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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number: 0-30428
FINDWHAT.COM
(Exact name of registrant as specified in its charter)
NEVADA 88-0348835
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5220 SUMMERLIN COMMONS BOULEVARD, SUITE 500, FORT MYERS, FLORIDA 33907
(Address of principal executive offices, including zip code)
(239) 561-7229
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 22,870,057 shares of
Common Stock, $.001 par value, were outstanding at April 30, 2004.
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FORM 10-Q
FINDWHAT.COM
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
December 31, 2003 and March 31, 2004 (Unaudited)
Unaudited Condensed Consolidated Statements of Income 4
For the Three Months Ended March 31, 2003 and 2004
Unaudited Condensed Consolidated Statements of Cash Flows 5
For the Three Months Ended March 31, 2003 and 2004
Notes to Interim Condensed Consolidated Unaudited 6
Financial Statements For the Three Months Ended
March 31, 2003 and 2004
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 34
Signature 36
2
ITEM 1. FINANCIAL STATEMENTS
FindWhat.com
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
--------- ---------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 55,181 $ 59,210
Accounts receivable, less allowance for doubtful accounts of $282
and $223 at March 31, 2004 and December 31, 2003, respectively 7,990 5,051
Deferred tax assets 467 180
Note receivable and related accrued interest 2,080 2,054
Prepaid expenses and other current assets 2,947 3,312
--------- ---------
Total current assets 68,665 69,807
EQUIPMENT AND FURNITURE - NET 5,607 4,695
INTANGIBLE ASSETS - NET 22,944 --
DEFERRED TAX ASSETS 10,568 --
OTHER ASSETS 441 156
--------- ---------
Total assets $ 108,225 $ 74,658
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 9,041 $ 7,770
Note payable 1,366 --
Deferred revenue 2,164 1,866
Current portion of long-term debt 139 --
Deferred tax liabilities - current 1,272 --
Other current liabilities 765 --
--------- ---------
Total current liabilities 14,747 9,636
DEFERRED INCOME TAXES 4,009 600
LONG-TERM DEBT, LESS CURRENT PORTION 158 --
OTHER LIABILITIES 1,699 115
--------- ---------
Total liabilities 20,613 10,351
--------- ---------
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 22,848
and 21,428, respectively; outstanding 22,841 and 21,421, respectively 23 21
Additional paid-in capital 72,385 52,884
Treasury stock; 7 shares, at cost (82) (82)
Retained earnings 15,286 11,484
--------- ---------
Total stockholders' equity 87,612 64,307
--------- ---------
Total liabilities and stockholders' equity $ 108,225 $ 74,658
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements
3
FindWhat.com
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2004 2003
------- -------
Revenues $24,686 $15,849
------- -------
Operating expenses
Search serving 844 610
Marketing, sales and service 13,540 8,969
General and administrative 3,459 1,754
Product development 600 298
Amortization 189 --
------- -------
Total operating expenses 18,632 11,631
------- -------
Income from operations 6,054 4,218
Interest income, net 180 127
------- -------
Income before provision for income taxes 6,234 4,345
Income tax expense 2,432 1,650
------- -------
Net income $ 3,802 $ 2,695
======= =======
Net income per share
Basic $ 0.17 $ 0.15
======= =======
Diluted $ 0.16 $ 0.13
======= =======
Weighted-average number of common
shares outstanding
Basic 21,899 18,553
======= =======
Diluted 24,053 21,337
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements
4
FindWhat.com
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2004 2003
-------- --------
Cash Flows from Operating Activities
Net income $ 3,802 $ 2,695
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for doubtful accounts 77 6
Depreciation and amortization 780 368
Deferred income tax expense -- 234
Loss on sale of assets -- 10
Changes in operating assets and liabilities
Accounts receivable (932) (377)
Prepaid expenses and other current assets (586) 111
Other assets (15) (5)
Deferred revenue 139 (49)
Accounts payable, accrued expenses and other liabilities 343 1,716
-------- --------
Net Cash Provided by Operating Activities 3,608 4,709
-------- --------
Cash Flows from Investing Activities
Proceeds from short-term investments -- 3,157
Purchase of business, net of cash acquired (6,464) --
Purchase of equipment and furniture (1,153) (583)
-------- --------
Net Cash (Used in) Provided by Investing Activities (7,617) 2,574
-------- --------
Cash Flows from Financing Activities
Payments made on capital leases and notes payable (959) (4)
Proceeds received from exercise of stock options and warrants 939 2,415
-------- --------
Net Cash (Used in) Provided by Financing Activities (20) 2,411
-------- --------
(Decrease) Increase in Cash and Cash Equivalents (4,029) 9,694
Cash and Cash Equivalents, Beginning of Period 59,210 17,982
-------- --------
Cash and Cash Equivalents at End of Period $ 55,181 $ 27,676
======== ========
Interest Paid $ 75 $ 3
Income Taxes Paid $ 700 $ 18
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
FindWhat.com
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(dollars in thousands)
(Unaudited)
NOTE A - NATURE OF BUSINESS
FindWhat.com was organized under the laws of the State of Nevada.
FindWhat.com and its subsidiaries, BeFirst Internet Corporation, Miva
Corporation ("Miva") and Comet Systems, Inc. ("Comet") are collectively referred
to as the Company. Intercompany accounts and transactions have been eliminated
in consolidation. The Company develops and provides performance-based marketing
and commerce-enabling services. As of March 31, 2004, the Company currently
provides three related, proprietary services:
o FindWhat.com Network(TM)/Private Label. The FindWhat.com Network is a
performance-based, keyword-targeted advertisement service that
distributes millions of advertisements throughout the Internet each
day. The Company's Private Label service offers large companies the
opportunity to brand and sell their own performance-based,
keyword-targeted advertising service using the Company's turn-key
operation, or parts thereof;
o Primary Traffic, currently offered through Comet, by which the Company
establishes a direct relationship with Internet users by, for example,
providing connected desktop consumer software. This provides a direct
source of traffic for the Company's advertisers, and the opportunity
for the Company to optimize paid listings opportunities on the
Internet; and
o Merchant Services, which provide commerce enabling products and
services that help online businesses create online storefronts, by
which they can offer products and services to prospective buyers of
such services. Merchant Services include Miva Merchant(TM), a leading
e-commerce development system that a retailer can use to create a
complete online store, including transactional capabilities.
