FINDWHAT COM INC - 10-K Annual Report

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

Form 10-K

	(Mark One)
		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Fiscal Year Ended December 31, 2004
		or
		Transition Report Pursuant to 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			88-0348835
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

5220 Summerlin Commons Blvd Fort Myers, Florida 33907			(239) 561-7229
(Address of principal executive offices, including zip code)			(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:		None
Securities registered pursuant to Section 12(g) of the Act:		Common Stock, $.001 par value
		(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No

The aggregate market value of the Registrant’s common equity held by non-affiliates of the Registrant was approximately $485.6 million on June 30, 2004.

There were 30,661,108 shares of the Registrant’s Common Stock outstanding on January 31, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2004. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.

PART I

Forward-Looking Statements

This document contains certain forward-looking statements that are based upon current expectations and involve certain risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words or expressions such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “estimate,” “project,” or variations of these words as well as similar words or expressions are intended to identify forward-looking statements. Additionally, this document contains forward-looking statements attributed to certain third-parties relating to, among other things, their estimates regarding the growth of the Internet, Internet advertising, and online commerce markets and spending. Readers should not place undue reliance on the forward-looking statements contained in this document, which apply only as of the date of this report, or, in the case of third-party forward-looking statements, the date of such third-party’s statements or reports. We undertake no obligation to update the information contained herein. Our actual performance and results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to economic changes and changes in the Internet industry generally. Key Risk Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled “Business Risks” included herein at Page 17.

Item 1. Business.

Overview

FindWhat.com, Inc. (“we” “our” “us” “FindWhat” or “the Company”) and its predecessors have been providing e-commerce solutions since 1998. We offer 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.

To accomplish this full circle e-commerce offering, we provide five related, proprietary services under two business units:

	•	Performance-based Marketing

			o	FindWhat.com Network™ The FindWhat.com Network is a performance-based, keyword-targeted advertising service that distributes advertisements throughout the Internet each day, primarily in North America;

			o	Espotting Network. As with the FindWhat.com Network, the Espotting Network distributes advertisements throughout the Internet each day primarily in Europe. Espotting’s operations are primarily in the U.K., France, Germany, Italy, Spain and Scandinavia;

			o	Private Label. Our Private Label service offers large companies the opportunity to brand and sell their own performance-based, keyword-targeted advertising service using all or a portion of our turn-key operation;

Primary Traffic. We offer services such as toolbars, screensavers and other unique and effective interactive products and services that allow us to establish a direct relationship with Internet users. These services create a direct source of traffic for our advertisers and enable us to maximize paid listings opportunities on the Internet on behalf of our network traffic partners.

•

Merchant Services Division. We offer commerce-enabling products and services that help online businesses capitalize on opportunities unique to transacting business on the Internet through our subsidiary, Miva Corporation. Our Merchant Services division includes 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.

We maintain an Internet website at http://www.findwhat.com. We make available free of charge on our website links to our annual reports on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Information on our website is not incorporated by reference into this report. Additionally, individuals can access our electronically filed reports, proxy statements and other information through the Internet site maintained by the Securities and Exchange Commission at http://www.sec.gov. The public may also read and copy any materials we file with the Securities and Exchange Commission at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.

Recent Developments and Company History

During 2004, we continued to build our primary business, as we executed the first phase of our global growth strategy by completing a number of transactions, including the merger or acquisition of five businesses and the expansion of our private label relationships to include the launch of a number of new Private Label partners. We also were the first paid listings company to launch an auction-based, Pay Per Call solution. Through these initiatives and others, we now have new or enhanced product and service offerings in eleven countries on three continents. In 2005, we intend to continue building upon the synergies created in 2004, while pursuing additional strategic opportunities as they become available. Strategic highlights for 2004 include the following:

On January 1, 2004, we acquired all of the outstanding stock of Miva Corporation, a leading supplier of e-commerce software and services to small and medium-sized businesses. Miva is based in San Diego, California. Miva subsequently acquired the assets of MvCool on September 1, 2004. Following our acquisitions of Miva and MvCool, we launched MivaCentral.com on September 16, 2004. MivaCentral.com is a newly created retail outlet serving the software and service needs of online merchants. As a result of these acquisitions and the launch of MivaCentral.com, we have been able to combine several commerce enabling services into a comprehensive e-commerce solution for small and medium sized merchants interested in establishing, maintaining and growing an e-commerce business.

On March 22, 2004, we acquired all of the outstanding stock of Comet Systems, Inc., a leading provider of connected desktop consumer software. Through Comet, we have access to the millions of consumers who have voluntarily downloaded Comet software and search functionality directly onto their personal computers. This direct connection to the end consumer allows us to enhance our keyword-targeted, performance-based advertising service. In addition, we have leveraged Comet’s desktop software technology to offer toolbars and other downloadable applications to our FindWhat and Espotting Network partners under our partners’ own brands, increasing the value we can provide to our distribution partners.

On June 4, 2004, we acquired certain assets of B&B Enterprises, Inc., which we refer to as BBE. The assets purchased included BBE’s proprietary client tools, distribution partner interfaces and implementation software used within its performance-based, keyword-targeted advertising business. This new operating unit of the FindWhat.com Network is referred to as B&B Advertising, Inc., or B&B. B&B’s resources allow the FindWhat.com Network to target small distribution partners through related proprietary tools and processes.

On July 1, 2004, one of our subsidiaries merged with Espotting Media Inc., one of Europe’s leading paid listing providers, resulting in Espotting becoming our wholly-owned subsidiary. Our combination with Espotting established us as an international leader in performance based marketing, with operations and partnerships throughout the world. The merger has also expanded our core services into a geographic region where we previously had only a minor presence.

On September 3, 2004 we completed our reincorporation from the state of Nevada to the state of Delaware as a result of the merger of FindWhat.com, a Nevada corporation and the former public reporting company, with and into FindWhat.com, Inc., a Delaware corporation and the current public reporting company. The reincorporation did not cause any change in our personnel, management, assets, liabilities, net worth or the location of our headquarters. As a result of the reincorporation, we adopted the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of FindWhat.com, Inc. The reincorporation was previously approved by our shareholders at our annual meeting held on June 4, 2004.

On September 14, 2004, we launched our Pay Per Call service. Similar to our pay-per-click service, advertisers using the Pay Per Call advertising platform and services create advertisements relevant to their businesses that are shown to prospective customers searching for products and services on the FindWhat.com Network. With the Pay Per Call service, advertisers then pay when someone calls a special toll free number contained in the advertisement, as opposed to the pay-per-click service where advertisers pay when someone clicks on their advertisement and is transferred to their website.

On December 29, 2004, we entered into a Perpetual License Agreement with Fast Search & Transfer, entitling us to an enterprise license for FAST’s Data Search^TM 360 data search and analysis software. Utilizing FAST’s technology, we intend to enhance our business in several core areas, including the following specific projects currently under review or now underway:

	•	Enhancement and automation of our paid placement search infrastructure to improve editorial efficiencies using FAST’s computational linguistic technologies;

	•	Creation of relevant contextual algorithms to supply greater traffic opportunities for our advertisers;

	•	Creation of additional search-based solutions for our merchant customers, potentially including shopping search and site search solutions; and

•

Creation of premium web search catalogs covering our major territories to deliver a more robust and complete product offering to our distribution partners.

