT RIGHTS WHICH COULD PREVENT US FROM
OPERATING THE FINDWHAT.COM SERVICES IN THEIR PRESENT FORM.
Our principal competitor, Overture Services, Inc., purports to be the
owner of U.S. Patent No. 6,269,361, which was issued on July 31, 2001 and is
entitled "System and method for influencing a position on a search result list
generated by a computer network search engine." Additionally, Overture Services
has announced it acquired an issued patent that may apply to our current
bid-for-position pay-per-click business model. Overture Services has advised us
that they believe our current bid-for-position pay-per-click business model
infringes their patents; however, we believe that we do not infringe any valid
and enforceable claim of the patents. On January 17, 2002, we filed a complaint
to challenge the '361 patent in the District Court for the Southern District of
New York. Subsequently, Overture commenced litigation against us in the District
Court for the Central District of California in Los Angeles, alleging that we
are infringing the '361 patent. Our complaint has been transferred to the
District Court for the Central District of California in Los Angeles. As a
result, we have asserted our claims for declaratory judgment against Overture
for invalidity, unenforceability, and non-infringement of the '361 patent in an
Answer we filed on March 25, 2003 in the California action, and simultaneously
dismissed the transferred New York action without prejudice.All claims are now
pending before the District Court for the Central District of California in Los
Angeles, and the litigation is ongoing. Our patent litigation with Overture
Services may be time-consuming, expensive, and result in the diversion of our
time and attention. Accordingly, such patent litigation could negatively impact
our business, even if we prevail. If it is determined that our bid-for-position
business model infringes one or more valid and enforceable claims of the patents
held by Overture Services, our business, prospects, financial condition, and
results of operations could be materially and adversely affected and we could be
subject to damages and forced to obtain a license from Overture Services or
revise our business model. We can offer no assurance that a license would be
available on acceptable terms or at all, or that we will be able to revise our
business model economically, efficiently, or at all.
OUR BUSINESS IS DEPENDENT UPON OUR RELATIONSHIPS WITH OUR DISTRIBUTION PARTNERS.
Our distribution partners are very important to our revenue and results of
operations. Any adverse changes in our relationship with key distribution
partners could have a material adverse impact on our revenue and results of
operations. Our agreements with our distribution partners vary in duration, and
depending on the agreement with any one particular distribution partner, may be
terminable upon the occurrence of certain events, including our failure to meet
certain service levels, general breaches of agreement terms, and changes in
control in certain circumstances. We may not be successful in renewing our
existing distribution partnership agreements, or if they are renewed, any new
agreement may not be on as favorable terms.
OUR AGREEMENT TO MERGE WITH ESPOTTING MEDIA INC. IS SUBJECT TO A NUMBER OF
CONTINGENCIES AND THERE IS NO ASSURANCE THAT THE TRANSACTION WILL CLOSE.
On June 17, 2003, we entered into an agreement to merge with Espotting
Media Inc., a leading provider of performance based internet marketing services
in Europe. Under the terms of the Espotting transaction, Espotting's
stockholders will receive approximately 8.1 million shares of our common stock
and $27 million in cash, subject to adjustment. Additionally, the agreement
calls for us to issue options and warrants to purchase approximately 2.1 million
shares of our common stock to Espotting's option and warrant holders. The
Espotting transaction is subject to a number of contingencies, including receipt
of stockholder and regulatory approvals; and there is no guarantee that the
transaction will be consummated. On September 19, 2003, we announced that we
were engaged in negotiations with Espotting as a result of our post-signing
examination of Espotting's historical and projected financial performance. The
parties are reserving their rights under the existing merger agreement, and
depending on the outcome
21
of our review of Espotting's financial performance, the parties may negotiate to
modify the terms of the transaction. It is possible that mutually agreeable
terms will not be reached and that the merger may not be consummated. In the
event the Espotting transaction is not consummated, it could have a material
adverse effect on our financial statements, stock price, business, and
prospects.
OUR AGREEMENT TO MERGE WITH ESPOTTING MEDIA INC. EXPOSES OUR BUSINESS TO
SIGNIFICANT RISK.