As of March 31, 2004, 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 subsidiaries.
The accompanying unaudited condensed consolidated interim financial
statements reflect all adjustments, consisting of only normal and
recurring items, which in the opinion of management, are necessary for
a fair presentation of the results of operations for the periods shown.
The results of operations for such periods are not necessarily
indicative of the results expected for the full year or for any future
period.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2003.
2. Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
6
NOTE B (CONTINUED)
3. Accounts Receivable
Accounts receivable are recorded at face value, less an allowance for
doubtful accounts. The Company does not require collateral. 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.
4. Prepaid Expenses and Other Current Assets
As of March 31, 2004, the Company had incurred and capitalized
approximately $2.5 million in legal, advisory and transaction costs
associated with the 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 an expense on the date of the termination.
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 capitalized and 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 the
Company's managed advertisers' paid listings. 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 also are generated from the Company's private label service
and from click-throughs by Comet's users, and are recognized in
accordance with the contractual revenue share payment agreement as the
services are rendered and the click-throughs performed. 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 and Comet's click-through-related revenues net.
Revenue for software licenses is generally recognized as products are
shipped. Revenue from support arrangements is recognized ratably over
the contract period of the invoice. Non click-through-related revenue
from Comet is recognized when earned under the terms of the contractual
arrangement with the advertiser or advertising agency, provided that
collection is probable.
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 and the unearned portion of support revenues.
7
NOTE B (CONTINUED)
9. Fair Value of Financial Instruments
At March 31, 2004, the Company's financial instruments included cash,
cash equivalents, accounts receivable, note receivable, accounts
payable, note payable and long-term debt.
The fair values of these financial instruments approximated their
carrying values because of the short-term nature of these instruments.
10. Business Segments
The Company operates in one primary business segment -
Performance-based, keyword-targeted advertising, which includes the
Company's FindWhat.com Network/Private Label and Primary Traffic
divisions. Due to the immateriality of the Company' Merchant Services
division, separate segment reporting is not required.
11. Accounting for Stock-Based Compensation
The Company accounts 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." The Company accounts
for stock-based compensation to non-employees using the fair value
method set forth in SFAS 123, as amended by SFAS 148, and related
interpretations.
The following table summarizes the Company's pro forma results as if
the Company had recorded stock-based compensation expense related to
employees and directors for the three months ended March 31, 2004 and
2003, using the fair value method of SFAS 123, as amended by SFAS 148:
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
------- ---------
Net income (loss), as reported $ 3,802 $ 2,695
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,883) (384)
------- ---------
Pro forma net income (loss) $ 1,919 $ 2,311
======= =========
Earnings per share:
Basic - as reported $ 0.17 $ 0.15
======= =========
Basic - pro forma $ 0.09 $ 0.12
======= =========
Diluted - as reported $ 0.16 $ 0.13
======= =========
Diluted - pro forma $ 0.08 $ 0.11
======= =========
12. Advertising Costs
Advertising costs are expensed as incurred.
13. Income Taxes
Income taxes are recognized using the liability method.
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.
8
NOTE B (CONTINUED)
14. Goodwill and Other Intangible Assets
Intangible assets include goodwill and other identifiable intangible
assets as discussed in Note C. Goodwill and intangible assets with
indefinite lives are not amortized and are reviewed for impairment on
an annual basis, or more frequently if impairment indicators arise.
Intangible assets with finite lives are amortized over their respective
useful lives and are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be fully
recoverable.
15. 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 March 31, 2004.
16. Reclassifications
Certain amounts in the prior period have been reclassified to conform
to the current period.
17. 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.
NOTE C - ACQUISITIONS
MIVA
On January 1, 2004, the Company acquired all of the outstanding stock
of Miva Corporation, a leading supplier of e-commerce software and
services to small and medium-sized businesses (SME's). Through this
acquisition, the Company believes it can combine several of its
commerce enabling services to provide a more comprehensive business
solution to SMEs.
The total purchase price of approximately $6.2 million consisted of
$1.3 million in cash consideration, the issuance of a note payable for
$1.4 million, the issuance of 163,550 shares of common stock valued at
$3.1 million, and direct transaction costs of approximately $0.4
million. The value of the common stock was based on the average closing
price two days prior to the completion of the acquisition. The note
payable is payable in four quarterly installments beginning April 1,
2004.
9
NOTE C (CONTINUED)
The preliminary allocation of the purchase price to the assets acquired
and liabilities assumed based on the estimated fair values was as
follows (in thousands):
Cash acquired $ 26
Other tangible assets acquired 245
Intangibles:
Trademarks 278 Indefinite
Customer relationships 1,116 15 years
Service agreements 111 15 years
Reseller agreements 62 15 years
Developed technology 1,429 5 years
Goodwill 4,977 Indefinite
Liabilities assumed (2,042)
-------
Total $ 6,202
=======
Amortization expense related to Miva's identifiable intangible assets
with definite lives was $93,000 for the three month period ended March
31, 2004. As of March 31, 2004, future amortization expense related to
the Miva acquisition for each of the next five years is expected to be:
2004--$279,000, 2005--$372,000, 2006--$372,000, 2007--$372,000, and
2008--$372,000.
COMET
On March 22, 2004, the Company acquired all of the outstanding stock of
Comet, a leading provider of connected desktop consumer software.
Through Comet, the Company has access to the millions of consumers who
have voluntarily downloaded Comet software and search functionality
directly onto their personal computers (PCs). This direct connection to
the end consumer should allow the Company to gain a greater
understanding of consumer behavior on the Internet, helping enhance its
keyword-targeted, performance-based advertising service.
The total purchase price of approximately $24.0 million consisted of
$8.1 million in cash consideration, the issuance of 837,510 shares of
common stock valued at $15.4 million, and direct transaction costs of
approximately $0.5 million. The value of the common stock was based on
the Company's average closing stock price for the date of the
completion of the acquisition and the two trading days prior to the
closing date. Comet stockholders may receive up to an additional $10.0
million in cash based on Comet's operating performance in 2004 and
2005. No amount for this "earn out" has been recorded as of March 31,
2004.