Industry Overview

Since the launch of the Internet for commercial enterprise, there has been one constant: the number of visitors to a website has a direct impact on the success of that website. Based upon this tenet, an entire industry has been developed around driving Internet users to certain websites. It is our belief that all online businesses, regardless of size, and especially those that rely on their websites for revenue or to disseminate information about their products and services, are constantly seeking to increase the number of visitors to their websites for the opportunity to convert each visitor into a paying customer.

According to the Interactive Advertising Bureau (IAB), online advertisers have, over the last few years, turned more and more to performance-based advertising on the Internet as an alternative to traditional forms of advertising when fulfilling their marketing objectives. Historically, advertising, including most online advertising, has been impression-based, with advertisers being charged based on the number of viewers, listeners, readers or users who are potentially exposed to their ad. The banner advertising that is prevalent on many websites is a form of impression-based advertising. Companies that engage in impression-based advertising usually cannot guarantee to those paying for the ad that the users exposed have any interest in the product or services advertised, or that they even noticed the advertisement. Increasingly, online advertisers are demanding the heightened accountability of performance-based advertising alternatives, where advertisers pay for every prospect that undertakes a predetermined action, be it clicking-through to an advertiser’s website, calling an advertiser or registering for or buying the products or services offered by the advertiser. According to the IAB, 38% of all U.S. online advertising spending in the first six months of 2004 was performance-based, versus 33% in the same period in 2003 and 15% in the same period in 2002.

With performance-based advertising, Internet advertisers can select from a variety of alternatives, including pay-per-click, pay-per-call, pay-per-lead, banner display advertisements, e-mail and pop-up campaigns. However, of these alternatives, performance-based, keyword-targeted, search-based advertisements have grown faster than most others, due, we believe, to their distinct advantages. Among those advantages is the ability of an advertiser to get its message in front of a prospect at the very time that prospect is displaying an interest in the product or service the advertiser is offering, either because the prospect has searched for the keyword, clicked on a directory link, or has visited a site that relates to the keyword. We believe that as a result of these advantages, advertisers have allocated increased amounts of their online marketing budgets to keyword-targeted, search-based advertisements (or “paid listings”). According to the IAB, paid listings accounted for 40% of total online advertising revenue during the first six months of 2004, compared to 29% during the same period in 2003. According to eMarketer, Inc. in November 2004, revenue from paid listings in the United States will be approximately $4.96 billion in 2005, and will grow to approximately $6.74 billion by 2008.

Prospective buyers can find paid listings via browser applications, customized downloadable applications and websites that provide Web directories, search engines or contextually relevant listings. These applications and websites enable potential customers, be they individual consumers or businesses, to find listings of advertisers’ websites matching a descriptive word or phrase, while offering advertisers exposure to a highly relevant Internet audience that has already indicated an interest in their products or services. As evidenced by the increase in spending on paid listings, it has become a more important tool for sellers of product and services to find prospective buyers in a fast, organized and convenient manner.

Of course, these positive trends towards paid listings are not without obstacles for all parties concerned, and we believe Internet users, advertisers, high traffic sites and portals, and small to medium sized enterprises face numerous challenges. Through our suite of product and service offerings, we believe we have addressed these challenges through best-in-class solutions. The following table sets forth the challenges we believe exist to each of the above referenced groups and our corresponding solutions:

Issues Facing Internet Users:

Unmet Commercial Search Requirements. Businesses and consumers are capitalizing on the efficiency and interactive nature of the Internet to research and purchase goods and services. However, the number of commercial websites on the Internet is large and growing rapidly, and finding the exact product or service desired among the billions of web pages available on the Internet can be frustrating and time-consuming.

Our Solutions:

Efficiency of the Pay-for-Performance Model. We believe that the bid-for-position, pay-for-performance model delivers a better and more relevant list of commercial sites for Internet users looking for a product or service, because companies actively promoting and selling the desired goods and services are positioned first within the list of FindWhat.com or Espotting keyword ads displayed in response to that Internet user’s query.

Accessibility. Through our distribution partners’ websites and browser applications, advertisements placed in the FindWhat.com and Espotting Networks enjoy wide accessibility for online users across the Internet.

High quality content. We have written and strictly enforce advertising guidelines to ensure high relevancy standards. Additionally, advertisers police their own activity to avoid paying for traffic that is not likely to convert to a sale of their products or services.

Issues Facing Advertisers:

Barriers to online advertising. Advertisers of all sizes are faced with the challenge of attaining wide distribution of their advertisements on a cost-effective basis to those Internet users that are most interested in their products or services. In order to achieve this goal, advertisers must select an advertising channel that allows them control over the resources they dedicate to a particular campaign, as well as the ability to intelligently determine which campaigns are providing successful results, all with minimal effort.

Our Solutions:

Control. Our advertisers can access their account to change or edit their company or product description at any time. Advertisers control, monitor, track, organize, budget and manage their bids, placement of their keyword ads, total expenditures, and their cost per visitor or introduction. As a result, advertisers can easily determine and work to improve the return on their advertising investment with us.

Widespread Distribution. By bidding into the top positions for keywords or phrases, an advertiser’s keyword ad will appear on the websites of the distribution partners in our networks, which are primarily comprised of smaller online entities, including category-specific websites, that tend to generate targeted prospects for our advertisers.

Efficiency, accountability and evaluation. We bring efficiency and accountability to the purchase of Internet advertising and address the most common objection marketers have when considering any advertising expenditure–knowing precisely what they are getting for their money. Our FindWhat.com Network advertisers also have access to a free post-click analytical tool that can tell them how well their keyword campaign is doing, including information on return on investment by keyword. This furthers the accountability of advertising on the FindWhat.com Networks and allows advertisers to optimize their campaigns based on conversion data made available to them.

Issues Facing High Traffic Websites and Large Portals:

Need by large portals and high traffic websites to create deeper relationships with large numbers of advertisers in order to attract interest in the advertising services they offer. While most browser applications and websites that provide Web directories, search engines or contextually relevant listings are small or medium-sized businesses, and have limited sales capabilities, the largest portals and high traffic websites maintain extensive sales forces and offer a variety of advertising services. We believe large portals and high traffic websites recognize the benefits of offering their own performance-based, keyword-targeted advertisement service, but do not have the capability or desire to service or manage many of the details involved with such a service. These details include the time and expense required for reviewing advertisers’ listings for relevancy and ensuring that advertisers are only charged for legitimate click-throughs or calls. However, if the services are not offered directly to advertisers under the brand of this large portal or high-traffic website, and are instead outsourced, the opportunity for a direct relationship with those advertisers may be lost, preempting the development of a relationship for other advertising services.

Our Solutions:

Speed to Market and Cost Savings. Our experience and ability at designing and operating a keyword-targeted advertisement service for our private label partners makes a strategic partnership with FindWhat.com an efficient and logical choice. We also believe that we can offer the private label service at a lower ongoing cost than the portal would incur to manage the service itself, with a higher level of service to advertisers, due to our experience and the efficiencies we realize by leveraging assets built to run our FindWhat.com and Espotting Networks.

Direct Relationship with Advertisers / Cross-Selling Opportunities. Portals and high traffic websites that import paid listings from third parties do not maintain a relationship with the advertisers appearing on their sites. While this may be a benefit to a smaller website that does not have its own sales force, it can be a detriment to a large portal or company that offers or would like to offer a number of advertising alternatives. Over the last few years, advertiser demand for keyword-targeted, performance-based advertising services – specifically the ability to pay-for-placement within search results on large portals – has grown dramatically, and prominent position within search results can now command high bid prices per click or call. We believe advertisers are quick to realize which company can provide that position, and the advertiser will likely go straight to that third party, bypassing the portal. In such an instance, the sales force of a portal or high traffic website has lost an opportunity to build a direct relationship with an advertiser, which might have been a candidate for other advertising offerings. With our private label service, our partner maintains the relationship with the advertisers, and its sales force now has the opportunity to contact any of the advertisers attracted by the keyword-targeted advertising service to determine if there is an interest in an expanded relationship.

Issues Facing High Traffic Websites and Large Portals (continued):

Need by browser applications and websites that provide Web directories, search engine capabilities, or contextually relevant listings to fund their offerings to Internet users and capitalize on advertiser demand for performance-based, keyword-targeted advertisements. In order to attract Internet users, providers of browser applications and high-traffic websites need to create compelling tools, functionality and content, all of which are generally costly to build and maintain, especially given the intense and growing competition on the Internet. In order to fund these offerings, providers of these applications and websites need to ensure that they take full advantage of the opportunities presented by users visiting their websites or utilizing their applications. Specifically, providers of browser applications and websites need a revenue source that is able to capitalize on both the demand by Internet users for high quality, relevant commercial listings, and the demand by online advertisers of all sizes for performance-based, keyword-targeted advertisements. Further, many of the purveyors of these websites and applications are small and need expert, reliable assistance in generating revenue and managing the sources of their traffic.

Our Solutions:

High quality content. Our database of keyword advertisements represents continuously updated, high quality content for any website or browser application that desires to offer its users access to e-commerce-oriented information. Our bid-for-position, pay-per-click and pay-per-call environment encourages the most relevant, highest-quality advertisers to actively pursue the top positions in our list of keyword ads.

Sustainable, recurring, high margin revenue. By including keyword ads from the FindWhat.com and/or Espotting Network, our distribution partners can earn revenue from their users who are interested in finding products or services. Because we handle all of the interaction with the advertisers required to offer a comprehensive, keyword-targeted advertisement service, there is very little cost involved for our distribution partners to receive their share of this recurring revenue stream.

Ability to Focus on Core Business. For those large companies with leadership positions looking to extend into the paid listings advertising market, consideration must be given to the ability of the company to enter that market without losing focus on these core business initiatives, while finding a strategic partner who is not a competitor or a potential competitor. Given that the skills and effort required to run a keyword-targeted advertisement service are very different from those of running a large portal or high traffic website, and would require significant investment and management focus in order to provide an attractive service and oversee a sophisticated technology platform, we believe our private label service offers large portals, high traffic websites, and leadership companies developing an online marketplace a very low barrier to entry into the paid listings advertising market.

Issues Facing Small to Mid-Sized Enterprises (SMEs):

A relatively large number of businesses do not have websites. In the United States alone, we estimate that there are 15 million businesses without a web presence. These businesses have traditionally been limited in their ability to effectively reach potential customers through online advertising, which we believe is a growing and distinct disadvantage to their competitors with an Internet presence. We believe that businesses that are unwilling or unable to establish a website can still benefit from a presence on the Internet to generate valuable leads for their businesses.

Our Solutions:

Pay Per Call offers an online advertising solution for advertisers without a website. Using our Pay Per Call service, both online and offline advertisers are able to participate in keyword-targeted performance-based advertising. By bidding for placement in search results delivered in response to an Internet user’s search or click on a keyword link, Internet users are provided with a special toll free number that, upon calling, connects the user directly to the advertiser.

Ability for small to mid-sized enterprises (SMEs) to develop a cost-effective, impactful e-commerce solution. The cost to develop, host and maintain a website may preclude many companies from engaging in e-commerce. There are a myriad of options to choose from in putting together an e-commerce website, and many require highly technical or strategic knowledge in order to choose and execute the optimal solution. Leading barriers to e-commerce that any merchant must address include: secure data and order collection, online payment processing, fraud protection, merchant banking services, web hosting, web design and maintenance, web site promotion, product management, product marketing and customer service. Without guidance, or specific technical and strategic knowledge, the business individual or SME is at a disadvantage to compete with larger companies, which may have greater resources to handle many of the issues faced in launching and maintaining a successful online business.

Miva Merchant. Our Miva product line ranges from Miva Merchant, a point and click e-commerce site building application to Miva Script, an XML based server side scripting language. Additionally, storefronts built with Miva Merchant can automatically synchronize their product, customer and order data with QuickBooks Pro from Intuit, using Miva Synchro. This approach allows merchants to build their online store with nothing more than a web browser, and lets developers provide aftermarket enhancements for the storefront. Integrated into the Miva product line are services that help people market their online storefront and collect money on the Internet. Miva Marketplace also helps merchants use keyword-targeted, pay-per-click advertising to bring buyers to their online stores and websites. Once a buyer purchases a product, credit cards and online checks can be processed with Miva Payment. Follow-up marketing can be done via email using Miva Mailer, a service that automates un-subscribe functionality and mailing list management.

The FindWhat.com and Espotting Networks

The FindWhat.com and Espotting Networks are online marketplaces that connect businesses with prospects likely to make purchases or research potential purchases through the businesses’ websites. They also provide additional revenue to browser applications and websites that contain Web directories, search engines or contextually relevant listings. We view both the FindWhat.com and Espotting Networks as similar to the Yellow Pages in the offline world; as a tool for leading providers of goods and services to reach the people or businesses that are actively looking to research or purchase those goods or services. While our advertisers’ listings are available at our website, their listings are primarily viewed by people using our distribution partners’ websites and browser applications. We distribute the listings our advertisers have placed with us to thousands of high traffic websites and applications. Many of these distribution partners offer full search functionality combine search results from other providers with our listings to offer a search experience that can satisfy an Internet user’s query, whether it was research-based or e-commerce-based.

Advertisements from the FindWhat.com and Espotting Networks are rank-ordered through a competitive bidding process in which each advertiser’s bid represents the amount they are willing to pay for each prospect we send to that advertiser’s website, or connect to that advertiser through a call. The advertiser with the highest bid is listed first in the paid listings, with the remaining advertisers appearing in descending order of their bids. Because advertisers must pay for each click-through or call, we believe that they select and bid only on those keywords or phrases that are most relevant to their business offerings. We also employ relevancy algorithms and reviews by our editorial staff to ensure that advertisers do not bid on irrelevant keywords.

Utilizing an enterprise license for FAST’s Data Search^TM 360 data search and analysis software, we currently intend to enhance our business in several core areas, including the following specific projects currently under review or now underway:

	•	Enhancement and automation of our paid placement search infrastructure to improve editorial efficiencies using FAST’s computational linguistic technologies;

	•	Creation of relevant contextual algorithms to supply greater traffic opportunities for our advertisers;

	•	Creation of additional search-based solutions for our merchant customers, potentially including shopping search and site search solutions; and

•

Creation of premium web search catalogs covering our major territories to deliver a more robust and complete product offering to its distribution partners.

Private Label Service

Our private label service offers large portals, search engines, high traffic websites and large companies with leadership positions in their respective geographies and/or markets, the opportunity to brand and sell their own pay-per-click, keyword-targeted advertisement service using our turnkey operation. Historically, large portals earned most of their revenue from banner ads, and did not offer advertisers any direct way to purchase keyword ads/paid listings within the portals’ search results. In late 2000, large portals began to incorporate paid listings among their search results, and by 2002, many major U.S. portals and search engines were taking advantage of this revenue stream. Almost all large portals and search engines have chosen to outsource the compilation and maintenance of keyword-targeted ads to a third-party.

In September 2002, we launched our private label service with our first client, Terra Lycos’s Lycos and HotBot (which are now owned by Daum). During 2004, we substantially expanded our private label business by launching a number of new private label offerings with our strategic partners, such as Verizon Information Services’ SuperPages.com and Mitsui & Co. Ltd.’s “LISTOP” service, supported by our technology and business operations expertise.

Our private label service includes building and hosting a partner-branded sign-up page for advertisers and a separate advertiser account management center designed to the private label partners’ specifications. Our private label partners are able to set certain key variables, such as the minimum initial deposit and the minimum bid amount. This turnkey service makes available our technology platform, our editorial review capabilities for all keyword ads, customer service support and processing of advertiser deposits, all in a manner that looks and feels like it is being provided by our private label partner, from the way we answer incoming calls from advertisers, to the colors and logos used within the private label partner’s account management center. Most importantly, the private label partner owns the advertiser relationship, and has the ability to work directly with advertisers on promoting their keyword ad campaigns, or any other advertising campaigns or services offered by the private label partner on its own website.

Primary Traffic Group

Our Primary Traffic division was created in 2004 resulting from our acquisition of Comet Systems, Inc. The group’s main purpose is to create and leverage off of direct distribution channels, resulting in increased inventory for FindWhat and Espotting Network listings, as well as third-party networks. In addition to increased traffic for FindWhat and Espotting advertisers, the Primary Traffic division generates additional revenue opportunities – such as desktop marketing, e-commerce, a travel related comparison shopping product for its toolbar users and lead generation – through direct contact with consumers. This is accomplished by offering customers the ability to download Internet search toolbars, customized cursors, screensavers and other unique and effective interactive products and services. Through Comet, we have access to the millions of consumers who have voluntarily downloaded Comet software and search functionality directly onto their personal computers. This direct connection to the end consumer allows us to enhance our keyword-targeted, performance-based advertising service. In addition, we have leveraged Comet’s desktop software technology to offer toolbars and other downloadable applications to our FindWhat and Espotting Network partners under our partners’ own brands, increasing the value we can provide to our distribution partners.

Merchant Services

The Merchant Services division was also formed in 2004 to better enable small to medium sized merchants (SMEs) to conduct business online. Specifically, we provide products and services to e-commerce websites, giving businesses the ability to convert visitors to customers. When these services are combined with the benefits that the FindWhat.com and Espotting Networks offer advertisers, we are able to offer online businesses, as well as offline businesses wishing to establish an Internet presence, a suite of products and services that help facilitate the entire customer lifecycle: reaching prospects, converting those prospects to customers and retaining those customers in the future. This division was formed on January 1, 2004 upon our acquisition of Miva.

Our core products in this division are two e-commerce solutions: Miva Merchant, a complete storefront system, and Miva Empresa™ Virtual Machine, the server engine which executes compiled Miva Script applications like Miva Merchant. These solutions are used by developers, merchants, hosting partners and business portals. In addition, following Miva’s acquisition of MvCool in September of 2004, we created MivaCentral, an online retail outlet serving the software and service needs of online merchants.

Our Merchant Services division has several additional services, including Miva Mailer™, Miva Service Club™, Miva Payment™ and Miva Marketplace™, each of which have been designed to cater to Miva’s large installed base of online merchants. In April 2004, a new version of Miva Marketplace was introduced that included direct access to traffic from the FindWhat.com Network, with expansion to the Espotting Network anticipated in 2005. These combined offerings enable tens of thousands of Miva users to access keyword-targeted, pay-per-click advertising services accessible from the Miva administrative interface, which is capable of yielding a valuable source of additional revenue for small to medium sized merchants. The seamless integration of the two products allows online SMEs an efficient, accessible way to manage their online advertising campaigns, along with their online storefronts, through one system. We will continue to search for opportunities to leverage the advantages of both business units in order to provide enhanced, integrated e-commerce solutions to individuals and businesses on the Internet.

Strategy

We currently pursue three main growth strategies: grow our core performance-based marketing business; leverage our expertise and experience by expanding our performance-based marketing business geographically and into new markets, including by offering our private label service to industry leaders throughout the world; and expand into new markets and grow commerce-enabling services for online and offline businesses (especially SMEs) to help them throughout the customer lifecycle: reaching, converting and retaining customers.

Each of these growth strategies is guided by our core philosophy that our success is directly aligned with the success of our advertisers, distribution partners and merchants. Accordingly, we are dedicated to balancing our growth in each of these areas with a commitment to ensuring that our growth and success is measured by the growth and success of our advertisers, distribution partners and merchants alike. We believe that adherence to this overarching strategy will enhance our long-term growth prospects. In keeping with this principle, we consistently monitor the effectiveness of our product and service offerings and regularly take initiatives to increase the value proposition of our offerings for our advertisers, distribution partners and merchants with a focus on conversions rather than clicks alone. Our efforts in this regard are ongoing and permeate all aspects of our business growth strategies. As we integrate new technology and services into our existing products and services, we believe we will be well positioned to take advantage of marketplace demands for increased accountability in both online and offline advertising.

Grow Core Performance-Based Marketing Business

Our core business is currently the FindWhat.com and Espotting Networks. Today these networks are made up of distribution partners, ranging from a few large portals and search engines to small, niche vertical market websites. We believe there are additional ways to help our existing distribution partners monetize their content and traffic by providing alternative methods of displaying our keyword ads including search, related search, contextual and directory implementations, Pay Per Call and private branded desktop applications, and we intend to move aggressively to capitalize on these opportunities.

We also seek to add additional distribution partners to both the FindWhat.com and Espotting Networks. We believe there are numerous additional potential distribution partners in our current markets and are actively seeking to add new distribution partners on a daily basis. To that end, we believe that we have a competitive advantage to certain other providers of performance-based marketing services, in that we are an independent supplier in the marketplace and we do not operate a branded destination portal, in potential competition with our distribution partners for Internet users, plus we offer additional services like Pay Per Call, private branded desktop applications and customized contextual and directory implementations.

We also continuously try to recruit additional advertisers for the FindWhat.com and Espotting Networks. Many of our advertisers learn about our services by seeing our name online at our distribution partners’ websites, through our advertising efforts (mostly online) or on sites that provide marketing resources to Internet businesses. Additionally, we recruit advertisers to utilize our services through our direct sales function. Our sales staff targets e-commerce businesses located through online and offline research. Our sales staff usually contacts potential advertisers and advertising agencies directly utilizing telemarketing, e-mail and other direct sales techniques. We also attend trade shows, seminars and conferences where our services are presented to potential advertisers and other industry related contacts, including potential traffic partners. Finally, we have established and continue to seek referral arrangements with entities that can promote our service to large numbers of potential advertisers.