The following factors, among others, could have a material adverse
effect on our stock price, business, prospects, financial condition, and results
of operations given our potential merger with Espotting: risk that our merger
with Espotting will not be consummated; difficulties executing integration
strategies or achieving planned synergies after a merger with Espotting; risk
that the Espotting transaction will be terminated, delayed, or not close when
expected; the failure of FindWhat.com and Espotting to resolve issues relating
to Espotting's financial performance and the failure of the parties to agree to
related amendments to the merger documents; FindWhat.com's and Espotting's
failure to retain clients as a result of uncertainty regarding the merger
agreement; difficulties executing integration strategies or achieving planned
synergies in connection with the Espotting transaction; the risk that the
conditions precedent to the parties' obligations to close under the Espotting
agreement will not be satisfied, including the receipt of stockholder and
regulatory approvals; the risk that transaction costs relating to the Espotting
transaction will be higher than anticipated; the risk that the businesses of
FindWhat.com and Espotting will suffer as a result of uncertainty involving the
merger; the risk that the continuity of FindWhat.com's and Espotting's
operations will be disrupted if the merger does not close; the risk that
Espotting will require more cash than anticipated before closing; fluctuations
in currency exchange rates; and fluctuations in the trading price and volume of
our common stock.
WE PARTIALLY DEPEND ON THIRD PARTIES FOR CERTAIN SOFTWARE AND INTERNET SERVICES
FOR THE FINDWHAT.COM NETWORK.
We partially depend on third-party software to operate the FindWhat.com
Network. Although we believe that several alternative sources for this software
are available, any failure to obtain and maintain the rights to use such
software would have a material adverse effect on our business, prospects,
financial condition, and results of operations. We also are dependent upon third
parties to provide Internet services to allow us to connect to the Internet with
sufficient capacity and bandwidth so that the FindWhat.com Network can function
properly and our FindWhat.com website can handle current and anticipated
traffic. We currently have contracts with Sprint, Internap, and KMC Telecom for
these services. Any restrictions or interruption in our connection to the
Internet would have a material adverse effect on our business, prospects,
financial condition, and results of operations.
WE RELY ON INTERNALLY DEVELOPED SYSTEMS WHICH MAY PUT US AT A COMPETITIVE
DISADVANTAGE.
We use internally developed systems for a portion of our
keyword-targeted paid listing request processing software. We developed these
systems primarily to increase the number of appropriate paid keyword-targeted
ads for each related keyword request made on our network, for our private label
partners, and for customer service. A significant amount of manual effort may be
required to update these systems if our competitors develop superior processing
methods. This manual effort is time-consuming and costly and may place us at a
competitive disadvantage when compared to competitors with more efficient
systems. We intend to upgrade and expand our processing systems and to integrate
newly-developed and purchased modules with our existing systems in order to
improve the efficiency of our paid listing methods and support increased
transaction volume, although we are unable to predict whether these upgrades
will improve our competitive position when compared to our competitors.
OUR MANAGEMENT TEAM IS RELATIVELY NEW; MANY OF OUR EMPLOYEES HAVE RECENTLY
JOINED US AND MUST BE INTEGRATED INTO OUR OPERATIONS.
Some of our officers have no prior senior management experience in
public companies. At September 30, 2003 we have 161 full time employees; our new
employees include a number of key managerial, technical, financial, marketing,
and operations personnel as of September 30, 2003 who have not yet been fully
integrated into our operations; and we expect to add additional key personnel in
the near future. Our failure to fully integrate our new employees into our
operations could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
22
WE MAY HAVE DIFFICULTY ATTRACTING AND RETAINING QUALIFIED, HIGHLY SKILLED
PERSONNEL.
We expect the expansion of our business to place a significant strain
on our limited managerial, operational, and financial resources. We will be
required to expand our operational and financial systems significantly and to
expand, train, and manage our work force in order to manage the expansion of our
operations. We will need to attract and retain highly qualified, technical
personnel in order to maintain and update our products and services and meet our
business objectives. Competition for such personnel is intense. We may not be
successful in attracting and retaining such qualified technical personnel on a
timely basis, on competitive terms, or at all. If we are unable to attract and
retain the necessary technical personnel, it would have a material and adverse
effect on our business, prospects, financial condition, and results of
operations.
CURRENT CAPACITY CONSTRAINTS MAY REQUIRE US TO EXPAND OUR NETWORK INFRASTRUCTURE
AND CUSTOMER SUPPORT CAPABILITIES.
Our ability to provide high-quality customer service largely depends on
the efficient and uninterrupted operation of our computer and communications
systems in order to accommodate any significant increases in the numbers of
advertisers using our services and the queries and paid click-throughs we
receive. We believe we will be required to expand our network infrastructure and
customer support capabilities to support an anticipated expanded number of
queries and paid click-throughs. Any such expansion will require us to make
significant upfront expenditures for servers, routers, computer equipment, and
additional Internet and intranet equipment, and to increase bandwidth for
Internet connectivity. Any such expansion or enhancement will need to be
completed and integrated without system disruptions. Failure to expand our
network infrastructure or customer service capabilities either internally or
through third parties, if and when necessary, would materially adversely affect
our business, prospects, financial condition, and results of operations.