The preliminary allocation of the purchase price to the assets acquired
and liabilities assumed based on the estimated fair values was as
follows (in thousands):
Cash acquired $ 3,350
Other tangible assets acquired 2,609
Deferred tax assets 10,856
Intangibles:
Trademarks 100 Indefinite
Websites and domain names 800 Indefinite
Patents 600 10 years
Customer relationships 1,300 8 months
License and distribution agreements 30 1 year
Partner agreements 30 1 year
Developed technology 7,900 5 years
Goodwill 4,393 Indefinite
Deferred tax liabilities (4,681)
Liabilities assumed (3,295)
---------
Total $ 23,992
=========
10
NOTE C (CONTINUED)
Amortization expense related to Comet's identifiable intangibles with
definite lives was $90,000 for the three month period ended March 31,
2004. As of March 31, 2004, future amortization expense related to the
Comet acquisition for each of the next five years is expected to be:
2004--$2,527,000, 2005--$1,653,000, 2006--$1,640,000, 2007--$1,640,000,
and 2008--$1,640,000.
The Company expects to treat the Comet acquisition as a stock
acquisition for tax purposes and hence will have different book and tax
basis. As a result, the Company recognized deferred tax assets of $10.9
million, $10.0 million of which relates to Comet's net operating loss
carryforwards and $0.9 million of which relates to other liabilities.
The Company's annual utilization of Comet's losses is limited due to
the section 382 rules of the Internal Revenue Code, and the Company has
considered this in establishing the initial deferred tax assets.
Additionally, the Company recognized $4.7 million in deferred tax
liabilities in purchase accounting for the tax effect of the different
book and tax basis of the acquired intangibles other than goodwill.
SUMMARY
The results of operations of Miva and Comet have been included in the
Company's statements of operations since the completion of the
acquisitions on January 1, 2004 and March 22, 2004, respectively. The
following unaudited pro forma information presents a summary of the
results of operations of the Company assuming the acquisitions of Miva
and Comet occurred on January 1st of each year (in thousands, except
per share amounts):
For the three months
ended March 31,
----------------------
2004 2003
-------- --------
Net revenues $ 27,530 $ 18,438
Net income $ 3,501 $ 2,183
Net income per share - basic $ 0.15 $ 0.11
Net income per share - diluted $ 0.14 $ 0.10
NOTE D - PER SHARE DATA
For the three months ended March 31, 2004 there were 234,000 weighted
outstanding stock options, at an exercise price range of $18.75 -
$27.72, which were excluded from the dilutive earnings per share
calculation because the effect would be anti-dilutive.
The following is a reconciliation of the number of shares used in the
basic and diluted computation of net income per share (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
--------- -------
Weighted-average number of common
shares outstanding-basic 21,899 18,553
Dilution from stock options and
warrants 2,154 2,784
------ ------
Weighted-average number of common
shares and potential common shares
outstanding - diluted 24,053 21,337
====== ======
11
NOTE E - LITIGATION
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" (U.S. Patent No. 6,269,361, "the `361 patent").
Additionally, Overture Services has announced it acquired an issued
patent that may apply to the Company's current bid-for-position
pay-per-click business model. Overture Services has advised the Company
that they believe the Company's current bid-for-position pay-per-click
business model infringes their patents; however the Company believes
that it does not infringe any valid and enforceable claim of the
patents. On January 17, 2002, the Company filed a complaint to challenge
the `361 patent in the District Court for the Southern District of New
York. Subsequently, 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. The
Company's complaint has been transferred to the District Court for the
Central District of California in Los Angeles. 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 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 December 2004. In addition, on
January 23, 2004, the Company 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 the Company
infringes 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 as discussed above, are not
expected to have a material adverse effect on the Company's financial
position or the results of its operations. As such, no accruals have
been made related to the Company's legal proceedings.
NOTE F - DEBT
Revolving Loan
As of February 19, 2004, the Company entered into a $10.0 million
revolving loan with Fifth Third Bank, which expires on June 30, 2005.
Outstanding borrowings under the loan will bear interest at LIBOR plus
2.75 basis points per annum and are secured by substantially all of the
Company's assets. The initial commitment fee was $25,000 and there are
no other continuing fees.
The loan agreement includes various financial covenants which require
the Company to maintain liquidity, certain financials ratios and which
limit the Company's ability to incur additional debt.
Borrowings under the loan agreement are secured by substantially all of
the Company's assets. As of March 31, 2004, the Company has no
outstanding borrowings under the loan.
12
NOTE F (CONTINUED)
Seller Note Payable
Prior to the Company's acquisition of Comet, Comet purchased the domain
names associated with Screensavers.com, Inc. which requires monthly
installments of $12,500 until April 2006.
The following table summarizes the Company's long-term debt (in
thousands):
March 31, March 31,
2004 2003
---- ----
Obligation to Screensavers.com,
principal and interest payable
monthly - net of discount of $16 $ 297 $--
Less current portion - net of
discount of $11 (139) --
----- ---
Long-term debt $ 158 $--
===== ===
The following table summarizes future payments to Screensavers.com as of
March 31, 2004 (in thousands):
2004 $ 113
2005 150
2006 50
-----
$ 313
=====
NOTE G - COMMITMENTS
The Company's largest ongoing contractual cash payments are to its
distribution partners, which are funded by payments from the Company's
advertisers for the paid click-throughs (visitors), delivered to them
via the Company's distribution partners. None of these agreements have
minimum payment amounts.
When the Company acquired Comet in March 2004, the Company assumed
Comet's obligation under an operating lease agreement for its office
space in New York, NY. The lease includes fixed increases in the lease
payments, and expires in February 2007. Consistent with the conclusions
of Comet's management, the Company preliminarily believes that the
amount of space leased exceeds its current and projected needs. As a
result, the net present value of the remaining lease obligation for the
excess space was recorded in purchase accounting, at an amount of
approximately $1.6 million.
Additionally, the Company believes the lease obligation is
above-market rate, as of March 2004, and hence the Company has also
recorded a liability related to the portion of the space in use for $0.7
million in purchase accounting. The Company expects to further evaluate
its plan for the Comet office space in the next few months. If it
becomes probable that the Company, or a third-party sub-lessee, may
occupy this unused space in the future, the liability may be decreased
and goodwill will be decreased accordingly.
The Company's obligations regarding future minimum payments under
non-cancelable operating leases are as follows at March 31, 2004 (in
thousands):
OPERATING
LEASES
---------
2004 $ 1,530
2005 2,050
2006 1,928
2007 989
2008 782
Thereafter 3,200
--------
$ 10,479
========
13
NOTE H - STOCKHOLDERS' EQUITY
The following table shows stockholders' equity activity for the three
months ended March 31, 2004 (in thousands):
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ PAID-IN TREASURY RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
------ ------ ------ ------ ------- ----- -------- -----
Balance as of January 1, 2004 -- $-- 21,428 $21 $52,884 $(82) $11,484 $64,307
Issuance of common stock in
connection with business
acquisitions -- -- 1,001 1 18,563 -- -- 18,564
Issuance of common stock in
connection with exercises of
stock options and warrants -- -- 419 1 938 -- -- 939
Net Income -- -- -- -- -- -- 3,802 3,802
-- --- ------- --- ------- ---- ------- -------
Balance at March 31, 2004 -- $-- 22,848 $23 $72,385 $(82) $15,286 $87,612
== === ======= === ======= ==== ======= =======
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management's discussion and analysis or plan of operation contains
forward-looking statements, the accuracy of which involves risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "estimates", "projects," and similar expressions
to identify forward-looking statements. This management's discussion and
analysis also contains forward-looking statements attributed to certain
third-parties relating to their estimates regarding the growth of the Internet,
Internet advertising, and online commerce markets and spending. Readers should
not place undue reliance on these forward-looking statements, which apply only
as of the date of this report. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed in our Amendment No. 1 to Registration Statement on Form S-4
(File No. 33-113582) filed on April 22, 2004 under the section entitled "Risk
Factors," and "Business Risks" included herein.
OVERVIEW
We are a leading developer and provider of performance-based marketing
and commerce enabling services. We are focused on providing intelligent,
efficient and productive services to businesses, helping clients of all sizes
throughout the business lifecycle. We provide services that 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 related, proprietary services:
o FindWhat.com Network(TM)/Private Label. The FindWhat.com Network is a
performance-based, keyword-targeted advertisement service that
distributes millions of advertisements throughout the Internet each
day. Our Private Label service 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;
o Primary Traffic, currently offered through Comet Systems, by which we
establish a direct relationship with Internet users by, for example,
providing connected desktop consumer software. This provides a direct
source of traffic for our advertisers, and the opportunity for us to
optimize paid listings opportunities on the Internet; and
o Merchant Services, which provide commerce enabling products and
services that help online businesses create online storefronts, by
which they can offer products and services to prospective buyers of
such services. Merchant Services include Miva Merchant(TM), a leading
e-commerce development system that a retailer can use to create a
complete online store, including transactional capabilities.
Our primary focus is developing online marketplaces that connect
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, 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 through the FindWhat.com Network. The FindWhat.com Network
consists primarily of third-party search engines, websites, applications and
other traffic sources, which serve as distribution partners for our advertisers'
listings. We recognize 100% of the revenue from paid click-throughs on the sites
of the distribution partners in the FindWhat.com Network, and then share that
revenue with those distribution partners. We recognize only our share of the
revenue generated from private label initiatives. With both the FindWhat.com
Network and our private label offering, 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.
Our sources of primary traffic can show keyword-targeted advertisements
from the FindWhat.com Network, from our private label initiatives or from
third-party providers of paid listings.
Through our merchant services division, which includes software and
services offered by Miva, we have broadened our range of services to help online
businesses.
15
RECENT DEVELOPMENTS
On April 6, 2004, we entered into an agreement with Ingenio, Inc., the
leading provider of search and directory monetization products and services that
seamlessly bridge telephony and the Internet. Under the terms of the agreement,
we plan to incorporate Ingenio's technology, processes and systems to offer the
Pay Per Call advertising platform and services to our advertisers, distributed
through the FindWhat.com Network. Additionally, together with Ingenio, we plan
to develop and co-market a unified pay-per-click and Pay Per Call solution
(PPC(2) (TM)) to companies seeking to utilize both forms of performance-based
advertising opportunities.
On April 1, 2004, we entered into a joint venture with Thomas Global
Register, LLC ("Thomas"), a leading publisher of global business-to-business
("B2B") Internet directories for industrial products and services, and a
division of Thomas Publishing Company LLC. The name of the joint venture is
Thomas B2B.com LLC, and it will use our private label service to offer
performance-based paid listings for sellers of industrial B2B products and
services. We will account for this investment using the equity method of
accounting.
On March 22, 2004, we acquired all of the outstanding stock of Comet
Systems, Inc. ("Comet"), a leading provider of connected desktop consumer
software, pursuant to a merger of Comet with and into our wholly-owned
subsidiary. We issued Comet stockholders 837,510 shares of our common stock and
paid them approximately $8.1 million in cash, subject to certain escrow
requirements. Comet stockholders may receive up to an additional $10.0 million
in cash based on Comet's operating performance in 2004 and 2005. No additional
amount for this "earn out" has been recorded as of March 31, 2004.
On March 1, 2004, Verizon Information Services' SuperPages.com launched
a redesigned website, adding bid-for-position, pay-per-click advertisements to
its online yellow pages listings. Through a revenue sharing-based licensing
agreement, we provide the technology and business operations expertise to
support these new enhanced local SuperPages.com advertising services. The
services employ our existing infrastructure and systems, and the technology
resides on our globally redundant data centers
As of February 19, 2004, we entered into a $10.0 million revolving loan
with Fifth Third Bank, which expires on June 30, 2005. Outstanding borrowings
under the loan will bear interest at LIBOR plus 2.75 basis points per annum and
are secured by substantially all of our assets. The initial commitment fee was
$25,000 and there are no other continuing fees. To date, we have not utilized
any of the revolving loan.
On February 9, 2004, we entered into an amended and restated merger
agreement and related agreements to merge with Espotting Media Inc., a leading
provider of performance-based Internet marketing services in Europe. Under the
terms of the Espotting transaction, as amended, Espotting's stockholders will
receive approximately 7.0 million shares of our common stock and approximately
$20.0 million in cash, subject to adjustment. Additionally, the agreement
requires us to issue options and warrants to purchase approximately 800,000
shares of our common stock to Espotting's option and warrant holders. Closing of
the transaction is subject to a number of conditions, including receiving
approval of the transaction from our respective shareholders. Assuming the
fulfillment of these conditions and the receipt of all approvals, we would
expect to close the merger on July 1, 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%. On February 9, 2004, we amended the maturity date of the
note to require that the monies be repaid to us on the earliest of: (1) the day
we consummate the merger, (2) the day Espotting terminates the merger agreement
for any reason, (3) 45 days after the day we terminate the merger agreement for
any reason or we and Espotting mutually agree to the termination, and (4) July
31, 2004. As of March 31, 2004, we had incurred and capitalized approximately
$2.5 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 an expense on the date of the
termination.
On January 1, 2004, we acquired all of the outstanding stock of Miva
Corporation ("Miva"), a leading supplier of e-commerce software and services to
small and medium-sized businesses, based in San Diego, California. We issued
Miva stockholders 163,550 shares of our common stock and paid them approximately
$2.7 million in cash, and we assumed approximately $2.0 million in Miva
liabilities.
On September 25, 2003, we announced the signing of an agreement with
Mitsui & Co., Ltd. to power a performance-based, keyword-targeted advertisement
service in Japan, which is expected to launch in the summer of 2004.
16
Among other things, our growth rate and results depend on our continued
ability to:
o grow our U.S. performance-based marketing business;
o expand our performance-based marketing business geographically and
as applicable, extend into new markets;
o grow our commerce enabling services for online businesses to help
them throughout the customer lifecycle: finding, getting and
keeping customers; and
o complete, integrate and pursue additional strategic initiatives.
FindWhat.com Network click-through revenue, private label revenue, and
revenue from our primary traffic sources are recognized when earned, which is
based primarily 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 for those customers to whom we extend credit.
Revenue for software products is generally recognized as products are shipped.
Revenue from support arrangements is accounted for as a subscription, with
billings recorded as deferred revenue and recognized as revenue ratably over the
billing coverage period.
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 expand 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
RESULTS OF OPERATIONS
Three months ended March 31, 2004 and 2003
Our fiscal year is from January 1 through December 31. We commercially
launched the FindWhat.com Network in September 1999, our first private label
agreement commenced in September 2002 and we acquired Miva in January 2004 and
Comet in March 2004. When making comparisons between the three months ending
March 31, 2004 and 2003, readers should note that the results of operations of
Miva and Comet have been included in our statements of operations since the
completion of the acquisitions on January 1, 2004 and March 22, 2004,
respectively, and were a factor in the increase in our revenue and operating
expenses for the three months ended March 31, 2004 compared to the three months
ended March 31, 2003. Readers should also note that we do not anticipate our
historical growth rates to continue.
REVENUE
Revenue was approximately $24.7 million for the three months ended
March 31, 2004, compared to approximately $15.8 million for the three months
ended March 31, 2003. The increase in our overall revenue 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 three months ending March 31, 2004 and 2003, 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 the three months ended March 31, 2004 and 2003.
17
OPERATING EXPENSES
Search Serving - Search serving expense consists primarily of costs
associated with designing and maintaining the technical infrastructure which
supports our various services and fees paid to telecommunications carriers for
Internet connectivity. Costs associated with the technical infrastructure which
supports our various services 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 $844,000 for the
three months ended March 31, 2004, compared to approximately $610,000 for the
three months ended March 31, 2003. The increase was due primarily to increases
in depreciation of equipment and personnel expense. We anticipate search serving
expense will continue to increase as our traffic and number of managed active
advertiser accounts increase, and as we complete and integrate strategic
initiatives.
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;
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 $13.5
million for the three months ended March 31, 2004, compared to $9.0 million for
the three months ended March 31, 2003.
The increase in marketing, sales and service expense 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 advertising;
o consulting fees; and
o travel.
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, obtaining additional private label
partners or other third parties to provide paid listings powered by us and
obtaining users for Comet's and Miva's services - 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; expenses and fees associated with the reporting
and other obligations of a public company; travel costs; depreciation of
furniture and equipment, 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, pursuing litigation (including our
litigation with Overture Services) and evaluating and pursuing new
opportunities.
18
General and administrative expenses increased to approximately $3.5
million for the three months ended March 31, 2004, compared to approximately
$1.8 million for the three months ended March 31, 2003.
The increase in general and administrative expenses was due primarily
to increases in professional fees, personnel costs, credit card fees,
depreciation on furniture and equipment, 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 proprietary
services and depreciation for related equipment used in product development.
Product development expense was approximately $600,000 for the three months
ended March 31, 2004, as compared to approximately $298,000 for the three months
ended March 31, 2003. The increase 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.
Amortization - Amortization expense for the three months ended March
31, 2004 relates primarily to the amortization of intangible assets associated
with the acquisitions of Miva and Comet on January 1, 2004 and March 22, 2004,
respectively. We expect to continue purchasing assets or businesses, which may
result in the creation of intangible assets and additional amortization expense.
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
$180,000 for the three months ended March 31, 2004 compared to approximately
$127,000 for the three months ended March 31, 2003. The increase in interest
income was due to higher average cash and cash equivalent balances.
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.
We expect to treat the Comet acquisition as a stock acquisition for tax
purposes and hence will have different book and taxes bases. As a result, we
recognized deferred tax assets of $10.9 million, $10.0 million of which relates
to Comet's net operating loss carryforwards and $0.9 million of which relates to
other liabilities. Additionally, we recognized $4.7 million in deferred tax
liabilities in purchase accounting for the tax effect of the different book and
tax bases of the acquired intangibles other than goodwill.
For the three months ended March 31, 2004 we recorded a tax provision
of $2.4 million, which represented an approximate 39% effective tax rate, our
current approximate statutory tax rate. For the three months ended March 31,
2003, we recorded a tax provision of approximately $1.7 million, which
represents an approximate 38% effective tax rate, which was our approximate
statutory tax rate.
NET INCOME
As a result of the factors described above, we generated net income of
approximately $3.8 million, or $0.17 per basic share and $0.16 per diluted
share, for the three months ended March 31, 2004. This compares to net income of
approximately $2.7 million, or $0.15 per basic share and $0.13 per diluted
share, for the three months ended March 31, 2003. Diluted weighted average
common shares outstanding increased 2.8 million shares from 21.3 million shares
for the three months ended March 31, 2003 to 24.1 million shares for the three
months ended March 31, 2004. The increase in shares is due to the weighted
impact of 1.0 million shares issued in July 2003 related to a private placement,
approximately 1.0 million shares issued during the three months ended March 31,
2004 to acquire Miva and Comet, and shares issued related to the exercise of
options and warrants.
19
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 March 31, 2004, we
have raised net proceeds of approximately $33.6 million through private equity
financings, and received approximately $10.3 million in proceeds from the
exercise of warrants and options.
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 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 $3.6
million for the three months ended March 31, 2004. The net cash provided in the
three months ended March 31, 2004 was based primarily on net income of
approximately $3.8 million plus the recognition of depreciation and amortization
expense for the period of approximately $0.8 million and an increase in accounts
payable, accrued expenses and other liabilities of approximately $0.3 million.
The increase in cash for the period was partially offset by an increase in
accounts receivable (adjusted by the increase in the allowance for doubtful
accounts) of approximately $0.9 million and an increase in prepaid expenses and
other current assets of $0.6 million. Accounts receivable increased from
December 31, 2003 to March 31, 2004 as revenue increased over the same period.
The use of cash related to prepaid expenses and other current assets is
primarily due to an increase of additional capitalized costs of approximately
$0.4 million to a total of $2.5 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 will be written off as an expense on
the date of the termination.
Net cash used in investing activities totaled approximately $7.6
million for the three months ended March 31, 2004, and consisted of $6.5 million
for the purchase of Comet and Miva, net of cash acquired, and approximately $1.2
million in capital expenditures for equipment, furniture and fixtures.
Net cash used by financing activities totaled approximately $20,000 for
the three months ended March 31, 2004. During the three months ended March 31,
2004, we paid off approximately $1.0 million of capital leases and notes payable
previously incurred by Miva prior to our acquisition of Miva on January 1, 2004.
This use of cash for debt reduction was offset by approximately $0.9 million
from the exercise of stock options and warrants during the three months ended
March 31, 2004.
As of February 19, 2004, FindWhat entered into a $10.0 million
revolving loan with Fifth Third Bank, which expires on June 30, 2005.
Outstanding borrowings under the loan will bear interest at LIBOR plus 2.75
basis points per annum and are secured by substantially all of FindWhat's
assets. The initial commitment fee was $25,000 and there are no other continuing
fees. As of March 31, 2004 there were no amounts outstanding under the loan.
Our principal sources of liquidity consisted of approximately $55.2
million of cash and cash equivalents as of March 31, 2004, along with the
availability of $10.0 million on our revolving loan. 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.
20
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 February 9, 2004, we entered into an amended and restated merger
agreement and related agreements to merge with Espotting Media Inc., a leading
provider of performance based internet marketing services in Europe. Under the
terms of the Espotting transaction, as amended, Espotting's stockholders will
receive approximately 7.0 million shares of our common stock and approximately
$20.0 million in cash, subject to a net asset value adjustment. Additionally,
the agreement requires us to issue options and warrants to purchase
approximately 800,000 shares of our common stock to Espotting's option and
warrant holders. 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 customary
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 expect to close the merger on July
1, 2004.
Prior to our acquisition of Comet, Comet purchased the domain names
associated with Screensavers.com, Inc. which requires monthly installment
payments of $12,500 until April 2006.
We currently anticipate that our cash and cash equivalents as of March
31, 2004, together with cash flows from operations and the availability on our
revolving loan, will be sufficient to meet our anticipated liquidity needs for
working capital, acquisitions and capital expenditures over the next 12 months,
including the cash expected to be used in our announced merger with Espotting.
In the future, we may seek additional capital through the issuance of debt or
equity to fund working capital, expansion of our business and/or acquisitions or
to capitalize on market conditions. On May 6, 2004, we filed a Registration
Statement on Form S-3 with respect to the issuance of up to 6 million shares of
our authorized but unissued common stock from time to time after such
registration statement is declared effective by the Securities and Exchange
Commission. 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 look to increase our revolving loan. 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.
We have contractual obligations regarding future minimum payments under
non-cancelable operating leases and payments of principal and interest related
to long-term debt which consisted of the following at March 31, 2004 (in
thousands):
OPERATING LONG-TERM NOTE
LEASES DEBT PAYABLE TOTAL
--------- --------- ------- ------
2004 $ 1,530 $113 $1,025 $ 2,668
2005 2,050 150 341 2,541
2006 1,928 50 1,978
2007 989 989
2008 782 782
Thereafter 3,200 3,200
------- ---- ------ -------
$10,479 $313 $1,366 $12,158
======= ==== ====== =======
21
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
This Management's Discussion and Analysis of Financial Condition and
Results 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
Revenues are generated primarily through click-throughs on our managed
advertisers' paid listings. 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 our private
label service and from click-throughs by Comet's users and are recognized in
accordance with the contractual revenue share payment agreement as the services
are rendered and the click-throughs performed. In accordance with the guidance
of Emerging Issue Task Force No. 99-19, "Reporting Revenue Gross as a Principal
Versus Net as an Agent," we record FindWhat.com Network click-through revenues
gross, and private label and Comet's click-through-related revenues net.
Revenue for software licenses is generally recognized as products are
shipped. Revenue from support arrangements is recognized ratably over the
contract period of the invoice. Non click-through-related revenue from Comet is
recognized when earned under the terms of the contractual arrangement with the
advertiser or advertising agency, provided that collection is probable.
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 $282,000 at March 31, 2004. 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 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 $2.0 million of cash to Espotting in June 2003, in the form
of an 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 earliest of: (1) the day we consummate the merger,
(2) the day Espotting terminates the merger agreement for any reason, (3) 45
days after the day we terminate the merger agreement for any reason or we and
Espotting mutually agree to the termination, and (4) 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 note
receivable.
Deferred Costs
We defer acquisition-related costs related to acquisitions and mergers
which we are pursuing seriously. At March 31, 2004, we had deferred $2.5 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
22
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 deferred costs.
Income Taxes
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. This requires us to
make estimates of our future taxable results. As of March 31, 2004, we have a
net deferred tax asset of approximately $5.8 million, net of a valuation
allowance of approximately $1.0 million.
Purchase Accounting
We have made estimates of the fair values of the assets and liabilities
acquired as a part of our Miva and Comet acquisitions in the first quarter of
2004 based on appraisals from third parties and also based on certain internally
generated information. In addition, we have estimated the economic lives of
certain of these assets and these lives were used to calculate depreciation and
amortization expense.
Accrual for Excess Office Space
When we acquired Comet in March 2004, we assumed Comet's obligation
under an operating lease agreement for its office space in New York, NY. The
lease includes fixed increases in the lease payments, and expires in February
2007. Consistent with the conclusions of Comet's management, we preliminarily
believe that the amount of space leased exceeds our current and projected space
needs in New York, NY. As a result, the net present value of the remaining lease
obligation for the excess space was recorded in purchase accounting, at an
amount of approximately $1.6 million. We expect to further evaluate our plan for
the Comet office space in the next few months. If it becomes probable that we,
or a third-party sub-lessee, may occupy this unused space in the future, the
liability may be decreased and goodwill will be decreased accordingly.
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. On March 22, 2004, we acquired all of the outstanding
stock of Comet Systems, Inc., a leading provider of connected desktop consumer
software, pursuant to a merger of Comet with and into a wholly-owned subsidiary.
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, rapidly evolving and consolidating 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;
23
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 FINDWHAT.COM NETWORK'S PRINCIPAL COMPETITORS MAY HAVE PATENT RIGHTS WHICH
COULD PREVENT US FROM OPERATING THE FINDWHAT.COM SERVICES IN THEIR PRESENT FORM.
One of 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 it does 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 December 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.
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 Yahoo!, 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
that 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, Marchex's 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.
24
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 we 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 and may start competing
businesses, notwithstanding non-competition agreements. The emergence of these
enterprises could have a material adverse effect on our business, prospects,
financial condition and results of operations.
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 relationships 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 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.
THE SUCCESS OF OUR COMET DIVISION IS DEPENDENT UPON OUR ABILITY TO ESTABLISH AND
MAINTAIN RELATIONSHIPS WITH COMET'S USERS.
Our ability to generate revenue from Comet's products is dependent upon
our ability to attract new Comet users, maintain relationships with existing
Comet users and maintain or increase our revenue per Comet user. Our programs to
attract users include performance-based advertising, publicity in online and
offline publications and word of mouth. We attempt to maintain relationships
with our users through constantly improving our products. If we are unable to
attract additional users to Comet's products or fail to maintain relationships
with our current Comet users, 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 February 9, 2004, we entered into an amended and restated merger
agreement and related agreements to merge with Espotting Media Inc., a leading
provider of performance-based Internet marketing services in Europe. Under the
amended terms of the Espotting transaction, Espotting's stockholders will
receive approximately 7.0 million shares of our common stock and approximately
$20.0 million in cash, subject to a net asset value adjustment. Additionally,
the agreement requires 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
25
to a number of conditions, including receiving approval of the merger agreement,
the merger and the other transactions contemplated by the merger agreement by
the Espotting stockholders and the approval of the issuance of shares of our
common stock pursuant to the merger by our stockholders; Nasdaq's approval of
the listing application for our shares issued pursuant to the merger; approval
of the FindWhat 2004 Stock Incentive Plan and the EMI Replacement Option Plan by
our stockholders; agreement by each of us and Espotting on an estimated
adjustment amount to the merger consideration; our having at least $20 million
in cash on the closing date; the achievement by Espotting of certain monthly
operating income targets prior to closing; and material accuracy, as of the
closing date, of the representations and warranties made by the parties and
material compliance by the parties with their respective obligations under the
merger agreement. In the event the Espotting transaction is not consummated, it
could have a material adverse effect on our financial condition, 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 risk that our merger with Espotting will not be consummated;
o difficulties executing integration strategies or achieving planned
synergies after a merger with Espotting;
o risk that the Espotting transaction will be terminated, delayed or
not close when expected;
o our or Espotting's failure to retain clients as a result of
uncertainty regarding the merger agreement;
o the risk that the conditions precedent to the parties' obligations
to close under the Espotting agreement, as amended, will not be
satisfied, including the receipt of stockholder and regulatory
approvals;
o the risk that our business and the business of Espotting will
suffer as a result of uncertainty involving the merger;
o the risk that the continuity of our or Espotting's operations will
be disrupted if the merger does not close;
o the risk that Espotting will require more cash than anticipated
before closing;
o fluctuations in currency exchange rates; and
o fluctuations in the trading price and volume of our common stock.
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 are also dependent upon third parties to provide
Internet services to allow us to connect to the Internet with sufficient
capacity and bandwidth so that our business can function properly and our
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 and operate
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;
26
o the potential of disagreements with our partners regarding their
relationship with us;
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 May 6, 2004, we had 222 full time employees, including
employees of our wholly-owned subsidiaries, a number of whom have joined us
within the last five months. Our new employees include a number of key
managerial, technical, financial, marketing and operations personnel 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, including expansion internationally. 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. Our inability to attract and retain the necessary technical personnel 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 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 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.
27
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.
We use certain Internet domain names for our respective products and
services which we believe 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, 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 its confidentiality agreements or produce patents and copyrights
that would materially 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), MIVA(R) and COMET CURSOR(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.
28
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 that may cover our business model and has acquired an
issued patent that may be applicable to our business model. See "Our principal
competitor may have patent rights which could prevent us from operating the
FindWhat.com 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 may be unable to obtain such
insurance in the near future due to high cost or other reasons. We believe that
the loss of the services of any of our executive officers or other key employees
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
OUR 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 that
may be issued by our board of directors for such consideration as they may
consider sufficient without seeking stockholder approval. Additionally, at our
2004 annual meeting of stockholders, we are seeking stockholder approval of an
amendment to our articles of incorporation that would increase the number of
authorized shares of common stock to 200,000,000. 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 that 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 holders of our securities.
WE DO NOT INTEND TO PAY FUTURE CASH DIVIDENDS.
We have never paid cash dividends and 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. The loan
agreement we entered into as of February 19, 2004 restricts 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
29
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 March 31, 2004, we have outstanding stock options under our 1999
Stock Incentive Plan to purchase approximately 3,632,817 million shares of
common stock at a weighted average exercise price of $5.79 and warrants to
purchase approximately 282,500 shares of common stock at a weighted average
exercise price of $3.40 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;
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, our merchant
services and our Comet products and 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.
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RECENT ACQUISITIONS MAY RESULT IN A DISRUPTION OF OUR EXISTING BUSINESS,
DISTRACTION OF MANAGEMENT, AND DIVERSION OF OTHER RESOURCES.
We recently acquired Miva Corporation, a leading supplier of e-commerce
software and services to small and medium-sized businesses, and Comet Systems,
Inc., a leading provider of connected desktop consumer software. The
integrations of Miva and Comet are made more challenging because our historical
business has focused on the performance-based marketing industry, and both Miva
and Comet require different knowledge and sets of skills than we have needed
previously. These integrations may divert management time and resources from our
original businesses. It is possible that these integration efforts will not be
completed as planned, will take longer to complete or will be more costly than
anticipated, any of which could have a material adverse effect on the operations
of the combined entity.
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 IS UNCERTAIN AND IS STILL EVOLVING.
Internet marketing and advertising, in general, and advertising through
priority placement in keyword-targeted ads in particular, are at early stages of
development, are evolving rapidly and are characterized by an increasing number
of market entrants. Our future revenues and profits are substantially dependent
upon the widespread acceptance and use of the Internet and other online services
as an effective medium of commerce by merchants and consumers. Rapid growth in
the use of and interest in the Internet, the Web and online services is a recent
phenomenon, and may not continue on a lasting basis. In addition, customers may
not adopt, and continue to use, the Internet and other online services as a
medium of commerce. The demand and market acceptance for recently introduced
services is generally subject to a high level of uncertainty. Most potential
advertisers have only limited experience advertising on the Internet and have
not devoted a significant portion of their advertising expenditures to Internet
advertising. If this trend continues, the market for our existing services,
which are dependent upon increased Internet advertising, may be adversely
affected, which in turn will have a material adverse effect on our business,
prospects, financial condition or results of operations.
WE WILL NEED TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE IN THE INTERNET SEARCH
AND ADVERTISING INDUSTRIES.
In order to remain competitive, we will be required continually to
enhance and improve the functionality and features of our existing 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
31
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 its 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 a 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 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 March 31, 2004, together with cash flows from
operations and the availability on our $10.0 million revolving loan, will be
sufficient to meet the anticipated liquidity needs for working capital and
capital expenditures over the next 12 months, including the cash expected to be
used in our announced merger with Espotting. In the future, we may seek
additional capital through the issuance of debt or equity to fund working
capital, expansion of our business and/or acquisitions or to capitalize on
market conditions. On May 6, 2004, we filed a Registration Statement on Form S-3
with respect to the issuance of up to 6 million shares of our authorized but
unissued common stock from time to time after such registration statement is
declared effective by the Securities and Exchange Commission. 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 may seek to sell
additional equity or debt securities or obtain additional bank lines 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.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures as of the end of the
period covered by this report are effective to provide reasonable assurance that
our disclosure controls and procedures will timely alert them to material
information required to be included in our periodic SEC reports.
As of the end of the period covered by this report, there has been no
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934, as amended)
during the quarter to which this report relates that has materially affected or
is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One of the 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"
(U.S. Patent No. 6,269,361, "the `361 patent"). 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
December 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 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 1, 2004, we issued 163,550 shares of common stock in
connection with our acquisition of Miva Corporation. These shares were issued
pursuant to an exemption from registration under Section 3(a) (10) of the Act.
On March 22, 2004, we issued 837,510 shares of common stock in
connection with our acquisition of Comet Systems, Inc. These shares were issued
pursuant to an exemption from registration under Regulation D of the Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Quarterly Report on Form
10-Q:
(1) Exhibits:
Number Exhibit
2.1### 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.
2.3##### Amended and Restated Agreement and Plan of Merger among
FindWhat.com, Haley Acquisition Corp. and Comet Systems, Inc.,
dated March 14, 2004.
3.1* Articles of Incorporation of FindWhat.com (f/k/a Collectibles
America, Inc.).
3.2** Amended and Restated By-laws of FindWhat.com.
3.3***** Audit Committee Charter.
10.1##/+ Amended and Restated Executive Employment Agreement between
FindWhat.com and Craig A. Pisaris-Henderson.
10.2##/+ Amended and Restated Executive Employment Agreement between
FindWhat.com and Phillip R. Thune.
10.3###### Loan and Security Agreement by and between Fifth Third Bank,
as lender, and FindWhat.com, as borrower, dated February 19,
2004.
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.
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).
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** 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 exhibit previously filed on March 5,
2004 with FindWhat.com's Form 10-K for the year ended December 31, 2003.
# 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.
##### Incorporated by reference to the exhibit previously filed on April 6,
2004 with FindWhat.com's Form 8-K.
###### Incorporated by reference to the exhibit previously filed on March 12,
2004 with FindWhat.com's Form S-4.
+ Management compensatory contract or plan.
(b) Reports on Form 8-K
Report on Form 8-K, dated January 6, 2004, regarding the completion of
the acquisition of Miva Corporation (Items 2 and 7), as filed with the
Securities and Exchange Commission on January 6, 2004.
Report on Form 8-K, dated January 9, 2004, regarding the addition of
David Londoner to the Board of Directors (Items 5 and 7), as filed with the
Securities and Exchange Commission on January 9, 2004.
Report on Form 8-K, dated February 9, 2004, regarding fourth quarter
financial results (Items 7 and 9), as filed with the Securities and Exchange
Commission on February 10, 2004.
Report on Form 8-K, dated February 9, 2004, regarding the execution of
an amended merger agreement with Espotting Media Inc. (Items 7 and 9), as filed
with the Securities and Exchange Commission on February 10, 2004.
Report on Form 8-K, dated February 23, 2004, regarding the acquisition
of Comet Systems, Inc. (Items 5 and 7), as filed with the Securities and
Exchange Commission on February 23, 2004.
Report on Form 8-K, dated March 23, 2004, regarding the completion of
the acquisition of Comet Systems, Inc. (Items 5 and 7), as filed with the
Securities and Exchange Commission on March 23, 2004.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINDWHAT.COM
Date: May 7, 2004 By: /s/ Phillip R. Thune
-----------------------------------
Phillip R. Thune
Chief Operating Officer and Chief Financial
Officer (Duly Authorized Officer and Principal
Financial and Accounting Officer)
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