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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
 88-0348835
(I.R.S. Employer
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)

FindWhat.com
(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              NO    

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES              NO    

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 30,274,201 shares of Common Stock, $.001 par value, were outstanding at October 29, 2004.

FORM 10-Q

FindWhat.com, Inc.

Table of Contents

      Page No.
PART I. FINANCIAL INFORMATION  
       
  Item 1. Financial Statements.  
       
    3
       
    4
       
    5
       
    6
       
  18
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk. 41
     
  Item 4. Controls and Procedures. 41
     
PART II. OTHER INFORMATION  
     
  Item 1. Legal Proceedings. 42
     
  Item 5. Other Information 42
     
  Item 6. Exhibits 43
     
  Signature 44

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Item 1. Financial Statements

FindWhat.com, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)

          September 30,     December 31,  
         

2004

 

 

2003

 
       
 
 
          (unaudited)        
ASSETS              
CURRENT ASSETS              
  Cash and cash equivalents   $ 46,180   $ 59,210  
 
Accounts receivable, less allowance for doubtful accounts of $3,269 and $223 at September 30, 2004 and December 31, 2003, respectively
    26,600     5,051  
  Deferred tax assets     —     180  
  Note receivable     —     2,054  
  Income taxes receivable     1,975     758  
  Prepaid expenses and other current assets     1,844     2,554  
       
 
 
    Total current assets     74,599     69,807  
                   
EQUIPMENT AND FURNITURE – NET     9,226     4,695  
INTANGIBLE ASSETS – NET     223,810     —  
DEFERRED TAX ASSETS     1,698     —  
OTHER ASSETS     539     156  
       
 
 
    Total assets   $ 309,872   $ 74,658  
       
 
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY              
                   
CURRENT LIABILITIES              
  Accounts payable and accrued expenses   $ 34,247   $ 7,770  
  Deferred revenue     4,331     1,866  
  Current portion of long-term debt     826     —  
  Deferred income tax liabilities     623     —  
  Current portion of rent related liabilities     771     —  
       
 
 
    Total current liabilities     40,798     9,636  
                   
DEFERRED INCOME TAXES     —     600  
LONG-TERM DEBT     86     —  
RENT-RELATED LIABILITIES     1,354     115  
       
 
 
    Total liabilities     42,238     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, 200,000 shares; issued 30,255 and 21,428, respectively; outstanding 30,212 and 21,421, respectively
      30       21  
  Additional paid-in capital     245,578     52,884  
  Treasury stock; 43 and 7 shares at cost, respectively     (804 )   (82 )
  Accumlated other comprehensive income     (934 )   —  
  Retained earnings     23,764     11,484  
       
 
 
    Total stockholders’ equity     267,634     64,307  
       
 
 
    Total liabilities and stockholders’ equity   $ 309,872   $ 74,658  
       
 
 

See Notes to Unaudited Condensed Consolidated Financial Statements.

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FindWhat.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

                                 
            Three months ended September 30,     Nine months ended September 30,  
            2004     2003     2004     20043  
         
 
 
 
 
Revenues     $ 58,293   $ 17,841   $ 110,744   $ 51,202  
         
 
 
 
 
Operating expenses                          
  Search serving     1,864     714     3,857     2,046  
  Marketing, sales and service     35,650     10,222     63,365     29,282  
  General and administrative     8,815     2,073     16,468     5,871  
  Product development     1,872     416     3,768     1,094  
  Amortization     2,225     —     3,499     —  
         
 
 
 
 
Total operating expenses     50,426     13,425     90,957     38,293  
         
 
 
 
 
Income from operations     7,867     4,416     19,787     12,909  
Other expense     (14 )   —     (14 )   —  
Interest income, net     106     158     380     368  
         
 
 
 
 
Income before provision for income taxes     7,959     4,574     20,153     13,277  
                                 
Income tax expense     3,118     1,759     7,873     5,060  
         
 
 
 
 
Net income       $ 4,841   $ 2,815   $ 12,280   $ 8,217  
         
 
 
 
 
Net income per share                          
  Basic   $ 0.16   $ 0.14   $ 0.50   $ 0.42  
     
 
 
 
 
  Diluted   $ 0.15   $ 0.12   $ 0.46   $ 0.37  
         
 
 
 
 
Weighted-average number of common shares outstanding                          
  Basic     30,055     20,435     24,792     19,353  
     
 
 
 
 
  Diluted     32,208     23,338     26,925     22,149  
     
 
 
 
 

See Notes to Unaudited Condensed Consolidated Financial Statements.