OUR BUSINESS IS PARTIALLY SUBJECT TO SEASONALITY, WHICH MAY IMPACT OUR GROWTH
RATE.
We have historically experienced, and expect to continue to experience,
seasonal fluctuations in the number of click-throughs received by typical
distribution partners within the FindWhat.com Network. We expect that the first
and fourth quarters of each calendar year will realize more activity than the
second and third quarters, due to increased overall Internet usage during the
first and fourth quarters due to colder weather and holiday purchases. Our
operating results and growth rate may vary significantly in the future, partly
due to such seasonal fluctuations. It is possible that in some future quarter
our operating results will be below the expectations of public market analysts
and investors due to seasonality and in such event, the price of our common
stock could be materially adversely affected.
OUR TECHNICAL SYSTEMS ARE VULNERABLE TO INTERRUPTION AND DAMAGE.
A disaster could interrupt our services for an indeterminate length of
time and severely damage our business, prospects, financial condition, and
results of operations. Our systems and operations are vulnerable to damage or
interruption from fire, floods, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, penetration of our network by
unauthorized computer users and "hackers," and similar events. The occurrence of
a natural disaster or unanticipated problems at our technical operations
facilities could cause material interruptions or delays in our business, loss of
data, or render us unable to provide services to customers. Failure to provide
the data communications capacity we require, as a result of human error, natural
disaster, or other operational disruptions, could cause interruptions in our
services and websites. The occurrence of any or all of these events could
adversely affect our business, prospects, financial condition, and results of
operations.
WE MAY BE UNABLE TO OBTAIN THE INTERNET DOMAIN NAMES THAT WE HOPE TO USE.
The Internet domain name we are using for our paid keyword-targeted ad
website is "FindWhat.com." We believe that this domain name is an extremely
important part of our business. We may desire, or it may be necessary in the
future, to use other domain names in the United States and abroad. Governmental
authorities in different countries may establish additional top-level domains,
appoint additional domain name registrars, or modify the requirements for
holding domain names. These new domains may allow combinations and similar
domain names that may be confusingly similar to our own. Also, we may be unable
to acquire or maintain desired and relevant domain names in all countries in
which we will conduct business. In addition, there are other substantially
similar domain names that are registered by companies which may compete with us.
There can be no assurance that potential users and advertisers
23
will not confuse our domain name with other similar domain names. If that
confusion occurs,
o we may lose business to a competitor; and
o some users of our services may have negative experiences with other
companies on their websites that those users erroneously associate with
us.
WE MAY BE UNABLE TO PROMOTE AND MAINTAIN OUR BRANDS.
We believe that establishing and maintaining the brand identities of
our services is a critical aspect of attracting and expanding a large client
base. Promotion and enhancement of our brands will depend largely on our success
in continuing to provide high quality service. If businesses do not perceive our
existing services to be of high quality, or if we introduce new services or
enter into new business ventures that are not favorably received by businesses,
we will risk diluting our brand identities and decreasing their attractiveness
to existing and potential customers.
In order to attract and retain customers and to promote and maintain
brands in response to competitive pressures, we may also have to increase
substantially our financial commitment to creating and maintaining a distinct
brand loyalty among our customers. If we incur significant expenses in an
attempt to improve our services or to promote and maintain our brands, our
business, prospects, financial condition, and results of operations could be
materially adversely affected. Moreover, any brand identities we establish may
be diluted as a result of any inability to protect our service marks or domain
names, which could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT BE PROTECTABLE OR OF SIGNIFICANT VALUE
IN THE FUTURE.
We depend upon confidentiality agreements with specific employees,
consultants, and subcontractors to maintain the proprietary nature of our
technology. These measures may not afford us sufficient or complete protection,
and others may independently develop know-how and services similar to ours,
otherwise avoid our confidentiality agreements, or produce patents and
copyrights that would materially and adversely affect our business, prospects,
financial condition, and results of operations.
Legal standards relating to the validity, enforceability, and scope of
protection of certain intellectual property rights in Internet-related
industries are uncertain and still evolving. The steps we take to protect our
intellectual property rights may not be adequate to protect our future
intellectual property. Third parties may also infringe or misappropriate any
copyrights, trademarks, service marks, trade dress, and other proprietary rights
we may have. Any such infringement or misappropriation could have a material
adverse effect on our business, prospects, financial condition, and results of
operations.
We own federal service mark registrations for "Be1st(R)," "BeFirst(R),"
"Find What You're Looking For(R)," and "FindWhat.com(R)."If other companies also
claim the words "Be1st," "BeFirst," "Find What You're Looking For," or
"FindWhat.com," we may be required to become involved in litigation or incur
additional expense. Effective service mark, copyright, and trade secret
protection may not be available in every country in which our services are
distributed or made available through the Internet.
The process and technology we use to operate the FindWhat.com Network
is critical to the success of our business. In February 2000, we filed a patent
application for our FindWhat.com Network with the United States Patent and
Trademark Office. Subsequently, we have filed additional patent applications
covering additional services and the evolution of our business model. These
applications are currently pending. Our patent applications may be rejected and
we may be unable to prevent third parties from infringing on our proprietary
rights. Further, our principal competitor has been granted a patent which may
cover our business model and has acquired an issued patent that may be
applicable to our business model. See "Our principal competitor may have patent
rights which could prevent us from operating our FindWhat.com Network in its
present form."
In addition, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is unclear.
We may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon, or otherwise decrease the value of our trademarks and
other proprietary rights, which may
24
result in the dilution of the brand identity of our services. See "We may be
unable to promote and maintain our brands."
Our current and future business activities may infringe upon the
proprietary rights of others, and third parties may assert infringement claims
against us. Any such claims and resulting litigation could subject us from time
to time to significant liability for damages, could result in the invalidation
of our proprietary rights, and have a material adverse effect on our business,
prospects, financial condition, and results of operations. Even if not
meritorious, such claims could be time-consuming, expensive to defend, and could
result in the diversion of our management's time and attention. In addition,
this diversion of managerial resources could have a material adverse effect on
our business, prospects, financial condition, and results of operations.
WE DEPEND ON THE EFFORTS OF OUR KEY PERSONNEL.
Our success is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success depends
substantially on the continued efforts of Craig A. Pisaris-Henderson, our
Chairman, Chief Executive Officer, and President, and Phillip R. Thune, our
Chief Operating Officer and Chief Financial Officer. Currently, we do not have
key person life insurance on Messrs. Pisaris-Henderson or Thune and we may be
unable to obtain such insurance in the near future due to high cost or other
reasons. We believe that the loss of the services of any of our executive
officers or other key employees could have a material adverse effect on our
business, prospects, financial condition, and results of operations.
OUR CHARTER DOCUMENTS LIMIT THE LIABILITY OF OUR DIRECTORS AND OFFICERS.
Our articles of incorporation contain provisions which limit the
personal liability of our directors and officers for monetary damages arising
from a breach of their fiduciary duties as directors or officers. In addition,
our by-laws require us to indemnify any person who is or was involved in any
manner, or who is threatened to be involved in any pending or completed action
or proceeding, including a derivative action brought by us or in our name, by
reason of the fact that such person is or was a director, officer, employee, or
agent of ours, or was serving at our request as an officer, director, employee,
or agent of another entity, enterprise, or employee benefit plan, against all
liabilities and expenses actually and reasonably incurred by such person in
connection with any such action or proceeding.
OUR ARTICLES OF INCORPORATION AUTHORIZE US TO ISSUE ADDITIONAL SHARES OF STOCK.
We are authorized to issue up to 50,000,000 shares of common stock
which may be issued by our board of directors for such consideration as they may
consider sufficient without seeking stockholder approval. The issuance of
additional shares of common stock in the future will reduce the proportionate
ownership and voting power of current stockholders.
Our Articles of Incorporation also authorize us to issue up to 500,000
shares of preferred stock, the rights and preferences of which may be designated
by our board of directors. These designations may be made without stockholder
approval. The designation and issuance of preferred stock in the future could
create additional securities which would have dividend and liquidation
preferences prior in right to the outstanding shares of common stock. These
provisions could also impede a non-negotiated change in control.
WE DO NOT INTEND TO PAY FUTURE CASH DIVIDENDS.
We currently do not anticipate paying cash dividends on our common
stock at any time in the near future. We may never pay cash dividends or
distributions on our common stock. Any credit agreements which we may enter into
with institutional lenders may restrict our ability to pay dividends. Whether we
pay cash dividends in the future will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements, and any other factors that the board of
directors decides is relevant.
THE MARKET PRICE OF OUR SECURITIES MAY BE VOLATILE.
