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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2003
Commission File Number: 0-27331
FINDWHAT.COM
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(Exact name of registrant as specified in its charter)
NEVADA 88-0348835
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5220 SUMMERLIN COMMONS BLVD
FORT MYERS, FLORIDA 33907
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(Address of principal executive offices,
including zip code)
(239) 561-7229
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's common equity held by
non-affiliates of the Registrant was approximately $267,000,000 on June 30,
2003.
There were 21,598,092 shares of the Registrant's Common Stock
outstanding on January 31, 2004.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes X No
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2003. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.
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PART I
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements that are based upon
current expectations and involve certain risks and uncertainties within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words or
expressions such as "plan," "intend," "believe," "project," or "expect" or
variations of such words and similar expressions are intended to identify such
forward-looking statements. Key risks are described in our reports filed with
the U.S. Securities and Exchange Commission. Readers should note that these
statements may be impacted by several factors, including economic changes and
changes in the Internet industry generally and, accordingly, our actual
performance and results may vary from those stated herein, and we undertake no
obligation to update the information contained herein.
ITEM 1. BUSINESS.
OVERVIEW
We are focused on providing smart, efficient and productive services to online
businesses, helping clients of all sizes throughout the business lifecycle. We
both find prospects for our clients, and help our clients get those prospects to
become paying customers that keep coming back.
To accomplish this full circle e-commerce offering, we currently provide three
primary, proprietary services: the FindWhat.com Network(TM), a
performance-based, keyword-targeted advertisement service that distributes
advertisements throughout the Internet each day; a private label service, which
offers large companies the opportunity to brand and sell their own
performance-based, keyword-targeted advertising service using our turn-key
operation, or parts thereof; and a set of merchant services, which are commerce
enabling products and services that help online businesses capitalize on
opportunities unique to transacting business on the Internet, including Miva
Merchant(TM), a leading e-commerce development system that a merchant can use to
create a complete online store within an existing website or when creating a new
website.
We maintain an Internet website at http://www.findwhat.com. We make available
free of charge on our website our annual reports on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) of the Securities Exchange
Act of 1934 as soon as practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission. Information on
our website is not incorporated by referenced into this report.
COMPANY HISTORY
We were organized under the laws of the State of Nevada in October 1995 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 our 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 and commercially
launched the FindWhat.com Network. We initiated our private label service in
September 2002 by providing a bid-for-position, pay-per-click, keyword-targeted
advertisement service for Terra Lycos's Lycos and HotBot.
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 the second quarter of 2004.
On December 3, 2003 we announced the signing of a private label contract with
Verizon Information Services. Under the terms of the revenue sharing-based
licensing agreement, we provide the technology and business operations expertise
to support enhanced local SuperPages.com advertising services which launched
on March 1, 2004.
On January 1, 2004 we acquired all of the outstanding stock of Miva Corporation,
a leading supplier of e-commerce software and services to small and medium-sized
businesses, based in San Diego, California. We issued Miva
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stockholders approximately 165,000 shares of our common stock and paid them
approximately $2.7 million in cash, and we assumed approximately $2.5 million in
Miva liabilities.
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. On February 9, 2004 we announced the signing of an amended merger
agreement with Espotting. Under the amended terms of the Espotting transaction,
Espotting's stockholders will receive approximately 7.0 million shares of our
common stock and approximately $20 million in cash, subject to adjustment.
Additionally, the agreement calls for us to issue options and warrants to
purchase approximately 800,000 shares of our common stock to Espotting's
employees and affiliates. Closing of the transaction is conditioned upon
regulatory filings and approvals, shareholder approvals by both companies, the
absence of a material adverse change in the companies' businesses, the meeting
of certain requirements before and until the closing date, and other closing
conditions. As a result, the merger may be consummated on significantly
different terms or not at all. Assuming the fulfillment of these conditions and
the receipt of all approvals, we would expect to close the merger in the third
quarter of 2004.
On February 23, 2004, we entered into an agreement to acquire Comet Systems,
Inc., a leading provider of connected desktop consumer software. Under the terms
of the acquisition agreement, Comet stockholders will receive approximately $8.5
million in cash, which is subject to adjustment based on the value of Comet's
closing date current net assets, plus $15.0 million in our common stock, and up
to an additional $10.0 million in cash based on Comet's operating performance in
2004 and 2005. Closing of the transaction is conditioned upon approval from
Comet's shareholders, the absence of a material adverse change in the companies'
businesses, receipt of a favorable tax opinion, and other customary closing
conditions. As a result, the acquisition may not be consummated or may be
consummated on significantly different terms. Assuming the fulfillment or waiver
of these conditions, we expect to close the acquisition within 60 days of
February 23, 2004.
INDUSTRY OVERVIEW
We believe all online businesses, no matter their size and especially those that
rely on their websites for revenue or to disseminate information about their
products and services, are constantly seeking to reach online users. We believe
more and more online advertisers are turning to performance-based advertising to
fulfill their Internet marketing objectives.
Historically, advertising, including most online advertising, has been
impression-based, meaning that advertisers are charged based on the number of
viewers, listeners, readers or users who are potentially exposed to their ad,
with no guarantee that the ad was seen, heard or read. With the inherent
accountability of the Internet and the decreasing attention paid to banner ads,
online advertisers are increasingly demanding performance-based advertising
alternatives, where advertisers only pay for every visitor, or click-through,
who either gets to the advertisers' websites, or who registers for or buys the
products or services offered. According to the Interactive Advertising Bureau
(IAB), 33% of all U.S. online advertising spending in the first half of 2003 was
performance-based, up from 15% in the first half of 2002.
Internet advertisers can select from a variety of performance-based advertising
alternatives, including pay-per-click banner display advertisements, e-mail and
pop-up campaigns. However, performance-based, keyword-targeted search-based
advertisements have grown faster than most other alternatives. One advantage of
keyword-targeted ads is that they get an advertiser's message in front of
prospects at the time that a prospect has shown he or she is interested in what
the advertiser has to offer, either because the prospect has searched for the
keyword, clicked on a directory link, or has visited a site that relates to that
keyword. As a result, advertisers have increased the allocation of their online
marketing budgets that is spent on keyword-targeted, search-based advertisements
(or "keyword search"); according to the IAB, keyword search accounted for 29% of
total online advertising revenue during the first six months of 2003, compared
to 8% during the first six months of 2002. According to US Bancorp Piper Jaffrey
in March 2003, revenue from keyword search in the United States will grow from
approximately $1.0 billion in 2002 to $6.0 billion in 2007, and globally will
grow from approximately $1.2 billion in 2002 to $7.0 billion in 2007.
Internet users and advertisers alike have come to rely on browser applications,
customized downloadable applications and websites which provide Web directories,
search engines or contextually relevant listings as ways for buyers of certain
products and services to find the companies that provide those items. These
applications and websites enable consumers and businesses to find a listing of
advertiser websites matching a descriptive word or phrase, while offering
advertisers exposure to a highly relevant Internet audience that has already
indicated an interest in their products or services. However, in order to
attract and keep users, many of these applications and websites have created
additional tools and a vast array of content and services that are costly to
build and maintain.
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Many are small, and need expert, reliable assistance in generating revenue and
managing the sources of their traffic. Online merchants need to ensure that they
take advantage of visitors to their websites. While it is one thing to find
prospects, it is entirely another to convert them to paying customers and keep
them as loyal and repeat clients.
We believe Internet users, the applications and websites serving both Internet
users and advertisers, and online businesses from both an advertising
perspective and a general online merchant perspective face the following
challenges:
o INTERNET USERS' UNMET COMMERCIAL SEARCH REQUIREMENTS. Businesses and
consumers increasingly are capitalizing on the efficiency and interactive
nature of the Internet to research and purchase goods and services.
However, the number of commercial websites on the Internet is extremely
large and growing rapidly, and finding the exact product or service desired
among the billions of web pages available on the Internet can be
frustrating and time-consuming. To find what they are looking for, some
Internet users rely on browser applications, customizable downloadable
applications or websites that offer listings from search engines. However,
search engines that determine their commercial results using human editors
can suffer from links to commercial sites that no longer exist or that have
materially changed their content. Search engines that determine their
commercial results through automated programs can have the same problem,
and may also provide confusing listings because the titles and descriptions
have been generated by an automated process, without human review.
Additionally, in some cases, the process for assigning results to
commercial queries by traditional search engines may generate irrelevant
results, due to manipulation by websites that are not relevant for the
keyword entered. We believe that when looking for sites that sell products
and services, Internet users want the most relevant listings of commercial
websites and listings that are easy to read.
o INEFFECTIVENESS OF TRADITIONAL INTERNET ADVERTISING. Traditionally,
Internet advertising has been in the form of banner or sponsorship
advertising, which is typically priced on a cost per thousand impressions
(CPM) basis where advertisers pay for viewers. Advertising with large
portals or other high traffic websites is typically expensive and available
only to relatively large advertisers, which limits the number of Internet
advertising opportunities, especially for small to mid-sized businesses. We
believe the pay-per-view, or pay-per-impression, model does not efficiently
exploit the advertising potential and accountability of the Internet
because advertisers are paying for viewers who may not be interested in
their products or services.
o NEED BY BROWSER APPLICATIONS AND WEBSITES WHICH PROVIDE WEB DIRECTORIES,
SEARCH ENGINE, OR CONTEXTUALLY RELEVANT LISTINGS TO FUND THEIR OFFERINGS TO
INTERNET USERS AND CAPITALIZE ON ADVERTISER DEMAND FOR PERFORMANCE-BASED,
KEYWORD-TARGETED ADVERTISEMENTS. In order to attract Internet users,
browser applications and websites need to create compelling tools,
functionality and content. This is expensive and time-consuming, especially
because the competition for Internet users' attention is intense. These
applications and websites need a revenue source to fund the cost of
attracting and retaining Internet users, preferably a revenue source that
capitalizes on both the demand by Internet users for high quality, relevant
commercial listings, and the demand by online advertisers of all sizes for
performance-based, keyword-targeted advertisements.
o NEED BY LARGE PORTALS AND HIGH TRAFFIC WEBSITES TO CREATE DEEPER
RELATIONSHIPS WITH LARGE NUMBERS OF ADVERTISERS, IN ORDER TO ATTRACT
INTEREST IN THE ADVERTISING SERVICES THEY OFFER. While most browser
applications and websites which provide Web directories, search engines or
contextually relevant listings are small or medium-sized businesses, and
have limited sales capabilities, the largest portals and high traffic
websites do have extensive sales forces and offer a variety of advertising
services. We believe large portals and high traffic websites recognize the
opportunity to offer their own performance-based, keyword-targeted
advertisement service, but do not have the capability or interest to manage
the advertisers that would be interested in such a service, including the
time and expense required for reviewing advertisers' listings for relevancy
and ensuring that advertisers are only charged for legitimate
click-throughs. However, traditionally, if they outsource the management of
keyword-targeted advertisements, they often lose the opportunity to have a
direct relationship with those advertisers, some of which may be candidates
for the portal or high traffic website's other advertising services.
o DESIRE BY LARGE COMPANIES TO CAPITALIZE ON THE DEMAND FOR EFFECTIVE
ADVERTISING WITH THEIR LEADERSHIP POSITION IN PARTICULAR GEOGRAPHIES AND
MARKETS. Large companies who have become leaders in their respective
geographies and/or markets typically have done so by focusing on their core
competencies, and when desiring to grow their business by branching out
into entirely new products, services and/or markets, relying on a smart
acquisition strategy, or forming strategic alliances with partners who have
the knowledge, experience and expertise in that product, service and/or
geography. These companies base their choice on the typical barriers to
entry, such as competition, access to technology, legal and trademark
issues, start up costs and development
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time. Additionally, the company has to decide if they have the time or
interest in managing numerous advertisers and their potentially millions of
advertisements, and monitoring the quality of both the advertising and the
traffic. An additional and important consideration to forming any strategic
partnership is whether the partner is a fully independent partner or is one
that already is, or could become, a chief competitor.
o ABILITY FOR SMALL TO MID-SIZED ENTERPRISES (SMEs) TO DEVELOP A
COST-EFFECTIVE, SMART E-COMMERCE SOLUTION. The cost to develop, host and
maintain a website, especially an e-commerce website, can be high. There
are a myriad of options to choose from in putting together an e-commerce
website, and many require highly technical or strategic knowledge in order
to choose and execute the optimal solution. Leading barriers to e-commerce
that any merchant must address include: secure data and order collection,
online payment processing, fraud protection, merchant banking services, web
hosting, web design and maintenance, web site promotion, product
management, product marketing and customer service. Without guidance, or
specific technical and strategic knowledge, the business individual or
smaller-sized company is at a disadvantage to compete with larger
companies, which may have greater resources to handle each of the issues
faced in launching and maintaining a profitable business online.
THE FINDWHAT.COM SOLUTION
THE FINDWHAT.COM NETWORK
The FindWhat.com Network is an online marketplace that connects businesses with
entities that are likely to purchase specific goods and services from the
businesses' websites and provides an additional revenue stream to browser
applications and websites which provide Web directories, search engines or
contextually relevant listings. We view the FindWhat.com Network as similar to
the Yellow Pages in the offline world; as a tool for people or businesses that
are actively looking to research or purchase goods or services. While our
advertisers' listings are available at our website, their listings are primarily
viewed by people using our distribution partners' websites and browser
applications. We distribute the listings our advertisers have placed with us to
hundreds of high traffic websites and applications, including search engines
like CNET's Search.com and Microsoft Internet Explorer Autosearch. Many of these
distribution partners which offer full search functionality combine search
results from other providers with our listings to offer a search experience that
can satisfy an Internet user's query, whether it was research-based or
e-commerce-based.
Advertisements from the FindWhat.com Network are rank-ordered through a
competitive bidding process in which each advertiser's bid represents the amount
it will pay us for each visitor, or "click-through," we send to the advertiser's
website. The advertiser with the highest bid is listed first in the search
results, with the remaining advertisers appearing in descending order of their
bids. Because advertisers must pay for each click-through to their website, we
believe that they select and bid only on those keywords or phrases which are
most relevant to their business offerings. We also employ relevancy algorithms
that consist of an automated editing program and review by our editorial staff
to ensure that advertisers do not bid on irrelevant keywords.