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FindWhat.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

                     
            Nine months ended September 30,  
            2004     2003  
Cash Flows from Operating Activities  
 
 
  Net income   $ 12,280   $ 8,217  
  Adjustments to reconcile net income to net cash provided by operating activities              
    Provision for doubtful accounts     513     80  
    Depreciation and amortization     5,835     1,245  
    Tax benefit of stock option exercises     3,676     —  
    Deferred income tax expense     2,429     446  
    Loss on sale of assets     —     11  
    Changes in operating assets and liabilities      
      Accounts receivable     (4,141 )   (1,418 )
      Prepaid expenses and other current assets     2,275     (1,804 )
      Income taxes receivable     (1,068 )   —  
      Other assets     1,905     11  
      Deferred revenue     (154 )   54  
      Accounts payable, accrued expenses and other liabilities     (10,608 )   2,569  
         
 
 
  Net Cash Provided by Operating Activities     12,942     9,411  
         
 
 
Cash Flows from Investing Activities              
  Advances under note receivable     —     (2,029 )
  Proceeds from the sale of assets     —     8  
  Proceeds from short-term investments     —     3,157  
  Purchase of businesses, net of cash acquired     (20,343 )   —  
  Purchase of equipment and furniture     (5,048 )   (2,420 )
         
 
 
  Net Cash Used in Investing Activities     (25,391 )   (1,284 )
         
 
 
Cash Flows from Financing Activities              
                     
  Payments made on capital leases and notes payable     (1,732 )   (4 )
  Net proceeds from private placements     —     20,001  
  Proceeds received from exercise of stock options and warrants     2,085     7,897  
         
 
 
  Net Cash Provided by Financing Activities     353     27,894  
         
 
 
Effect of Foreign Currency Exchange Rates     (934 )   —  
         
 
 
(Decrease) Increase in Cash and Cash Equivalents     (13,030 )   36,022  
                     
Cash and Cash Equivalents, Beginning of Period     59,210     17,982  
         
 
 
Cash and Cash Equivalents, End of Period   $ 46,180   $ 54,004  
         
 
 
Supplemental Disclosures of Cash Flow Information:              
  Interest paid   $ 58   $ 3  
     
 
 
  Income taxes paid   $ 5,605   $ 4,117  
         
 
 
Supplemental Schedule of Noncash Investing and Financing Activities:              
  Treasury stock received to satisfy accrued liabilities   $ 722   $ —  
     
 
 
  Stock issued for acquisitions   $ 186,942   $ —  
     
 
 

See Notes to Unaudited Condensed Consolidated Financial Statements.

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FindWhat.com, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)

NOTE A – NATURE OF BUSINESS

FindWhat.com, Inc. is a corporation organized under the laws of the State of Delaware. On September 3, 2004, FindWhat.com, a Nevada corporation and the former public reporting company, was merged with and into FindWhat.com, Inc., resulting in the reincorporation to the State of Delaware of the public reporting company. FindWhat.com, Inc and its direct and indirect wholly-owned operating subsidiaries, BeFirst Internet Corporation, Espotting Media Inc. (“Espotting”), Miva Corporation (“Miva”), Comet Systems, Inc. (“Comet”) and B&B Advertising, Inc. (“B&B”) are collectively referred to as the Company. The Company creates and offers proprietary performance-based marketing and commerce enabling services that help businesses of all sizes throughout the business cycle in reaching prospects, converting prospects to customers and then retaining those customers. The Company currently provides three related, proprietary services under four operating divisions:

• Performance-based Marketing
   
  o FindWhat.com Network™/Private Label. The FindWhat.com Network is a performance-based, keyword-targeted advertising service that distributes advertisements throughout the Internet each day, primarily in the United States. 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 Espotting Network. On July 1, 2004, FindWhat.com completed a merger with Espotting Media Inc. and formed its Espotting Network division. As with the FindWhat.com Network, the Espotting Network distributes advertisements throughout the Internet each day. Espotting’s operations are primarily in Europe, with operations in the U.K., France, Germany, Italy, Spain and Scandinavia;
     
• Primary Traffic. Through Comet, the Company offers services such as connected desktop consumer software, which allow the Company to establish a direct relationship with Internet users. These services create a direct source of traffic for the Company’s advertisers and enable the Company to obtain additional information about maximizing paid listings opportunities on the Internet on behalf of its network traffic partners; and
   
• Merchant Services. The Company offers commerce-enabling products and services that help online businesses capitalize on opportunities unique to transacting business on the Internet. Merchant Services include Miva Merchant™, a leading e-commerce development system that allows a merchant to create a complete online store within an existing website or when creating a new website.