From time to time the market price of our common stock may experience
significant volatility. Our quarterly results, failure to meet analysts'
expectations, patents issued or not issued to us or our competitors,
announcements by us or our competitors regarding planned or failed mergers,
acquisitions, or dispositions, loss of existing clients, new procedures or
technology, litigation, sales of substantial amounts of our common stock,
including shares issued upon
25
the exercise of outstanding options or warrants, changes in general conditions
in the economy and general market conditions could cause the market price of the
common stock to fluctuate substantially. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the trading prices of equity securities of many technology and Internet
companies. Frequently, these price and volume fluctuations have been unrelated
to the operating performance of the affected companies. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against such a company. This
type of litigation, regardless of the outcome, could result in substantial costs
and a diversion of management's attention and resources, which could materially
adversely affect our business, prospects, financial condition, and results of
operations.
SIGNIFICANT ADDITIONAL DILUTION WILL OCCUR IF OUTSTANDING OPTIONS AND WARRANTS
ARE EXERCISED.
As of September 30, 2003 we have outstanding stock options under our
1999 Stock Incentive Plan to purchase approximately 3.7 million shares of common
stock at a weighted average exercise price of $4.05 and warrants to purchase
approximately 295,000 shares of common stock at a weighted average exercise
price of $3.36 per share. To the extent these options or warrants are exercised,
our stockholders will experience further dilution. In addition, in the event
that any future financing should be in the form of, be convertible into, or
exchangeable for, equity securities, and upon the exercise of options and
warrants, investors may experience additional dilution.
WE FACE SUBSTANTIAL AND INCREASING COMPETITION.
We may face increased pricing pressure for the sale of keyword-targeted
advertisements, which could materially adversely affect our business, prospects,
financial condition, and results of operations. Our competitors may have or
obtain certain intellectual property rights which may interfere or prevent the
use of our bid-for-position business model. The market for Internet-based
marketing services is relatively new, intensely competitive, and rapidly
changing. Our principal competitors for the FindWhat.com Network are Yahoo! and
Google. We also compete against providers of Web directories and search and
information services, such as those provided by America Online, Google, MSN, and
Yahoo. Our principal competitors have longer operating histories, larger
customer bases, greater brand recognition, and greater financial, marketing, and
other resources than we have.
We are not aware of any other company with an offering exactly similar
to our private label service. In the future, other companies with greater
financial, marketing, and other resources may offer directly competing services.
Additionally, in pursuing acquisition opportunities we may compete with
other companies with similar growth strategies, certain of which may be larger
and have greater financial and other resources than we have. Competition for
these acquisition targets will likely also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition.
We have filed applications for several patents, any of which could be
rejected, and have only a limited amount of other proprietary technology that
would preclude or inhibit competitors from entering the keyword-targeted
advertising market. Therefore, we must rely on the skill of our personnel and
the quality of our client service. The costs to develop and provide e-commerce
services are relatively low. Therefore, we expect that we continually will face
additional competition from new entrants into the market in the future, and we
are subject to the risk that our employees may leave us and may start competing
businesses, notwithstanding non-competition agreements. The emergence of these
enterprises could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, INTERNET
ADVERTISING, AND CUSTOMER DEMANDS CONTINUE TO EVOLVE.
We may not be able to adapt as the Internet, electronic commerce,
Internet advertising, and customer demands continue to evolve. Our failure to
respond in a timely manner to changing market conditions, or client requirements
would have a material adverse effect on our business, prospects, financial
condition and results of operations. The Internet e-commerce and the Internet
advertising industry are characterized by:
o rapid technological change;
26
o changes in user and customer requirements and preferences;
o frequent new product and service introductions embodying new
technologies; and
o the emergence of new industry standards and practices that could render
proprietary technology and hardware and software infrastructure
obsolete.
Our success will depend, in part, on our ability to:
o enhance and improve the responsiveness and functionality of our
FindWhat.com Network and our private label service;
o license or develop technologies useful in our business on a timely
basis, enhance our existing services, and develop new services and
technology that address the increasingly sophisticated and varied needs
of our prospective or current customers; and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS.
The process of e-commerce aggregation by means of our hardware and
software infrastructure involves the transmission and analysis of confidential
and proprietary information of the advertiser, as well as our own confidential
and proprietary information. The compromise of our security or misappropriation
of proprietary information could have a material adverse effect on our business,
prospects, financial condition, and results of operations. We rely on encryption
and authentication technology licensed from other companies to provide the
security and authentication necessary to effect secure Internet transmission of
confidential information, such as credit and other proprietary information.
Advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments may result in a compromise or breach of the
technology used by us to protect client transaction data. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause material interruptions in our operations. We may be required to expend
significant capital and other resources to protect against security breaches or
to minimize problems caused by security breaches. To the extent that our
activities or the activities of others involve the storage and transmission of
proprietary information, security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible liability. Our security
measures may not prevent security breaches. Our failure to prevent these
security breaches may have a material adverse effect on our business, prospects,
financial condition, and results of operations.
OUR FUTURE SUCCESS WILL DEPEND ON CONTINUED GROWTH IN THE USE OF THE INTERNET.
Our future success will depend substantially upon continued growth in
the use of the Internet to support the sale of our advertising services and
acceptance of e-commerce transactions on the Internet. As this is a new and
rapidly evolving industry, the ultimate demand and market acceptance for
Internet-related services is subject to a high level of uncertainty. Significant
issues concerning the commercial use of the Internet and online services
technologies, including security, reliability, cost, ease of use, and quality of
service remain unresolved and may inhibit the growth of Internet business
solutions that utilize these technologies. In addition, the Internet or other
online services could lose their viability due to delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, or due to increased governmental regulation. In the event
that the use of the Internet and other online services does not continue to grow
or grows more slowly than we expect, or the Internet does not become a
commercially viable marketplace, our business, prospects, financial condition,
and results of operations would be materially adversely affected.
THE MARKET FOR OUR SERVICES IS UNCERTAIN AND IS STILL EVOLVING.
Internet marketing and advertising, in general, and advertising through
priority placement in keyword-targeted ads in particular, are at early stages of
development, are evolving rapidly, and are characterized by an increasing number
of market entrants. Our future revenues and profits are substantially dependent
upon the widespread
27
acceptance and use of the Internet and other online services as an effective
medium of commerce by merchants and consumers. Rapid growth in the use of and
interest in, the Internet, the Web, and online services is a recent phenomenon,
and may not continue on a lasting basis. In addition, customers may not adopt,
and continue to use, the Internet and other online services as a medium of
commerce. The demand and market acceptance for recently introduced services is
generally subject to a high level of uncertainty. Most potential advertisers
have only limited experience advertising on the Internet and have not devoted a
significant portion of their advertising expenditures to Internet advertising.
If this trend continues, the market for our existing services, which are
dependent upon increased Internet advertising, may be adversely affected, which
in turn will have a material adverse effect on our business, prospects,
financial condition, or results of operations.
WE WILL NEED TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE IN THE INTERNET SEARCH
AND ADVERTISING INDUSTRIES.
In order to remain competitive, we will be required continually to
enhance and improve the functionality and features of our existing FindWhat.com
services, which could require us to invest significant capital. If our
competitors introduce new products and services embodying new technologies, or
if new industry standards and practices emerge, our existing services,
technology, and systems may become obsolete and we may not have the funds or
technical know-how to upgrade our services, technology, and systems. If we face
material delays in introducing new services, products, and enhancements, our
users may forego the use of our services and select those of our competitors, in
which event, our business, prospects, financial condition, and results of
operations could be materially adversely affected.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
We are not currently subject to direct regulation by any government
agency other than laws or regulations applicable generally to e-commerce. Due to
the increasing popularity and use of the Internet and other online services,
federal, state, and local governments may adopt laws and regulations, or amend
existing laws and regulations, with respect to the Internet or other online
services covering issues such as user privacy, pricing, content, copyrights,
distribution, and characteristics and quality of products and services. In 1998,
the United States Congress established the Advisory Committee on Electronic
Commerce which is charged with investigating, and making recommendations to
Congress regarding, the taxation of sales by means of the Internet. Furthermore,
the growth and development of the market for e-commerce may prompt calls for
more stringent consumer protection laws and impose additional burdens on
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our services and increase our cost
of doing business, or otherwise have a material adverse effect on our business,
prospects, financial condition, and results of operations. Moreover, the
relevant governmental authorities have not resolved the applicability to the
Internet and other online services of existing laws in various jurisdictions
governing issues such as property ownership and personal privacy and it may take
time to resolve these issues definitively. Any new legislation or regulation,
the application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could have a material
adverse effect on our business, prospects, financial condition, and results of
operations.
IMPLEMENTATION OF OUR FINDWHAT.COM SERVICES AND OUR SEARCH ENGINE OPTIMIZATION
SERVICE FOR SOME CLIENTS MAY INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
In implementing our FindWhat.com services and our search engine
optimization service, we utilize promotional material generated by our clients
and our editing staff to promote websites. From time to time, third parties have
advised that the use of certain keywords in our FindWhat.com services and our
search engine optimization service have infringed on their intellectual property
rights. Although the terms and conditions of our services provide that our
clients are responsible for infringement of intellectual property rights of
others arising out of the use of keywords or content in their paid keyword ads
and on their websites, our involvement in disputes regarding these claims could
be time-consuming, expensive to defend, and could result in the diversion of our
management's time and attention, which could have a material adverse effect on
our business, prospects, financial condition, and results of operations.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
Although we have no material long-term commitments for capital
expenditures, we anticipate an increase in capital expenditures consistent with
anticipated growth of operations, infrastructure, and personnel. We currently
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anticipate that our cash as of September 30, 2003, together with cash flows from
operations, will be sufficient to meet the anticipated liquidity needs for
working capital and capital expenditures over the next 12 months, including the
cash to be used in our announced merger with Espotting Media Inc. and our
announced acquisition of Miva Corporation. In the future, we may seek additional
capital through the issuance of debt or equity depending upon results of
operations, market conditions, or unforeseen opportunities. Our future liquidity
and capital requirements will depend upon numerous factors. The pace of
expansion of our operations will affect our capital requirements. We may also
have increased capital requirements in order to respond to competitive
pressures. In addition, we may need additional capital to fund acquisitions of
complementary products, technologies, or businesses. Our forecast of the period
of time through which our financial resources will be adequate to support our
operations is a forward-looking statement that involves risks and uncertainties
and actual results could vary materially as a result of the factors described
above. As we require additional capital resources, we will seek to sell
additional equity or debt securities or obtain a bank line of credit. The sale
of additional equity or convertible debt securities could result in additional
dilution to existing stockholders. There can be no assurance that any financing
arrangements will be available in amounts or on terms acceptable to us, if at
all.
OUR AGREEMENT TO ACQUIRE MIVA CORPORATION IS SUBJECT TO A NUMBER OF
CONTINGENCIES AND THERE IS NO ASSURANCE THAT THE TRANSACTION WILL CLOSE.
In September 2003, we announced the signing of an agreement to acquire
Miva Corporation, a leading supplier of e-commerce software and services to
small and medium-sized businesses, for $5.5 million, plus the assumption of
approximately $2.5 million in notes and other liabilities. Under the terms of
the Miva transaction, Miva stockholders would receive $2.7 million in cash and
$2.7 million in FindWhat.com common stock. The Miva transaction is subject to a
number of contingencies, including receipt by Miva of stockholder and regulatory
approvals; and there is no guarantee that the transaction will be consummated.
In the event the Miva transaction is not consummated, it could have a material
adverse effect on our stock price, business, prospects, financial condition, and
results of operations.
OUR AGREEMENT WITH MITSUI & CO, LTD. IS SUBJECT TO A NUMBER OF CONTINGENCIES AND
RISKS.
In September 2003, we announced that we had entered into a
revenue-sharing-based licensing agreement with Mitsui & Co., Ltd. Under the
terms of the licensing agreement, FindWhat.com is to provide the technology and
business operations expertise for Mitsui to launch a new keyword-targeted paid
listings service in Japan. This transaction is subject to numerous contingencies
and risks including: the failure of FindWhat.com's existing infrastructure to
adequately support Mitsui's paid listing service, the failure of Mitsui to
successfully create and manage a paid listings network in Japan, risk that the
development and implementation of the Japanese version technology will be
delayed or not completed when expected, risk that development, implementation
and integration costs will be higher than anticipated, the inability of Mitsui
to leverage off of its existing client base and potential distribution partners,
the failure of the paid listing services market to develop in Japan as
envisioned by FindWhat.com, intense competition in the paid listing services
market in Japan, the potential that FindWhat.com and Mitsui will fail to agree
on the management and growth of their relationship, and economic changes and
changes in the Internet industry generally.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective to provide reasonable assurance that our disclosure
controls and procedures will timely alert them to material information required
to be included in our periodic SEC reports.
As of the end of the period covered by this report, there has been no
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934, as amended)
during the quarter to which this report relates that has materially affected or
is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One of the Company's competitors, Overture Services, Inc., purports to
be the owner of a United States patent that was issued on July 31, 2001 entitled
"System and method for influencing a position on a search result list generated
by a computer network search engine" (U.S. Patent No. 6,269,361, "the '361
patent"). On January 17, 2002, the Company filed a complaint to challenge the
validity, enforceability, and assert non-infringement of Overture's '361 Patent
in the District Court for the Southern District of New York. Subsequently, on
January 25, 2002, Overture commenced litigation against the Company in the
District Court for the Central District of California in Los Angeles, alleging
that the Company is infringing the '361 Patent. In the litigation, the Company
is seeking a declaration that the '361 Patent is invalid and unenforceable and
not infringed by the Company, and Overture is seeking a permanent injunction
against any act by the Company deemed by the court to infringe Overture's '361
Patent, an award of unspecified monetary damages, and attorney's fees, costs,
and expenses. In an Opinion and Order dated February 13, 2003, despite finding
that FindWhat.com's complaint was properly brought in New York, Judge Mukasey in
the Southern District of New York ordered the action transferred to the Central
District of California based largely on the convenience of the expected
witnesses in this case. As a result, the Company has asserted its claims for
declaratory judgment against Overture for invalidity, unenforceability, and
non-infringement of the '361 Patent in an Answer the Company filed on March 25,
2003 in the California action, and simultaneously dismissed the transferred New
York action without prejudice. All claims are now pending before the District
Court for the Central District of California in Los Angeles, and the litigation
is ongoing. A trial in this matter is not expected before the second quarter of
2004.
ITEM 5. OTHER INFORMATION
Historically the Company has held its annual meeting of stockholders in
June of each year. The Company anticipates holding its 2003 annual meeting of
stockholders on December 15, 2003.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Quarterly Report on
Form 10-Q:
(1) Exhibits:
Number Exhibit
- ------ -------
2.1* Agreement and Plan of Reorganization dated June 17, 1999 by and
among BeFirst Internet Corporation, Collectibles America, Inc. and
Mick Jardine.
2.2### Agreement and Plan of Merger among FindWhat.com, Who Merger Corp.
and Espotting Media Inc., dated June 17, 2003.
2.3#### First Amendment to Agreement and Plan of Merger dated October 24,
2003 by, and among FindWhat.com, Who Merger Corp, and Espotting
Media Inc.
3.1* Articles of Incorporation of FindWhat.com (f/k/a Collectibles
America, Inc.).
3.2** Amended and Restated By-laws of FindWhat.com.
3.3*** Audit Committee Charter.
10.1##/+ Amended and Restated Executive Employment Agreement between
FindWhat.com and Craig A. Pisaris-Henderson.
10.2##/+ Amended and Restated Executive Employment Agreement between
FindWhat.com and Phillip R. Thune.
10.3 [Reserved.]
10.4****/+ FindWhat.com 1999 Stock Incentive Plan, as amended.
10.5##/+ Form of Incentive Stock Option Agreement.
10.6##/+ Form of Non-Qualified Stock Option Agreement.
10.7##/+ Executive Employment Agreement between FindWhat.com and Dave Rae.
10.8 [Reserved.]
10.9## Colonial Bank Plaza office building lease dated January 31, 2002, as
amended.
10.10#/+ Executive Employment Agreement between FindWhat.com and Anthony
Garcia.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.
31
* Incorporated by reference to the exhibit previously filed on September 14,
1999 with prior Form 10 of FindWhat.com (file no. 0-27331).
** Incorporated by reference to the exhibit previously filed on January 23, 2002
with FindWhat.com's Form 8-K.
*** Incorporated by reference to the exhibit previously filed on March 31, 2000
with FindWhat.com's Form 10-K for the fiscal year ended December 31, 1999.
****Incorporated by reference to the exhibit previously filed on August 1, 2002,
with FindWhat.com's Form S-8.
#Incorporated by reference to the exhibit previously filed on May 15, 2001 with
FindWhat.com's Form 10-QSB for the fiscal quarter ended March 31, 2001.
##Incorporated by reference to the exhibit previously filed on November 6, 2002
with FindWhat.com's Form 10-QSB for the fiscal quarter ended September 30, 2002.
###Incorporated by reference to the exhibit previously filed on June 18, 2003
with FindWhat.com's Form 8-K.
####Incorporated by reference to the exhibit previously filed on October 27,
2003 with FindWhat.com's Form 8-K.
+Management compensatory contract or plan.
(b) Reports on Form 8-K
Report on Form 8-K, dated September 25, 2003, regarding agreement
with Mitsui & Co., Ltd.
Report on Form 8-K/A dated September 19, 2003, regarding renegotiating
Espotting merger and reiterating third quarter and full year guidance.
Report on Form 8-K dated September 3, 2003, regarding acquisition of
Miva Corporation.
Report on Form 8-K, dated July 21, 2003, regarding second quarter 2003
earnings.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINDWHAT.COM
Date: October 30, 2003 By: /s/ Phillip R. Thune
------------------------
Phillip R. Thune
Chief Operating Officer and Chief Financial
Officer (Duly Authorized Officer and Principal
Financial and Accounting Officer)
33