In addition, we are focused on technical innovations to increase qualified traffic to advertisers. Our achievements in this area include improved keyword matching technologies, where advertisers do not need to bid upon and manage multiple variants of the same keyword in order to encompass the different ways Internet users may search for the same item. Also we have launched geo-routing initiatives, where the Internet user is shown paid listings from either the FindWhat.com or Espotting Networks, depending upon which would give the user a relevant result based on his or her geographic location. We believe our experience and technical skill allows us to work with our distribution partners to create unique implementations, while maintaining the quality of the new traffic that is generated. We strive to continue to upgrade our systems, offering additional easy-to-use tools and reports based on advertiser feedback, both of which help advertisers achieve industry-leading returns on their marketing investments.

Expand Our Performance-Based Marketing Business Geographically And, As Applicable, Extend Into New Markets

We believe that the paid listings industry is expanding, and will continue to expand, to new countries and new markets. We intend to capture paid listings revenue from these evolving markets by growing our existing networks, adding new private label partners, as well as through other strategic transactions and initiatives.

Expand Into New Markets And Grow Commerce Enabling Services For Online and Offline Businesses To Help Them Throughout The Customer Lifecycle: Reaching, Converting and Retaining Customers–Specifically Targeted To SMEs

The e-commerce lifecycle follows the traditional business model of identifying, monetizing and retaining customers. We have been helping online businesses drive high quality traffic to their websites since 1998, and now through our Pay Per Call product, we are helping offline advertisers capitalize on Internet marketing by delivering qualified introductions to their establishments. We are able to help online businesses, specifically SMEs, create e-commerce websites that convert potential customers into paying customers. Similarly, we are able to help offline advertisers with promoting their products and services to a new audience, by providing the tools necessary to establish a multi-faceted online presence, through our Pay Per Call offering, or both. We have extended our product line to include appropriate complementary products and services that will enable merchants to further optimize their e-commerce revenues, especially SMEs who are looking for a cost effective, independent, comprehensive e-commerce services provider.

Sales & Marketing

We have global sales and marketing efforts originating from the U.K., France, Germany, Italy, Spain, Scandinavia, New York, New Jersey, San Diego, California and Ft. Myers, FL. As of December 31, 2004, we had 69 people in our sales department, 20 in marketing, 19 business development personnel and 4 corporate development personnel. Our sales department seeks to continually add new advertisers to the FindWhat.com and Espotting Networks, our business development department focuses on adding new distribution partners to those networks, and our corporate development department seeks potential mergers, acquisitions and strategic transactions. Almost all of our paid click-throughs and calls result from Internet user actions on our distribution partners’ and private label partners’ websites, and, as a result, we do not spend any marketing efforts to attract Internet users to utilize our websites at www.FindWhat.com or www.Espotting.com. However, we do have relationships with third parties to attract online businesses to our websites in order to encourage them to open an advertising account.

Advertisers

FindWhat.com and Espotting Networks

We believe that businesses that become FindWhat.com and Espotting Networks advertisers are those that are particularly interested in taking advantage of the growth of e-commerce. Our program to attract advertising clients includes:

	•	Direct sales: Our sales staff targets companies with highly visible Web-based promotional programs and advertisers who are using competitive services.

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Agency sales: We employ sales personnel for both the FindWhat.com and Espotting Networks who focus on advertising agencies, which tend to represent larger advertisers, and can spend more money per campaign.

	•	Online promotion: Our online promotional program includes banner advertisements, keyword-targeted advertising and preferred placement on websites that offer resources and reviews to advertisers interested in performance-based online marketing.

	•	Referral agreements: We seek to build referral arrangements with entities that can promote our service to large numbers of potential advertisers.

	•	Tradeshows: We speak at, participate in, exhibit at and sponsor industry trade shows.

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Customer service: To eliminate any perceived barriers to doing business with us, we endeavor to deliver excellent customer service to our advertisers.

Private Label Service

We assist our private label partners in attracting advertisers to their keyword-targeted ad services. We can help train our private label partners’ sales forces in techniques to promote keyword-targeted advertising, and in some cases we may promote their private label offering to our FindWhat.com and Espotting Network advertisers. Additionally, we may hold events with our private label partners to promote keyword advertising, and we may engage in co-promotion sales, marketing and communications tactics to attract advertisers to the FindWhat.com or Espotting Network and one or more private label services.

Revenue Model

We currently generate revenue primarily from paid click-throughs on the FindWhat.com and Espotting Networks, private label net revenue share payments, and pay-for-performance advertising revenue generated by Comet’s applications along with sales of Miva e-commerce solutions.

Our FindWhat.com and Espotting Networks keyword advertising paid click-through and call revenue is determined by multiplying the number of click-throughs and calls on paid keyword advertisements by the amounts bid for applicable keywords. Click-through and call revenue is earned based on activity to the extent that the advertiser has deposited sufficient funds with us or we believe collection is probable. We recognize 100% of the revenue from paid click-throughs and calls from distribution partners in the FindWhat.com and Espotting networks and then share that revenue with our distribution partners.

With our private label service, we recognize only our share of the revenue generated from advertisers for click-throughs on our private label partners’ sites. Our private label partners are responsible for reporting the gross revenue generated from the click-throughs executed on their sites.

Financial information about geographic areas is set forth in Note M to the consolidated financial statements.

Customers

In the fourth quarter of 2004, we had approximately 75,000 active relationships. We define active relationships as those that have had a paying transaction with us during the quarter. In total, we have relationships with over 100,000 online businesses, including businesses that are using our Miva Merchant storefront software, or that have made deposits in their FindWhat.com or Espotting Network accounts to fund future transactions. No single advertiser account in the FindWhat.com and Espotting Networks represented more than 5% of our revenue in 2004.

Competition

The FindWhat.com Network and Espotting Network

We compete with companies that provide keyword-targeted advertising, including portals and search engines that allow advertisers to pay-for-placement within search results. Portals and search engines that offer keyword-targeted ads on their websites or within their search engines include About.com, AOL, Ask Jeeves’s Ask.com/Direct Hit/Teoma, Google, Industry Brains and InfoSpace’s search properties (Excite/WebCrawler/MetaCrawler/Dogpile), Daum’s Lycos.com and HotBot, MSN and Yahoo!. Companies that provide primarily performance-based, keyword-targeted ads, and that seek to distribute those ads to a distribution network, include Google, LookSmart, and Yahoo!’s Search Marketing Solutions division.

Private Label Service

We compete with companies that allow large portals or high traffic websites to offer their own branded, keyword-targeted advertising service. These include Enhance Interactive, IndustryBrains and Interchange.

Primary Traffic

In addition to services offered by the organizations already mentioned, competitors to our Primary Traffic division include Intermix, Freeze.com and the Interactive Search Holdings Division of Ask Jeeves. All of these competitors offer a form of online media or entertainment through a series of websites. These offerings can include social networking, casual gaming, viral networks, screensavers, ring tones and many other products and services.

Merchant Services

Our Merchant Services division is currently comprised of Miva. Main competitors to Miva include: Yahoo! Stores and eBay stores. Other competitors include companies who have shopping cart products and a few hosting companies that have their own product, including AIT and Alabanza os commerce (open source), Mercantec, Shopsite, Lagaarde, AbleCommerce and Cart32.

In the future, other companies may offer directly competing services to the FindWhat.com Network and Espotting Network, our private label service, our Primary Traffic division and/or our Merchant Services division. Most providers of Web directories, search engines and information services offer additional features and content that we have elected not to offer at this time. We also compete with traditional offline media such as television, radio and print for a share of advertising budgets.

Technology and Operations

We believe high traffic, keyword-targeted advertising networks, especially those that distribute their results to third-party websites, require a fast, reliable and secure infrastructure that can be easily expanded to maintain acceptable response times under the stress of growth. We believe that we have managed to create an infrastructure that provides us with a platform from which to grow our business, including technical operations in our headquarters in Fort Myers, FL and in hosted facilities in Atlanta, New York and London. In addition, Miva maintains their own technical operations in their office in San Diego, CA.

We believe our current infrastructure and operating environment are appropriately sized and designed for their intended use, which includes interaction with Internet users, advertisers, distribution partners and private label clients. However, we will need to continue to invest significantly to maintain and upgrade our infrastructure. The physical components of our infrastructure are comprised of equipment made by industry-leading manufacturers including Hewlett-Packard, Juniper Systems, EMC and Cisco Systems. The software being used to power our services is a combination of industry standard commercial software and our internally developed proprietary software. We believe that given the solid mix of industry standard equipment and software we are positioned to sustain the effects of considerable growth.

Early in our development, we placed a firewall between the outside world and our service. As currently configured, we maintain a comprehensive security policy that provides us with the ability to block out traffic that is not required to operate our services or represents a threat to the continuity of our operating systems. Firewalls and intrusion detection software are some of the many components within the comprehensive security policy. We are constantly monitoring and updating our security systems to prevent an ever-growing array of programs and systems designed to thwart our security processes.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements, and other intellectual property protection methods to protect our services and related products. We own patents related to our Primary Traffic division and have several patent applications pending for various aspects of our products and services filed with the U.S. Patent and Trademark Office. We own several domestic and foreign trade and service mark registrations related to our products or services, including U.S. Federal Registrations for FINDWHAT.COM®, ESPOTTING®, COMET® and MIVA®, and we have additional registrations pending.

One of our principal competitors offering performance based marketing services, Overture Services, Inc. (now owned by Yahoo! and a part of Yahoo! Search Marketing Solutions), 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.” We have been engaged in litigation with Overture with respect to the `361 patent since January 2002. The litigation is pending in the District Court for the Central District of California (Overture Services, Inc. v. FindWhat.com, Inc., 03-685 (CJC)(EX))(the “California Action”). In the California Action, Overture is asserting that we willfully infringe on claims of the `361 patent and Overture Services is seeking a permanent injunction against any act by us deemed by the Court to infringe Overture’s `361 Patent, an award of unspecified monetary damages, and attorney’s fees, costs and expenses. We believe that we do not infringe any valid and enforceable claim of the patents and we are seeking a declaration that the `361 Patent is invalid and unenforceable and not infringed. Trial in the California Action is currently scheduled for April 2005. In addition, on January 23, 2004, we were named as a third-party defendant by Overture in an action between Lycos, Inc. and Overture Services, Inc. The third party complaint alleges infringement by us of Overture’s purported patent. Overture Services has also previously announced that it acquired an issued patent that may apply to our current bid-for-position pay-per-click business model.

Regulations

We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to, or commerce on, the Internet. However, due to the increasing popularity and use of the Internet, it is possible that various laws and regulations may be adopted with respect to the Internet, covering issues such as taxation, user privacy and characteristics and quality of products and services. In 1998, the United States Congress established the Advisory Committee on Electronic Commerce which is charged with investigating and making recommendations to Congress regarding the taxation of sales by means of the Internet. The adoption of any such laws or regulations upon the recommendation of this Advisory Committee or otherwise may decrease the growth of the Internet, which could in turn decrease the demand for our products or services, increase our cost of doing business or otherwise have an adverse effect on our business, prospects, financial condition, or results of operations. Moreover, the applicability to the Internet of existing laws governing issues, such as property ownership, libel and personal privacy is uncertain. Future federal or state legislation or regulations could have a material adverse effect on our business, prospects, financial conditions and results of operations. For instance, legislation has been introduced and, in one instance, enacted, that, if upheld, may impact our ability to display contextual ads.

Additionally, the U.S. Congress and some state legislatures have introduced legislation designed to regulate “spyware,” which has not been precisely defined, but which is often defined as software installed on consumers’ computers without their informed consent and which is designed to gather and, in some cases, disseminate information about those consumers, including personally identifiable information, without the consumers’ consent. We do not rely on “spyware” for any purpose and it is not part of our product offerings, but the definition of spyware or proposed legislation relating to spyware may be broadly defined or interpreted to include legitimate ad-serving software, including toolbar offerings currently provided by our Primary Traffic division. Currently, legislation has focused on providing Internet users with notification of and the ability to consent or decline the installation of such software, but there can be no guarantee that future legislation will not provide more burdensome standards by which software can be downloaded onto consumers’ computers. Currently all downloadable software that we distribute requires an express consent of the consumer and provides consumers with an easy mechanism to delete the software once downloaded. However, if future legislation is adopted which makes the consent, notice or uninstall procedures more onerous, we may have to develop new technology or methods to provide our services or discontinue those services in some jurisdictions or altogether. There is no guarantee we will be able to develop this new technology at all or in a timely fashion or on commercially reasonable terms.

As we expand our international presence, we have also become exposed to foreign laws and proposed legislation relating to user privacy and related matters. For example, the European Union has adopted directives designed to address privacy and electronic data collection concerns. These directives limit the manner in which personal data of Internet users may be collected and processed.

Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. Future federal or state legislation or regulations could have a material adverse effect on our business, prospects, financial conditions and results of operations.

Employees

As of December 31, 2004, we had approximately 481 employees. We had approximately 284 employees in marketing, sales and service (which includes, but is not limited to departments such as, business development, sales, marketing, customer service, credit transactions, business affairs, corporate development and affiliate relations), 118 in our technical, product development and product management departments and 79 in general and administrative departments.

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. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.

Risks Related to Our Business

Our business is difficult to evaluate because we have a limited operating history in an emerging and rapidly evolving market and have recently acquired several new businesses.

We began operating our business in 1998 and since that time we have undergone significant changes:

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We launched the FindWhat.com Network in September 1999 and launched our private label service in September 2002;


	•	On January 1, 2004, we acquired Miva, a leading supplier of e-commerce software and services to small and medium-sized businesses;

	•	On March 22, 2004, we acquired Comet, a provider of connected desktop consumer software;

	•	On June 4, 2004, we acquired certain assets of BBE, a performance-based, keyword-targeted advertising business; and

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On July 1, 2004, we merged with Espotting, a provider of performance-based, keyword-targeted Internet advertising services in Europe.

Accordingly, we have a limited historical operating history upon which an investor can make an evaluation of the likelihood of our success. Additionally, we derive nearly all of our net revenue from online advertising, which is a new and rapidly evolving market. An investor should consider the likelihood of our future success to be 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 emerging and changing markets, such as e-commerce. To address these risks, we must, among other things:

	•	maintain and increase our client base;

	•	implement and successfully execute our business and marketing strategy;

	•	continue to develop and upgrade our technology;

	•	continually update and improve our service offerings and features;

	•	provide superior customer service;

	•	find and integrate strategic transactions;

	•	respond to industry and competitive developments; and

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attract, retain and motivate qualified personnel.

We may not be successful in addressing these risks, particularly as some of these are largely outside of our control. If we are unable to do so, our business, prospects, financial condition and results of operations would be materially and adversely affected.

One of our FindWhat.com Network’s principal competitors may have patent rights that could prevent us from operating our services in their present form.

One of our FindWhat.com Network’s principal competitors, Overture Services, Inc. (now owned by Yahoo! and a part of Yahoo! Search Marketing Solutions), purports to be the owner of U.S. Patent No. 6,269,361, which was issued on July 31, 2001 and is titled “System and method for influencing a position on a search result list generated by a computer network search engine.” Additionally, Overture Services has previously announced that 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 it believes our current bid-for-position, pay-per-click business model infringes the `361 patent. However, we believe that it does not infringe any valid and enforceable claim of Overture Services’ patents.

We have been engaged in litigation with Overture Services with respect to the `361 patent since January 2002. The litigation is pending in the District Court for the Central District of California in Los Angeles (Overture Services, Inc. v. FindWhat.com, Inc., 03-685 (CJC)(EX))(the “California Action”). In the California Action, Overture is asserting that the Company willfully infringes on claims of the `361 patent and Overture Services is seeking a permanent injunction against any act by us deemed by the court to infringe Overture Services’ `361 patent, an award of unspecified monetary damages, and attorney’s fees, costs, and expenses. We are seeking a declaration that the `361 patent is invalid and unenforceable and not infringed by us. Trial in the California Action is currently scheduled for April 2005.

In addition, on January 23, 2004, we were named as a third-party defendant by Overture Services 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 Services alleges that we infringe the `361 patent. In the Lycos litigation, Overture Services is seeking substantially the same relief as is sought in the California Action. In our Answer, we denied infringement and have counterclaimed for invalidity and unenforceability of the `361 patent. The claims and counterclaims concerning the `361 patent have been stayed in this case pending the outcome of the California Action.

We are also aware that Overture Services has pending patent applications in Europe. If these patents were to issue, Overture Services could attempt to assert the patents against our European operations, including those conducted by Espotting.

Our patent litigation with Overture Services is time-consuming, expensive and results in the diversion of our management’s time and attention. Our legal expenses related to pending litigation could cost between $1.5 million and $2.0 million per quarter until the cases are resolved. Accordingly, such patent litigation could negatively impact our business even if we prevail. If it is determined that our bid-for-position, pay-per-click business model infringes one or more valid and enforceable claims of the patents held by Overture Services, our 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 commercially acceptable terms, if at all, or that we will be able to revise our business model economically, efficiently or at all.

Our business is dependent upon our relationships with, and the success of, our distribution partners.

Our distribution partners are very important to our business, revenue and results of operations. These partners provide their users with our services on their websites or otherwise direct their traffic to our paid listings. Our distribution partners may experience difficulty in attracting and retaining a substantial number of users due to, among other reasons, the rapidly changing nature of the market, technological innovation, industry consolidation and changing consumer preferences.

In addition, we may not be able to further develop and maintain relationships with distribution partners. Difficulties may arise in our relationships with distribution partners for a number of reasons, some of which are outside of our control. These distribution partners may regard us as not significant for their own businesses, may regard us as a competitor to their businesses or find our competitors to be more attractive. In addition, our distribution partners face substantial competition, and any inability on our part to align with successful distribution partners could adversely affect our business. Additionally, our agreements with our distribution partners vary in duration and generally are not long-term agreements. Our distribution agreements are generally 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. Any adverse changes in the business of, or our relationships with, key distribution partners could have a material adverse effect on our business, revenue and results of operations.

Click-through fraud, whether we detect it or not, could cause our revenues and our business to suffer.

From time to time, we receive fraudulent clicks on our ads by persons seeking to increase the advertising fees paid to distribution partners within our FindWhat.com and Espotting Networks. Click-through fraud occurs when a person or program clicks on an advertisement displayed on a website for the purpose of generating a click-through payment to the FindWhat.com and Espotting Networks partner rather than to view the underlying content. We have implemented screening policies and procedures to minimize the effects of these fraudulent clicks. We believe that these policies and procedures assist us in detecting fraudulent click-throughs, which are not billed to our advertisers. However, it is difficult to detect all fraudulent clicks and detection may become more difficult in the future if third parties implement more sophisticated fraudulent click-through schemes. To the extent that we are unable to detect click-through fraud, we may refund revenue that our advertisers have paid to us that is later discovered to be attributed to these fraudulent click-throughs. If we find new evidence of past fraudulent clicks, we may have to issue refunds to advertisers retroactively for amounts previously paid to our FindWhat.com or Espotting Network distribution partners. Any of these situations would adversely affect our profitability, and these types of fraudulent activities could hurt our brands. If fraudulent clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising programs because the fraudulent clicks would not lead to potential revenue for the advertisers. If this occurs, our advertisers may become dissatisfied with our advertising programs, and we may lose advertisers and revenue.

The business of our FindWhat.com and Espotting Networks is dependent upon our ability to deliver qualified leads to our advertisers.

Advertisers utilize our FindWhat.com and Espotting Networks to deliver Internet traffic to their websites. We believe advertisers will only use our services if we deliver high quality Internet traffic that meets their needs. A typical way for an advertiser to gauge the quality of Internet traffic is a conversion ratio measuring conversions on their website against the amount of Internet traffic delivered. If we are not satisfied with the quality of Internet traffic delivered from our distribution partners we may take remedial action, including removal of the distribution partner from our networks. We may not be successful in identifying distribution partners with low quality traffic or in delivering high quality traffic to our advertisers, either of which could have a material adverse effect on our business, revenue and results of operations.

We face substantial and increasing competition in the market for Internet-based marketing services.

We face substantial competition in every aspect of our business, and particularly from other companies that seek to connect people with information on the Internet and provide them with relevant advertising and commerce-enabling services, either directly or through a network of partners. Some of our principal competitors include Yahoo! and its Search Marketing Services division, Google, Ask Jeeves, Lycos, Microsoft and Time Warner’s AOL division. Our principal competitors have longer operating histories, larger customer bases, greater brand recognition and greater financial, marketing, personnel and other resources than we have. In addition, these and other competitors may have or obtain certain intellectual property rights which may interfere with or prevent the use of one or more of our business models. These and other competitors can use their experience and resources against us in a variety of competitive ways, including by acquiring complementary companies or assets, investing more aggressively in research and development and competing more aggressively for advertisers and partners. We expect that these competitors will increasingly use their financial and technological resources to compete with us. For example, Microsoft has recently announced plans to develop a new Internet search technology that may make its search functions a more integrated part of its Windows operating system.

We have sought protection from competition by filing applications for several patents; however, there is no assurance that any of these patents ultimately will be granted. In the absence of patent protection, we have only a limited amount of proprietary technology that would preclude or inhibit competitors from entering the keyword-targeted advertising market and the other markets in which we operate. Therefore, we must compete based on the skill of our personnel and the quality of our customer service. We believe that the barriers to entry with respect to the development and provision of 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. The emergence of these enterprises could have a material adverse effect on our business, prospects, financial condition and results of operations.

Additionally, in pursuing strategic transactions, we may compete with other companies with similar growth strategies, some 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.

If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive.

Our success depends on providing products and services that businesses use to provide their clients with a high quality Internet experience. Our competitors are constantly developing innovative Internet products. As a result, we must continue to seek to enhance our technology and our existing products and services and introduce new high-quality products and services that businesses will use. Our success will depend, in part, on our ability to:

	•	enhance and improve the responsiveness and functionality of our FindWhat.com and Espotting Networks, our private label service, our primary traffic services and our merchant services;

	•	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 and current customers; and

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respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

Because our markets are still developing and rapidly changing, we must allocate our resources based on our predictions as to the future development of the Internet and our markets. These predictions ultimately may not prove to be accurate. 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 are unable to predict user preferences or industry changes, or to modify our products and services on a timely basis, we may lose partners and advertisers, and our business, prospects, financial condition and results of operations could be materially adversely affected.

Our success is dependent upon our ability to establish and maintain relationships with our advertisers.

We generate most of our revenue from our advertisers. Accordingly, our ability to generate revenue from the FindWhat.com and Espotting Networks 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.

Our advertisers can generally terminate their contracts with us at any time and on limited or no advance notice. We believe that advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

We must successfully integrate several recently acquired businesses.

We have recently merged with or acquired a number of businesses: Miva, Comet, BBE and Espotting. The integration of these businesses may be difficult, time consuming and costly. The integration may divert our management’s time and resources from the operation of our businesses. The integration and management of these companies is also more challenging because Espotting’s primary operations are conducted in Europe, while FindWhat’s historical operations and those of our other new acquisitions are conducted primarily in the United States. Our integration efforts may not be completed as planned, may take longer to complete or may be more costly than anticipated, or these acquired businesses may not achieve their expected results, any of which would have a material adverse effect on our business and results of operations. Additionally, if these acquired businesses are unable to achieve their expected results, there is risk of an impairment of the assets acquired, which in turn could have an adverse effect on our results of operations.

If we fail to manage our growth, our business will be adversely affected.

Our revenues and headcount have grown rapidly, due in part to several recent mergers and acquisitions. To continue to grow, we may make additional acquisitions in the future. These may include acquisitions of foreign companies or other international operations. We have limited experience in acquiring and integrating companies, and we may also expand into new lines of business in which we have little or no experience. Additionally, we may fail to achieve the anticipated synergies from such acquisitions. Accordingly, our growth strategy subjects us to a number of risks, including the following, which could materially adversely affect our business, prospects, financial condition and results of operations:

	•	we may incur substantial costs, delays or other operational or financial problems in integrating acquired businesses, including in integrating each company’s accounting, management information, human resource and other administrative systems to permit effective management;

	•	we may not be able to identify, acquire or profitably manage any additional businesses;

	•	with smaller acquired companies we may need to implement or improve controls, procedures and policies appropriate for a public company;

	•	the acquired companies may adversely affect our consolidated operating results, particularly since some of the acquired companies have a history of operating losses;

	•	acquisitions may divert our management’s attention from the operation of our businesses;

	•	we may not be able to retain key personnel of acquired businesses;

	•	there may be cultural challenges associated with integrating employees from our acquired companies into our organization; and

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we may encounter unanticipated events, circumstances or legal liabilities.

We expect our historical growth rates and operating margins to decline in the future.

Although we have grown rapidly, we expect that in the future our revenue growth rate will decline primarily as a result of increased competition, as well as difficulty in maintaining growth rates as our net revenues increase. In addition, we believe our annual operating margins will decline in 2005 as a result of integrating recently acquired businesses with lower operating margins, the impact of amortizing intangible assets acquired from mergers and acquisitions, increased competition and increased expenditures for certain aspects of our business as a percentage of our net revenues, which may include product development expenditures, sales and marketing expenses and increased costs of operating as an international public company with multiple divisions.

We are subject to numerous risks associated with our recently-acquired international operations.

Historically, we have operated primarily in the United States. We recently merged with Espotting, which is based in the United Kingdom and serves seven additional European countries. We have no prior experience integrating and managing international operations. Any inability to successfully integrate and manage our newly-acquired international operations could have a material adverse effect on our business, results of operations, business prospects or financial condition. In addition, our future operating results could be adversely affected by a variety of factors arising out of our international operations, some of which are beyond our control. These factors include:

	•	lower per capita Internet usage or lower advertiser spending in many countries, due to factors such as lower disposable incomes, lack of telecommunications and computer infrastructure, concern about security in online e-commerce transactions, and less access to and use of credit cards;

	•	relatively smaller Internet markets in some countries;

	•	current or future competitors obtaining intellectual property rights that they could assert against our business internationally, which may adversely affect our foreign operations;

	•	technological differences by marketplace, which we may not be able to support;

	•	foreign laws and regulations that may impact the conduct of our business operations in a particular country;

	•	difficulty in recruiting qualified local employees and in building locally relevant products and services, which could limit our ability to aggregate a large local advertiser base;

	•	longer payment cycles and local economic downturns;

	•	credit risk and potentially higher levels of payment fraud;

	•	currency exchange rate fluctuations, as well as foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States;

	•	political and economic instability; and

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higher costs associated with doing business internationally.

Our private label agreements are subject to a number of contingencies and risks.

We have agreements to provide our private label services with our private label partners. Generally, under the terms of the agreements, we provide the technology and expertise to our partners to launch keyword-targeted paid listings services. These transactions are subject to numerous contingencies and risks including:

	•	the failure of our partners to successfully create and manage paid listings networks;

	•	the risk that development and implementation of the different versions of our technology will be delayed or not completed when expected;

	•	the risk that development, implementation and integration costs will be higher than anticipated;

	•	the inability of our partners to leverage their existing client base;

	•	the failure of the paid listing services market to continue to grow;

	•	intense competition in the paid listing services market;

	•	the potential for disagreements with our partners;

	•	the potential that implementation of our private label services violates intellectual property rights of third parties;

	•	economic changes in the Internet industry generally; and

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the potential that our partners will be acquired or change their business plans and cease using our services.

The occurrence of any of these contingencies or risks could have a material adverse effect on our business, revenues and results of operations.

We have also agreed to indemnify our private label partners against any losses suffered by them as a result of the Overture Services litigation (see “–One of our FindWhat.com Network’s principal competitors may have patent rights that could prevent us from operating our services in their present form”), as well as other losses suffered by them resulting from use of intellectual property that we have provided to our private label partners. We may also be required to pay legal expenses incurred and losses suffered by our private label partners if Overture Services brings a patent infringement claim against them for using our bid-for-position, pay-per-click technology. If we are unsuccessful in our litigation with Overture Services, we may have to provide our private label partners with acceptable alternatives to our bid-for-position, pay-per-click technology, or refund monies that they have paid to us.

Our management team has limited experience managing a public company and many of our employees have recently joined us and must be integrated into our operations.

Some of our officers have had no senior management experience in public companies prior to joining FindWhat. As of December 31, 2004, we had 481 full time employees, an increase from 161 on December 31, 2003. Our new employees include certain key managerial, technical, financial, marketing and operations personnel, including from acquired or merged companies, 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.

The continued service of our executive officers and key personnel is critical to our success.

Our success is substantially dependent on the performance of our senior management and key technical personnel. Many of our management and key employees are not bound by agreements that could prevent them from terminating their employment at any time. In addition, we do not currently hold key personnel life insurance policies on any of our key employees. 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.

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 managerial, operational and financial resources. We will be required to expand our operational and financial systems significantly and train and manage our work force in order to manage the expansion of our operations. We will need to attract and retain highly qualified, technical and other personnel 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 personnel on a timely basis, on competitive terms, or at all. Our inability to attract and retain the necessary technical and other personnel would have a material adverse effect on our business, prospects, financial condition and results of operations.

Our reliance