The Company offers its marketing services on three continents: the FindWhat.com Network in North America, the Espotting Network in Europe and Listop (a performance-based, keyword-targeted advertising service offered through a private label agreement with Mitsui & Co., Ltd.) in Asia.

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Presentation
   
    The consolidated financial statements include the accounts and operations of FindWhat.com, Inc. and its direct and indirect wholly-owned operating subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities in which the Company can exercise significant influence but is not the primary beneficiary, are accounted for under the equity method of accounting and are included in other assets on the balance sheet.

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NOTE B (continued)

    The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal 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.
     
3. Accounts Receivable
 
    Accounts receivable are recorded at face value, less an allowance for doubtful accounts. The allowance for doubtful accounts is an estimate that is calculated based on an analysis of current business and economic risks, customer credit-worthiness, specific identifiable risks such as bankruptcies, terminations or discontinued customers, and other factors that may indicate a potential loss. The allowance is reviewed on a regular basis to adequately provide for all reasonably expected losses in the receivable balances. An account may be determined to be uncollectible 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. Uncollectible amounts are written off against the allowance. The Company does not require collateral in connection with billable accounts.
     
  4. Prepaid Expenses and Other Current Assets
     
    The Company capitalizes legal, advisory and other costs associated with an acquisition or merger transaction that are considered to be direct costs of the transaction. These and any additional transaction costs are considered part of the purchase price for accounting purposes when the acquisition is consummated.
     
5. Equipment and Furniture
 
    Equipment and furniture are stated at cost except in the case of items acquired as a part of business acquisitions which are recorded at fair value on the date of acquisition. Equipment and furniture are depreciated using the straight-line method over the estimated useful lives for the respective assets, which range from two 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 life of three years.
     
7. Revenue
 
    Revenue is generated primarily through click-throughs on the Company’s managed advertisers’ paid listings. When an Internet user clicks on a keyword advertisement, revenue is recognized in the amount of the advertiser’s bid price. Revenue is also generated from the Company’s private label service and is recognized in accordance with the contractual payment agreements 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 the FindWhat.com and Espotting Network click-through revenue gross, and private label revenue net.

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NOTE B (continued)

  Revenue for network set-up fees are deferred and recognized over the expected life of the advertiser’s relationship with the Company. Revenue for software licenses is generally recognized as products are shipped and all customer acceptance has occurred. Revenue from support arrangements is recognized ratably over the contract period of the invoice. When a Comet user clicks on a sponsored advertisement on a partner’s network, revenues are recognized in the amount of the partner’s fee due to Comet. 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 primarily represents advance deposits made by the Company’s advertisers for future click-throughs for keyword advertisements on both the FindWhat.com and Espotting Networks, the unearned portion of support revenues, and other revenues that do not meet the criteria for revenue recognition as of the balance sheet date.
   
9. Fair Value of Financial Instruments
   
  At September 30, 2004, the Company’s financial instruments included cash, cash equivalents, accounts 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 and Espotting Networks, its Private Label agreements and Primary Traffic. Due to the immateriality of the Company’s 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 and nine months ended September 30, 2004 and 2003, using the fair value method of SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
   
   
Three months ended
September 30,
Nine months ended
September 30,
       
 
 
       
2004
2003
2004
2003
 
       
 
 
 
 
  Net income, as reported   $ 4,841   $ 2,815   $ 12,280   $ 8,217  
  Deduct: Total stock-based employee compensation                          
    expense determined under fair value based method                          
    for all awards, net of related tax effects     (1,575 )   (865 )   (4,703 )   (1,928 )
       
 
 
 
 
  Pro forma net income   $ 3,266   $ 1,950   $ 7,577   $ 6,289  
       
 
 
 
 
  Earnings per share: