sv1za
As Filed With The United States Securities and Exchange
Commission on February 8, 2006
Registration
No. 333-123228
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 6 to
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
Spark Networks plc
(Exact name of Registrant as specified in its charter)
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England and Wales |
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7389 |
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98-0200628 |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(IRS Employer
Identification Number) |
8383 Wilshire Boulevard, Suite 800
Beverly Hills, CA 90211
(323) 836-3000
(Address, including zip code, and telephone number, including
area code, of Registrants principal executive offices)
David E. Siminoff
President and Chief Executive Officer
Spark Networks plc
8383 Wilshire Boulevard, Suite 800
Beverly Hills, California 90211
Telephone: (323) 836-3000
Fax: (323) 836-3333
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Thomas J. Poletti, Esq.
Katherine J. Blair, Esq.
Anh Q. Tran, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP
10100 Santa Monica Boulevard, 7th Floor
Los Angeles, California 90067
Telephone: (310) 552-5000
Fax: (310) 552-5001
Approximate date of commencement of proposed sale to the
public: From time to time after this Registration Statement
is declared effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, please check
following box: þ
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering: o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, please check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering: o
If this form is a post effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, please check
the following box and list the Securities Act registration
statement number of the earliest effective registration
statement for the same
offering: o
If delivery of the prospectus is expected to be made pursuant to
Rule 434 under the Securities Act of 1933, check the
following
box: o
CALCULATION OF REGISTRATION FEE
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Maximum |
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Proposed Maximum |
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Amount to be |
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Offering Price |
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Aggregate Offering |
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Amount of |
Title of Each Class of Securities to be Registered |
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Registered(1) |
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Per Share(2) |
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Price |
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Registration Fee |
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Ordinary Shares, par value £0.01 per share(3)
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30,238,996 |
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$7.12 |
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$215,301,652 |
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$25,341 |
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Ordinary Shares, par value £0.01 per share(3)(4)
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3,025,000 |
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$7.12 |
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$21,538,000 |
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$2,535 |
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Total Registration Fee
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$27,876(5) |
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(1) |
In accordance with Rule 416(a), the Registrant is also
registering hereunder an indeterminate number of additional
shares of common stock that shall be issuable pursuant to
Rule 416 to prevent dilution resulting from stock splits,
stock dividends or similar transactions. |
(2) |
Estimated pursuant to Rule 457(c) of the Securities Act of
1933, as amended, solely for the purpose of computing the amount
of the registration fee based on the average of the high and low
sales prices of the ordinary shares traded in the form of Global
Depositary Receipts, or GDRs, as reported by the Frankfurt Stock
Exchange in Germany on September 15, 2005. For purposes of
this calculation the sales price of the GDRs is converted into
U.S. dollars at an exchange rate of
0.81413 per
$1.00, which is based on the average bid and ask currency
exchange price as reported by OANDA on September 15, 2005. |
(3) |
Consists of ordinary shares that are to be offered and sold in
the form of American Depositary Shares, or ADSs, by the selling
shareholders identified in this prospectus and any prospectus
supplement. The ADSs, each representing one ordinary share,
evidenced by American Depositary Receipts, or ADRs, upon deposit
of the ordinary shares registered hereby, are being registered
under a separate registration statement on
Form F-6.
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(4) |
Represents shares of the Registrants ordinary shares being
registered for resale that have been or may be acquired upon the
exercise of warrants or options issued to the selling
shareholders named in this prospectus and any prospectus
supplement. |
(5) |
Previously paid. Pursuant to Rule 457(p), the registration
fee was partially offset by a previously paid filing fee of
$12,670 paid in connection with the filing on August 4,
2004 by MatchNet, Inc. of a registration statement on
Form S-1 (file
number 333-117940).
In addition, $15,210 was also previously paid. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. The selling
shareholders may not sell these securities until the Securities
and Exchange Commission declares our registration statement
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to
completion, dated February 8, 2006
33,263,996 American Depositary Shares
SPARK NETWORKS PLC
Representing 33,263,996 Ordinary Shares
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The selling shareholders identified in this prospectus and any
prospectus supplement are offering 33,263,996 ordinary shares in
the form of American Depositary Shares, or ADSs. Each ADS
represents the right to receive one ordinary share. We will not
receive any proceeds from the sale of our shares by the selling
shareholders, except for funds received from the exercise of
warrants and options held by selling shareholders, if and when
exercised. |
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No public market for our ordinary shares or ADSs currently
exists in the United States of America. |
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Our ordinary shares in the form of Global Depositary Shares, or
GDSs, currently trade on the Frankfurt Stock Exchange under the
symbol MHJG. The last reported sales price of the
GDSs on the Frankfurt Stock Exchange on February 7, 2006
was
6.48 per
GDS, or $7.78 per GDS. |
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Proposed trading symbol for the ADSs: American Stock
Exchange LOV. |
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The current offering price as of the date of this prospectus is
between approximately $5.84 and $7.78, which is approximately
75% and 100% of the last reported sales price of the GDSs on the
Frankfurt Stock Exchange as of February 7, 2006. Selling
shareholders will sell the ADSs at this price until the ADSs are
quoted on the American Stock Exchange. Once our ADSs are quoted
on the American Stock Exchange and there is an established
market for these shares, the selling shareholders may sell the
ADSs from time to time at market price prevailing on the
American Stock Exchange at the time of offer and sale, or at
prices related to such prevailing market prices or in negotiated
transactions or a combination of such methods of sale directly
or through brokers. |
This investment involves risk. See Risk Factors
beginning on page 7.
Neither the U.S. Securities and Exchange Commission nor
any state securities commission has approved or disapproved of
anyones investment in these securities or determined if
this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
NOTICE TO RESIDENTS OF THE UNITED KINGDOM AND OTHER MEMBER
STATES OF THE EUROPEAN UNION: The shares and ADSs referred to in
this document may only be sold or offered to, and this
prospectus and any other invitation or inducement to buy or
participate in the offer or sale of shares or ADSs may only be
communicated to persons outside the United Kingdom and other
member states of the European Union (Relevant
Persons). The shares and ADSs to which this prospectus
relates are available only to Relevant Persons and this
prospectus must not be acted on or relied on by persons that are
not Relevant Persons. Any investment or investment activity to
which this prospectus relates is available only to Relevant
Persons and may be engaged in only with Relevant Persons. Any
person communicating any information relating to this prospectus
or the shares and ADSs in the UK or another member state of the
European Union should comply with all applicable provisions of
the Financial Services and Markets Act 2000 in the UK
(FSMA) and/or other applicable legislation of the
relevant member state of the European Union (including the
applicable provisions of the Prospectus Directive (2003/71/EC))
and any regulations made thereunder in so doing. Persons in the
UK or another member state of the European Union who are in any
doubt as to the action they should take are recommended to seek
their own personal financial advice from their stockbroker, bank
manager, accountant or other financial adviser who is authorized
under the FSMA or the relevant competent authority or national
regulator of that member state.
The date of this prospectus
is ,
2006
TABLE OF CONTENTS
You should rely only on information contained in this
prospectus. We have not authorized any other person to provide
you with different information. This prospectus is not an offer
to sell, nor is it seeking an offer to buy, these securities in
any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of
the date on the front cover, but the information may have
changed since that date.
i
PROSPECTUS SUMMARY
This summary highlights information continued elsewhere in
this prospectus and does not contain all the information you
should consider in your investment decision. You should read
this summary, which includes material information, with the more
detailed information set out in this prospectus and the
financial statements and related notes. You should carefully
consider, among other things, the matters discussed in
Risk Factors. We were incorporated in September 1998
under the laws of England and Wales as a public limited company.
Throughout this prospectus, we refer to Spark Networks plc
(known as MatchNet plc until January 10, 2005) and our
subsidiaries as we, us, our,
our company, Spark Networks and
MatchNet unless otherwise indicated. Spark Networks,
MatchNet, JDate, AmericanSingles and MingleMatch are our
trademarks. Trade names, trademarks and service marks of other
companies appearing in this prospectus are the property of the
respective holders.
Our Business
We are a leading provider of online personals services in the
United States and internationally. Our Web sites enable adults
to meet online and participate in a community, become friends,
date, form a long-term relationship or marry. We provide this
opportunity through the many features on our Web sites, such as
detailed profiles, onsite email centers, real-time chat rooms,
and instant messaging services. According to comScore Media
Metrix, we averaged approximately 3.4 million total unique
visitors per month to our Web sites in the United States during
the first nine months of 2005, which ranked us as the third
largest provider of online personals services in the United
States in terms of total unique visitors. comScore Media Metrix
defines total unique visitors as the estimated
number of different individuals that visited any content of a
Web site, a category, a channel, or an application during the
reporting period. The number of total unique
visitors to our Web sites as measured by comScore Media
Metrix does not correspond to the number of members we have in
any given period. Currently, our key Web sites are JDate.com and
AmericanSingles.com. We operate several international Web sites
and maintain operations in both the United States and Israel.
Information regarding the geographical source of our revenues
can be found in our Consolidated Financial Statements included
in this prospectus. Membership on our sites is free and allows a
registered user to post a personal profile and to access our
searchable database of member profiles and our 24 hours a
day, 7 days a week customer service. The ability to
initiate most communication with other members requires the
payment of a monthly subscription fee, which represents our
primary source of revenue. Our subscription fees are charged on
a monthly basis, with discounts for longer-term subscriptions
ranging from three to twelve months, and subscriptions renew
automatically for subsequent one-month periods until paying
subscribers terminate them.
We believe that online personals fulfill significant needs for
Americas single adults who are looking to meet a companion
or date. Traditional methods such as printed personals
advertisements, offline dating services and public gathering
places often do not meet the needs of time-constrained single
people. Printed personals advertisements offer individuals
limited personal information and interaction before meeting.
Offline dating services are time-consuming, expensive and offer
a smaller number of potential partners. Public gathering places
such as restaurants, bars and social venues provide a limited
ability to learn about others prior to an in-person meeting. In
contrast, online personals services facilitate interaction
between singles by allowing them to screen and communicate with
a large number of potential companions. With features such as
detailed personal profiles, email and instant messaging, this
medium allows users to communicate with other singles at their
convenience and affords them the ability to meet multiple people
in a safe and secure online setting.
1
For the nine month period ended September 30, 2005, we had
approximately 218,700 average paying subscribers, representing a
decrease of 2.9% from the same period in 2004. Our JDate and
AmericanSingles segments had approximately 69,400 and 109,800
average paying subscribers for the nine months ended
September 30, 2005, a decrease of 1.3% and 17.8%,
respectively, compared to the same period in 2004.
We intend to grow our business in the following ways:
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Increasing our base of members in the United States and
internationally through consistent and targeted marketing
efforts and geographic expansion. We define a member as an
individual who has posted a personal profile during the
immediately preceding 12 months or an individual who has
previously posted a personal profile and has subsequently logged
on to one of our Web sites at least once in the preceding
12 months. Members may or may not be paying subscribers
which we define as individuals who have paid a monthly fee for
access to communication and Web site features beyond those
provided to our members. Accordingly, the number of members we
have at any given time may not directly affect our revenue. |
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Increasing the number of our members who become paying
subscribers by offering improved technology and communications
features and by utilizing our strong customer service focus. |
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Extending into new vertical affinity markets that we believe
will be receptive to paid online personals and are large enough
to enable us to attain enough paying subscribers sufficient to
support an online community. We view vertical affinity markets
as identifiable groups of people who share common interests and
the desire to meet companions or dates with similar interests,
backgrounds or traits. |
Office Location
Our principal executive offices are located at 8383 Wilshire
Boulevard, Suite 800, Beverly Hills, California 90211. Our
telephone number at that location is
(323) 836-3000.
Our registered office is located at 24/26 Arcadia Avenue,
London, N3 2JU, England. Our corporate Web site address is
www.spark.net. This is a textual reference only. We do not
incorporate the information on our Web site into this
prospectus, and you should not consider any information on, or
that can be accessed through, our Web site as part of this
prospectus.
Our Securities
Our ordinary shares currently trade on the Frankfurt Stock
Exchange in the form of Global Depositary Shares, or GDSs, each
of which represents the right to receive one ordinary share. The
selling shareholders identified in this prospectus and any
prospectus supplement are offering 33,263,996 ordinary shares in
the form of American Depositary Shares, or ADSs, each of which
represents the right to receive one ordinary share. ADSs may be
issued to persons located in the United States and the selling
shareholders may sell their ordinary shares in the form of ADSs
after this registration statement is declared effective by the
Securities and Exchange Commission except during any time with
respect to which we inform those shareholders that this
registration statement may not be relied upon. Selling
shareholders that hold their ordinary shares in the form of GDSs
may offer and sell their shares in the United States by
surrendering those GDSs to our depositary bank, The Bank of New
York, and requesting the depositary bank to deliver ADSs to the
order of the purchaser. Once GDSs have been surrendered for
ordinary shares, the shares may not be
re-deposited for GDSs
because the GDS facility will be closed to any deposits of
shares for GDSs, and if and when all GDSs have been surrendered,
2
we intend to terminate our GDS deposit agreement such that our
ordinary shares will only be publicly traded in the form of ADSs.
We are registering the ordinary shares in the form of ADSs, and
not directly as ordinary shares. An acquisition or transfer of
an ordinary share in the United States will generally trigger a
charge to United Kingdom stamp duty, and such stamp duty is
generally not triggered when the sale or transfer of the
beneficial interest in the ordinary shares is effected by a
transfer of ADSs. See Taxation on page 122 for
additional information regarding taxation of our ordinary shares
and ADSs.
The Offering
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ADSs offered by selling shareholders |
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33,263,996
ADSs(1) |
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Total ordinary shares outstanding after the offering, including
ordinary shares underlying ADSs and GDSs |
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30,238,996 Ordinary
Shares(2) |
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Use of Proceeds |
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We will not receive any of the net proceeds from the sale of
shares by the selling shareholders. See Use of
Proceeds. |
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Proposed American Stock Exchange symbol |
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LOV |
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(1) |
Consists of 30,238,996 ordinary shares, 2,595,000 ordinary
shares underlying options and 430,000 ordinary shares underlying
warrants. The ordinary shares are to be offered and sold in the
form of American Depositary Shares, or ADSs. The ADSs, each
representing one ordinary share, evidenced by American
Depositary Receipts, or ADRs, upon deposit of the ordinary
shares registered hereby, are being registered under a separate
registration statement on
Form F-6.
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(2) |
The total number of ordinary shares to be outstanding
immediately after this offering is based on 30,238,996 ordinary
shares outstanding as of December 6, 2005. This information
excludes: |
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4,731,688 ordinary shares issuable upon the exercise of
outstanding options as of December 6, 2005, with exercise
prices ranging from $0.87 to $9.25 per share and a weighted
average exercise price of $5.53 per share; |
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430,000 ordinary shares issuable upon the exercise of warrants
outstanding as of December 6, 2005, with an exercise price
an exercise price of $2.44 per share; and |
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14,364,562 ordinary shares available for issuance under our
share option schemes. |
3
Summary Consolidated Financial Data
The following summary consolidated financial data should be read
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements, related notes, and
other financial information included herein.
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Nine months ended | |
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Year ended December 31,(1) | |
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September 30,(1) | |
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2002 | |
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2003(7) | |
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2004(7) | |
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2004(7) | |
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2005(7) | |
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(unaudited) | |
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(unaudited) | |
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(in thousands, except per share and paying subscriber data) | |
Consolidated Statements of Operations Data:
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Net revenues
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$ |
16,352 |
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$ |
36,941 |
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$ |
65,052 |
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$ |
48,000 |
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$ |
48,925 |
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Direct marketing expenses
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5,396 |
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18,395 |
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31,240 |
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24,612 |
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18,352 |
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Contribution margin
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10,956 |
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18,546 |
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33,812 |
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23,388 |
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30,573 |
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Operating
expenses:(6)
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Indirect marketing
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403 |
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986 |
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2,607 |
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2,060 |
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758 |
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Customer service
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1,207 |
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2,536 |
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3,379 |
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2,601 |
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1,787 |
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Technical operations
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1,587 |
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4,481 |
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7,184 |
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5,201 |
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4,848 |
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Product development
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603 |
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959 |
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2,013 |
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1,376 |
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2,949 |
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General and administrative
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7,996 |
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18,537 |
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29,253 |
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21,559 |
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20,013 |
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Amortization of goodwill and intangible assets
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524 |
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555 |
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860 |
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670 |
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848 |
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Impairment of long-lived assets and goodwill
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1,532 |
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208 |
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Total operating expenses
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12,320 |
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29,586 |
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45,504 |
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33,467 |
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31,203 |
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Operating (loss)
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(1,364 |
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(11,040 |
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(11,692 |
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(10,079 |
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(630 |
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Interest (income) and other expenses, net
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(840 |
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(188 |
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(66 |
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(14 |
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285 |
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(Loss) before income taxes
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(524 |
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(10,852 |
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(11,626 |
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(10,065 |
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(915 |
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Provision for income taxes
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1 |
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1 |
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120 |
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Net (loss)
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$ |
(524 |
) |
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$ |
(10,852 |
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$ |
(11,627 |
) |
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$ |
(10,066 |
) |
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$ |
(1,035 |
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Net (loss) per share basic and diluted
(3)
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$ |
(0.03 |
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$ |
(0.57 |
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$ |
(0.51 |
) |
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$ |
(0.45 |
) |
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$ |
(0.04 |
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Weighted average shares outstanding basic and
diluted(3)
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18,460 |
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18,970 |
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22,667 |
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22,139 |
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25,621 |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$ |
874 |
|
|
$ |
1,441 |
|
|
$ |
3,065 |
|
|
$ |
2,721 |
|
|
$ |
3,558 |
|
Additional Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average paying
subscribers(4)
|
|
|
58,700 |
|
|
|
125,800 |
|
|
|
226,100 |
|
|
|
225,200 |
|
|
|
218,700 |
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
September 30, | |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$ |
7,755 |
|
|
$ |
5,815 |
|
|
$ |
7,423 |
|
|
$ |
8,668 |
|
Total assets
|
|
|
17,461 |
|
|
|
16,969 |
|
|
|
27,359 |
|
|
|
39,473 |
|
Deferred revenue
|
|
|
1,535 |
|
|
|
3,232 |
|
|
|
3,933 |
|
|
|
4,099 |
|
Capital lease obligations and notes payable
|
|
|
|
|
|
|
487 |
|
|
|
1,873 |
|
|
|
10,517 |
|
Total liabilities
|
|
|
3,998 |
|
|
|
11,659 |
|
|
|
16,872 |
|
|
|
23,155 |
|
Shares subject to
rescission(5)
|
|
|
|
|
|
|
|
|
|
|
3,819 |
|
|
|
3,819 |
|
Accumulated deficit
|
|
|
(21,156 |
) |
|
|
(32,008 |
) |
|
|
(43,635 |
) |
|
|
(44,670 |
) |
Total shareholders equity
|
|
|
13,463 |
|
|
|
5,310 |
|
|
|
6,668 |
|
|
|
12,499 |
|
|
|
(1) |
Refer to Managements Discussion and Analysis of
Financial Condition and Results of Operations for a
discussion of certain asset and business acquisitions. |
(2) |
In 2004, general and administrative expenses included an expense
of approximately $2.4 million related to an employee
severance, $2.1 million related to the United States
initial public offering of MatchNet, Inc. that was planned for
mid-2004, but which was withdrawn shortly after the related
registration statement was filed in the third quarter of 2004,
as well as one legal settlement resulting in the recognition of
$900,000 in expenses in the third quarter and two legal
settlements resulting in the recognition of $2.1 million in
expenses in the fourth quarter of 2004. In 2003, general and
administrative expenses included a charge of $1.7 million
primarily related to a settlement with Comdisco. |
(3) |
For information regarding the computation of per share amounts,
refer to note 1 of our consolidated financial statements. |
(4) |
Average paying subscribers for each month are calculated as the
sum of the paying subscribers at the beginning and the end of
the month, divided by two. Average paying subscribers for
periods longer than one month are calculated as the sum of the
average paying subscribers for each month, divided by the number
of months in such period. Additionally, refer to
Managements Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of
other business metrics we use to evaluate our business. |
(5) |
Under our 2000 Executive Share Option Scheme (2000 Option
Scheme), we granted options to purchase ordinary shares to
certain of our employees, directors and consultants. The
issuances of securities upon exercise of options granted under
our 2000 Option Scheme may not have been exempt from
registration and qualification under federal and California
state securities laws, and as a result, we may have potential
liability to those employees, directors and consultants to whom
we issued securities upon the exercise of these options. In
order to address that issue, we may elect to make a rescission
offer to those persons who exercised all, or a portion, of those
options and continue to hold the shares issued upon exercise, to
give them the opportunity to rescind the issuance of those
shares. However, the staff of the Securities and Exchange
Commission is of the opinion that a rescission offer will not
bar or extinguish any liability under the Securities Act of 1933
with respect to these options and shares, nor will a rescission
offer extinguish a holders right to rescind the issuance
of securities that were not registered or exempt from the
registration requirements under the Securities Act of 1933. As
of September 30, 2005, assuming every eligible person that
continues to hold the securities issued upon exercise of options
granted under the 2000 Option Scheme were to accept a rescission
offer, we estimate the total cost to us to complete the
rescission would be approximately $3.8 million including
statutory interest at 7% per annum, accrued since the date
of exercise of the options. The rescission acquisition price is
calculated as equal to the original exercise price paid by the
optionee to our company upon exercise of their option. |
(6)Operating
expenses include share-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
Year Ended | |
|
Ended | |
|
|
December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Indirect marketing
|
|
$ |
79 |
|
|
$ |
156 |
|
|
$ |
128 |
|
|
$ |
10 |
|
Customer service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Technical operations
|
|
|
140 |
|
|
|
22 |
|
|
|
22 |
|
|
|
168 |
|
Product development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
General and administrative
|
|
|
1,652 |
|
|
|
1,526 |
|
|
|
1,012 |
|
|
|
1,000 |
|
|
|
(7) |
For the purposes of this and all future filings, prior period
classification of share-based compensation was reclassified to
conform to current period classification. |
5
Presentation of Financial Information
We report our financial statements in U.S. dollars and
prepare our financial statements in accordance with generally
accepted accounting principles in the United States. In this
prospectus, except where otherwise indicated, references to
$ or U.S. dollars are to the lawful
currency of the United States, references to
or
euro are to the single currency of the European
Union, and references to £ or pound
sterling are to the currency of the United Kingdom. Unless
otherwise noted, the exercise prices of options and warrants as
outstanding on September 30, 2005 noted in this prospectus
are presented on an as converted basis into U.S. dollars at
an exchange rate of
0.83001 per
$1.00, which is based on the average bid and ask exchange price
as reported by OANDA for the day September 30, 2005. The
exercise prices of options and warrants as outstanding on
December 6, 2005 and December 31, 2005 utilize the
exchange rate as of such dates, which are
0.85378 and
0.84427
per $1.00, respectively.
6
RISK FACTORS
You should carefully consider the risks described below
together with all of the other information included in this
prospectus and the related registration statement before making
an investment decision. The risks described below are the
material risks that we are currently aware of that are facing
our company. In addition, other sections of this prospectus may
include additional factors that could adversely impact our
business and operating results. If any of the following risks
actually occurs, our business, financial condition or results of
operations could be materially adversely affected. In that case,
the trading price of our ordinary shares, in the form of ADSs,
would decline and you may lose all or part of your
investment.
Risks Related To Our Business
We have significant operating losses and we may incur
additional losses in the future.
We have historically generated significant operating losses. As
of September 30, 2005, we had an accumulated deficit of
approximately $44.7 million. We had net loss of
approximately $1.0 million for the nine months ended
September 30, 2005 and a loss of $11.6 million for the
fiscal year ended December 31, 2004. We also had negative
operating cash flow in 2004. We expect that our operating
expenses will continue to increase during the next several years
as a result of the promotion of our services, the hiring of
additional key personnel, the expansion of our operations,
including the launch of new Web sites, and entering into
acquisitions, strategic alliances and joint ventures. If our
revenues do not grow at a substantially faster rate than these
expected increases in our expenses or if our operating expenses
are higher than we anticipate, we may not be profitable and we
may incur additional losses, which could be significant.
Our limited operating history and relatively new business
model in an emerging and rapidly evolving market makes it
difficult to evaluate our future prospects.
We derive nearly all of our net revenues from online
subscription fees for our services, which is an early-stage
business model for us that has undergone, and continues to
experience, rapid and dramatic changes. As a result, we have
very little operating history for you to evaluate in assessing
our future prospects. You must consider our business and
prospects in light of the risks and difficulties we will
encounter as an early-stage company in a new and rapidly
evolving market. Our performance will depend on the continued
acceptance and evolution of online personal services and other
factors addressed herein. We may not be able to effectively
assess or address the evolving risks and difficulties present in
the market, which could threaten our capacity to continue
operations successfully in the future.
If our efforts to attract a large number of members, convert
members into paying subscribers and retain our paying
subscribers are not successful, our revenues and operating
results would suffer.
Our future growth depends on our ability to attract a large
number of members, convert members into paying subscribers and
retain our paying subscribers. This in turn depends on our
ability to deliver a high-quality online personals experience to
these members and paying subscribers. As a result, we must
continue to invest significant resources in order to enhance our
existing products and services and introduce new high-quality
products and services that people will use. If we are unable to
predict user preferences or industry changes, or if we are
unable to modify our products and services on a timely basis, we
may lose existing members and paying subscribers and may fail to
attract new members and paying subscribers. Our revenue and
expenses would also be adversely affected if our innovations are
not responsive to the needs of our members and paying
subscribers or are not brought to market in an effective or
timely manner.
7
Our subscriber acquisition costs vary depending upon
prevailing market conditions and may increase significantly in
the future.
Costs for us to acquire paying subscribers are dependent, in
part, upon our ability to purchase advertising at a reasonable
cost. Our advertising costs vary over time, depending upon a
number of factors, many of which are beyond our control.
Historically, we have used online advertising as the primary
means of marketing our services.
In general, the costs of online advertising have recently
increased substantially and we expect those costs to continue to
increase as long as the demand for online advertising remains
robust. If we are not able to reduce our other operating costs,
increase our paying subscriber base or increase revenue per
paying subscriber to offset these anticipated increases, our
profitability will be adversely affected.
Competition presents an ongoing threat to the performance of
our business.
We expect competition in the online personals business to
continue to increase because there are no substantial barriers
to entry. For example, an article in the USA Today stated
that there are signs of fierce competition among online
personals sites, and that an Internet tracking firm found that
the number of online personals sites it monitors had reached 836
in February 2005, up from 611 in January 2004. We believe that
our ability to compete depends upon many factors both within and
beyond our control, including the following:
|
|
|
|
|
the size and diversity of our member and paying subscriber bases; |
|
|
|
the timing and market acceptance of our products and services,
including the developments and enhancements to those products
and services relative to those offered by our competitors; |
|
|
|
customer service and support efforts; |
|
|
|
selling and marketing efforts; and |
|
|
|
our brand strength in the marketplace relative to our
competitors. |
We compete with traditional personals services, as well as
newspapers, magazines and other traditional media companies that
provide personals services. We compete with a number of large
and small companies, including Internet portals and
specialty-focused media companies that provide online and
offline products and services to the markets we serve. Our
principal online personals services competitors include Yahoo!
Personals, Match.com, a wholly-owned subsidiary of
InterActiveCorp., and eHarmony, all of which operate primarily
in North America. In addition, we face competition from social
networking Web sites such as MySpace and Friendster. Many of our
current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing
and other resources and larger customer bases than we do. These
factors may allow our competitors to respond more quickly than
we can to new or emerging technologies and changes in customer
requirements. These competitors may engage in more extensive
research and development efforts, undertake more far-reaching
marketing campaigns and adopt more aggressive pricing policies
which may allow them to build larger member and paying
subscriber bases than we have. Our competitors may develop
products or services that are equal or superior to our products
and services or that achieve greater market acceptance than our
products and services. These activities could attract members
and paying subscribers away from our Web sites and reduce our
market share.
In addition, current and potential competitors are making, and
are expected to continue to make, strategic acquisitions or
establishing cooperative and, in some cases, exclusive
relationships with significant companies or competitors to
expand their businesses or to offer more comprehensive products
and services. To the extent these competitors or potential
competitors establish exclusive relationships with major
portals, search engines and Internet service providers, or ISPs,
our ability to reach potential members through online
advertising may be restricted. Any of these competitors could
8
cause us difficulty in attracting and retaining members and
converting members into paying subscribers and could jeopardize
our existing affiliate program and relationships with portals,
search engines, ISPs and other Web properties.
Our efforts to capitalize upon opportunities to expand into
new vertical affinity markets may fail and could result in a
loss of capital and other valuable resources.
One of our strategies is to expand into new vertical affinity
markets to increase our revenue base. We view vertical affinity
markets as identifiable groups of people who share common
interests and the desire to meet companions or dates with
similar interests, backgrounds or traits. Our planned expansion
into such vertical affinity markets will occupy our
managements time and attention and will require us to
invest significant capital resources. The results of our
expansion efforts into new vertical affinity markets are
unpredictable, and there is no guarantee that our efforts will
have a positive effect on our revenue base. We face many risks
associated with our planned expansion into new vertical affinity
markets, including but not limited to the following:
|
|
|
|
|
competition from pre-existing competitors with significantly
stronger brand recognition in the markets we enter; |
|
|
|
our improper evaluations of the potential of such markets; |
|
|
|
diversion of capital and other valuable resources away from our
core business and other opportunities that are potentially more
profitable; and |
|
|
|
weakening our current brands by over expansion into too many new
markets. |
If we fail to keep pace with rapid technological change, our
competitive position will suffer.
We operate in a market characterized by rapidly changing
technologies, evolving industry standards, frequent new product
and service announcements, enhancements and changing customer
demands. Accordingly, our performance will depend on our ability
to adapt to rapidly changing technologies and industry
standards, and our ability to continually improve the speed,
performance, features, ease of use and reliability of our
services in response to both evolving demands of the marketplace
and competitive service and product offerings. There have been
occasions when we have not been as responsive as many of our
competitors in adapting our services to changing industry
standards and the needs of our members and paying subscribers.
Our industry has been subject to constant innovation and
competition. Historically, new features may be introduced by one
competitor, and if they are perceived as attractive to users,
they are often copied later by others. Over the last few years,
such new feature introductions in the industry have included
instant messaging, message boards, ecards, personality profiles,
and mobile content delivery. We are currently unable to deliver
mobile features until completion of our new system architecture.
Introducing new technologies into our systems involves numerous
technical challenges, substantial amounts of capital and
personnel resources and often takes many months to complete. We
intend to continue to devote efforts and funds toward the
development of additional technologies and services. For
example, in 2003 and 2004 we introduced a number of new Web
sites and features, and we anticipate the introduction of
additional Web sites and features in 2005 and 2006. We may not
be able to effectively integrate new technologies into our Web
sites on a timely basis or at all, which may degrade the
responsiveness and speed of our Web sites. Such technologies,
even if integrated, may not function as expected.
Our business depends on establishing and maintaining strong
brands and if we are not able to maintain and enhance our
brands, we may be unable to expand or maintain our member and
paying subscriber bases.
We believe that establishing and maintaining our brands is
critical to our efforts to attract and expand our member and
paying subscriber bases. We believe that the importance of brand
recognition will
9
continue to increase, given the growing number of Internet sites
and the low barriers to entry for companies offering online
personals services. For example, an article in the USA Today
stated that there are signs of fierce competition among online
personals sites, and that an Internet tracking firm found that
the number of online personals sites it monitors had reached 836
in February 2005, up from 611 in January 2004. To attract and
retain members and paying subscribers, and to promote and
maintain our brands in response to competitive pressures, we
intend to substantially increase our financial commitment to
creating and maintaining distinct brand loyalty among these
groups. If visitors, members and paying subscribers to our Web
sites and our affiliate and distribution associates do not
perceive our existing services to be of high quality, or if we
introduce new services or enter into new business ventures that
are not favorably received by such parties, the value of our
brands could be diluted, thereby decreasing the attractiveness
of our Web sites to such parties. In addition, we changed our
corporate name in January 2005 from MatchNet plc to Spark
Networks plc, however, we did not change the names of our
Web sites or brand names. Our adoption of a new corporate name
may prevent us from taking advantage of goodwill that potential
and existing customers may have associated with our old
corporate name. As a result, our results of operations may be
adversely affected by decreased brand recognition.
We may have potential liability under California state and
federal securities laws with respect to the grant of share
options to certain of our employees, directors and consultants
and the exercise of these options.
Under our 2000 Executive Share Option Scheme (2000 Option
Scheme), we granted options to purchase ordinary shares to
certain of our employees, directors and consultants. California
state securities laws generally require qualification for the
offer and sale of securities subject to California law. Under
California law, the grant of an option constitutes a sale of the
underlying shares at the time of the option grant and not at the
exercise of the option. Our option grants were not qualified and
may not have been exempt from qualification under California
state securities laws. As a result, we may have potential
liability to those employees, directors and consultants to whom
we granted options under the 2000 Option Scheme. In order to
address that issue, we may elect to make a rescission offer to
the holders of outstanding options under the 2000 Option Scheme
to give them the opportunity to rescind the grant of their
options.
As of September 30, 2005, assuming every eligible optionee
were to accept a rescission offer, we estimate the total cost to
us to complete the rescission would be approximately
$4.0 million including statutory interest at 7% per
annum. These amounts reflect the costs of offering to rescind
the issuance of the outstanding options by paying an amount
equal to 20% of the aggregate exercise price for the entire
option.
In addition, issuances of securities upon exercise of options
granted under our 2000 Option Scheme may not have been exempt
from registration and qualification under California state
securities laws as a result of the option grants themselves and
also may not have been exempt from registration under federal
securities laws. Federal securities laws prohibit the offer or
sale of securities unless the sales are registered or exempt
from registration. The issuances of ordinary shares upon the
exercise of our options were not registered and may not have
been exempt from registration under California state and federal
securities laws. As a result, we may have potential liability to
those employees, directors and consultants to whom we issued
securities upon the exercise of these options. In order to
address that issue, we may elect to make a rescission offer to
those persons who exercised all, or a portion, of those options
and continue to hold the shares issued upon exercise, to give
them the opportunity to rescind the issuance of those shares
(Option Shares).
As of September 30, 2005, assuming every eligible person
that continues to hold the securities issued upon exercise of
options granted under the 2000 Option Scheme were to accept a
rescission offer, we estimate the total cost to us to complete
the rescission would be approximately $3.8 million including
10
statutory interest at 7% per annum, accrued since the date
of exercise of the options. These amounts are calculated by
reference to the acquisition price of the Option Shares.
A holder could argue that this process does not represent an
adequate remedy for issuance of an option and securities issued
upon exercise of an option in violation of California state or
federal securities laws and, if a court were to impose a greater
remedy, our financial exposure could be greater. In addition, it
is the Securities and Exchange Commissions position that a
rescission offer will not bar or extinguish any liability under
the Securities Act of 1933 with respect to these options and
shares, nor will a rescission offer extinguish a holders
right to rescind the issuance of securities that were not
registered or exempt from the registration requirements under
the Securities Act of 1933. If any or all of the holders reject
or fail to respond to our rescission offer, the holders will
keep their options and securities and we may continue to be
liable under federal and California state securities laws for up
to an amount equal to the value of the options and securities
granted or issued plus any statutory interest we may be required
to pay. Further, claims or actions based on fraud may not be
waived or barred pursuant to a rescission offer and there can be
no assurance that we will be able to enforce any waivers that we
may receive in connection with the rescission offer in order to
bar such claims or other causes of action until the applicable
statute of limitations has run. In addition, despite a
rescission offer, whether accepted or not, if it is determined
that we offered securities without properly registering them
under federal or state law, or securing an exemption from
registration, regulators could impose monetary fines or other
sanctions as provided under these laws.
For the purposes of English company law, a rescission offer in
respect of our Option Shares would take the form of a purchase
by our company of the relevant Option Shares. The Companies Act
1985 (Companies Act) provides that we may only
purchase our own shares using our distributable
profits (as defined by the Companies Act), also known as
distributable reserves (Distributable Reserves), or
the proceeds from the issuance of new shares for that purpose.
When we issue shares at a value which represents a premium over
their nominal value, we are required by the Companies Act to
transfer the premium (subject to certain limited exceptions) to
a share premium account. Under the Companies Act, our ability to
utilize our share premium account is very limited and does not
include the payment of dividends. However, in accordance with a
procedure set out in the Companies Act, we have obtained
approval from our shareholders and from the High Court of
Justice in England and Wales (the Court) to reduce
our share premium account by US$44,000,000 with effect from
December 8, 2005 (the Effective Date) in order
to reduce or eliminate the deficit on our profit and loss
account, which had arisen as a result of previous accumulated
losses. This will enable profits, if any, arising after
December 31, 2005 to give rise to Distributable Reserves,
which we could use to purchase our own shares pursuant to a
rescission offer. In connection with the approval from the
Court, we have given an undertaking to the Court for the
protection of our creditors, which requires us to transfer to a
non-distributable reserve (the Special Reserve) the
amount (if any) by which the deficit on our profit and loss
account at December 31, 2005 falls short of the amount of
the reduction (being US$44,000,000), and any profits made by us
or any of our subsidiaries prior to December 31, 2005,
until our non-consenting creditors at the Effective Date
(Non-Consenting Creditors) have been paid off. In
other words, if there is a surplus on our profit and loss
account after application of the $44.0 million from the
share premium reduction and any additional profits made by us
prior to December 31, 2005 (Special Reserve
Surplus), then we would not be permitted to use the
Special Reserve Surplus to purchase our own shares until all
Non-Consenting Creditors are paid . However, we do not currently
expect that any sums will be required to be transferred to the
Special Reserve since we do not anticipate that there will be a
surplus on our profit and loss account after application of the
share premium reduction and any profits made before
December 31, 2005, although this will need to be confirmed
when we prepare our audited UK GAAP profit and loss account and
balance sheet for the year ended December 31, 2005.
Although we believe we have substantially reduced our
accumulated profit and loss account deficit pursuant to the
Companies Act, we are not permitted to purchase any of our own
shares until we have
11
sufficient Distributable Reserves in order to fund such
purchases of our own shares or sufficient proceeds of a new
issuance of shares made for the purposes of such purchases of
our own shares. As of September 30, 2005, if every eligible
person holding Option Shares were to accept the rescission
offer, we estimate that the amount we would need in
Distributable Reserves is approximately $3.8 million. After
application of the share premium reduction to the accumulated
profit and loss account deficit, we anticipate that the deficit
will be substantially reduced; however, we will not have any
Distributable Reserves, which we will accumulate to the extent
that we make any distributable profits in the future. We do not
intend to make a rescission offer until we have the
Distributable Reserves required to make a rescission offer of
the Option Shares.
The undertaking to the Court also prevents us from making any
distribution to shareholders, or redeeming or purchasing our own
shares, until we have obtained approval at a shareholders
general meeting of our audited UK GAAP balance sheet for the
year ended December 31, 2005. It is likely that our UK GAAP
balance sheet for the year ended December 31, 2005 will be
ready for approval by shareholders on or about May 31,
2006. The share premium reduction will only be reflected on our
UK GAAP balance sheet for the purposes of UK law. It will not be
reflected on our US GAAP balance sheet.
Any purchase of the Option Shares pursuant to a rescission offer
would not only need to be made out of Distributable Reserves,
but would also require shareholder approval given in accordance
with the requirements of the Companies Act. Such approval must
be given by resolution passed with a majority of at least 75% of
the votes cast on the resolution (excluding votes carried by the
Option Shares proposed to be purchased), having made a copy of
the contract for the purchase of the Option Shares available for
inspection both at our registered office for at least 15 days
prior to the date of the meeting to approve the purchase and at
the meeting itself. Once a purchase has been completed, we would
be subject to further disclosure obligations in relation to
information about the purchase.
We do not intend to seek shareholder approval for a purchase of
Option Shares until we have made a rescission offer which has
been accepted by any one or more shareholders and it has become
necessary to seek such approval.
In summary, in order to effectuate a rescission offer and
repurchase any of our own shares upon any acceptances of the
rescission offer, we must satisfy the following conditions:
(1) obtain shareholder approval of our audited UK GAAP
balance sheet for the year ended December 31, 2005;
(2) obtain additional shareholder approval, as further
discussed above, of any acceptances of the rescission offer to
repurchase shares; and (3) have sufficient Distributable
Reserves to repurchase shares subject to the rescission offer.
If we do not obtain the requisite shareholder approval of
acceptances to a rescission offer or if we continue to
accumulate a deficit on our profit and loss account and we do
not issue new shares for additional funds for a rescission
offer, then we will not be able to effectuate a rescission offer.
We have terminated and no longer grant options under our 2000
Option Scheme, but options previously granted under the 2000
Option Scheme remain in full force and effect. We filed a
registration statement on
Form S-8 covering
the issuance of future shares upon exercise of presently
unexercised options under the 2000 Option Scheme. However, none
of the shares (including shares underlying unexercised options)
registered on the Form
S-8 will be eligible
for resale if they are tendered as part of the rescission offer.
If we are unable to attract, retain and motivate key
personnel or hire qualified personnel, or such personnel do not
work well together, our growth prospects and profitability will
be harmed.
Our performance is largely dependent on the talents and efforts
of highly skilled individuals. We have recently recruited many
of our directors, executive officers and other key management
talent, some of which have limited or no experience in the
online personals industry. For example, David E. Siminoff,
12
our President and Chief Executive Officer, joined us in August
2004 and each of our Chief Financial Officer, Chief Operating
Officer and General Counsel, and Chief Technology Officer joined
us in October 2004. Because members of our executive management
have only worked together as a team for a limited time, there
are inherent risks in the management of our company with respect
to decision-making, business direction, product development and
strategic relationships. In the event that the members of our
executive management team are unable to work well together or
agree on operating principles, business direction or business
transactions or are unable to provide cohesive leadership, our
business could be harmed and one or more of those individuals
may discontinue their service to our company, and we would be
forced to find a suitable replacement. The loss of any of our
management or key personnel could seriously harm our business.
Furthermore, we have recently experienced significant turnover
on our board of directors. We currently have seven members
serving on our board of directors. Since October 2004, we have
had two directors resign from our board of directors and five
directors join our board of directors. Alon Carmel, one of our
companys co-founders and co-chairmen, resigned from his
position in February 2005 to pursue other entrepreneurial and
philanthropic interests.
In August 2004, we initiated a cost reduction program and
terminated the employment of 40 full-time and temporary
employees, and, as a result, our future recruiting efforts may
become more difficult. We may also encounter difficulties in
recruiting personnel as we become a more mature company in a
competitive industry. Competition in our industry for personnel
is intense, and we are aware that our competitors have directly
targeted our employees. We do not have non-competition
agreements with most employees and, even in cases where we do,
these agreements are of limited enforceability in California. We
also do not maintain any key-person life insurance policies on
our executives. The incentives to attract, retain and motivate
employees provided by our option grants or by future
arrangements, such as cash bonuses, may not be as effective as
they have been in the past. If we do not succeed in attracting
necessary personnel or retaining and motivating existing
personnel, we may be unable to grow effectively.
Our inability to effectively manage our growth could have a
materially adverse effect on our profitability.
We have experienced rapid growth since inception. The growth and
expansion of our business and service offerings places a
continuous significant strain on our management, operational and
financial resources. We are required to manage multiple
relations with various strategic associates, technology
licensors, members, paying subscribers and other third parties.
In the event of further growth of our operations or in the
number of our third-party relationships, our computer systems or
procedures may not be adequate to support our operations and our
management may not be able to manage such growth effectively. To
effectively manage our growth, we must continue to implement and
improve our operational, financial and management information
systems and to expand, train and manage our employee base. If we
fail to do so, our management, operational and financial
resources could be overstrained and adversely impacted.
We expect our growth rates to decline and our operating
margins could deteriorate.
We believe our revenue growth rate will decline as our net
revenues increase to higher levels and as the growth of the
online personals industry begins to slow. We have seen a decline
in our growth rates during the latter stages of 2004 and first
half of 2005. A February 2005 report by Jupiter Research
forecasts the online personals industry will experience single
digit growth in 2005 as compared to 77% growth in 2003. It is
possible that our operating margins will deteriorate if revenue
growth does not exceed planned increases in expenditures for all
aspects of our business in an increasingly competitive
environment, including sales and marketing, general and
administrative and technical operations expenses.
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Our business depends on our server and network hardware and
software and our ability to obtain network capacity; our current
safeguard systems may be inadequate to prevent an interruption
in the availability of our services.
The performance of our server and networking hardware and
software infrastructure is critical to our business and
reputation, to our ability to attract visitors and members to
our Web sites, to convert them into paying subscribers and to
retain paying subscribers. An unexpected and/or substantial
increase in the use of our Web sites could strain the capacity
of our systems, which could lead to a slower response time or
system failures. Although we have not yet experienced many
significant delays, any future slowdowns or system failures
could adversely affect the speed and responsiveness of our Web
sites and would diminish the experience for our visitors,
members and paying subscribers. We face risks related to our
ability to scale up to our expected customer levels while
maintaining superior performance. If the usage of our Web sites
substantially increases, we may need to purchase additional
servers and networking equipment and services to maintain
adequate data transmission speeds, the availability of which may
be limited or the cost of which may be significant. Any system
failure that causes an interruption in service or a decrease in
the responsiveness of our Web sites could reduce traffic on our
Web sites and, if sustained or repeated, could impair our
reputation and the attractiveness of our brands as well as
reduce revenue and negatively impact our operating results.
Furthermore, we rely on many different hardware systems and
software applications, some of which have been developed
internally. If these hardware systems or software applications
fail, it would adversely affect our ability to provide our
services. If we are unable to protect our data from loss or
electronic or magnetic corruption, or if we receive a
significant unexpected increase in usage and are not able to
rapidly expand our transaction-processing systems and network
infrastructure without any systems interruptions, it could
seriously harm our business and reputation. We have experienced
occasional systems interruptions in the past as a result of
unexpected increases in usage, and we cannot assure you that we
will not incur similar or more serious interruptions in the
future. From time to time, our company and our Web sites have
been subject to delays and interruptions due to software
viruses, or variants thereof, such as internet worms. To date,
we have not experienced delays or systems interruptions that
have had a material impact on our business.
In addition, we do not currently have adequate disaster recovery
systems in place, which means in the event of any catastrophic
failure involving our Web sites, we may be unable to serve our
Web traffic for a significant period of time. Our servers
primarily operate from only a single site in Southern California
and the absence of a backup site could exacerbate this
disruption. Any system failure, including network, software or
hardware failure, that causes an interruption in the delivery of
our Web sites and services or a decrease in responsiveness of
our services would result in reduced visitor traffic, reduced
revenue and would adversely affect our reputation and brands.
The failure to establish and maintain affiliate agreements
and relationships could limit the growth of our business.
We have entered into, and expect to continue to enter into,
arrangements with affiliates to increase our member and paying
subscribers bases, bring traffic to our Web sites and enhance
our brands. Pursuant to our arrangements, an affiliate generally
advertises or promotes our Web site on its Web site, and earns a
fee whenever visitors to its Web site click though the
advertisement to one of our Web sites and registers or
subscribes on our Web site. Affiliate arrangements constitute
over half of our marketing program. These affiliate arrangements
are easily cancelable, often with one day notice. We do not
typically have any exclusivity arrangements with our affiliates,
and some of our affiliates may also be affiliates for our
competitors. None of these affiliates, individually, represents
a material portion of our revenue. If any of our current
affiliate agreements is terminated, we may not be able to
replace the terminated agreement with an equally beneficial
arrangement. We cannot assure you that we will be able to renew
any of our current agreements when they terminate or, if we are
able to do so, that such
14
renewals will be available on acceptable terms. We also do not
know whether we will be able to enter into additional agreements
or that any relationships, if entered into, will be on terms
favorable to us.
We rely on a number of third-party providers and their
failure or unwillingness to continue to perform could harm
us.
We rely on third parties to provide important services and
technologies to us, including a third party that manages and
monitors our offsite data center located in Southern California,
ISPs, search engine marketing providers and credit card
processors. In addition, we license technologies from third
parties to facilitate our ability to provide our services. Any
failure on our part to comply with the terms of these licenses
could result in the loss of our rights to continue using the
licensed technology, and we could experience difficulties
obtaining licenses for alternative technologies. Furthermore,
any failure of these third parties to provide these and other
services, or errors, failures, interruptions or delays
associated with licensed technologies, could significantly harm
our business. Any financial or other difficulties our providers
face may have negative effects on our business, the nature and
extent of which we cannot predict. Except to the extent of the
terms of our contracts with such third party providers, we
exercise little or no control over them, which increases our
vulnerability to problems with the services and technologies
they provide and license to us. In addition, if any fees charged
by third-party providers were to substantially increase, such as
if ISPs began charging us for email sent by our paying
subscribers to other members or paying subscribers, we could
incur significant additional losses.
If we fail to develop or maintain an effective system of
internal controls over financial reporting, we may not be able
to accurately report our financial results or prevent fraud. As
a result, current and potential shareholders could lose
confidence in our financial reporting, which would harm the
value of our shares.
Effective internal controls over financial reporting are
necessary for us to provide reliable financial reports,
effectively prevent fraud and operate as a public company. If we
cannot provide reliable financial reports or prevent fraud, our
reputation and operating results would be harmed. We have, in
the past, discovered and may, in the future, discover areas of
our internal controls over financial reporting that need
improvement. For example, during our audit of 2003 results, our
external auditors brought to our attention a need to restate
2001 and 2002 results and also noted, in a letter to management,
certain conditions involving internal controls and operations,
none of which were a material weakness. Furthermore, in 1994, a
civil action was filed in Israeli district court (the
Action) involving Videomatrix Industries, LTD
(Videomatrix), a company unrelated to Spark Networks
except of which our former Co-chairman and current Chairman were
officers. In that Action, our former Co-chairman was a
respondent, the Israeli equivalent of a defendant, and our
current Chairman was a formal respondent, but not a defendant.
The Action was initiated by a venture capital lender to, and
investor in, Videomatrix. The Israeli court appointed an
investigator to make factual findings. The investigator noted
that there were inaccurate records and/or entries in corporate
books, incomplete disclosures and/or inaccurate representations
in a prospectus, questionable documents, and undisclosed related
party transactions, involving Videomatrix. Thereafter, the court
issued an order providing for a four month moratorium on
litigation to permit Videomatrix, its audit committee, and its
auditors to conduct an examination and form conclusions. Our
Chairman and former
Co-chairman purchased
the entire ownership interest of the venture capital lender in
Videomatrix during the moratorium provided for in the court
order and no further action was taken by the venture capital
lender in connection with this matter.
If we become a U.S. public company, we will be subject to
the reporting requirements of the Sarbanes-Oxley Act of 2002.
Beginning December 31, 2006, we will be required to
annually assess and report on our internal controls over
financial reporting. If we are unable to adequately establish or
improve our internal controls over financial reporting, we may
report that our internal controls are ineffective and our
external auditors will not be able to issue an unqualified
opinion on the effectiveness of our internal controls.
Ineffective internal controls over financial reporting could
also cause investors to lose
15
confidence in our reported financial information, which would
likely have a negative effect on the trading price of our
securities or could affect our ability to access the capital
markets and which could result in regulatory proceedings against
us by, among others, the U.S. Securities Exchange
Commission.
We face risks related to our recent accounting restatements,
which could result in costly litigation or regulatory
proceedings against us.
Our ordinary shares in the form of GDSs trade on the Frankfurt
Stock Exchange in Germany. Pursuant to the laws governing this
exchange, we publicly report our quarterly and annual operating
results. On April 28, 2004, we publicly announced that we
had discovered accounting inaccuracies in previously reported
financial statements. As a result, following consultation with
our new auditors, we restated our financial statements for the
nine months ended September 30, 2003 and for each of the
years ended December 31, 2001 and 2002 to correct
inappropriate accounting entries.
The restatements primarily related to the timing of recognition
of deferred revenue and the capitalization of bounty costs,
which are the amounts paid to online marketers to acquire
members. The restatements are in accordance with United States
generally accepted accounting principles and pertain primarily
to timing matters and had no impact on cash flow from operations
or our ongoing operations. The impact on net loss for 2001 and
2002 was an increase of $1.5 million and $1.0 million,
respectively.
The restatement of the financial statements may lead to
litigation claims and/or regulatory proceedings against us. The
defense of any such claims or proceedings may cause the
diversion of managements attention and resources, and we
may be required to pay damages if any such claims or proceedings
are not resolved in our favor. Any litigation or regulatory
proceeding, even if resolved in our favor, could cause us to
incur significant legal and other expenses. Moreover, we may be
the subject of negative publicity focusing on the financial
statement inaccuracies and resulting restatement. The occurrence
of any of the foregoing could divert our resources, harm our
reputation and cause the price of our securities to decline.
Acquisitions could result in operating difficulties, dilution
and other harmful consequences.
In May 2005, we acquired MingleMatch, Inc., and we plan, during
the next few years, to further extend and develop our presence,
both within the United States and internationally, partially
through acquisitions of entities offering online personals
services and related businesses. We have limited experience
acquiring companies and the companies we have acquired have been
small. We have evaluated, and continue to evaluate, a wide array
of potential strategic transactions. From time to time, we may
engage in discussions regarding potential acquisitions, some of
which may divert significant resources away from our daily
operations. In addition, the process of integrating an acquired
company, business or technology is risky and may create
unforeseen operating difficulties and expenditures. For example,
we have been engaged in significant litigation in the past, but
which has since settled, with respect to our acquisition of
SocialNet, Inc. in 2001. Some areas where we may face risks
include:
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the need to implement or remediate controls, procedures and
policies of acquired companies that lacked appropriate controls,
procedures and policies prior to the acquisition; |
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diversion of management time and focus from operating our
business to acquisition integration challenges; |
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cultural challenges associated with integrating employees from
an acquired company into our organization; |
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retaining employees from the businesses we acquire; and |
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the need to integrate each companys accounting, management
information, human resource and other administrative systems to
permit effective management. |
The anticipated benefit of many of our acquisitions may not
materialize. Future acquisitions could result in potentially
dilutive issuances of our equity securities, the incurrence of
debt, contingent liabilities or amortization expenses, or
write-offs, any of which could harm our financial condition.
Future acquisitions may require us to obtain additional equity
or debt financing, which may not be available on favorable terms
or at all.
We may not be effective in protecting our Internet domain
names or proprietary rights upon which our business relies or in
avoiding claims that we infringe upon the proprietary rights of
others.
We regard substantial elements of our Web sites and the
underlying technology as proprietary, and attempt to protect
them by relying on trademark, service mark, copyright, patent
and trade secret laws, and restrictions on disclosure and
transferring title and other methods. We also generally enter
into confidentiality agreements with our employees and
consultants, and generally seek to control access to and
distribution of our technology, documentation and other
proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use
our proprietary information without authorization or to develop
similar or superior technology independently. Effective
trademark, service mark, copyright, patent and trade secret
protection may not be available in every country in which our
services are distributed or made available through the Internet,
and policing unauthorized use of our proprietary information is
difficult. Any such misappropriation or development of similar
or superior technology by third parties could adversely impact
our profitability and our future financial results.
We believe that our Web sites, services, trademarks, patent and
other proprietary technologies do not infringe upon the rights
of third parties. However, there can be no assurance that our
business activities do not and will not infringe upon the
proprietary rights of others, or that other parties will not
assert infringement claims against us. We are aware that other
parties utilize the Spark name, or other marks that
incorporate it, and those parties may have rights to such marks
that are superior to ours. From time to time, we have been, and
expect to continue to be, subject to claims in the ordinary
course of business including claims of alleged infringement of
the trademarks, service marks and other intellectual property
rights of third parties by us. Although such claims have not
resulted in any significant litigation or had a material adverse
effect on our business to date, any such claims and resultant
litigation might subject us to temporary injunctive restrictions
on the use of our products, services or brand names and could
result in significant liability for damages for intellectual
property infringement, require us to enter into royalty
agreements, or restrict us from using infringing software,
services, trademarks, patents or technologies in the future.
Even if not meritorious, such litigation could be time-consuming
and expensive and could result in the diversion of
managements time and attention away from our
day-to-day business.
We currently hold various Web domain names relating to our
brands and in the future may acquire new Web domain names. The
regulation of domain names in the United States and in foreign
countries is subject to change. Governing bodies may establish
additional top level domains, appoint additional domain name
registrars or modify the requirements for holding domain names.
As a result, we may be unable to acquire or maintain relevant
domain names in all countries in which we conduct business.
Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar
proprietary rights is unclear. We may be unable to prevent third
parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our existing
trademarks and other proprietary rights or those we may seek to
acquire. Any such inability to protect ourselves could cause us
to lose a significant portion of our members and paying
subscribers to our competitors.
17
We may face potential liability, loss of users and damage to
our reputation for violation of our privacy policy or privacy
laws and regulations.
Our privacy policy prohibits the sale or disclosure to any third
party of any members personal identifying information,
except to the extent expressly set forth in the policy. Growing
public concern about privacy and the collection, distribution
and use of information about individuals may subject us to
increased regulatory scrutiny and/or litigation. In the past,
the Federal Trade Commission has investigated companies that
have used personally identifiable information without permission
or in violation of a stated privacy policy. If we are accused of
violating the stated terms of our privacy policy, we may be
forced to expend significant amounts of financial and managerial
resources to defend against these accusations and we may face
potential liability. Our membership database holds confidential
information concerning our members, and we could be sued if any
of that information is misappropriated or if a court determines
that we have failed to protect that information.
In addition, our affiliates handle personally identifiable
information pertaining to our members and paying subscribers.
Both we and our affiliates are subject to laws and regulations
related to Internet communications (including the CAN-SPAM Act
of 2003), consumer protection, advertising, privacy, security,
and data protection. If we or our affiliates are found to be in
violation of these laws and regulations, we may become subject
to administrative fines or litigation, which could materially
increase our expenses and cause the value of our securities to
decline.
We may be liable as a result of information retrieved from or
transmitted over the Internet.
We may be sued for defamation, civil rights infringement,
negligence, copyright or trademark infringement, invasion of
privacy, personal injury, product liability or under other legal
theories relating to information that is published or made
available on our Web sites and the other sites linked to it.
These types of claims have been brought, sometimes successfully,
against online services in the past. We also offer email
services, which may subject us to potential risks, such as
liabilities or claims resulting from unsolicited email or
spamming, lost or misdirected messages, security breaches,
illegal or fraudulent use of email or personal information or
interruptions or delays in email service. Our insurance does not
specifically provide for coverage of these types of claims and,
therefore, may be inadequate to protect us against them. In
addition, we could incur significant costs in investigating and
defending such claims, even if we ultimately are not held
liable. If any of these events occurs, our revenues could be
materially adversely affected or we could incur significant
additional expense, and the market price of our securities may
decline.
Our quarterly results may fluctuate because of many factors
and, as a result, investors should not rely on quarterly
operating results as indicative of future results.
Fluctuations in operating results or the failure of operating
results to meet the expectations of public market analysts and
investors may negatively impact the value of our ordinary shares
and depositary shares. Quarterly operating results may fluctuate
in the future due to a variety of factors that could affect
revenues or expenses in any particular quarter. Fluctuations in
quarterly operating results could cause the value of our
securities to decline. Investors should not rely on
quarter-to-quarter
comparisons of results of operations as an indication of future
performance. Factors that may affect our quarterly results
include:
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the demand for, and acceptance of, our online personals services
and enhancements to these services; |
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the timing and amount of our subscription revenues; |
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the introduction, development, timing, competitive pricing and
market acceptance of our Web sites and services and those of our
competitors; |
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the magnitude and timing of marketing initiatives and capital
expenditures relating to expansion of our operations; |
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the cost and timing of online and offline advertising and other
marketing efforts; |
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the maintenance and development of relationships with portals,
search engines, ISPs and other Web properties and other entities
capable of attracting potential members and paying subscribers
to our Web sites; |
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technical difficulties, system failures, system security
breaches, or downtime of the Internet, in general, or of our
products and services, in particular; |
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costs related to any acquisitions or dispositions of
technologies or businesses; and |
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general economic conditions, as well as those specific to the
Internet, online personals and related industries. |
As a result of the factors listed above and because the online
personals business is still immature, making it difficult to
predict consumer demand, it is possible that in future periods
results of operations may be below the expectations of public
market analysts and investors. This could cause the market price
of our securities to decline.
We may need additional capital to finance our growth or to
compete, which may cause dilution to existing shareholders or
limit our flexibility in conducting our business activities.
We currently anticipate that existing cash, cash equivalents and
marketable securities and cash flow from operations will be
sufficient to meet our anticipated needs for working capital,
operating expenses and capital expenditures for at least the
next 12 months. We may need to raise additional capital in
the future to fund expansion, whether in new vertical affinity
or geographic markets, develop newer or enhanced services,
respond to competitive pressures or acquire complementary
businesses, technologies or services. Such additional financing
may not be available on terms acceptable to us or at all. To the
extent that we raise additional capital by issuing equity
securities, our shareholders may experience substantial
dilution, and to the extent we engage in debt financing, if
available, we may become subject to restrictive covenants that
could limit our flexibility in conducting future business
activities. If additional financing is not available or not
available on acceptable terms, we may not be able to fund our
expansion, promote our brands, take advantage of acquisition
opportunities, develop or enhance services or respond to
competitive pressures.
Our limited experience outside the United States increases
the risk that our international expansion efforts and operations
will not be effective.
One of our strategies is to expand our presence in international
markets. Although we currently have offices in Germany, Israel
and the United Kingdom and Web sites that serve the Australian,
Canadian, German, Israeli and United Kingdom markets, we have
only limited experience with operations outside the United
States. Our primary international operations are in Israel,
which carries additional risk for our business as a result of
continuing hostilities there. Expansion into international
markets requires management time and capital resources. In
addition, we face the following additional risks associated with
our expansion outside the United States:
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challenges caused by distance, language and cultural differences; |
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local competitors with substantially greater brand recognition,
more users and more traffic than we have; |
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our need to create and increase our brand recognition and
improve our marketing efforts internationally and build strong
relationships with local affiliates; |
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longer payment cycles in some countries; |
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credit risk and higher levels of payment fraud in some countries; |
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different legal and regulatory restrictions among jurisdictions; |
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political, social and economic instability; |
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potentially adverse tax consequences; and |
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higher costs associated with doing business internationally. |
Our international operations subject us to risks associated
with currency fluctuations.
Our foreign operations may subject us to currency fluctuations
and such fluctuations may adversely affect our financial
position and results. However, sales and expenses to date have
occurred primarily in the United States. For this reason, we
have not engaged in foreign exchange hedging. In connection with
our planned international expansion, currency risk positions
could change correspondingly and the use of foreign exchange
hedging instruments could become necessary. Effects of exchange
rate fluctuations on our financial condition, operations, and
profitability may depend on our ability to manage our foreign
currency risks. There can be no assurance that steps taken by
management to address foreign currency fluctuations will
eliminate all adverse effects and, accordingly, we may suffer
losses due to adverse foreign currency fluctuation.
Our business could be significantly impacted by the
occurrence of natural disasters and other catastrophic
events.
Our operations depend upon our ability to maintain and protect
our network infrastructure, hardware systems and software
applications, which are housed primarily at a data center
located in Southern California that is managed by a third party.
Our business is therefore susceptible to earthquakes, tsunamis
and other catastrophic events, including acts of terrorism. We
currently lack adequate redundant network infrastructure,
hardware and software systems supporting our services at an
alternate site. As a result, outages and downtime caused by
natural disasters and other events out of our control, which
affect our systems or primary data center, could adversely
affect our reputation, brands and business.
We hold a fixed amount of insurance coverage, and if we were
found liable for an uninsured claim, or claim in excess of our
insurance limits, we may be forced to expend a significant
capital to resolve the uninsured claim.
We contract for a fixed amount of insurance to cover potential
risks and liabilities, including, but not limited to, property
and casualty insurance, general liability insurance, and errors
and omissions liability insurance. Although we have not recently
experienced any significantly increased premiums as a result of
changing policies of our providers, we have experienced
increasing insurance premiums due to the increasing size of our
business, and thus the increased potential risk to underwriters
for insuring our business. If we decide to obtain additional
insurance coverage in the future, it is possible that we may not
be able to get enough insurance to meet our needs, we may have
to pay very high prices for the coverage we do get, or we may
not be able to acquire any insurance for certain types of
business risk or may have gaps in coverage for certain risks.
This could leave us exposed to potential uninsured claims for
which we could have to expend significant amounts of capital
resources. Consequently, if we were found liable for a
significant uninsured claim in the future, we may be forced to
expend a significant amount of our operating capital to resolve
the uninsured claim.
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Our services are not well-suited to many alternate Web access
devices, and as a result the growth of our business could be
negatively affected.
The number of people who access the Internet through devices
other than desktop and laptop computers, including mobile
telephones and other handheld computing devices, has increased
dramatically in the past few years, and we expect this growth to
continue. The lower resolution, functionality and memory
currently associated with such mobile devices may make the use
of our services through such mobile devices more difficult and
generally impairs the member experience relative to access via
desktop and laptop computers. If we are unable to attract and
retain a substantial number of such mobile device users to our
online personals services or if we are unable to develop
services that are more compatible with such mobile
communications devices, our growth could be adversely affected.
Risks Related to Our Industry
The percentage of canceling paying subscribers in comparison
to other subscription businesses requires that we continuously
seek new paying subscribers to maintain or increase our current
level of revenue.
Internet users in general, and users of online personals
services specifically, freely navigate and switch among a large
number of Web sites. Monthly subscriber churn represents the
ratio expressed as a percentage of (a) the number of paying
subscriber cancellations during the period divided by the
average number of paying subscribers during the period and
(b) the number of months in the period. The number of
average paying subscribers is calculated as the sum of the
paying subscribers at the beginning and end of the month,
divided by two. Average paying subscribers for periods longer
than one month are calculated as the sum of the average paying
subscribers for each month, divided by the number of months. For
the quarters ended September 30, 2005 and 2004, the monthly
subscriber churn for (1) the JDate segment was 25.2% and
26.0%, respectively, (2) the AmericanSingles segment was
34.8% and 36.7%, respectively, and (3) the Web sites in our
Other Businesses segment was 31.2% and 28.6%, respectively. We
cannot assure you that our monthly average subscriber churn will
remain at such levels, and it may increase in the future. This
makes it difficult for us to have a stable paying subscriber
base and requires that we constantly attract new paying
subscribers at a faster rate than subscription terminations to
maintain or increase our current level of revenue. If we are
unable to attract new paying subscribers on a cost-effective
basis, our business will not grow and our profitability will be
adversely affected.
Our network is vulnerable to security breaches and
inappropriate use by Internet users, which could disrupt or
deter future use of our services.
Concerns over the security of transactions conducted on the
Internet and the privacy of users may inhibit the growth of the
Internet and other online services generally, and online
commerce services, like ours, in particular. To date, we have
not experienced any material breach of our security systems;
however, our failure to effectively prevent security breaches
could significantly harm our business, reputation and results of
operations and could expose us to lawsuits by state and federal
consumer protection agencies, by governmental authorities in the
jurisdictions in which we operate, and by consumers. Anyone who
is able to circumvent our security measures could misappropriate
proprietary information, including customer credit card and
personal data, cause interruptions in our operations or damage
our brand and reputation. Such breach of our security measures
could involve the disclosure of personally identifiable
information and could expose us to a material risk of
litigation, liability or governmental enforcement proceeding. We
cannot assure you that our financial systems and other
technology resources are completely secure from security
breaches or sabotage, and we have occasionally experienced
security breaches and attempts at hacking. We may be
required to incur significant additional costs to protect
against security breaches or to alleviate problems caused by
such breaches. Any well-publicized compromise of our security or
the security of any other Internet provider could deter people
from using our services or the Internet to conduct transactions
that involve
21
transmitting confidential information or downloading sensitive
materials, which could have a detrimental impact on our
potential customer base.
Computer viruses may cause delays or other service interruptions
and could damage our reputation, affect our ability to provide
our services and adversely affect our revenues. The inadvertent
transmission of computer viruses could also expose us to a
material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system were highly
publicized, our reputation could be significantly damaged,
resulting in the loss of current and future members and paying
subscribers.
We face certain risks related to the physical and emotional
safety of our members and paying subscribers.
The nature of online personals services is such that we cannot
control the actions of our members and paying subscribers in
their communication or physical actions. There is a possibility
that one or more of our members or paying subscribers could be
physically or emotionally harmed following interaction with
another of our members or paying subscribers. We warn our
members and paying subscribers that we do not and cannot screen
other members and paying subscribers and, given our lack of
physical presence, we do not take any action to ensure personal
safety on a meeting between members or paying subscribers
arranged following contact initiated via our Web sites. If an
unfortunate incident of this nature occurred in a meeting of two
people following contact initiated on one of our Web sites or a
Web site of one of our competitors, any resulting negative
publicity could materially and adversely affect us or the online
personals industry in general. Any such incident involving one
of our Web sites could damage our reputation and our brands.
This, in turn, could adversely affect our revenues and could
cause the value of our ordinary shares and depositary shares to
decline. In addition, the affected members or paying subscribers
could initiate legal action against us, which could cause us to
incur significant expense, whether we were successful or not,
and damage our reputation.
We face risks of litigation and regulatory actions if we are
deemed a dating service as opposed to an online personals
service.
We supply online personals services. In many jurisdictions,
companies deemed dating service providers are subject to
additional regulation, while companies that provide personals
services are not generally subject to similar regulation.
Because personals services and dating services can seem similar,
we are exposed to potential litigation, including class action
lawsuits, associated with providing our personals services. In
the past, a small percentage of our members have alleged that we
are a dating service provider, and, as a result, they claim that
we are required to comply with regulations that include, but are
not limited to, providing language in our contracts that may
allow members to (1) rescind their contracts within a
certain period of time, (2) demand reimbursement of a
portion of the contract price if the member dies during the term
of the contract and/or (3) cancel their contracts in the
event of disability or relocation. If a court holds that we have
provided and are providing dating services of the type the
dating services regulations are intended to regulate, we may be
required to comply with regulations associated with the dating
services industry and be liable for any damages as a result our
past and present non-compliance.
Three separate yet similar class action complaints have been
filed against us. On June 21, 2002, Tatyana Fertelmeyster
filed an Illinois class action complaint against us in the
Circuit Court of Cook County, Illinois, based on an alleged
violation of the Illinois Dating Referral Services Act. On
September 12, 2002, Lili Grossman filed a New York class
action complaint against us in the Supreme Court in the State of
New York based on alleged violations of the New York Dating
Services Act and the Consumer Fraud Act. On November 14,
2003, Jason Adelman filed a nationwide class action complaint
against us in the Los Angeles County Superior Court based on an
alleged violation of California Civil Code section 1694 et seq.,
which regulates businesses that provide dating services. In each
of these cases, the complaint included allegations that we are a
dating service as defined by the
22
applicable statutes and, as an alleged dating service, we are
required to provide language in our contracts that allows
(i) members to rescind their contracts within three days,
(ii) reimbursement of a portion of the contract price if
the member dies during the term of the contract and/or
(iii) members to cancel their contracts in the event of
disability or relocation. Causes of action include breach of
applicable state and/or federal laws, fraudulent and deceptive
business practices, breach of contract and unjust enrichment.
The plaintiffs are seeking remedies including declaratory
relief, restitution, actual damages although not quantified,
treble damages and/or punitive damages, and attorneys fees
and costs.
Huebner v. InterActiveCorp., Superior Court of the State of
California, County of Los Angeles, Case No. BC 305875
involves a similar action, involving the same
plaintiffs counsel as Adelman, brought against
InterActiveCorps Match.com that has been ruled related to
Adelman, but the two cases have not been consolidated. We
have not been named a defendant in the Huebner case.
Adelman and Huebner each seek to certify a
nationwide class action based on their complaints. Because the
cases are class actions, they have been assigned to the Los
Angeles Superior Court Complex Litigation Program. The court has
ordered a bifurcation of the liability issue. At an
August 15, 2005 Status Conference, the court set the
bifurcated trial on the issue of liability for March 27,
2006. The parties have agreed in principle to continue the
bifurcated trial to approximately May 15, 2006 and extend
the time for filing briefs and completing discovery, in
Adelman, with respect to the bifurcated trial. In
addition, the parties are in the process of scheduling a
mediation in Adelman which in all probability will occur
before the end of February, 2006.
On March 25, 2005, the court in Fertelmeyster
entered its Memorandum Opinion and Order (Memorandum
Opinion) granting summary judgment in our favor on the
grounds that Fertelmeyster lacks standing to seek injunctive
relief or restitutionary relief under the Illinois Dating
Services Act, Fertelmeyster did not suffer any actual damages,
and we were not unjustly enriched as a result of our contract
with Fertelmeyster. The Memorandum Opinion disposes of all
matters in controversy in the litigation and also provides
that we are subject to the Illinois Dating Services Act and, as
such, our subscription agreements violate the act and are void
and unenforceable. This ruling may subject us to potential
liability for claims brought by the Illinois Attorney General or
customers that have been injured by our violation of the
statute. Fertelmeyster filed a Motion for Reconsideration of the
Memorandum Opinion and, on August 26, 2005, the court
issued its opinion denying Fertelmeysters Motion for
Reconsideration. In the opinion, the court, among other things:
(i) decertified the class, eliminating the last remnant of
the litigation; (ii) rejected each of the plaintiffs
arguments based on the arguments and law that we provided in our
opposition; (iii) stated that the court would not
judicially amend the Illinois statute to provide for restitution
when the legislature selected damages as the sole remedy;
(iv) noted that the cases cited by plaintiff in connection
with plaintiffs Motion for Reconsideration actually
support the courts prior order granting summary judgment
in our favor; and (v) denied plaintiffs Motion for
Reconsideration in its entirety. The time for filing an appeal
from the Memorandum Opinion and the courts order denying
Fertelmeysters Motion for Reconsideration has now lapsed
and as a result thereof, this litigation has concluded.
In December 2002, the Supreme Court of New York dismissed the
case brought by Ms. Grossman. Although the plaintiff
appealed the decision, in October 2004, the New York Supreme
Court, Appellate Division upheld the lower courts
dismissal. In addition, two Justices wrote concurring opinions
stating their opinion that our services were not covered under
the New York Dating Services Act.
We intend to defend vigorously against each of the pending
lawsuits, however, no assurance can be given that these matters
will be resolved in our favor and, depending on the outcome of
these lawsuits, we may choose to alter our business practices.
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We are exposed to risks associated with credit card fraud and
credit payment, which, if not properly addressed, could increase
our operating expenses.
We depend on continuing availability of credit card usage to
process subscriptions and this availability, in turn, depends on
acceptable levels of chargebacks and fraud performance. We have
suffered losses and may continue to suffer losses as a result of
subscription orders placed with fraudulent credit card data,
even though the associated financial institution approved
payment. Under current credit card practices, a merchant is
liable for fraudulent credit card transactions when, as is the
case with the transactions we process, that merchant does not
obtain a cardholders signature. Our failure to adequately
control fraudulent credit card transactions would result in
significantly higher credit card-related costs and, therefore,
increase our operating expenses and may preclude us from
accepting credit cards as a means of payment.
We face risks associated with our dependence on computer and
telecommunications infrastructure.
Our services are dependent upon the use of the Internet and
telephone and broadband communications to provide high-capacity
data transmission without system downtime. There have been
instances where regional and national telecommunications outages
have caused us, and other Internet businesses, to experience
systems interruptions. Any additional interruptions, delays or
capacity problems experienced with telephone or broadband
connections could adversely affect our ability to provide
services to our customers. The temporary or permanent loss of
all, or a portion, of the telecommunications system could cause
disruption to our business activities and result in a loss of
revenue. Additionally, the telecommunications industry is
subject to regulatory control. Amendments to current
regulations, which could affect our telecommunications
providers, could disrupt or adversely affect the profitability
of our business.
In addition, if any of our current agreements with
telecommunications providers were terminated, we may not be able
to replace any terminated agreements with equally beneficial
ones. There can be no assurance that we will be able to renew
any of our current agreements when they expire or, if we are
able to do so, that such renewals will be available on
acceptable terms. We also do not know whether we will be able to
enter into additional agreements or that any relationships, if
entered into, will be on terms favorable to us.
Our business depends, in part, on the growth and maintenance
of the Internet, and our ability to provide services to our
members and paying subscribers may be limited by outages,
interruptions and diminished capacity in the Internet.
Our performance will depend, in part, on the continued growth
and maintenance of the Internet. This includes maintenance of a
reliable network backbone with the necessary speed, data
capacity and security for providing reliable Internet services.
Internet infrastructure may be unable to support the demands
placed on it if the number of Internet users continues to
increase, or if existing or future Internet users access the
Internet more often or increase their bandwidth requirements. In
addition, viruses, worms and similar programs may harm the
performance of the Internet. We have no control over the
third-party telecommunications, cable or other providers of
access services to the Internet that our members and paying
subscribers rely upon. There have been instances where regional
and national telecommunications outages have caused us to
experience service interruptions during which our members and
paying subscribers could not access our services. Any additional
interruptions, delays or capacity problems experienced with any
points of access between the Internet and our members could
adversely affect our ability to provide services reliably to our
members and paying subscribers. The temporary or permanent loss
of all, or a portion, of our services on the Internet, the
Internet infrastructure generally, or our members and
paying subscribers ability to access the Internet could
disrupt our business activities, harm our business reputation,
and result in a loss of revenue. Additionally, the Internet,
electronic communications and telecommunications industries are
subject to federal, state and foreign governmental regulation.
New laws and regulations governing such matters
24
could be enacted or amendments may be made to existing
regulations at any time that could adversely impact our
services. Any such new laws, regulations or amendments to
existing regulations could disrupt or adversely affect the
profitability of our business.
We are subject to burdensome government regulations and legal
uncertainties affecting the Internet that could adversely affect
our business.
Legal uncertainties surrounding domestic and foreign government
regulations could increase our costs of doing business, require
us to revise our services, prevent us from delivering our
services over the Internet or slow the growth of the Internet,
any of which could increase our expenses, reduce our revenues or
cause our revenues to grow at a slower rate than expected and
materially adversely affect our business, financial condition
and results of operations. Laws and regulations related to
Internet communications, security, privacy, intellectual
property rights, commerce, taxation, entertainment, recruiting
and advertising are becoming more prevalent, and new laws and
regulations are under consideration by the United States
Congress, state legislatures and foreign governments. For
example, during 2004 and 2005, legislation related to the use of
background checks for users of online personals services was
proposed in Ohio, Texas, California, Michigan, Florida and
Virginia. None of these states enacted these proposed laws,
however, state legislatures are still considering the
implementation of such legislation. The enactment of any of
these proposed laws could require us to alter our service
offerings and could negatively impact our performance by making
it more difficult and costly to obtain new subscribers and may
also subject us to additional liability for failure to properly
screen our subscribers. Any legislation enacted or restrictions
arising from current or future government investigations or
policy could dampen the growth in use of the Internet,
generally, and decrease the acceptance of the Internet as a
communications, commercial, entertainment, recruiting and
advertising medium. In addition to new laws and regulations
being adopted, existing laws that are not currently being
applied to the Internet may subsequently be applied to it and,
in several jurisdictions, legislatures are considering laws and
regulations that would apply to the online personals industry in
particular. Many areas of law affecting the Internet and online
personals remain unsettled, even in areas where there has been
some legislative action. It may take years to determine whether
and how existing laws such as those governing consumer
protection, intellectual property, libel and taxation apply to
the Internet or to our services.
In the normal course of our business, we handle personally
identifiable information pertaining to our members and paying
subscribers residing in the United States and other countries.
In recent years, many of these countries have adopted privacy,
security, and data protection laws and regulations intended to
prevent improper uses and disclosures of personally identifiable
information. In addition, some jurisdictions impose database
registration requirements for which significant monetary and
other penalties may be imposed for noncompliance. These laws may
impose costly administrative requirements, limit our handling of
information, and subject us to increased government oversight
and financial liabilities. Privacy laws and regulations in the
United States and foreign countries are subject to change and
may be inconsistent, and additional requirements may be imposed
at any time. These laws and regulations, the costs of complying
with them, administrative fines for noncompliance and the
possible need to adopt different compliance measures in
different jurisdictions could materially increase our expenses
and cause the value of our securities to decline.
Risks Related to Owning Our Securities
The price of our ADSs may be volatile, and if an active
trading market for our ADSs does not develop, the price of our
ADSs may suffer and decline.
Prior to this offering, there has been no public market for our
securities in the United States. Accordingly, we cannot assure
you that an active trading market will develop or be sustained
or that the market price of our ADSs will not decline. The price
at which our ADSs will trade after this
25
offering is likely to be highly volatile and may fluctuate
substantially due to many factors, some of which are outside of
our control.
In addition, the stock market has experienced significant price
and volume fluctuations that have affected the market price for
the stock of many technology, communications and entertainment
and media companies. Those market fluctuations were sometimes
unrelated or disproportionate to the operating performance of
these companies. Any significant stock market fluctuations in
the future, whether due to our actual performance or prospects
or not, could result in a significant decline in the market
price of our securities.
Our principal shareholders can exercise significant influence
over us, and, as a result, may be able to delay, deter or
prevent a change of control or other business combination.
As of December 6, 2005, Joe Y. Shapira, Alon Carmel, Great
Hill Investors, LLC and Tiger Global Management, L.L.C. and
their respective affiliates beneficially owned approximately, in
the aggregate, 54.2% of our outstanding share capital.
Mr. Shapira is a co-founder of our company and current
Chairman of our Board of Directors. Mr. Carmel is a
co-founder, former President and former Executive Co-Chairman of
our Board of Directors. Great Hill Investors, LLC and its
affiliates (Great Hill) became our largest
shareholder on December 1, 2005 when it purchased an
aggregate of 6,000,000 ordinary shares in four privately
negotiated transactions. Of the 6,000,000 shares purchased,
(i) 1,250,000 shares were purchased from
Mr. Shapira at $4.60 per share,
(ii) 1,250,000 shares were purchased from
Mr. Carmel at $4.60 per share,
(iii) 1,500,000 shares were purchased from Criterion
Capital Management LLC, a more than 5% holder of our securities,
at $5.35 per share and (iv) 2,000,000 shares were
purchased from affiliates of Tiger Global Management L.L.C. at
$5.35 per share. Tiger Global Management, L.L.C.
(Tiger Global Management) is our second largest
shareholder, and one of our directors, Scott Shleifer, is a
limited partner of Tiger Global, L.P., an affiliate of Tiger
Global Management. These shareholders possess significant
influence over our company. Such share ownership and control may
have the effect of delaying or preventing a change in control of
our company, impeding a merger, consolidation, takeover or other
business combination involving our company or discourage a
potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company. Furthermore, such
share ownership may have the effect of control over
substantially all matters requiring shareholder approval,
including the election of directors. Other than the arrangement
to elect a director at the selection of Great Hill, as discussed
below, we do not expect that these shareholders will vote
together as a group.
Our largest shareholder, Great Hill, also possesses a
significant amount of voting power and an ability to elect a
director of our company.
Great Hill beneficially owns 6,000,000 shares of our
company, or approximately 19.8% of our outstanding shares, and
has voting control of an aggregate of approximately 60.3% our
securities to elect a director of our company subject to the
terms and conditions of the share purchase agreements entered
into on December 1, 2005 with each of Mr. Shapira,
Mr. Carmel, affiliates of Tiger Global Management, and
Criterion Capital Management, LLC (Criterion Capital
Management, and collectively with Mr. Shapira,
Mr. Carmel and Tiger Global Management, the Selling
Shareholders). Pursuant to the terms of the share purchase
agreements with each of the Selling Shareholders, for so long as
Great Hill collectively owns: (i) in the case of the share
purchase agreements entered into with Messrs. Shapira and
Carmel, at least 10% of the outstanding ordinary shares; and
(ii) in the case of the share purchase agreements entered
into with Tiger Global Management and Criterion Capital
Management, at least 5% of the outstanding ordinary shares, each
Selling Shareholder agreed that:
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if at any time Great Hill notifies a Selling Shareholder of its
desire and intention to designate a single director (Great
Hill Director) in advance of any meeting of the
shareholders for the election of directors or when any other
approval is sought with respect to the election of directors,
such Selling Shareholder agreed to vote all of its voting |
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shares that are owned or held of record by such Selling
Shareholder or to which it has voting power or can direct,
restrict or control any such voting power (the Remaining
Shares) to elect such Great Hill Director; and |
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if at any time Great Hill notifies a Selling Shareholder of its
desire and intention to remove or replace a Great Hill Director
or to fill a vacancy caused by the resignation of a Great Hill
Director, such Selling Shareholder agreed to cooperate in
causing the requested removal and/or replacement by voting in
the appropriate manner. |
Each Selling Shareholder also irrevocably granted, and appointed
Michael A. Kumin, and any other person who shall be designated
by Great Hill, as such Selling Shareholders proxy and
attorney (with full power of substitution), to vote all of such
Selling Shareholders Remaining Shares held at the time
such consent is sought or meeting is held in any circumstances
where a vote, consent or other approval is sought to elect a
Great Hill Director. The covenants and obligations of each
Selling Shareholder terminate after a Great Hill Director
(together with any replacements therefore) has served a single,
full term of office of three years, in accordance with the our
articles and memorandum of association, as in effect on
December 1, 2005.
As a result of its voting arrangement with the Selling
Shareholders, Great Hill is able to select a member of our Board
of Directors at its discretion and is able to exercise
significant influence over our company. This influence has the
potential to delay, prevent, change or initiate a change in
control, acquisition, merger or other transaction, such as a
transaction to take the company private.
We have entered into a standstill agreement pursuant to which
Great Hill and its affiliates are permitted to acquire
additional voting securities of our company in the future and
may initiate and participate in any tender, takeover or exchange
offer, other business combination or other transaction, such as
taking our company private, any of which may be to the detriment
of our shareholders.
On December 1, 2005, we and Great Hill Equity
Partners II, which is one of the affiliates of Great Hill,
entered into a Standstill Agreement with a term of five years,
unless terminated earlier.
Pursuant to the Standstill Agreement, for a period of
14 months from the date of the Standstill Agreement (the
Fourteen Month Period), Great Hill Equity
Partners II agreed that it would not, without the prior
written consent by us:
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acquire or seek to acquire, directly or indirectly, ownership of
any of our voting securities (or rights to acquire any of our
class of securities or any subsidiary thereof) such that Great
Hill Equity Partners II and its affiliates (the Great
Hill Group) would beneficially own more than 29.9% of our
total voting power (the Total Voting Power), which
is defined as the aggregate number of votes which may be cast by
holders of outstanding voting securities on a poll at a general
meeting of ours taking into account any voting restrictions
imposed by our Articles of Association, or take any action that
would require us to make a public announcement regarding the
foregoing under applicable law; |
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participate in any of the following with respect to us or our
subsidiaries: (i) any tender, takeover or exchange offer or
other business combination, (ii) any recapitalization,
restructuring, liquidation, dissolution or other extraordinary
transaction, or (iii) any solicitation of proxies or
consents to vote any voting securities; |
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form, join or participate in a group as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, in connection with any of the foregoing; |
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seek to control our Board of Directors; and |
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enter into any arrangements with any third party with respect to
any of the above. |
After the expiration of the Fourteen Month Period, Great Hill
Equity Partners II agreed that it would not acquire or seek
to acquire beneficial ownership of any of our voting securities
(or rights to acquire
27
any class of our securities or any subsidiary thereof) or
participate in any tender, takeover or exchange offer or other
business combination, or any recapitalization, restructuring,
dissolution or other extraordinary transaction if (i) prior
to giving effect thereto, the Great Hill Group beneficially owns
less than 60% of Total Voting Power and (ii) after giving
effect, the Great Hill Group would beneficially own more than
29.9% of Total Voting Power.
Under the Standstill Agreement, Great Hill is permitted to,
subject to the conditions of the Standstill Agreement, increase
its holding of voting securities in our company after the
expiration of the Fourteen Month Period, and after expiration of
the Standstill Agreement, Great Hill may increase its share
ownership without restriction. As such, Great Hill may
participate in and initiate any tender, takeover or exchange
offer, other business combination or other transaction, such as
taking our company private, any of which may be to the detriment
of our shareholders.
All of our ordinary shares and ordinary shares issuable upon
the exercise of our warrants and options will be eligible for
sale after this offering, which would result in dilution and
cause the price of our ADSs to decrease.
If our shareholders sell a substantial number of our shares,
including those represented by ADSs and GDSs, in the public
market following this offering, the market price of our ADSs
could fall. Our ordinary shares in the form of GDSs trade on the
Frankfurt Stock Exchange. We are registering under this
registration statement for sale in the United States all of our
issued and outstanding ordinary shares, ordinary shares
underlying all of our outstanding warrants and ordinary shares
underlying all of the options held by our officers, directors
and shareholders who own more than 10% of our issued and
outstanding securities. As of December 6, 2005, we had
outstanding 30,238,996 ordinary shares, 430,000 warrants and
2,595,000 options held by officers directors and 10%
shareholders. In addition, on November 18, 2005 we filed a
registration statement under the Securities Act of 1933, as
amended, on
Form S-8, which
has become effective, covering 8,719,688 ordinary shares
underlying outstanding options and 14,358,562 ordinary shares
reserved for issuance upon the exercise of options available for
grant under our share option schemes. Immediately after this
registration statement becomes effective, all of our ordinary
shares will be available for sale in the open market. Sales of
ordinary shares by existing shareholders in the public market,
or the availability of such ordinary shares for sale, could
materially and adversely affect the market price of our
securities.
You may not be able to exercise your right to vote the
ordinary shares underlying your ADSs.
Under the terms of the ADSs, you have a general right to direct
the exercise of the votes on the ordinary shares underlying ADSs
that you hold, subject to limitations on voting ordinary shares
contained in our Memorandum of Association and Articles of
Association, as amended. You may instruct the depositary bank,
Bank of New York, to vote the ordinary shares underlying our
ADSs, but only if we request Bank of New York to ask for your
instructions. Otherwise, you will not be able to exercise your
right to vote unless you withdraw the ordinary shares underlying
the ADSs. However, you may not receive voting materials in time
to ensure that you are able to instruct Bank of New York to vote
your shares or receive sufficient notice of a shareholders
meeting to permit you to withdraw your ordinary shares to allow
you to cast your vote with respect to any specific matter. In
addition, Bank of New York and its agents may not be able to
timely send out your voting instructions or carry out your
voting instructions in the manner you have instructed. As a
result, you may not be able to exercise your right to vote and
you may lack recourse if your ordinary shares are not voted as
you requested.