BENEFITS FOR INTERNET USERS
o MATCHING BUYERS WITH SELLERS. We believe that the bid-for-position,
pay-for-performance model delivers a better and more relevant list of
commercial sites for Internet users looking for a product or service,
because companies actively promoting and selling the desired goods and
services are positioned first within the list of FindWhat.com keyword
ads. The occurrence of dead links is extremely rare because advertisers
remove any of their keyword-targeted ads that are inactive to avoid
paying for traffic they cannot use. Our advertisers write their own
titles and descriptions following our advertising guidelines, which
were created to ensure the best user search experience, and prior to
becoming active, the titles and descriptions are reviewed by our
editors.
o A ROBUST DATABASE. Thousands of advertisers and their agencies are
bidding on keywords within the FindWhat.com Network creating a robust
database, which allows us to provide users of our distribution
partners' websites and browser applications with highly relevant lists
of commercial websites. In addition, we recently introduced our
IntelliMap process so that if an Internet user enters a variant of a
common word or phrase (such as a misspelling) when looking for a
product or service, we can provide a list of FindWhat.com
advertisements. This serves to broaden our coverage of potential
commercial queries, and drive more qualified visitors to our
advertisers.
o ACCESSIBILITY. Through our distribution partnerships, the FindWhat.com
database has wide accessibility
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for online users. Our listings are primarily viewed by people using our
distribution partners' websites and browser applications, which allows
Internet users the opportunity to access advertisements within the
FindWhat.com database without having to visit the FindWhat.com website.
o HIGH QUALITY SEARCH RESULTS. The FindWhat.com Network is dedicated to
delivering high-quality keyword ads as a result of an Internet user's
search query. As such, we have written and strictly enforce advertising
guidelines to try to ensure high relevancy standards.
BENEFITS TO ADVERTISERS
o DELIVERY OF THE TARGET MARKET. The FindWhat.com Network enables
marketers to target their message directly to the prospects who are
shopping for products or services in their category. Our advertisers
accomplish this precise targeting of qualified prospects by bidding to
reach Internet users who have expressed their interest in the
advertisers' product and service offerings, usually by typing in or
clicking on related keywords or phrases, or by visiting sites that
indicate the users' interests.
o SIMPLIFIED CAMPAIGN MANAGEMENT. We strive to make advertising with
FindWhat.com as simple as possible. In early 2003, we introduced a
suite of automated campaign management tools, called FindWhat.com
CruiseControl, that allows advertisers to monitor, track, organize,
budget, direct and manage their keyword campaigns, making bidding
easier. Through our IntelliMap process, advertisers do not need to bid
on every variant an Internet user might use to search for an item;
instead, many searches that are essentially the same are mapped
together to a single term.
o WIDESPREAD DISTRIBUTION. By bidding into the top positions for keywords
or phrases, an advertiser's keyword ad will appear on the websites of
distribution partners in our network. Our network includes primarily
smaller online entities, including category-specific websites, which
generate very targeted prospects for our advertisers' sites, leading to
high returns on our advertisers' spending with us. As we increase the
distribution of our keyword-targeted ads, our advertisers have the
opportunity to get their messages to a greater percentage of Internet
users, and to receive additional qualified visitors to their websites.
o CONTROL. The advertiser maintains control over their keyword ads within
the FindWhat.com Network. Our clients can access their account and
change or edit their company or product description at any time. We
believe this capability is particularly useful to advertisers when they
are running promotions or are featuring certain seasonal or holiday
items or services. Also, the suite of tools found within FindWhat.com
CruiseControl allows advertisers to automate the control process by
plugging in simple parameters that meet the advertisers' objectives.
o EASE OF USE. We believe that the FindWhat.com advertiser interface is
easy to access and use. Advertisers can establish an account directly
online with no human intervention, or they can access a customer
service representative via email, online chat or a toll-free number.
Through our Account Management Center, advertisers can manage their
accounts themselves, 24 hours a day, seven days a week.
o REASONABLE START-UP COSTS. Barriers to opening an account with us are
low. Any company with a website can utilize our services. Participation
in the FindWhat.com Network requires a minimum deposit of $25 (which is
100% applied to click-throughs on that account). The account is then
charged for each visitor who clicks through to the advertiser's
website. The minimum starting bid for a click-through on a specific
keyword is currently $0.05.
o EFFICIENCY, ACCOUNTABILITY AND EVALUATION. We believe we bring
efficiency and accountability to the purchase of Internet advertising
and address what we believe is the most common objection marketers have
when considering any advertising expenditure--knowing what they are
getting for their money. Advertisers can pick all of the keywords that
are relevant to their business, as verified by our editors. With our
open, automated bidding system, advertisers can judge the value of
paying for a premium position. The Account Management Center shows
advertisers what other advertisers are bidding for any specific
keyword, and allows them to make competing bids. The bidding for
keywords is automated in a real time environment, so that changes are
processed quickly, typically within a few minutes. Through the Account
Management Center, advertisers can control and track these bids, the
placement of their keyword ads, their total expenditures, and their
cost per visitor. As a result, advertisers can easily determine and
work to improve the return on their advertising investment with us.
With the addition of our AdAnalyzer tool, our advertisers have access
to a free post-click analytical
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tool that can tell them how well their keyword campaign is doing, down
to return on investment by keyword. This furthers the accountability of
advertising on the FindWhat.com Network and allows advertisers to
optimize their campaigns based on conversion data by keyword.
o PAY FOR PERFORMANCE ONLY. With FindWhat.com, advertisers pay only for
the prospects that come to their sites. We believe the pay-per-click
model delivers the type of accountability advertisers are seeking from
their online marketing campaigns.
o HIGH QUALITY ADVERTISING. We are dedicated to delivering high-quality
traffic to our advertisers' websites. We employ an integrated system of
numerous automated and human processes that continually monitor traffic
quality, often eliminating any charges for low quality traffic
proactively from the advertisers' accounts. We enforce strict
guidelines with our Network partners to ensure the quality of traffic
on the system.
BENEFITS TO BROWSER APPLICATIONS AND WEBSITES WHICH PROVIDE WEB
DIRECTORIES, SEARCH ENGINES OR CONTEXTUALLY RELEVANT LISTINGS
o SUSTAINABLE, RECURRING, HIGH MARGIN REVENUE. By including FindWhat.com
Network keyword ads, our distribution partners can earn revenue from
their users who are interested in finding products or services. Because
we handle all of the interaction with the advertisers required to offer
a comprehensive, keyword-targeted advertisement service, there is very
little cost involved for our distribution partners to receive their
share of this recurring revenue stream. Many of our distribution
partners are small or medium-sized entities, and do not have their own
sales force. Their share of revenue from FindWhat.com Network keyword
ads serves as an important source of capital to support the costs of
running their businesses.
o HIGH QUALITY CONTENT. We believe our database of keyword advertisements
represents continuously updated, high quality content for any website
or browser application which desires to offer its users access to
e-commerce-oriented information. Our bid-for-position, pay-per-click
environment encourages the most relevant, highest-quality advertisers
to garner the top positions in our list of keyword ads. We believe that
the advertisers which are the most relevant, and which have a website
that is professional and easy to use, will make more sales than the
other bidders in their category, and therefore will be able to afford
the highest positions. Typically, the FindWhat.com Network advertisers
at the top of our listings represent some of the best places to find
what the Internet user is seeking, so distribution partners that
utilize our service are fulfilling their users' demand for high quality
commercial results.
o FOCUS ON HELPING PARTNERS OF ALL SIZES. For distribution partners, the
integration of our keyword-targeted ads is quick and easy, enabling
entities of all sizes to be viable candidates to join the FindWhat.com
Network. We continually focus on ways to work more closely with each
distribution partner, no matter how large or small. We believe that the
combination of our resources, expertise, reliability and focus on small
to medium-sized partners is unique in our sector, leading to long-term,
mutually-beneficial relationships.
PRIVATE LABEL SERVICE
Our private label service offers large portals, search engines, high traffic
websites and large companies with leadership positions in their respective
geographies and/or markets, the opportunity to brand and sell their own
pay-per-click, keyword-targeted advertisement service using our turnkey
operation. Historically, large portals earned most of their revenue from banner
ads, and did not offer advertisers any direct way to purchase keyword ads/paid
listings within the portals' search results. In late 2000, large portals began
to incorporate paid listings among their search results, and by 2002, many major
U.S. portals and search engines were taking advantage of this revenue stream.
Almost all large portals and search engines have chosen to outsource the
compilation and maintenance of keyword-targeted ads to a third-party. In
September 2002, we launched our private label service with our first client,
Terra Lycos's Lycos and HotBot.
Our private label service includes building and hosting a partner-branded
sign-up page for advertisers and a separate advertiser account management center
designed to the private label partners' specifications. The partner can set
certain key variables, such as the minimum initial deposit and the minimum bid
amount. The turnkey service
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incorporates our technology platform, our editorial review capabilities for all
keyword ads, customer service support and processing of advertiser deposits. We
provide a service that looks and feels like it is being provided by our private
label partner, from the way we answer incoming calls from advertisers, to the
colors and logos used within the private label partner's account management
center. Most importantly, the private label partner owns the advertiser
relationship, and has the ability to work directly with advertisers on promoting
their keyword ad campaigns, or any other advertising campaigns or services
offered by the private label partner on its own website. Some advertisers who
sign up for the private label partner's service may also be advertising on the
FindWhat.com Network, but currently there is no overlap between the FindWhat.com
Network and the private label offering; advertisers must manage their separate
accounts individually. Some private label partners, like Terra Lycos, utilize
the full turnkey solution as outlined above. Others that have been announced,
such as Mitsui and Co., Ltd. and Verizon SuperPages.com, utilize the core
technology and operate the service themselves, with consulting expertise from
us. The private label service is flexible enough to offer slight modifications
to accommodate language and delivery differences among private label partners.
BENEFITS TO LARGE PORTALS, HIGH TRAFFIC WEBSITES AND LARGE COMPANIES WITH
LEADERSHIP POSITIONS IN THEIR RESPECTIVE GEOGRAPHIES AND/OR MARKETS THAT
WISH TO EXTEND INTO ONLINE ADVERTISING
o SPEED TO MARKET / COST SAVINGS. We believe that it would take a large
portal significantly longer than us to build a keyword-targeted
advertisement service on its own, due to the technological and business
process requirements. We also believe that we can offer the private
label service at a lower ongoing cost than the portal would incur to
manage the service, with a higher level of service to advertisers, due
to our experience and the efficiencies we can realize by leveraging
assets built to run our FindWhat.com Network.
o DIRECT RELATIONSHIP WITH ADVERTISERS / CROSS-SELLING OPPORTUNITIES.
Portals and high traffic websites that import paid listings from third
parties do not have any contact with, or ownership of, the advertiser
relationship. While this may be a benefit to a smaller website that
does not have its own sales force, it can be a detriment to a large
portal or company that offers numerous advertising alternatives. Over
the last few years, advertiser demand for keyword-targeted,
performance-based advertising services - specifically the ability to
pay-for-placement within search results on large portals - has grown
dramatically, and prominent position within search results can now
command high bid prices per click. However, we believe advertisers are
quick to realize which company can provide that position, and if it is
a third party, the advertiser will go straight to that third party,
bypassing the portal. In such a scenario, the company's sales force has
lost an opportunity to build a direct relationship with an advertiser,
which might have been a candidate for some of the company's other
advertising offerings. With our private label service, our partner
maintains the relationship with the advertisers, and its sales force
now has the opportunity to contact any of the advertisers attracted by
the keyword-targeted advertising service to see if there is the
possibility to build a deeper relationship.
o ABILITY TO FOCUS ON CORE BUSINESS. Large portals and high traffic
websites typically are engaged in competition with other companies that
provide similar services, or in the case of large companies with
leadership positions looking to extend into the paid listings
advertising market, are concerned with finding a strategic partner who
is not a competitor. Attracting Internet users to a portal or high
traffic website requires constant innovation and focus on providing
updated, high quality content. We believe that the skills and effort
required to run a keyword-targeted advertisement service are very
different, and would require significant investment and management
focus in order to provide an attractive service. With our private label
service, large portals, high traffic websites, and leadership companies
developing an online marketplace do not need to expend significant
resources, hire and manage specialized personnel, oversee a
sophisticated technology platform or provide any of the other aspects
of providing the service.
o REVENUE RECOGNITION. Traditionally, large portals and high traffic
websites which import paid listings from third parties only recognize
the share of the revenue that the third party pays to them (the third
party collects and recognizes the actual revenue paid by the
advertisers). With the private label service, the portal or high
traffic website owns the advertiser relationship, recognizes 100% of
the revenue paid by advertisers and pays us a share. We only recognize
our share as revenue.
FINDWHAT.COM MERCHANT SERVICES
The FindWhat.com Merchant Services division was formed in 2004 to better enable
small to medium sized merchants to conduct business online. Specifically, our
services aide in setting up e-commerce websites with the
8
right products and services that will convert visitors to customers, and keep
the customers over the long term. When these services are combined with the
benefits that the FindWhat.com Network offers advertisers, we should be able to
offer online businesses a suite of products and services that help facilitate
the entire customer lifecycle: finding, getting and keeping customers. This
division was formed on January 1, 2004 upon our acquisition of Miva.
Our core products in the merchant services division are two e-commerce
solutions: Miva Merchant, a complete storefront system, and Miva Empresa(TM)
Virtual Machine, the server engine which executes compiled Miva Script
applications like Miva Merchant. These solutions are used by developers,
merchants, hosting partners and business portals.
Our merchant services division has several e-commerce services, including Miva
Mailer(TM), Miva Service Club(TM), Miva Payment(TM) and Miva Marketplace(TM),
designed to cater to Miva's large installed base of online merchants. Our goal
is that Miva Marketplace clients will have access to traffic from the
FindWhat.com Network with the next upgrade of Miva Merchant. Utilizing the
turnkey FindWhat.com private label platform, we intend to make Miva Marketplace
a branded source of paid listings which is fully integrated with the Miva
Merchant offering.
We are developing new software, featuring the new Miva Synchro(TM) currently in
public beta, as well as new service offerings to further exploit our market
positioning by continuing to make users of Miva's platform more successful.
BENEFITS TO ONLINE MERCHANTS, SPECIFICALLY SMEs
o AN INTEGRATED OFFERING, WITH FLEXIBILITY. The Miva e-commerce platform
offers an integrated offering of products and services, both from Miva
and aggregated from a variety of partners, required to conduct business
online, while at the same time allowing businesses flexibility in
putting together the various pieces to accommodate their specific
objectives and strategy. The total offering consists of software,
services and a partner network of web hosters and software suppliers
assembled for the purpose of helping SMEs create and enhance their
online businesses.
o COST EFFECTIVE PRICING. We believe the Miva platform is cost effective
for SMEs, and upgrades are often free. Components are priced separately
so a business need only buy what it needs to accomplish its business
objectives. For SMEs who require live customer support, Miva has
various levels of support to accommodate merchants who require such
help.
o SIMPLE AND INTUITIVE. Standard features built into the Miva Merchant
storefront development and management system enable users of all skill
levels to build and securely administrate leading online storefronts,
using nothing but a web browser and an Internet connection.
o FLEXIBLE AND UBIQUITOUS. The Miva Merchant system also works with over
20 different online payment gateways, and with numerous merchant
banking services. Additionaly, it is included as standard equipment for
several hundred different web hosting accounts, which are available on
the six most common web server platforms. This flexibility translates
to significant choice for any business planning on collecting payments
online.
o EXTENSIVE CHOICE OF ADDITIONAL BUILT-IN SERVICES TO FACILITATE
E-COMMERCE. Additional services built into the Miva Merchant system
also help SMEs to compete in the e-commerce arena, including fully
integrated payment gateway and merchant account services with Miva
Payment; email marketing with Miva Mailer; and performance-based
marketing with Miva Marketplace, all designed specifically for SMEs.
o EXTENSIVE CHOICE OF ADDITIONAL THIRD PARTY PRODUCTS AND SERVICES. The
highly qualified field of developers, consultants and trainers in the
greater Miva Community of partners, who provide plug-in enhancement
software, focused tutorial and custom Miva Script development, allows
Miva Merchants to expand the capability of the platform. Best of breed
software and goods from these partners is available at Miva Warehouse,
as well as other online outlets.
STRATEGY
We currently pursue three main growth strategies: grow our core U.S.
performance-based marketing business; leverage our expertise and experience by
expanding our U.S. performance-based marketing business geographically
9
and, as applicable, into new markets, including by offering our private label
service to industry leaders throughout the world; and expand into new markets
and grow commerce enabling services for online businesses (especially SMEs) to
help them throughout the customer lifecycle: finding, getting and keeping
customers.
Grow Core U.S. Performance-Based Marketing Business
Our core business is currently the FindWhat.com Network. Today that network is
made up of distribution partners, ranging from a few large portals and search
engines that have relationships with many paid listings providers, to small,
niche vertical market websites that have exclusive agreements with us. We
believe that there are additional ways to help our existing distribution
partners monetize their content and traffic by providing alternative methods of
displaying our keyword ads including search, related search, contextual and
directory implementations.
We also seek to add additional distribution partners to the FindWhat.com
Network. We believe there are numerous additional potential distribution
partners in the U.S. We believe that we have a competitive advantage in that we
are an independent supplier in the marketplace and we do not operate a branded
destination portal, in potential competition with our distribution partners for
Internet users.
We also continuously try to recruit additional advertisers for the FindWhat.com
Network. Many of our advertisers learn of our services by seeing our name online
at our distribution partners' websites, through our advertising efforts (mostly
online) or on sites that provide marketing resources to Internet businesses.
Additionally, we recruit advertisers to utilize our services through our direct
sales efforts. Our sales staff targets e-commerce businesses that they locate
through online and offline research. Our sales staff in our Fort Myers, FL
office usually contacts potential advertisers directly, utilizing telemarketing
and e-mail. Our sales personnel in our New York, NY office focus more on
advertising agencies. We also attend trade shows, seminars and conferences in
which we believe potential advertisers will be receptive to our services, and we
seek to build referral arrangements with entities that can promote our service
to large numbers of potential advertisers. We believe the ease of our account
sign-up process through our recently launched sign up wizard, along with our
intuitive account management system, help to convince advertisers to sign-up for
our services.
In addition, we are focused on technical innovations to increase qualified
traffic to advertisers. This includes better keyword matching technologies
through FindWhat.com IntelliMap, where advertisers do not need to bid upon and
manage multiple variants of the same keyword in order to cover the myriad of
ways different Internet users may search for the same item. We believe our
experience and technical skill can allow us to work with our distribution
partners to create unique implementations, while maintaining the quality of the
new traffic that is generated. We strive to continue to upgrade our systems,
offering more easy-to-use tools like FindWhat.com CruiseControl, a suite of
automated campaign management tools launched in early 2003, and reports based on
advertiser feedback, both of which help advertisers achieve industry-leading
returns on their marketing investments.
Expand Our Performance-Based Marketing Business Geographically And, As
Applicable, Extend Into New Markets
We believe that the paid listings industry is expanding, and will continue to
expand, to countries outside the U.S., to local areas both inside and outside
the U.S., and to new markets. We intend to capture paid listings revenue from
these evolving markets by growing and evolving our FindWhat.com Network and our
private label service and through other strategic transactions and initiatives.
Expand Into New Markets And Grow Commerce Enabling Services For Online
Businesses To Help Them Throughout The Customer Lifecycle: Finding, Getting and
Keeping Customers--Specifically Targeted To SMEs
The e-commerce lifecycle follows the traditional business model of finding,
getting and keeping customers, although there can be additional complexity given
the technology and expertise required to transact business on the Internet. We
have been helping online businesses drive high quality traffic to their websites
since 1998. Now, with our acquisition of Miva, we are able to help online
businesses, specifically SMEs, to create e-commerce websites that convert
potential customers into paying customers. We intend to extend into appropriate
complementary products and services that will enable merchants to further
optimize their e-commerce revenues, especially SMEs who are looking for a cost
effective, independent, comprehensive e-commerce services provider.
10
SALES & MARKETING
Our sales and marketing efforts are coordinated out of our New York City and Ft.
Myers, FL offices. As of December 31, 2003, we had 22 people in our sales
department, seven business development personnel, three corporate development
personnel, and three individuals focused on marketing. Our sales department
seeks to add new advertisers to the FindWhat.com Network, our business
development department focuses on adding new distribution partners to that
network, and our corporate development department seeks potential mergers,
acquisitions and strategic transactions. Almost all of our paid click-throughs
come through our distribution partners' and private label partners' websites,
and, as a result, we do not spend any marketing efforts to attract Internet
users to utilize our website at www.FindWhat.com. However, we have relationships
with third parties to attract online businesses to our website in order to
encourage them to open a FindWhat.com Network account.
ADVERTISERS
FindWhat.com Network
We believe businesses that become FindWhat.com Network advertisers are those
that are particularly interested in taking advantage of the growth of e-commerce
by driving targeted consumers and businesses to their websites. Our program to
attract advertising clients includes:
o Direct sales: Our sales staff targets companies with highly visible
Web-based promotional programs and advertisers who are using
competitive services.
o Agency sales: In late 2002, we hired a vice president of sales who is
responsible for overseeing and expanding our direct sales staff and
adding additional sales personnel to focus on advertising agencies,
which tend to represent larger advertisers, and can spend more money
per campaign.
o Online promotion: Our online promotional program includes banner
advertisements, keyword-targeted advertising and preferred placement on
websites that offer resources and reviews to advertisers interested in
performance-based online marketing.
o Referral agreements: We seek to build referral arrangements with
entities that can promote our service to large numbers of potential
advertisers.
o Tradeshows: We speak at, participate in, exhibit at and sponsor
industry trade shows. We intend to participate in additional trade
shows that attract potential advertisers and distribution partners
throughout the year.
o Customer service: To eliminate any perceived barriers to doing business
with us, we attempt to deliver excellent customer service. We believe
that superior customer service adds an extra level of value to our
advertisers.
Private Label Service
We assist our private label partners to attract advertisers to their
keyword-targeted ad services, because we share in their success. We can help
train our private label partners' sales forces in techniques to promote
keyword-targeted advertising, and in some cases we may promote their private
label offering to our FindWhat.com Network advertisers. We may hold events with
our private label partners to promote keyword advertising, and we may engage in
co-promotion sales, marketing and communications tactics to attract advertisers
to both the FindWhat.com Network and one or more private label services.
REVENUE MODEL
We currently generate revenue primarily from paid click-throughs on the
FindWhat.com Network, private label net revenue share payments, and sales of
Miva e-commerce solutions. We acquired Miva on January 1, 2004. Accordingly, no
revenue from Miva was included in our financial statements through December 31,
2003.
Our FindWhat.com Network keyword ad paid click-through revenue is determined by
multiplying the number of click-throughs on paid search results by the amounts
bid for applicable keywords. Click-through revenue is earned
11
based on click-through activity to the extent that the advertiser has deposited
sufficient funds with us or we believe collection is probable.
With our private label service, we recognize only our share of the revenue
generated from advertisers for click-throughs on our private label partners'
sites. Our private label partners are responsible for reporting the gross
revenue generated from the click-throughs executed on their sites.
Our merchant services division recognizes revenue upon the sale of software
licenses to our clients, which include primarily web hosting companies and
direct retail customers. This division offers additional services and recognizes
revenue as earned over the life of the contract to provide such services.
CUSTOMERS
The FindWhat.com Network had thousands of managed advertiser accounts as of
December 31, 2003. No single advertiser account represented more than 3% of our
revenue in 2003.
Through our acquisition of Miva on January 1, 2004, we now have access to
thousands of online merchants, a large portion of which are not currently
advertisers on the FindWhat.com Network.
COMPETITION
The FindWhat.com Network
We compete with companies that provide keyword-targeted advertising, including
portals and search engines, which allow advertisers to pay-for-placement within
search results. Portals and search engines that offer keyword-targeted ads on
their websites or within their search engines include Primedia's About.com,
Yahoo!/Inktomi/Alta Vista/FAST, AOL, Ask Jeeves's Ask.com/Direct Hit/Teoma,
Google, Terra Lycos's Lycos/HotBot, MSN and InfoSpace's search properties
(Excite/WebCrawler/MetaCrawler/Dogpile). Companies which provide primarily
performance-based, keyword-targeted ads, and which seek to distribute those ads
to a distribution network, include Yahoo!'s Overture, Google, Kanoodle, Value
Click's Search 123, Enhance Interactive, and LookSmart.
Private Label Service
We are not aware of any other company with an offering exactly similar to our
private label service, although Enhance Interactive offers a "Guaranteed
Inclusion" program, primarily on behalf of InfoSpace's search properties, which
allows advertisers to pay a flat fee to submit their sites to be included in
InfoSpace's various search engines.
Merchant Services
Our newly formed merchant services division is currently comprised of Miva
Merchant. Main competitors to this division include: Yahoo! Stores and eBay
stores. Other competitors include companies who have shopping cart products and
a few hosting companies that have their own products: AIT and Alabanza os
commerce (open source), Mercantec, Shopsite, Lagaarde, AbleCommerce and Cart32.
In addition, in the future, other companies may offer directly competing
services to the FindWhat.com Network, our private label service and/or our
merchant services. Most providers of Web directories, search engines and
information services offer additional features and content that we have elected
not to offer. We also compete with traditional offline media such as television,
radio and print for a share of advertising budgets.
TECHNOLOGY AND OPERATIONS
We believe high traffic, keyword-targeted advertising networks, especially those
that distribute their results to third-party websites, require a fast, reliable
and secure infrastructure that can be easily expanded to maintain acceptable
response times under the stress of growth. We believe that we have managed to
create an infrastructure that provides us with a platform from which to grow our
business, including technical operations in our headquarters in Fort Myers, FL
and in a hosted facility in Atlanta, GA.
We believe our current infrastructure and operating environment are suitably
sized and designed to give Internet
12
users, advertisers, distribution partners and private label clients a positive
feeling about their interaction with us. The physical components of our
infrastructure are comprised of equipment made by industry-leading manufacturers
including Cisco and Intel. The software being used to power our services is a
combination of industry standard commercial software and our internally
developed proprietary software. We believe that given the solid mix of industry
standard equipment and software we are positioned to sustain the effects of
considerable growth.
Early in our development, we placed a firewall between the outside world and our
service. As currently configured, our firewall provides the ability to block out
any traffic that is not required to operate our services.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret laws,
employee and third party nondisclosure agreements, and other intellectual
property protection methods to protect our services and related products. We
have several patent applications pending for various aspects of our products and
services filed with the U.S. Patent and Trademark Office. We own several
domestic and foreign trade and service mark registrations related to our
products or services, including U.S. Federal Registrations for FINDWHAT.COM(R)
and Miva(R), and we have additional registrations pending.
One of our principal competitors, offering performance based marketing services,
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. A trial on this matter is not expected before the second half of 2004.
In addition, on January 23, 2004, we were named as a third-party defendant by
Overture in an action between Lycos, Inc. and Overture Services, Inc. The third
party complaint alleges infringement by us of Overture's purported patent.
REGULATIONS
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as taxation, user privacy 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. The adoption of any such laws or
regulations upon the recommendation of this Advisory Committee or otherwise may
decrease the growth of the Internet, which could in turn decrease the demand for
our products or services, increase our cost of doing business or otherwise have
an adverse effect on our business, prospects, financial condition, or results of
operations. Moreover, the applicability to the Internet of existing laws
governing issues, such as property ownership, libel and personal privacy is
uncertain. Future federal or state legislation or regulations could have a
material adverse effect on our business, prospects, financial conditions and
results of operations.
EMPLOYEES
As of December 31, 2003, we had approximately 161 employees. We had
approximately 110 employees in marketing, sales and service (which includes, but
is not limited to departments such as, business development, sales, marketing,
customer service, credit transactions, business affairs, corporate development
and affiliate relations), 22 in product development, 14 in search serving, and
15 in general and administration.
13
BUSINESS RISKS
We desire 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 our 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 our business 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.
We launched the FindWhat.com Network in September 1999. In September 2002, we
launched our private label service. In September 2003, we announced a license
agreement with Mitsui & Co., Ltd. to launch a bid-for-position keyword targeted
advertising service in Japan. On January 1, 2004, we acquired Miva Corporation,
a leading supplier of e-commerce software and services to small and medium-sized
businesses. 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 find and integrate strategic transactions;
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.
ONE OF THE FINDWHAT.COM NETWORK'S PRINCIPAL COMPETITORS MAY HAVE PATENT RIGHTS
WHICH COULD PREVENT US FROM OPERATING OUR SERVICES IN THEIR PRESENT FORM.
One of the FindWhat.com Network's principal competitors, 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.
This case is now pending before the District Court for the Central District of
California in Los Angeles, and the litigation is ongoing. A trial is not
expected before the second half of 2004. In addition, on January 23, 2004, we
were named as a third party defendant by Overture in an action between Lycos,
Inc. and Overture Services, Inc., in District Court for the District of
Massachusetts (CV 03-12012 RWZ). In its third party complaint, Overture alleges
that we infringe U. S. Patent 6,269,361, which is the same patent that is
involved in the above-referenced litigation pending in the Central District of
California.
14
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 because 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.
WE FACE SUBSTANTIAL AND INCREASING COMPETITION IN THE MARKET FOR INTERNET-BASED
MARKETING SERVICES.
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. Portals and search engines that offer keyword-targeted ads on their
websites or within their search engines include Primedia's About.com,
Yahoo!/Inktomi/Alta Vista/FAST, AOL, Ask Jeeves's Ask.com/Direct Hit/Teoma,
Google, Terra Lycos's Lycos/HotBot, MSN and InfoSpace's search properties
(Excite/WebCrawler/MetaCrawler/Dogpile). Companies which provide primarily
performance-based, keyword-targeted ads, and which seek to distribute those ads
to a distribution network, include Yahoo!'s Overture, Google, Kanoodle, Value
Click's Search 123, Enhance Interactive, and LookSmart. 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, although Enhance Interactive offers a "Guaranteed
Inclusion" program, primarily on behalf of InfoSpace's search properties, which
allows advertisers to pay a flat fee to submit their sites to be included in
InfoSpace's various search engines. In the future, other companies with greater
financial, marketing and other resources may offer directly competing services.
Our merchant services division competitors include: Yahoo! Stores and eBay
stores. Other competitors include companies who have shopping cart products and
a few hosting companies that have their own products: AIT and Alabanza os
commerce (open source), Mercantec, Shopsite, Lagaarde, AbleCommerce and Cart32.
Some of our principal competitors have longer operating histories, larger
customer bases, greater brand recognition and greater financial, marketing and
other resources than we have.
Additionally, in pursuing strategic transactions 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 likely also will 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 our markets 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 the results of operations.
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
generally are not long-term agreements, 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
15
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.
THE SUCCESS OF THE FINDWHAT.COM NETWORK IS DEPENDENT UPON OUR ABILITY TO
ESTABLISH AND MAINTAIN RELATIONSHIPS WITH OUR ADVERTISERS.
Our ability to generate revenue from the FindWhat.com Network is dependent upon
our ability to attract new advertisers, maintain relationships with existing
advertisers and generate traffic to our advertisers' websites. Our programs to
attract advertisers include direct sales, agency sales, online promotions,
referral agreements and participation in tradeshows. We attempt to maintain
relationships with our advertisers through customer service and delivery of
qualified traffic. If we are unable to attract additional advertisers to use our
services or fail to maintain relationships with our current advertisers, it
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
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. On February 9, 2004 we modified the terms of our agreement to merge with
Espotting. Under the terms of the current Espotting transaction, Espotting's
stockholders will receive approximately 7.0 million shares of our common stock
and $20 million in cash, subject to adjustment. Additionally, the agreement
calls for us to issue options and warrants to purchase approximately 800,000
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. 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:
o conditions precedent to the parties' obligations to close under the
Espotting agreement may not be satisfied, including the receipt of
stockholder and regulatory approvals;
o our merger with Espotting may not be consummated or may be
significantly delayed;
o fluctuations in currency exchange rates or in the trading price and
volume of our common stock, which could cause financial terms of our
proposed merger to be revised;
o diversion of management's attention and our resources from our core
operations to integration activities;
o difficulties executing integration strategies or achieving planned
synergies after a merger with Espotting;
o our failure to resolve issues relating to Espotting's financial
performance;
o loss of any key personnel resulting from the merger;
o our failure to retain clients as a result of uncertainty regarding the
merger agreement; and
o transaction costs relating to the Espotting transaction may be higher
than anticipated and will have to be expensed if the merger agreement
is terminated.
WE PARTIALLY DEPEND ON THIRD PARTIES FOR CERTAIN SOFTWARE AND INTERNET SERVICES
TO OPERATE OUR BUSINESS.
We depend on third-party software to operate our services. 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
16
so that our business 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.
OUR PRIVATE LABEL AGREEMENTS ARE SUBJECT TO A NUMBER OF CONTINGENCIES AND RISKS.
We have agreements to provide our private label services with our private label
partners. Generally, under the terms of the agreements, we provide the
technology and expertise to our partners to launch keyword-targeted paid
listings services. These transactions are subject to numerous contingencies and
risks including:
o the failure of our partners to successfully create and manage paid
listings networks;
o risk that development and implementation of the different versions of
our technology will be delayed or not completed when expected;
o risk that development, implementation and integration costs will be
higher than anticipated;
o the inability of our partners to leverage off their existing client
base;
o the failure of the paid listing services market to continue to grow;
o intense competition in the paid listing services market;
o the potential of disagreements with our partners regarding our
relationship;
o the potential that implementation of our private label services
violates intellectual property rights of third parties; and
o economic changes in the Internet industry generally.
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 December 31, 2003 we had 161 full time employees; our new
employees include a number of key managerial, technical, financial, marketing
and operations personnel as December 31, 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.
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
17
retain the necessary technical personnel, it would have a material 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 that 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 our 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 related to colder weather and holiday purchases.
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 our customers. Failure to provide the data
communications capacity we require, as a result of human error, natural
disaster, or other operational disruptions, could cause interruption in our
services and websites. The occurrence of any or all of these events could
materially 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" and the Internet domain name we are using for our current
merchant services business is "Miva.com." We believe that these domain names are
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 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 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,
18
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.
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 the
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 several domestic and foreign trade and service mark registrations related
to our products or services, including U.S. Federal Registrations for
FINDWHAT.COM(R) and Miva(R), and we have additional registrations pending.
Additionally, we use and have common law rights in several other marks. If other
companies also claim rights to use the marks we use in our business, we may be
required to become involved in litigation or incur an 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 our 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, one of the FindWhat.com Network's principal competitors 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 "One of the
FindWhat.com Network's principal competitors may have patent rights which could
prevent us from operating our services in their 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 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 we were to
prevail, 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 Pisaris-Henderson, our Chairman,
Chief Executive Officer, and President, and Phillip 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.
19
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
be used by our Board to impede a non-negotiated change in control, even though
such a transaction may be beneficial to you.
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 on our financial condition, results of operations, capital
requirements and any other factors that the board of directors decides are
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 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 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 the results of operations.
SIGNIFICANT ADDITIONAL DILUTION WILL OCCUR IF OUTSTANDING OPTIONS AND WARRANTS
ARE EXERCISED.
As of December 31, 2003 we have outstanding stock options under our 1999 Stock
Incentive Plan to purchase approximately 3.8 million shares of common stock at a
weighted average exercise price of $4.57 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 conversion or exchange of these securities,
investors may experience additional dilution.
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;
o changes in user and customer requirements and preferences;
20
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, our private label service and our merchant
services;
o license, develop or acquire 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 our clients, as well as our own confidential and
proprietary information. 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 or a
misappropriation of proprietary information 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 service 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 IN 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 acceptance and the 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
21
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 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 and businesses. 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 and other online
services covering issues such as user privacy, pricing, content, copyrights,
distribution and characteristics and quality of products and services. 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
or application of existing laws to the Internet generally or our industry 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 material adverse effect on our business, prospects,
financial condition, and results of operations.
IMPLEMENTATION OF OUR FINDWHAT.COM NETWORK SERVICE OR OUR PRIVATE LABEL SERVICE
FOR SOME CLIENTS MAY INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
In implementing our services, we utilize promotional material generated by our
clients to promote websites. From time to time, third parties have alleged that
the use of certain keywords in our services 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 anticipate that
our cash as of December 31, 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. 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 on 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.
22
ITEM 2. PROPERTIES.
We lease an executive, administrative, sales, customer service and technical
facility in Fort Myers, Florida and a business development and sales office in
New York City. We acquired Miva Corporation on January 1, 2004 and we assumed a
lease for an executive, administrative, sales, customer service and technical
facility that houses our Miva operations in San Diego, California.
ITEM 3. LEGAL PROCEEDINGS.
One of the FindWhat.com Network's principal competitors, 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.
This case is now pending before the District Court for the Central District of
California in Los Angeles, and the litigation is ongoing. The trial is not
expected before the second half of 2004. In addition, on January 23, 2004, we
were was named as a third party defendant by Overture in an action between
Lycos, Inc. and Overture Services, Inc., in the District Court for the District
of Massachusetts (CV 03-12012 RWZ). In its third party complaint, Overture
alleges that we infringe U. S. Patent 6,269,361, which is the same patent that
is involved in the above-referenced litigation pending in the Central District
of California.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) We held our Annual Meeting of Stockholders on December 15, 2003, for
the purposes of electing seven directors and approving an amendment to our 1999
Stock Incentive Plan.
(b) At the Annual Meeting of Stockholders, all directors nominated were
elected and the amendment to our 1999 Stock Incentive Plan was approved.
(c) The table below shows the voting tabulation for each matter voted upon
at the Annual Meeting of Stockholders:
PROPOSAL 1: Election of seven directors, each to serve for a one year term:
NUMBER OF SHARES
NOMINEES: FOR WITHHOLD AUTHORITY
Craig A. Pisaris-Henderson 21,088,303 247,903
Phillip R. Thune 21,105,368 247,903
Frederick E. Guest II 21,050,179 247,903
Kenneth E. Christensen 21,102,588 247,903
Dan Brewster 21,104,852 247,903
Jerry Della Femina 21,105,963 247,903
Lee Simonson 21,106,988 247,903
PROPOSAL 2: Approval of an amendment increasing the number of shares available
for issuance under our 1999 Stock Incentive Plan from 4,200,000 to 6,200,000
TOTAL NUMBER
OF VOTES CAST
FOR 11,395,087
AGAINST 4,499,820
ABSTAINED 24,476
24
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
MARKET FOR COMMON STOCK
Our common stock trades on the Nasdaq Stock Market under the symbol "FWHT." The
following table sets forth the high and low sales prices of our common stock for
the periods indicated as reported by the Nasdaq Stock Market or, for periods
prior to April 17, 2003, the Nasdaq Small Cap Market:
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 2003...................................... $ 19.74 $ 13.50
September 30, 2003..................................... $ 27.94 $ 16.81
June 30, 2003.......................................... $ 21.75 $ 8.79
March 31, 2003......................................... $ 10.50 $ 6.75
December 31, 2002...................................... $ 8.13 $ 2.75
September 30, 2002..................................... $ 5.30 $ 3.30
June 30, 2002.......................................... $ 6.35 $ 2.74
March 31, 2002......................................... $ 5.75 $ 3.11
Such prices reflect inter-dealer quotations, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
HOLDERS OF RECORD
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.001 par value per share, and 500,000 shares of preferred stock, $.001 par
value per share. As of December 31, 2003, there were 21,420,528 shares of our
common stock outstanding. As of December 31, 2003, the number of record holders
of our common stock was 101. No shares of our preferred stock are outstanding.
DIVIDENDS
We have never paid cash dividends on our capital stock and do not expect to pay
any dividends in the foreseeable future. We intend to retain future earnings, if
any, for use in our business.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The table containing the Equity Compensation Plan Information is included in
Item 11 of this Form 10-K.
RECENT SALES OF UNREGISTERED SECURITIES
In July 2003, we concluded a private placement to certain institutional
investors of 1,000,000 shares of our common stock at $20.27 per share. In our
opinion, the issuance of these shares was exempt from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder due to
the fact the shares were sold to less than 35 purchasers all of whom were
accredited investors.
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated statements of operations data for the years
ended December 31, 2003, 2002, 2001, 2000 and 1999 and the selected consolidated
balance sheet data as of December 31, 2003, 2002, 2001, 2000 and 1999 are
derived from our consolidated financial statements and related notes.
(In thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Statements of operations
Revenues $ 72,221 $ 42,805 $ 20,412 $ 2,887 $ 452
Net income (loss) 11,758 10,736 (347) (8,805) (1,790)
Net income (loss) per share
Basic $ 0.59 $ 0.63 $ (0.02) $ (0.63) $ (0.17)
Diluted 0.53 0.56 (0.02) (0.63) (0.17)
Balance sheets
Total assets $ 74,658 $ 27,312 $ 8,325 $ 2,102 $ 1,267
Long term debt -- 4 15 47 13
Stockholders' equity 64,307 22,168 5,082 790 1,028
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated statements of operations data for
the years ended December 31, 2003, 2002 and 2001, and the selected consolidated
balance sheet data as of December 31, 2003 and 2002, are derived from our
consolidated financial statements and related notes included elsewhere in this
Form 10-K.
CONSOLIDATED STATEMENT OF OPERATIONS DATA: FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 2003 2002 2001
-------- -------- --------
Revenues $ 72,221 $ 42,805 $ 20,412
-------- -------- --------
Operating expenses
Search serving 2,802 1,925 1,459
Marketing, sales and service 40,963 23,597 14,130
General and administrative 8,604 5,797 3,936
Product development 1,520 589 289
Loss on sales of advertising contract -- -- 996
-------- -------- --------
Total operating expenses 53,889 31,908 20,810
-------- -------- --------
Income (loss) from operations 18,332 10,897 (398)
Interest income, net 532 210 51
-------- -------- --------
Income (loss) before provision for income taxes 18,864 11,107 (347)
Income tax expense 7,106 371 --
-------- -------- --------
Net income (loss) $ 11,758 $ 10,736 $ (347)
======== ======== ========
Net income (loss) per share
Basic $ 0.59 $ 0.63 $ (0.02)
======== ======== ========
Diluted $ 0.53 $ 0.56 $ (0.02)
======== ======== ========
Weighted-average number of common
shares outstanding
Basic 19,867 17,021 16,183
======== ======== ========
Diluted 22,076 19,130 16,183
======== ======== ========
CONSOLIDATED BALANCE SHEET DATA: DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 2003 2002
------------ ------------
Current assets $ 69,807 $ 24,024
Total assets 74,658 27,312
Working capital 60,171 18,888
Stockholders' equity 64,307 22,168
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
We are a leading developer and provider of performance-based marketing
and commerce enabling services for online businesses. During fiscal 2003, we
offered two primary proprietary performance-based services: the FindWhat.com
Network, a keyword-targeted advertisement service that distributes
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. Our managed advertisers only pay us for each Internet
user we deliver to their websites.
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.
Along with our private label partners we distribute advertisements to
millions of Internet users each day, often in direct response to search or
directory queries. The FindWhat.com Network includes distribution partners. 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.
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. On February 9, 2004 the merger agreement with Espotting was amended.
Under the amended terms of the Espotting transaction, Espotting's stockholders
will receive approximately 7.0 million shares of our common stock and
approximately $20 million in cash, subject to adjustment. Additionally, the
agreement calls for us to issue options and warrants to purchase approximately
800,000 shares of our common stock to Espotting's employees and affiliates.
Closing of the transaction is subject to a number of conditions. Assuming the
fulfillment of these conditions and the receipt of all approvals, the companies
would expect to close the merger in the third quarter of 2004. On June 17, 2003,
we loaned Espotting $2.0 million in exchange for a promissory note. The loan to
Espotting bears interest at 5% 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
us to Espotting on the closing date.
Additionally, as of December 31, 2003, we had incurred and capitalized
approximately $2.1 million in legal, advisory and transaction costs associated
with our 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. However, if the merger agreement is terminated, these and
any additional costs incurred will be written off as a one-time expense on the
date of the termination.
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 the second quarter of 2004.
On December 3, 2003 we announced the signing of a private label
contract with Verizon Information Services. Under the terms of the revenue
sharing-based licensing agreement, we will provide the technology and business
operations expertise to support enhanced local SuperPages.com advertising
services which are expected to launch early in 2004.
On January 1, 2004, we completed our acquisition of Miva Corporation, a
leading supplier of e-commerce software and services to small and medium-sized
businesses. Under the terms of the agreement we issued Miva shareholders
approximately $2.7 million in cash and approximately 165,000 shares of our
common stock, and we assumed approximately $2.5 million in Miva liabilities. We
believe that we can combine our keyword-targeted paid
28
listings services with Miva's e-commerce software and services to better serve
small and medium-sized businesses, with the FindWhat.com Network delivering
qualified prospects to a Miva client's online store, and the Miva Merchant
software aiding that online store to make a successful sale.
On February 23, 2004, we entered into an agreement to acquire Comet
Systems, Inc., a leading provider of connected desktop consumer software. Under
the terms of the acquisition agreement, Comet stockholders will receive
approximately $8.5 million in cash, which is subject to adjustment based on the
value of Comet's closing date current net assets, plus $15.0 million in our
common stock, and up to an additional $10.0 million in cash based on Comet's
operating performance in 2004 and 2005. Closing of the transaction is
conditioned upon approval from Comet's shareholders, the absence of a material
adverse change in the companies' businesses, receipt of a favorable tax opinion,
and other customary closing conditions. As a result, the acquisition may not be
consummated or may be consummated on significantly different terms. Assuming the
fulfillment or waiver of these conditions, we expect to close the acquisition
within 60 days of February 23, 2004.
Among other things, our growth rate and results depend on our continued
ability to:
o grow our core U.S. performance-based marketing business;
o expand our performance-based marketing business geographically and
as applicable, extend into new markets; and
o grow our commerce enabling services for online businesses to help
them throughout the customer lifecycle: finding, getting and
keeping customers--merchant e-commerce services specifically
targeted to SMEs and to complete and integrate strategic
initiatives.
FindWhat.com Network click-through revenue, private label revenue and
other third-party performance-based marketing initiatives 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 if
we believe collection is probable.
The largest component of our expenses relate to marketing costs
incurred to attract consumers and businesses to our advertisers' websites
through our distribution partners on our FindWhat.com Network. 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 facilities. The proposed
increases in capital and expenditures will significantly increase future
operating expenses.
ORGANIZATION OF INFORMATION
Management's discussion and analysis provides a narrative on our
financial performance and condition that should be read in conjunction with the
accompanying financial statements. It includes the following sections:
o Results of operations
o Liquidity and capital resources
o Contractual obligations
o Use of estimates and critical accounting policies
o Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995
RESULTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
Our fiscal year is from January 1 through December 31. We commercially
launched the FindWhat.com Network in September 1999, and our first private label
agreement commenced in September 2002. When making comparisons between the years
ending December 31, 2003, 2002 and 2001, readers should note that we do not
anticipate our historical growth rates to continue.
29
REVENUE
Revenue was approximately $72.2 million for fiscal 2003, compared to
approximately $42.8 million for fiscal 2002 and $20.4 million for fiscal 2001.
The increase in our overall revenue over the three-year period primarily 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.
During the years ending December 31, 2003, 2002 and 2001, no advertiser
represented more than 10% of our total revenue. We purchase Internet traffic
from our distribution partners. Expressed as a percentage of revenue, Internet
traffic purchases from one distribution partner represented over 10% of total
revenue for each of fiscal 2003 and 2001 and Internet traffic purchases from two
individual distribution partners represented over 10% of total revenue for
fiscal 2002.
OPERATING EXPENSES
Search Serving - Search serving expense consists primarily of costs
associated with designing and maintaining the FindWhat.com Network and private
label service and fees paid to telecommunications carriers for Internet
connectivity. Costs associated with maintaining the FindWhat.com Network and
private label service include salaries of related technical personnel,
depreciation of related computer equipment, co-location charges for our network
equipment, and software license fees.
Search serving expense increased to approximately $2.8 million for
fiscal 2003, compared to approximately $1.9 million for fiscal 2002 and $1.5
million for fiscal 2001. The increase from fiscal 2002 to 2003 was primarily due
to increases in depreciation of equipment and Internet connectivity fees. The
increase from fiscal 2001 to 2002 was primarily due to increases in depreciation
of equipment, Internet connectivity fees, and personnel expense. We anticipate
search serving expense will continue to increase as our traffic and number of
managed active advertiser accounts increase.
Marketing, Sales and Service - Marketing, sales and service expense
consists primarily of:
o revenue-sharing or other arrangements with our FindWhat.com Network
distribution partners;
o advertising expenditures for the FindWhat.com Network, such as,
radio, outdoor and 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 marketing,
advertiser solutions, business development, sales functions,
affiliate relations, business affairs, corporate development and
credit transactions.
Our marketing, sales and service expense was approximately $41.0
million for fiscal 2003, compared to $23.6 million for fiscal 2002 and $14.1
million for fiscal 2001.
The increase in marketing, sales and service expense from fiscal 2002
to 2003 was related primarily to increases in:
o revenue-sharing payments and other fees paid to our FindWhat.com
distribution partners, which increase as our revenue increases;
o personnel costs due to expanding the number of business
development, corporate development, marketing, advertiser
solutions, credit transactions, affiliate relations, business
affairs and sales personnel;
o consulting fees; and
o 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
30
initiatives, and searching for new sources of revenue. 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 efforts.
The increase in marketing, sales and service expense from fiscal 2001
to 2002 was related primarily to increases in:
o revenue-sharing payments and other fees paid to our FindWhat.com
distribution partners, which increase as our revenue increases;
o personnel costs due to expanding the number of business
development, marketing, customer service, credit transactions,
affiliate relations, business affairs and sales employees; and
o consulting fees.
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 us, 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 accounting
fees; expenses and fees associated with the reporting and other obligations of a
public company; travel costs; depreciation of furniture and equipment for
non-technical employees; non-cash stock compensation expense for the issuance of
stock and stock options to non-employees; and other general corporate expenses;
and fees to affiliates which provide office space and other general and
administrative services. Fees for professional services include payments to
lawyers, accountants, tax advisors and other professionals in connection with
operating our business and evaluating and pursuing new opportunities.
General and administrative expenses increased to approximately $8.6
million for fiscal 2003, compared to approximately $5.8 million for fiscal 2002
and $3.9 million for fiscal 2001.
The increase in general and administrative expenses from fiscal 2002 to
2003 was primarily due to increases in professional fees, credit card fees, rent
expense, depreciation on furniture and equipment, and expenses relating to being
a public company.
The increase in general and administrative expenses from fiscal 2001 to
2002 was primarily due to increases in credit card fees, compensation expense,
professional fees, travel costs, rent expense, 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, as we litigate patent-related lawsuits with Overture
Services, Inc. and as we evaluate and pursue new opportunities.
Product Development -. Product development expense consists primarily
of payroll and related expenses for personnel responsible for the development
and maintenance of features, enhancements and functionality for our FindWhat.com
Network and private label services and depreciation for related equipment used
in product development. Product development expense was approximately $1.5
million for fiscal 2003, as compared to approximately $589,000 for fiscal 2002
and approximately $289,000 for fiscal 2001. The increase over the three-year
period was primarily due to increases in personnel expense. We believe that
continued investment in product development is critical to attaining our
strategic objectives and as a result, expect product development expenses to
increase in the future.
Loss on Sale of Advertising Contract - From January 2000 through March
2001, marketing, sales and service expense included non-cash charges related to
the issuance of 600,000 shares of common stock to a national radio group in
return for radio advertising time to promote the FindWhat.com Network. The
common stock had a
31
value of $4,425,000 at the time of issuance, and was being expensed as the radio
time was being used. As of March 30, 2001, $3,351,118 had been expensed in this
fashion. On March 30, 2001, a third party paid $250,000 in cash in return for
the remaining radio time and a warrant to purchase 125,000 shares of common
stock. The warrant was valued at $172,500. As a result of this transaction, a
loss of $996,382 was recorded in the twelve months ending December 31, 2001 for
the sale of the radio-advertising contract, which is shown as "Loss on sale of
advertising contract" on the statement of operations.
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
$532,000 for fiscal 2003 compared to approximately $210,000 for fiscal 2002 and
approximately $51,000 for fiscal 2001. The increase in interest income was due
to higher average cash and cash equivalent balances and short-term liquid
investments offset in part by lower interest rates.
INCOME TAXES
Deferred tax assets and liabilities are recognized based on differences
between the financial statement carrying amount and the tax basis of assets and
liabilities. Deferred tax assets are reviewed for recoverability based on
projections of future operating results, which dictates our ability to realize
our tax assets. In 2001, we recorded a valuation allowance on 100% of our net
deferred tax assets, based on a presumption that such tax assets would not be
realized due to recurring losses experienced at that time. In 2002, we had
taxable income, which was largely offset by net operating loss carryforwards.
The valuation allowance was reduced to reflect the utilization of the net
operating losses and other changes in deferred taxes, resulting in a reduced tax
provision for the period ending December 31, 2002. As a result, we had a
remaining allowance of approximately $183,000 at December 31, 2002 relating to
stock options and warrants issued for services. In 2003 the remaining valuation
allowance was reduced to zero, as we believe that it is more likely than not
that the tax benefit related to these options and/or warrants will be realized.
For fiscal 2003 we recorded a tax provision of $7.1 million, which
represented an approximate 37.6% effective tax rate, our approximate statutory
tax rate. For fiscal 2002 we recorded a tax provision of approximately $371,000,
which represents an approximate 3.3% effective tax rate. We experienced a net
loss in 2001; accordingly, we did not recognize a net tax provision in 2001.
NET INCOME (LOSS)
As a result of the factors described above, we generated net income of
approximately $11.8 million, or $0.59 per basic share and $0.53 per diluted
share, for the period ending December 31, 2003. This compares to net income of
approximately $10.7 million, or $0.63 per basic share and $0.56 per diluted
share, for the period ending December 31, 2002, and a net loss of approximately
$347,000 or ($0.02) per basic and diluted share, for the period ending December
31, 2001.
LIQUIDITY AND CAPTIAL 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. Through December 31, 2003 we
have raised net proceeds of approximately $33.6 million through private equity
financings, and received approximately $9.4 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 on July 15, 2003 in which 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 the second quarter of 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 and 2003,
with cash flows from operations of approximately $11.7 million and $15.5
million, respectively.
We started to generate positive cash flows from our operations
primarily due to the increase in the number of advertisers bidding for
keyword-targeted ads in the FindWhat.com Network, and the increase in the number
of
32
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, our partners may display
fewer FindWhat.com Network 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; any of these circumstances may reduce our revenue and cash flows.
Net cash provided by operating activities totaled approximately $15.5
million for 2003. The net cash provided in 2003 was based primarily on net
income of approximately $11.8 million, plus an increase in accounts payable and
accrued expenses of approximately $3.2 million, the tax benefit of stock option
exercises of approximately $2.4 million, the recognition of depreciation and
amortization expense for the period of approximately $1.8 million, a $890,000
deferred tax provision and an increase in deferred revenue of approximately
$623,000 due to growth of our advertiser prepayment deposits. The increase in
cash for the period was partially offset by the increase in accounts receivable
(adjusted by the increase in the allowance for doubtful accounts) of
approximately $3.4 million and the increase in prepaid expenses and other
current assets of $2.0 million. The increase in accounts payable and accrued
expenses from 2002 to 2003 was primarily due to higher accrued compensation and
higher accrued expenses under revenue sharing agreements with distribution
partners as the related revenue increased over the same period. Accounts
receivable increased from 2002 to 2003 as revenue increased over the same
period. Prepaid expenses and other current assets increased primarily due to
capitalized costs of approximately $2.4 million in legal, advisory and
transaction costs associated with our announced merger agreements with Espotting
and Miva. Upon the successful closing of the merger, these and any additional
deal costs will be considered part of the purchase price. However 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.
Net cash provided by operating activities totaled approximately $11.7
million for 2002. The net cash provided in 2002 was based primarily on net
income of approximately $10.7 million, plus an increase in accounts payable and
accrued expenses of approximately $1.2 million, an increase in deferred revenue
of approximately $736,000, and the recognition of depreciation and amortization
expense for the period of approximately $888,000. The increase in cash for the
period was partially offset by the recognition of the deferred tax benefit of
approximately $470,000 and the net increase in accounts receivable (adjusted by
the increase in the allowance for doubtful accounts) of approximately $1.3
million. The increase in accounts payable and accrued expenses from 2001 to 2002
was primarily due to higher accrued expenses under revenue sharing agreements
with distribution partners as the related revenue increased over the same
period. Accounts receivable increased from 2001 to 2002 as revenue increased
over the same period.
Net cash used in investing activities totaled approximately $2.2
million for 2003, and consisted of approximately $3.3 million in capital
expenditures for equipment, furniture and fixtures and a note receivable from
Espotting of $2.1 million (including accrued interest receivable), partially
offset by proceeds from the sale of short-term investments of approximately $3.2
million. On June 17, 2003, we loaned Espotting $2.0 million in exchange for a
promissory note. The loan to Espotting bears interest at 5% 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 us to Espotting on the closing date.
Net cash used in investing activities totaled approximately $5.3
million for 2002, and consisted of the net purchase of approximately $2.2
million in short-term highly liquid investments, and approximately $3.1 million
in capital expenditures for equipment, furniture and fixtures.
Net cash provided by financing activities totaled approximately $28.0
million for 2003. In July 2003 we completed a private placement of our common
stock with accredited investors. We issued one million shares of our common
stock and received net proceeds of approximately $20.0 million. Additionally, we
received approximately $8.0 million from the exercise of stock options and
warrants for the period ending December 31, 2003.
33
Net cash provided by financing activities totaled approximately $6.1
million for the year ended December 31, 2002. In December 2002 we completed a
private placement of our common stock with accredited investors. We issued one
million shares of our common stock and received net proceeds of approximately
$5.2 million. Additionally, we received approximately $867,000 from the exercise
of stock options and warrants for the period ending December 31, 2002.
Our principal sources of liquidity consisted of approximately $59.2
million of cash and cash equivalents as of December 31, 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.
We are engaged in patent litigation with one of our largest
performance-based advertising competitors, 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 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.
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. On February 9, 2004 we announced the signing of an amended merger
agreement. Under the amended terms of the Espotting transaction, Espotting's
stockholders will receive approximately 7.0 million shares of our common stock
and approximately $20 million in cash, subject to adjustment. Additionally, the
agreement calls for us to issue options and warrants to purchase approximately
800,000 shares of our common stock to Espotting's employees and affiliates.
Closing of the transaction is conditioned upon regulatory filings and approvals
and shareholder approvals by both companies, the absence of a material adverse
change in each company's respective business, the meeting of certain
requirements before and until the closing date and other closing conditions. As
a result, the merger may be consummated on significantly different terms or not
at all. Assuming the fulfillment of these conditions and the receipt of all
approvals, the companies would expect to close the merger in the third quarter
of 2004.
We currently anticipate that our cash and cash equivalents as of
December 31, 2003, together with cash flows from operations, will be sufficient
to meet our anticipated liquidity needs for working capital, acquisitions and
capital expenditures over the next 12 months. 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
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.
CONTRACTUAL OBLIGATIONS
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. None
of these agreements have minimum payment amounts.
34
We have significant contractual obligations regarding future minimum
payments under non-cancelable operating leases which consisted of the following
at December 31, 2003 (in thousands):
2004 $ 807
2005 786
2006 783
2007 805
2008 782
Thereafter 3,200
-------
$ 7,163
=======
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
This Management's Discussion and Analysis of Financial Condition and
Plan of Operation are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. When preparing our 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 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 agreements. Revenue
from click-throughs is recognized when generated. Management fees are recognized
as the service is rendered. Deferred revenue represents advertiser prepayment
deposits.
We have entered into agreements with various websites to display
FindWhat.com Network keyword-targeted ads. We pay a fee to the websites that
list our results for each click-through on a FindWhat.com Network 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 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 described in the agreement as the services are
rendered. Following the guidance of Emerging Issue Task Force No. 99-19,
"Reporting Revenue Gross as a Principal Versus Net as an Agent," we recognize
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.
Most of our advertisers prepay for services. The allowance for doubtful accounts
was approximately $223,000 at December 31, 2003. The allowance for doubtful
accounts is an estimate calculated based on an analysis of current business and
economic risks, customer credit-worthiness, specific identifiable risks such as
bankruptcies, terminations or discontinued customers, or other factors that may
indicate a potential loss. The allowance is reviewed on a monthly basis to
ensure that it adequately provides for all reasonably expected losses in the
receivable balances. An account may be determined to be uncollectable if all
collection efforts have been exhausted, the customer has filed for bankruptcy
and all recourse against the account is exhausted, or disputes are unresolved
and negotiations to settle are exhausted. This uncollectable amount is written
off against the allowance. 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
35
allowances may be necessary which would result in an additional general and
administrative expense in the period such determination was made.
Note receivable
We advanced $2 million of cash to Espotting in June 2003, in the form
of a unsecured promissory note bearing interest at 5% per annum. We evaluate the
collectibility of this note and related interest receivable, at the end of each
reporting period, or sooner if information comes to our attention. On February
9, 2004, we amended the maturity date of the note to require that the monies be
repaid to us on the earlier of three dates: the day we consummate the merger,
the day we terminate the proposed merger or July 31, 2004. We believe that the
monies are collectible either by a reduction of the cash proceeds we will pay to
Espotting, or we will be able to collect from Espotting's funds on hand, based
on our knowledge of their financial condition. If the merger is not consummated
and Espotting's financial condition deteriorates, or they are unwilling to pay
us, we may incur a loss of all or a portion of this receivable.
Deferred Costs
We defer acquisition-related costs related to acquisitions and mergers
which we are seriously pursuing. At December 31, 2003, we had deferred $2.4
million of such costs. If we consummate the acquisitions, then the costs will
become part of the purchase price. If we terminate our efforts with respect to a
particular transaction or believe that the deal will not be consummated for
other reasons, then the costs would be immediately expensed. As we pursue a
target, we are continually evaluating the future prospects, opportunities and
risks, the price to be paid and the seller's willingness to continue in
negotiations leading to consummation. Similarly, we evaluate these matters
surrounding each individual acquisition target, in determining whether these
deferred costs should continue to be deferred, or whether they should be
expensed. If the acquisition or merger is not consummated, we will recognize a
charge in our statement of operations for all of the associated costs.
Income Taxes
Deferred income taxes are recognized for temporary differences between
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. This requires us to
make estimates of our future taxable results.
As of December 31, 2003, we had a net deferred tax liability of
approximately $420,000.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in our Annual Report on Form 10-K include certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 which are intended to be
covered by the safe harbors created thereby. Those statements include, but may
not be limited to, all statements regarding our and management's intent, belief
and expectations, such as statements concerning our future profitability, our
operating and growth strategy, liquidity and expenses. Investors are cautioned
that all forward-looking statements involve risks and uncertainties including,
without limitation, the factors set forth under the caption "Business --
Business Risks" included elsewhere in this Annual Report on Form 10-K and other
factors detailed from time to time in our filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the
future could affect, our business and financial results and could cause actual
results to differ materially from plans and projections. Although we believe
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate. Therefore, there can
be no assurance that the forward-looking statements included in this Annual
Report on Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved. All
forward-looking statements made in this Annual Report on Form 10-K are based on
information presently available to our management. We assume no obligation to
update any forward-looking statements.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's short-term investment portfolio and issuance of debt.
The Company does not use derivative financial instruments in its investment
portfolio. The Company has a prescribed methodology whereby it invests its
excess cash in debt instruments of government agencies and high quality
corporate issuers. The portfolio is reviewed on a periodic basis and adjusted in
the event that the credit rating of a security held in the portfolio has
deteriorated.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Grant Thornton LLP served as the independent auditors for FindWhat.com for the
2002 fiscal year and throughout the periods covered by our financial statements
included in our annual report filed on Form 10-KSB/A on April 30, 2003.
On March 10, 2003, our audit committee engaged Ernst & Young LLP as its
independent auditors for fiscal year 2003. Our audit committee dismissed Grant
Thornton LLP as its independent auditors effective March 17, 2003.
The reports of Grant Thornton LLP on the 2002 and 2001 financial statements
contained no adverse opinion, disclaimer of opinion or modification of the
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles.
The decision to dismiss Grant Thornton LLP was ratified by our Audit Committee
and approved by our Board of Directors.
During our fiscal years ended December 31, 2002 and 2001, and for the interim
period beginning January 1, 2003 and ending March 17, 2003, there were no
disagreements with Grant Thornton LLP on any matter of accounting principles
practices, financial statement disclosure, or auditing scope or procedure and
there were no reportable events as listed in Item 304(a)(1)(v) of Regulation
S-K.
Grant Thornton LLP furnished us with a letter addressed to the SEC stating that
it agrees with the above statements.
During the two most recent fiscal years prior to our engagement of Ernst & Young
LLP and through March 18, 2003, we did not consult with Ernst & Young LLP
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our consolidated financial statements, and no written
report or oral advice was provided to us by Ernst & Young LLP as it relates to
an accounting, auditing, or financial reporting issue; or (ii) any matter that
was either the subject of disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is defined
in Item 304(a)(1)(iv) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures are
adequately designed to ensure that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the applicable
rules and forms. During the period covered by this Annual Report on Form 10-K,
there was no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required under this item is incorporated herein by reference to our
Proxy Statement for the 2004 Annual Meeting of Stockholders pursuant to
Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this item is incorporated herein by reference to our
Proxy Statement for the 2004 Annual Meeting of Stockholders pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
Information required under this item is incorporated herein by reference to our
Proxy Statement for the 2004 Annual Meeting of Stockholders pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this item is incorporated herein by reference to our
Proxy Statement for the 2004 Annual Meeting of Stockholders pursuant to
Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information required under this item is incorporated herein by reference to our
Proxy Statement for the 2004 Annual Meeting of Stockholders pursuant to
Regulation 14A.
38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The following financial statements are included in this report under
Item 8:
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001.
Notes to the Consolidated Financial Statements.
Report of Independent Certified Public Accountants - Ernst & Young LLP
Report of Independent Certified Public Accountants - Grant Thornton LLP
(2) Exhibits: Financial Statement Schedules (Schedules to the Financial
Statements have been omitted because the information required to be set
for therein is not applicable as is shown in the accompanying Financial
Statements or notes thereto).
Schedule II - Valuation and Qualifying Accounts
Exhibits
39
THE FOLLOWING EXHIBITS ARE FILED AS PART OF AND INCORPORATED BY REFERENCE INTO
THIS REPORT:
Number Exhibit
2.1### Amended and Restated Agreement and Plan of Merger among
FindWhat.com, Who Merger Corp. and Espotting Media Inc., dated
February 9, 2004.
2.2*** Agreement and Plan of Merger among FindWhat.com, Close Reach
Merger Corp. and Miva Corporation dated September 2, 2003.
3.1* Articles of Incorporation of FindWhat.com (f/k/a Collectibles
America, Inc.).
3.2** Amendment 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.
10.11+ Executive Employment Agreement between FindWhat.com and Brenda
Agius.
14.1 Code of Ethics
14.2 Code of Conduct
16.1#### Letter regarding change in certifying accountant
21.1 List of Subsidiaries
23.1 Consent of Grant Thornton LLP
23.2 Consent of Ernst & Young LLP
24.1 Powers of Attorney
40
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.
* 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 January 6, 2004,
with FindWhat.com's Form 8-K.
**** Incorporated by reference to the exhibit previously filed August 1, 2002,
with FindWhat.com's Form S-8.
***** Incorporated by reference to the extent previously filed on April 2, 2001
with FindWhat.com's Form 10-KSB for the year ended December 31, 2000
# Incorporated by reference to the exhibit previously filed on May 15, 2001 with
FindWhat.com's Form 10-QSB for the fiscal year 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 year ended September 30, 2002.
### Incorporated by reference to the exhibit previously filed on February 10,
2004 with FindWhat.com's Form 8-K.
#### Incorporated by reference to the exhibit previously filed on March 25, 2003
with FindWhat.com's Form 8-K/A.
+ Management compensatory contract or plan.
(b) Reports on Form 8-K
Report dated December 24, 2003, updating status of the Company's merger
agreement with Espotting Media Inc.
Report dated December 11, 2003, regarding the Company's financial estimates.
Report dated December 2, 2003, regarding a strategic relationship with Verizon
Information Services.
Report dated October 29, 2003, regarding the Company's 2003 annual meeting of
stockholders.
Report dated October 27, 2003, regarding an amendment to the Company's merger
agreement with Espotting Media Inc.
Report dated October 20, 2003, regarding third quarter financial results.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 5, 2004 By: /s/ Phillip R. Thune
------- ------------------------------------------
Phillip R. Thune, Chief Operating Officer,
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
indicated on the 5th day of March 2004.
Signature Title
*Craig A. Pisaris-Henderson Chairman, Chief Executive Officer,
- ----------------------------------- President and Director
Craig A. Pisaris-Henderson
/s/ Phillip R. Thune Chief Operating Officer, Chief Financial
- ----------------------------------- Officer, Treasurer
Phillip R. Thune (principal financial officer),
and Director
*Brenda Agius Vice President - Finance (principal
- ----------------------------------- accounting officer)
Brenda Agius
*Kenneth E. Christensen Director
- -----------------------------------
Kenneth E. Christensen
*Frederick E. Guest Director
- -----------------------------------
Frederick E. Guest
*David Londoner Director
- -----------------------------------
David Londoner
*Dan Brewster Director
- -----------------------------------
Dan Brewster
*Jerry Della Femina Director
- -----------------------------------
Jerry Della Femina
*Lee S. Simonson Director
- -----------------------------------
Lee S. Simonson
*By: /s/ Phillip R. Thune
--------------------------------------
Phillip R. Thune, Attorney-in-Fact
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP F-2
Report of Grant Thornton LLP F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Findwhat.com
We have audited the accompanying consolidated balance sheet of Findwhat.com as
of December 31, 2003, and the related statement of operations, stockholders'
equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule for the year ended December 31, 2003 listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FindWhat.com at
December 31, 2003, and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 2003, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
February 9, 2004
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
FindWhat.com
We have audited the accompanying consolidated balance sheet of FindWhat.com and
subsidiary as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FindWhat.com and
subsidiary as of December 31, 2002, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
/s/ GRANT THORNTON LLP
Tampa, Florida
January 30, 2003
F-3
FINDWHAT.COM
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,210 $ 17,982
Short-term investments -- 3,157
Accounts receivable, less allowance for doubtful accounts of
$223 and $95 at December 31, 2003 and 2002, respectively 5,051 1,920
Deferred tax asset 180 446
Note receivable 2,054 --
Prepaid expenses and other current assets 3,312 519
-------- --------
Total current assets 69,807 24,024
EQUIPMENT AND FURNITURE - NET 4,695 3,121
OTHER ASSETS 156 167
-------- --------
Total assets $ 74,658 $ 27,312
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,770 $ 3,809
Deferred revenue 1,866 1,243
Other current liabilities -- 84
-------- --------
Total current liabilities 9,636 5,136
DEFERRED TAX LIABILITIES 600 --
OTHER LIABILITIES 115 8
-------- --------
Total liabilities 10,351 5,144
-------- --------
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;
issued 21,428 and 18,177, respectively; outstanding 21,421
and 18,170, respectively 21 18
Additional paid-in capital 52,884 22,506
Treasury stock; 7 shares, at cost (82) (82)
Accumulated earnings (deficit) 11,484 (274)
-------- --------
Total stockholders' equity 64,307 22,168
-------- --------
Total liabilities and stockholders' equity $ 74,658 $ 27,312
======== ========
The accompanying notes are an integral part of these statements.
F-4
FINDWHAT.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Revenues $ 72,221 $ 42,805 $ 20,412
-------- -------- --------
Operating expenses
Search serving 2,802 1,925 1,459
Marketing, sales and service 40,963 23,597 14,130
General and administrative 8,604 5,797 3,936
Product development 1,520 589 289
Loss on sale of advertising contract -- -- 996
-------- -------- --------
Total operating expenses 53,889 31,908 20,810
-------- -------- --------
Income (loss) from operations 18,332 10,897 (398)
Interest income, net 532 210 51
-------- -------- --------
Income (loss) before provision for income taxes 18,864 11,107 (347)
Income tax expense 7,106 371 --
-------- -------- --------
Net income (loss) $ 11,758 $ 10,736 $ (347)
======== ======== ========
Net income (loss) per share
Basic $ 0.59 $ 0.63 $ (0.02)
======== ======== ========
Diluted $ 0.53 $ 0.56 $ (0.02)
======== ======== ========
Weighted-average number of common
shares outstanding
Basic 19,867 17,021 16,183
======== ======== ========
Diluted 22,076 19,130 16,183
======== ======== ========
The accompanying notes are an integral part of these statements.
F-5
FINDWHAT.COM
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMU-
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK DEFERRED LATED
--------------- --------------- PAID-IN SUBSCRIPTION SERVICE TREASURY EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COST STOCK (DEFICIT) TOTAL
------- ------- ------- ------- ---------- ------------- -------- --------- --------- --------
Balance as of January 1, 2001 -- $ -- 15,099 $ 15 $ 13,511 $ (1,251) $ (741) $ (82) $(10,663) $ 789
Issuance of common stock and
warrants in connection with
private placement net -- -- 1,350 1 1,349 -- -- -- -- 1,350
Issuance of common stock in
connection with exercises
of stock options and warrants -- -- 190 1 511 -- -- -- -- 512
Sale of advertising agreement
and settlement of stock
subscription receivable -- -- -- -- 173 1,251 594 -- -- 2,018
Issuance of warrants in
connection with metasearch
services -- -- -- -- 495 -- 147 -- -- 642
Issuance of stock and warrants
for consulting services -- -- 13 -- 133 -- (122) -- -- 11
Amortization of service costs on
warrants issued -- -- -- -- -- -- 107 -- -- 107
Net Loss -- -- -- -- -- -- -- -- (347) (347)
---- ----- -------- ---- -------- ------- ------ ------ -------- --------
Balance at December 31, 2001 -- -- 16,652 17 16,172 -- (15) (82) (11,010) 5,082
Issuance of common stock and
warrants in connection with
private placement, net -- -- 1,000 1 5,214 -- -- -- -- 5,215
Issuance of common stock in
connection with exercises of
stock options and warrants -- -- 525 -- 867 -- -- -- -- 867
Tax benefit of exercise of
non-qualified stock options -- -- -- -- 253 -- -- -- -- 253
Amortization of service costs on
warrants issued -- -- -- -- -- -- 15 -- -- 15
Net Income -- -- -- -- -- -- -- 10,736 10,736
---- ----- -------- ---- -------- ------- ------ ------ -------- --------
Balance at December 31, 2002 -- -- 18,177 18 22,506 -- -- (82) (274) 22,168
Issuance of common stock
in connection with
private placement, net -- -- 1,000 1 19,980 -- -- -- -- 19,981
Issuance of common stock in
connection with exercises of
stock options and warrants -- -- 2,251 2 7,973 -- -- -- -- 7,975
Tax benefit of exercise of
non-qualified stock options -- -- -- -- 2,425 -- -- -- -- 2,425
Net Income -- -- -- -- -- -- -- -- 11,758 11,758
---- ----- -------- ---- -------- ------- ------ ------ -------- --------
Balance at December 31, 2003 -- $ -- 21,428 $ 21 $ 52,884 $ -- $ -- $ (82) $ 11,484 $ 64,307
==== ===== ======== ==== ======== ======= ====== ====== ======== ========
The accompanying notes are an integral part of these statements.
F-6
FINDWHAT.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Cash Flows from Operating Activities
Net income (loss) $ 11,758 $ 10,736 $ (347)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for doubtful accounts 262 126 46
Depreciation and amortization 1,755 888 481
Equity based compensation -- 15 1,531
Tax benefit of stock option exercises 2,425 253 --
Loss on sale of advertising contract -- -- 996
Deferred income tax expense (benefit) 890 (470) --
Loss on sale of assets 11
Changes in operating assets and liabilities
Accounts receivable (3,393) (1,259) (415)
Prepaid expenses and other current assets (2,035) (394) (117)
Other assets (13) (92) (29)
Deferred revenue 623 736 417
Accounts payable, accrued expenses and other liabilities 3,226 1,176 1,546
-------- -------- --------
Net Cash Provided by Operating Activities 15,509 11,715 4,109
-------- -------- --------
Cash Flows from Investing Activities
Advances under note receivable (2,054) -- --
Proceeds from the sale of assets 8 -- --
Purchase of short-term investments -- (26,981) (1,000)
Proceeds from short-term investments 3,157 24,824 --
Purchase of equipment and furniture (3,344) (3,145) (506)
-------- -------- --------
Net Cash Used in Investing Activities (2,233) (5,302) (1,506)
-------- -------- --------
Cash Flows from Financing Activities
Net proceeds from private placements of common stock 19,981 5,215 1,350
Proceeds from sale of advertising contract -- -- 250
Payments made on capital leases (4) (11) (32)
Proceeds received from exercise of stock options and warrants 7,975 867 512
-------- -------- --------
Net Cash Provided by Financing Activities 27,952 6,071 2,080
-------- -------- --------
Increase in Cash and Cash Equivalents 41,228 12,484 4,683
Cash and Cash Equivalents, Beginning of Year 17,982 5,498 815
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 59,210 $ 17,982 $ 5,498
======== ======== ========
Interest Paid $ 3 $ 8 $ 8
======== ======== ========
Income Taxes Paid $ 4,193 $ 935 $ --
======== ======== ========
The accompanying notes are an integral part of these statements.
F-7
FINDWHAT.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS
FindWhat.com was organized under the laws of the State of Nevada.
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. In 2003, FindWhat.com offered 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. As of December 31, 2003, the Company operated principally in
the U.S.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation
The consolidated financial statements include the accounts and
operations of FindWhat.com and its wholly-owned subsidiary, BeFirst
Internet Corporation. Intercompany accounts and transactions have been
eliminated in consolidation.
2. Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. At December 31, 2003 and 2002, the
Company had cash and cash equivalents of approximately $59.2 million
and $18.0 million, respectively.
3. Short-term Investments
The Company's short-term investments as of December 31, 2002 were $3.2
million and consisted of investments in a fixed rate guaranteed annuity
contract with an insurance company. The Company classifies this
investment as available for sale. Due to the high liquidity of this
instrument, the fair value approximated its carrying value. The
instrument was not covered by any depository insurance.
4. Accounts Receivable
Accounts receivable are recorded at face value, less an allowance for
doubtful accounts. We do not require collateral. Most advertisers are
required to prepay. The allowance for doubtful accounts is an estimate
calculated based on an analysis of current business and economic risks,
customer credit-worthiness, specific identifiable risks such as
bankruptcies, terminations or discontinued customers, or other factors
that may indicate a potential loss. The allowance is reviewed on a
monthly basis to ensure that it adequately provides for all reasonably
expected losses in the receivable balances. An account may be
determined to be uncollectable if all collection efforts have been
exhausted, the customer has filed for bankruptcy and all recourse
against the account is exhausted, or disputes are unresolved and
negotiations to settle are exhausted. This uncollectable amount is
written off against the allowance.
F-8
NOTE B (CONTINUED)
5. Equipment and Furniture
Equipment and furniture are stated at cost and depreciated using the
straight-line method over the estimated useful lives for the respective
assets, which range from three to five years. Depreciation expense
consists of depreciation of computer equipment and furniture.
Improvements to leased premises are amortized over the shorter of the
related lease term or the useful lives of the improvements.
6. Capitalized Software
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 costs 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. Capitalized costs are amortized over the estimated useful
lives.
7. Revenues
Revenues are generated primarily through click-throughs on our managed
advertisers' paid listings (ad). When an Internet user clicks on a
sponsored advertisement in the FindWhat.com Network, revenues are
recognized in the amount of the advertiser's bid price. Revenues are
also generated from the Company's private label service and are
recognized in accordance with the contractual revenue share payment
agreement as the services are rendered. 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 Company records FindWhat.com
Network click-through revenues gross and private label revenues net.
8. Deferred Revenue
Deferred revenue represents advance deposits made by the Company's
advertisers for future click-throughs for keyword advertisements on the
FindWhat.com Network.
9. Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
10. Fair Value of Financial Instruments
At December 31, 2003 and 2002, the Company's financial instruments
included cash, cash equivalents, short-term investments, accounts
receivable, note receivable and accounts payable.
At December 31, 2003 and 2002, the fair values of these financial
instruments approximated carrying values because of the short-term
nature of these instruments.
F-9
NOTE B (CONTINUED)
11. Accounting for Stock-Based Compensation
We account for stock-based compensation to employees and directors
using the intrinsic value method set forth in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." We account for stock-based
compensation to non-employees using the fair value method set forth in
SFAS 123, and related interpretations.
The following table summarizes our pro forma results as if we had
recorded stock-based compensation expense for the years ended December
31, 2003, 2002 and 2001, using the fair value method of SFAS 123, as
amended by SFAS 148:
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Net income (loss), as reported $ 11,758 $ 10,736 $ (347)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (2,618) (1,846) (1,074)
-------- -------- --------
Pro forma net income (loss) $ 9,140 $ 8,890 $ (1,421)
======== ======== ========
Earnings per share:
Basic - as reported $ 0.59 $ 0.63 $ 0.02
======== ======== ========
Basic - pro forma $ 0.46 $ 0.52 $ 0.09
======== ======== ========
Diluted - as reported $ 0.53 $ 0.56 $ 0.02
======== ======== ========
Diluted - pro forma $ 0.41 $ 0.46 $ 0.09
======== ======== ========
12. Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 2003, 2002 and 2001, were approximately
$21,000, $24,000 and $1.9 million respectively.
13. Income Taxes
Income taxes are recognized using the liability method of accounting.
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases 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.
14. Impairment of Long Lived Assets
Long-lived assets, other than goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be fully recoverable. Conditions that would necessitate
an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent
or manner in which an asset is used, or a significant adverse change
that would indicate that the carrying amount of an asset or group of
assets is not recoverable. For long-lived assets to be held and used,
the Company recognizes an impairment loss only if its carrying amount
is not recoverable through its undiscounted cash flows and measures the
impairment loss based on the difference between the carrying amount and
fair value. Long-lived assets held for sale are reported at the lower
of cost or fair value less costs to sell. No impairment losses have
been recognized as of December 31, 2003.
F-10
NOTE B (CONTINUED)
15. Recently Issued Accounting Standards
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 March 31, 2004. 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 issued after
March 15, 2004. We do not believe that FIN 46 has an 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's financial statements with
the Company might be required.
16. Reclassification
Certain previously reported 2002 and 2001 amounts have been
reclassified to conform to the 2003 presentation.
NOTE C - EQUIPMENT AND FURNITURE
Equipment and furniture at December 31, consisted of the following (in
thousands):
DECEMBER 31,
2003 2002
------- -------
Computer equipment $ 6,439 $ 4,162
Furniture 1,325 536
Leased assets 73 73
Leasehold improvements 65 62
Capitalized software 209 --
------- -------
8,111 4,833
Less accumulated depreciation and amortization (3,416) (1,712)
------- -------
$ 4,695 $ 3,121
======= =======
Included in accumulated depreciation is $73,000 and $70,000 relating to
accumulated depreciation on equipment under capitalized lease
obligations as of December 31, 2003 and 2002, respectively.
Depreciation, excluding amortization, expense was $1,751,000, $852,000
and $481,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
F-11
NOTE D - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, consisted of the
following (in thousands):
DECEMBER 31,
2003 2002
------ ------
Accounts payable $1,783 $ 394
Revenue-sharing agreements 3,494 2,480
Consultant settlement agreement -- --
Accrued compensation 2,310 865
Professional fees 183 70
------ ------
$7,770 $3,809
====== ======
NOTE E - RELATED PARTY TRANSACTIONS
Through February 2003, some of the Company's sales and general and
administrative activities were conducted out of the Manhattan offices
of WPI Advertising, a business owned and operated by Robert D. Brahms,
the Company's former vice chairman and a former director. From the
Company's inception through February 2003, the Company paid WPI for
office space and support services. These expenses for the years ended
December 31, 2003, 2002 and December 31, 2001 were approximately
$16,000, $106,000 and $200,000, respectively.
The Company utilizes Porter, Wright, Morris & Arthur LLP to provide
various legal services. For the years ending December 31, 2003, 2002
and 2001, the Company incurred legal fees from Porter, Wright, Morris &
Arthur LLP for services rendered of approximately $1,395,000, $445,000
and $298,000, respectively. John Pisaris, who joined the Company in
January 2004 as a Vice President of the Company is the brother of the
Company's Chairman, Chief Executive Officer and President, Craig
Pisaris-Henderson. John Pisaris was a partner at Porter, Wright, Morris
& Arthur LLP during 2003, 2002 and 2001. In September 2003, the Company
transitioned its primary corporate counsel from Porter, Wright, Morris
& Arthur LLP to another firm.
In February 2001, the Company issued a warrant to purchase 125,000
shares of common stock at $1.00 per share to Mr. Andrew Lessman, a
greater than 5% shareholder of the Company, in exchange for consulting
services. The fair market value of the warrant, as determined using an
option pricing model, was $122,500 and was amortized over one year, the
term of the consulting agreement. In February 2002, Mr. Lessman agreed
to extend the consulting agreement in exchange for the Company waiving
the $1.00 strike price on the original warrant.
The Company believes that prior transactions with its officers,
directors, and principal stockholders were on terms that were no less
favorable than it could have obtained from unaffiliated third parties.
F-12
NOTE F - COMMITMENTS
1. Operating Leases
As of December 31, 2003, the Company leases office space in Florida,
California and New York under the terms of operating leases that expire
November 30, 2012, April 30, 2005 and April 1, 2008, respectively. The
leases contain provisions requiring the Company to pay their pro rata
share of operating expenses. These amounts have been included in the
lease commitments shown below.
Future minimum payments under non-cancelable operating leases consisted
of the following at December 31, 2003 (in thousands):
2004 $ 807
2005 786
2006 783
2007 805
2008 782
Thereafter 3,200
-------
$ 7,163
=======
For the years ended December 31, 2003, 2002 and 2001, the Company
recorded approximately $878,000, $268,000 and $146,000, respectively,
as rent expense under its leasing arrangements.
2. Employment Agreements
The Company has issued employment agreements to key executives
containing various terms and conditions. In accordance with certain
limitations, the employment agreements contain minimum salary
requirements, accelerated option vesting terms and severance pay
packages.
3. Indemnifications
The Company may indemnify officers and/or directors against all costs,
expenses, and liabilities incurred in a threatened, pending, or
completed action, suit or proceeding brought because such individual
has acted in the capacity of director and/or officer of the Company.
The officer and/or director must have conducted him or herself in good
faith, and reasonably believed that his or her conduct was in, or not
opposed to, the Company's best interests. In a criminal action he or
she must not have had a reasonable cause to believe his or her conduct
was unlawful. Costs not covered by the Company's directors and officers
liability insurance will be covered by the Company. This
indemnification is ongoing and does not include a limit on the maximum
potential future payments; nor are there any recourse provisions or
collateral that may offset the cost. As of December 31, 2003, the
Company does not believe it has incurred any losses for any obligations
arising as a result of these indemnifications and therefore, has not
recorded a liability.
F-13
NOTE G - CONCENTRATIONS
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and cash equivalents and
short-term investments. The Company places its cash and cash
equivalents with high quality credit financial institutions. In
general, such instruments exceeded the FDIC insurance limit of
$100,000.
During the years ending December 31, 2003, 2002 and 2001, no advertiser
represented more than 10% of the Company's total revenue. The Company
purchases Internet traffic from distribution partners. Expressed as a
percentage of revenue for the year ending December 31, 2003, Internet
traffic purchases from one distribution partner represented over 10% of
total revenue, for the year ending December 31, 2002, Internet traffic
purchases from two distribution partners each represented over 10% of
total revenue, and in the year ending December 31, 2001, Internet
traffic purchases from one distribution partner represented over 10% of
total revenue. However, none of these distribution partners represented
more than 15% of total revenue during the three-year period ended
December 31, 2003.
NOTE H - EQUITY TRANSACTIONS
1. Beasley Transaction
In January 2000, the Company entered into a common stock purchase
agreement with Beasley Internet Ventures LLC ("Beasley"), whereby the
Company issued 600,000 shares of common stock at $5.00 per share to
Beasley in exchange for a note receivable of $3 million. Concurrently,
the Company entered into an advertising agreement with Beasley for $3
million of advertising services to be provided over a two-year period.
Beasley had the right to offset payment obligations on the note
receivable owed to the Company by providing advertising services
pursuant to the advertising agreement. Since the value of the stock on
the date the agreements were consummated was $7.375 per share, an
additional deferred service cost of $1,425,000 was recognized and was
to be expensed over the contract period. During the year ended December
31, 2000, the Company received $1,748,702 of advertising, which reduced
the note receivable. The remaining balance on the note receivable at
December 31, 2000 of $1,251,298 was reflected as a stock subscription
receivable in stockholders' equity. During the year ended December 31,
2000, the Company expensed approximately $831,000 of the deferred
service cost related to the Beasley agreement.
In March 2001, the Company sold unused advertising services to a
consultant for $250,000 in cash and issued a warrant to purchase
125,000 shares of common stock valued at $172,500, on the grant date.
Prior to the sale of the unused advertising and stock subscription
receivable, the Company recognized $771,783 of expense for the quarter
ended March 31, 2001. As a result of this transaction, the Company
recognized a loss of approximately $996,000 in 2001, which is shown as
"Loss on sale of advertising contract" on the statement of operations.
2. Go2Net Transaction
In March 2000, the Company entered into a one-year agreement with
Go2Net, Inc. ("Go2Net"), whereby Go2Net provided the Company with
metasearch services, allowing the Company to have its search results
incorporated with Go2Net's. In exchange for these services, Go2Net
received warrants to purchase 725,000 shares of the Company's common
stock at $5.50 per share. Pursuant to the agreement, as the Company
issued any additional shares of common stock, non-plan options or
warrants at an exercise price less than the exercise price of $5.50,
then in each case, the exercise price was lowered to an amount
determined as per the agreement and Go2Net was entitled to receive an
additional number of shares calculated as per the agreement. The value
of the warrants was re-measured at each reporting date until the
services were completed. These warrants were valued at approximately
$587,000 based on the market price as of December 31, 2000, and,
accordingly, approximately $440,000 was charged to operations and
reflected in sales and marketing expense for the year ended December
31, 2000. As of December 31, 2000, based on adjustments made pursuant
to the agreement, the total number of shares purchasable under warrants
outstanding were 803,936, with an exercise price of $4.96 per share.
In March 2001, the Company amended the agreement and fixed the number
of shares purchasable under warrants outstanding to 801,839 at an
exercise price of $4.97 per share. In 2001, the Company recorded an
expense of approximately $643,000 pursuant to this agreement.
F-14
NOTE H (CONTINUED)
3. Other Transactions
In February 2001, the Company issued a warrant to purchase 125,000
shares of common stock at $1.00 per share for consulting services. The
fair market value of the warrant determined using an option pricing
model was $122,500 and the expense was amortized over one year, the
term of the consulting agreement. As of December 31, 2001,
approximately $15,000 was shown as deferred service cost in
stockholders' equity. The remaining deferred service costs at December
31, 2001 were fully amortized during the year ended December 31, 2002.
NOTE I - STOCK INCENTIVE PLAN
In June 1999, the Board of Directors of the Company adopted the 1999
Stock Incentive Plan ("the Plan"). The total number of shares reserved
and available for distribution to the Company's key employees,
officers, directors, consultants and other agents and advisors under
this Plan as of December 31, 1999 were 1,000,000 shares. Awards under
the Plan consist of stock options (both qualified and non-qualified
options), restricted stock awards, deferred stock awards and stock
appreciation rights. In January 2000, the Board of Directors of the
Company amended the Plan to increase the total number of shares
reserved and available for distribution to the Company's key employees,
officers, directors, consultants and other agents to 1,975,000 shares,
which was approved by the shareholders in July 2000.
On June 11, 2001, the Company's shareholders approved an amendment
increasing the number of shares available for issuance under the
Company's 1999 Stock Incentive Plan from 1,975,000 to 4,200,000 shares
and increasing the number of shares an individual employee can receive
from 600,000 to 1,000,000.
On December 15, 2003, the Company's shareholders approved an amendment
increasing the number of shares available for issuance under the
Company's 1999 Stock Incentive Plan from 4,200,000 to 6,200,000. As of
December 31, 2003, 1,877,000 shares remained available for future
grants under this plan.
During the years ended December 31, 2003, 2002 and 2001, the Company
granted options to employees and directors totaling approximately
726,000, 861,000 and 1,414,000, respectively, and granted no options to
non-employees. The options issued to employees in 2003, 2002 and 2001
vest in a range of immediate vesting up to four years vesting and
expire in ten years.
The fair value of the Company's stock options was estimated at the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- ----------- ----------
Volatility 63.1% 85.2% 138.0%
Risk-free rate 4.0% 4.2% 5.6%
Expected life 10.0 Years 8.8 Years 10.0 Years
Expected dividends -- -- --
The weighted-average fair value of Plan options granted during the
years ended December 31, 2003, 2002 and 2001 was $13.36, $3.31 and
$1.53, respectively, and the weighted-average exercise price was
$13.61, $3.96 and $1.58, respectively.
F-15
NOTE I (CONTINUED)
Stock option activity under the Plan during the years ended December
31, 2003, 2002 and 2001 is summarized below (in thousands, except per
share amounts):
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
------- ---------
Balance, December 31, 2000 1,494 $ 2.63
Granted 1,414 1.58
Exercised (38) 2.39
Canceled (48) 2.77
------ ------
Balance, December 31, 2001 2,822 2.11
Granted 861 3.96
Exercised (154) 1.79
Canceled (85) 3.22
------ ------
Balance, December 31, 2002 3,444 2.55
Granted 726 13.61
Exercised (313) 2.95
Canceled (50) 6.43
------ ------
Balance, December 31, 2003 3,807 $ 4.57
====== ======
The following table summarizes information as of December 31, 2003
concerning outstanding and exercisable stock options under the Plan (in
thousands, except per share amounts):
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE REMAINING AVERAGE AVERAGE
OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ------------ --------- ----------- ----------
$1.00-$3.00 2,085 5.8 $ 1.57 1,732 $1.57
$3.01-$6.00 963 7.9 4.28 409 4.74
$6.01-$14.00 542 9.0 11.07 34 7.11
$14.01-$27.72 217 9.8 18.49 -- --
----- --- ------ ----- -----
Total 3,807 7.0 $ 4.57 2,175 $2.25
===== === ====== ===== =====
F-16
NOTE J - PER SHARE DATA
For the year ended December 31, 2003 there were 34,000 outstanding
options and warrants at a price range of $15.33-$27.72, which were
excluded from the dilutive earnings per share calculation because the
effect would be anti-dilutive. For the year ended December 31, 2002
there were 1.3 million outstanding options and warrants at a price
range of $4.65-$12.00, which were excluded from the dilutive earnings
per share calculation because the effect would be anti-dilutive. All of
the Company's options and warrants were considered anti-dilutive for
the year ending December 31, 2001 due to the Company's net loss for the
period.
The following is a reconciliation of the number of shares used in the
basic and diluted computation of income (loss) per share (in
thousands):
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
------ ------ ------
Weighted-average number of common
shares outstanding - basic 19,867 17,021 16,183
Dilution from stock options and warrants 2,209 2,109 --
------ ------ ------
Weighted-average number of common
shares and common share equivalents
outstanding - diluted 22,076 19,130 16,183
====== ====== ======
NOTE K - WARRANTS
At December 31, 2003, 2002 and 2001 the Company had approximately 0.3
million, 2.3 million and 2.6 million warrants outstanding,
respectively, at a weighted average exercise price of $3.36, $3.59 and
$3.31, respectively. The Company's warrant activity during the years
ended December 31, 2003, 2002 and 2001 is summarized below (in
thousands, except for per share amounts):
WEIGHTED-
AVERAGE
EXERCISE
WARRANTS PRICE
-------- ---------
Balance, December 31, 2000 2,327 $ 3.71
Granted 453 1.05
Exercised (151) 2.78
Canceled -- --
------ ------
Balance, December 31, 2001 2,629 3.31
Granted -- --
Exercised (371) 1.60
Canceled -- --
------ ------
Balance, December 31, 2002 2,258 3.59
Granted -- --
Exercised (1,938) 3.64
Canceled (25) 2.50
------ ------
Balance, December 31, 2003 295 $ 3.36
====== ======
The following table summarizes information concerning currently
outstanding and exercisable warrants as of December 31, 2003 (in
thousands, except per share amounts and years):
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE REMAINING AVERAGE AVERAGE
OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ----------- ------------ --------- ----------- ---------
$0.00-$3.00 165 1.9 $ 1.68 165 $ 1.68
$3.01-$6.00 130 1.1 5.50 130 5.50
--- --- ----- --- ------
Total 295 1.6 $ 3.36 295 $ 3.36
=== === ===== === ======
F-17
NOTE L - DATABASE LICENSE
In August 1999, the Company acquired a database license, which required
minimum aggregate payments of $600,000 over the three-year life of the
contract. The Company accounted for this license as an executory
contract and recorded expense as the service was provided. As of
December 31, 2001, payments of $340,000 under the license had been
expensed, of which $260,000 had been paid. In April 2001, the Company
reached an agreement to terminate this executory contract with no
further payments.
NOTE M - INCOME TAXES
Components of the Company's deferred tax asset (liability) at December
31, are as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
------- ------- -------
Stock option compensation $ 95 $ 593 $ 318
Deferred service cost -- 24 43
Net operating loss carryforwards -- -- 3,500
Equipment and furniture related (600) -- 43
Reserves and accruals 85 36 101
------- ------- -------
(420) 653 4,005
Valuation allowance -- (183) (4,005)
------- ------- -------
Net deferred tax asset (liability) $ (420) $ 470 $ --
======= ======= =======
The recognition of deferred tax assets is appropriate if realization of
such assets is more likely than not. Accordingly, based on current and
projected taxable income in the near future, the Company reduced its
net valuation allowances by approximately $183,000, $3,822,000 and
$101,000 during the years ended December 31, 2003, 2002 and 2001,
respectively.
The income tax expense in the consolidated statements of operations
consisted of the following during the years ended December 31, 2003,
2002 and 2001 (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
------- ------- -------
Current provision $ 6,216 $ 841 $ --
------- ------- -------
Deferred provision (benefit)
Other deferred items 1,073 3,352 101
Change in valuation allowance (183) (3,822) (101)
------- ------- -------
890 (470) --
------- ------- -------
Total $ 7,106 $ 371 $ --
======= ======= =======
The reconciliation of the Company's statutory tax rate to the effective
tax rate is as follows for the year ended December 31:
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- ---------
Federal tax rate 35.0% 34.0% 34.0%
State tax rate, net of federal benefit 3.6 3.2 3.2
Deferred tax asset valuation allowance (1.0) (34.9) (37.2)
Other -- 1.0 --
---- ----- -----
37.6% 3.3% --%
==== ===== =====
F-18
NOTE N - 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 half of 2004. In addition, on January 23, 2004, we
were named as a third party defendant by Overture in an action between
Lycos, Inc. and Overture Services, Inc., in the District Court of the
District of Massachusetts. In its third party complaint, Overture
alleges that we infringe U.S. Patent 6,269,361, which is the same
patent that is involved in the above-referenced litigation pending in
the Central District of California.
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 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 O - ESPOTTING MERGER
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. On February 9, 2004 the Company announced
the signing of an amended merger agreement. Under the amended terms of
the Espotting transaction, Espotting's stockholders will receive
approximately 7.0 million shares of FindWhat.com common stock and
approximately $20 million in cash, subject to adjustment. Additionally,
the agreement calls for the Company to issue options and warrants to
purchase approximately 800,000 shares of FindWhat.com common stock to
Espotting's employees and affiliates. Closing of the transaction is
conditioned upon regulatory filings and approvals, shareholder approval
by both companies, the absence of a material adverse change in the
companies' businesses, the meeting of certain requirements before and
until the closing date, and other closing conditions. As a result, the
merger may be consummated on significantly different terms or not at
all. Assuming the fulfillment of these conditions and the receipt of
all approvals, the companies would expect to close the merger in the
third quarter of 2004.
Also on June 17, 2003, FindWhat.com loaned Espotting $2.0 million in
exchange for a promissory note. The unsecured loan to Espotting bears
interest at 5% and must be paid in full at closing, upon termination of
the merger agreement or July 31, 2004, 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 December 31, 2003, the Company had incurred and
capitalized approximately $2.1 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.
However, if the merger agreement is terminated, these and any
additional costs incurred will be written off as a one-time expense on
the date of the termination.
F-19
NOTE P - OTHER SUBSEQUENT EVENTS
On January 1, 2004, the Company completed its acquisition of Miva
Corporation, a leading supplier of e-commerce software and services to
small and medium-sized businesses. Under the terms of the agreement
FindWhat.com acquired all of the outstanding stock of Miva, with Miva
stockholders receiving approximately $2.7 million in cash and
approximately 165,000 shares of FindWhat.com common stock, while
FindWhat.com assumed approximately $2.5 million in Miva liabilities.
On February 23, 2004, we entered into an agreement to acquire Comet
Systems, Inc., a leading provider of connected desktop consumer
software. Under the terms of the acquisition agreement, Comet
stockholders will receive approximately $8.5 million in cash, which is
subject to adjustment based on the value of Comet's closing date
current net assets, plus $15.0 million in our common stock, and up to
an additional $10.0 million in cash based on Comet's operating
performance in 2004 and 2005. Closing of the transaction is conditioned
upon approval from Comet's shareholders, the absence of a material
adverse change in the companies' businesses, receipt of a favorable tax
opinion, and other customary closing conditions. As a result, the
acquisition may not be consummated or may be consummated on
significantly different terms. Assuming the fulfillment or waiver of
these conditions, we expect to close the acquisition within 60 days of
February 23, 2004.
NOTE Q - QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
THREE MONTHS ENDED
------------------------------------------
2003 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of operations
Revenues $ 15,849 $ 17,511 $ 17,841 $ 21,019
Net income 2,695 2,707 2,815 3,541
Net income per share
Basic $ 0.15 $ 0.14 $ 0.14 $ 0.17
Diluted 0.13 0.12 0.12 0.15
2002 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------------------- -------- -------- -------- --------
Statements of operations
Revenues $ 8,712 $ 9,710 $ 10,985 $ 13,397
Net income 1,975 4,307 1,781 2,673
Net income per share
Basic $ 0.12 $ 0.25 $ 0.10 $ 0.16
Diluted 0.10 0.22 0.09 0.14
The aggregate of quarterly amounts may not equal annual amounts due to
rounding.
F-20
FINDWHAT.COM
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
DESCRIPTION BEGINNING OF PERIOD EARNINGS OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- -------------------------------- ------------------- ---------- -------------- ---------- -------------
Allowance for doubtful accounts:
Year ended December 31, 2003 $ 95,000 $ 262,000 $ -- $ (134,000) (1) $ 223,000
Year ended December 31, 2002 $ 22,000 $ 126,000 $ -- $ (53,000) (1) $ 95,000
Year ended December 31, 2001 $ 23,000 $ 46,000 $ -- $ (18,000) (1) $ 51,000
Income tax valuation allowance:
Year ended December 31, 2003 $ 183,000 $ (183,000) $ -- $ -- $ --
Year ended December 31, 2002 $ 4,005,000 $(3,822,000) $ -- $ -- $ 183,000
Year ended December 31, 2001 $ 4,106,000 $ (101,000) $ -- $ -- $ 4,005,000
(1) Write-off fully reserved accounts receivable.
F-21