Your right or ability to transfer your ADSs may be limited in
a number of circumstances.
Your ADSs are transferable on the books of the depositary.
However, the depositary may close its transfer books at any time
or from time to time when it deems expedient in connection with
the performance of its duties. In addition, the depositary may
refuse to deliver, transfer or register
28
transfers of ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary
deem it advisable to do so because of any requirement of law or
of any government or governmental body, or under any provision
of the deposit agreement, or for any other reason.
Our ordinary shares in the form of ADSs or GDSs will be
traded on more than one market and this may result in price
variations.
Our ordinary shares are currently traded on the Frankfurt Stock
Exchange in the form of GDSs and we expect our ordinary shares
will be traded on the American Stock Exchange in the form of
ADSs upon completion of this offering. Trading in our ordinary
shares in the form of ADSs or GDSs on these markets will be made
in different currencies (dollars on the American Stock Exchange
and euros on the Frankfurt Stock Exchange), and at different
times (resulting from different time zones, different trading
days and different public holidays in the U.S. and Germany). The
trading prices of our ordinary shares in the form of ADSs or
GDSs on these two markets may differ due to these and other
factors. Any decrease in the trading price of our ordinary
shares in the form of ADSs or GDSs on one of these markets could
cause a decrease in the trading price of our ordinary shares in
the form of ADSs or GDSs on the other market. Any difference in
prices of our ordinary shares in the form of ADSs or GDSs on
these two markets could create an arbitrage opportunity whereby
an investor could take advantage of the price difference by
trading between the markets, thereby potentially increasing the
volatility of trading prices of our ADSs and having an adverse
affect on the price of our ADSs.
If we offer any subscription rights to our shareholders, your
right or ability to perform a sale, deposit, cancellation or
transfer of any ADSs issued after exercise of rights might be
restricted.
If we offer holders of our ordinary shares any rights to
subscribe for additional shares or any other rights, the
depositary may make these rights available to you after
consultation with us. However, the depositary may allow rights
that are not distributed or sold to lapse. In that case, you
will receive no value for them. In addition,
U.S. securities laws may restrict the sale, deposit,
cancellation and transfer of the ADSs issued after exercise of
rights. However, we cannot make rights available to you in the
United States unless we register the rights and the securities
to which the rights relate under the Securities Act or an
exemption from the registration requirements is available. In
addition, under the deposit agreement, the depositary will not
distribute rights to holders of ADSs unless the distribution and
sale of rights and the securities to which the rights relate are
either exempt from registration under the Securities Act with
respect to all holders of ADSs, or are registered under the
provisions of the Securities Act. We can give no assurance that
we can establish an exemption from registration under the
Securities Act, and we are under no obligation to file a
registration statement with respect to these rights or
underlying securities or to endeavor to have a registration
statement declared effective. Accordingly, you may be unable to
participate in our rights offerings, if any, and may experience
dilution of your holdings as a result.
Investors may be subject to both United States and United
Kingdom taxes.
Investors are strongly urged to consult with their tax advisors
concerning the consequences of investing in our company by
purchasing ADSs. Our ADSs are being sold in the United States,
but we are incorporated under the laws of England and Wales. A
U.S. holder of our ADSs will generally be treated as the
beneficial owner of the underlying ordinary shares, as
represented by ADSs, for purposes of U.S. and U.K. tax laws.
Therefore, U.S. federal, state and local tax laws and U.K.
tax laws will generally apply to ownership and transfer of our
ADSs and the underlying ordinary shares. Tax laws of other
jurisdictions may also apply.
29
If you hold shares in the form of ADSs, you may have less
access to information about our company and less opportunity to
exercise your rights as a shareholder than if you held ordinary
shares.
There are risks associated with holding our shares in the form
of ADSs, since we are a public company incorporated under the
laws of England and Wales. We are subject to the Companies Act
1985, as amended, our Memorandum and Articles of Association,
and other aspects of English company law. The depositary, the
Bank of New York and/or its various nominees, will appear in our
records as the holder of all our shares represented by the ADSs
and your rights as a holder of ADSs will be contained in the
deposit agreement. Your rights as a holder of ADSs will differ
in various ways from a shareholders rights, and you may be
affected in other ways, including:
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you may not be able to participate in rights offers or dividend
alternatives if, in the discretion of the depositary, after
consultation with us, it is unlawful or not practicable to do so; |
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you may not receive certain copies of reports and information
sent by us to the depositary and may have to go to the office of
the depositary to inspect any reports issued; |
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the deposit agreement may be amended by us and the depositary,
or may be terminated by us or the depositary, each with thirty
(30) days notice to you and without your consent in a
manner that could prejudice your rights, and the deposit
agreement limits our obligations and liabilities and those of
the depositary. |
Your rights as a shareholder will be governed by English law
and will differ from and may be inferior to the rights of
shareholders under U.S. law.
We are a public limited company incorporated under the laws of
England and Wales. Our corporate affairs are governed by our
Memorandum and Articles of Association, by the Companies Act
1985, each as amended, and other common and statutory laws in
England and Wales. The rights of shareholders to take action
against the directors and actions by minority shareholders are
to a large extent governed by the common law and statutory laws
of England and Wales. These rights differ from the typical
rights of shareholders in U.S. corporations. Facts that,
under U.S. law, would entitle a shareholder in a
U.S. corporation to claim damages may give rise to an
alternative cause of action under English law entitling a
shareholder in an English company to claim damages in an English
court. However, this will not always be the case. For example,
the rights of shareholders to bring proceedings against us or
against our directors or officers in relation to public
statements are different under English law than the civil
liability provisions of the U.S. securities laws. In
addition, shareholders of English companies may not have
standing to initiate shareholder derivative actions in various
courts, including before the federal courts of the United
States. As a result, our public shareholders may face different
considerations in protecting their interests in actions against
our company, management, directors or our controlling
shareholders, than would shareholders of a corporation
incorporated in a jurisdiction in the United States, and our
ability to protect our interests if we are harmed in a manner
that would otherwise enable us to sue in a United States federal
court, may be limited.
You may have difficulties enforcing, in actions brought in
courts in jurisdictions located outside the United States,
liabilities under the U.S. securities laws. In particular,
if you sought to bring proceedings in England based on
U.S. securities laws, the English court might consider:
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that it did not have jurisdiction; and/or |
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that it was not the appropriate forum for such proceedings;
and/or |
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that, applying English conflict of laws rules, U.S. law
(including U.S. securities laws) did not apply to the
relationship between you and us or our directors and officers;
and/or |
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that the U.S. securities laws were of a public or penal
nature and should not be enforced by the English court. |
30
Alternatively, if you were to bring an action in a U.S. Court,
and we were to bring a competing action in an English Court, the
English Court may grant an order seeking to prohibit you from
pursuing the action before the U.S. court.
You should also be aware that English law does not allow for any
form of legal proceedings directly equivalent to the class
action available in U.S. courts. In addition, awards of
punitive damages (or their nearest English law equivalent), are
rare in English courts.
In addition, we are required by the Companies Act 1985 to
prepare for each financial year audited accounts which comply
with the requirements of that Act. These UK audited accounts are
distributed to holders of our ordinary shares in advance of our
annual shareholder meeting at which the UK audited accounts are
voted on by our shareholders and are then filed with the
Registrar of Companies for England and Wales. The UK audited
accounts will be audited by an accounting firm eligible under UK
statutory requirements, currently the UK firm Ernst &
Young LLP. The UK audited accounts are likely to be materially
different to the US GAAP financial statements which will be
prepared in a form similar to those included within this
prospectus and which will be filed with the US Securities and
Exchange Commission. Our shareholders will not have an
opportunity to vote on our US GAAP financial statements. Our
ability to pay future dividends will be determined by reference
to the distributable reserves shown by our UK audited accounts
and this may restrict our ability to pay such dividends.
You may have difficulty in effecting service of process or
enforcing judgments obtained in the United States against one of
our directors named in this prospectus who is not a resident of
the United States.
Currently, one of our directors, Martial Chaillet, named in this
prospectus is a resident of a country other than the United
States. Furthermore, all or a substantial portion of his assets
may be located outside the United States. As a result, it may
not be possible for you to:
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effect service of process within the United States upon such
director; or |
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enforce in U.S. courts judgments obtained against such
director in the U.S. courts in any action, including
actions under the civil liability provisions of
U.S. securities laws; or |
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enforce in U.S. courts judgments obtained against such
director in courts of jurisdictions outside the United States in
any action, including actions under the civil liability
provisions of U.S. securities laws. |
You may also have difficulties enforcing in courts outside the
United States judgments obtained in the U.S. courts against
any of our directors and some of the experts named in this
prospectus or us (including actions under the civil liability
provisions of the U.S. securities laws). In particular,
there is doubt as to the enforceability in England of
U.S. civil judgments predicated purely on
U.S. securities laws. In any event, there is no system of
reciprocal enforcement in England and Wales of judgments
obtained in the U.S. courts. Accordingly, a judgment
against any of those persons or us may only be enforced in
England and Wales by the commencement of an action before the
English court, seeking the recognition of the judgment of the
U.S. court at common law in England. Judgment against any
of those persons or us, as the case may be, may be granted by
the English court without requiring the issues on the merits in
the U.S. litigation to be reopened on the basis that those
matters have already been decided by the U.S. court. To
recognize a U.S. court Judgment, the English court must be
satisfied that:
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that the judgment is final and conclusive; |
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that the U.S. court had jurisdiction (as a matter of
English law); |
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that the U.S. judgment is not impeachable for fraud and is
not contrary to English rules of natural justice; |
31
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that the enforcement of the judgment will not be contrary to
public policy or statute in England; |
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that the judgment is for a liquidated sum; |
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that the English proceedings were commenced within the relevant
limitation period; |
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that the judgment is not directly or indirectly for the payment
of taxes or other charges of a like nature or a fine or penalty; |
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that the judgment remains valid and enforceable in the court in
which it was obtained unless and until it is stayed or set
aside; and |
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that, before the date on which the U.S. court gave
judgment, the issues in question had not been the subject of a
final judgment of an English court or of a court of another
jurisdiction whose judgment is enforceable in England. |
We have never paid any dividend and we do not intend to pay
dividends in the foreseeable future.
To date, we have not declared or paid any cash dividends on our
ordinary shares and currently intend to retain any future
earnings for funding growth. We do not anticipate paying any
dividends in the foreseeable future. Moreover, companies
incorporated under the laws of England and Wales cannot pay
dividends unless they have distributable profits as defined in
the Companies Act 1985 as amended. As a result, you should not
rely on an investment in our shares if you require dividend
income. Capital appreciation, if any, of our shares may be your
sole source of gain for the foreseeable future.
Currency fluctuations may adversely affect the price of the
ADSs relative to the price of our GDSs.
The price of our GDSs is quoted in euros. Movements in the euro/
U.S. dollar exchange rate may adversely affect the
U.S. dollar price of our ADSs and the U.S. dollar
equivalent of the price of our GDSs. For example, if the euro
weakens against the U.S. dollar, the U.S. dollar price
of the ADSs could decline, even if the price of our GDSs in
euros increases or remains unchanged.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains forward-looking statements that
involve substantial risks and uncertainties. All statements
other than statements of historical facts contained in this
prospectus, including statements regarding our future financial
position, business strategy and plans and objectives of
management for future operations, are forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as believes,
expects, anticipates,
intends, estimates, may,
will, continue, should,
plan, predict, potential or
the negative of these terms or other similar expressions. We
have based these forward-looking statements on our current
expectations and projections about future events and financial
trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
Our actual results could differ materially from those
anticipated in these forward-looking statements, which are
subject to a number of risks, uncertainties and assumptions
described in Risk Factors section and elsewhere in
this prospectus, regarding, among other things:
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our significant operating losses and uncertainties relating to
our ability to generate positive cash flow and operating profits
in the future; |
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difficulty in evaluating our future prospects based on our
limited operating history and relatively new business model; |
32
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our ability to attract members, convert members into paying
subscribers and retain our paying subscribers, in addition to
maintain paying subscribers; |
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the highly competitive nature of our business; |
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our ability to keep pace with rapid technological change; |
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the strength of our existing brands and our ability to maintain
and enhance those brands; |
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our ability to effectively manage our growth; |
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our dependence upon the telecommunications infrastructure and
our networking hardware and software infrastructure; |
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risks related to our recent accounting restatements; |
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uncertainties relating to potential acquisitions of companies; |
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the volatility of the price of our ADSs after this offering; |
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the strain on our resources and management team of being a
public company in the United States; |
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the ability of our principal shareholders to exercise
significant influence over our company; and |
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other factors referenced in this prospectus and other reports. |
You should not rely upon forward-looking statements as
predictions of future events. We cannot assure you that the
events and circumstances reflected in the forward-looking
statements will be achieved or occur. Although we believe that
the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor
any other person assume responsibility for the accuracy and
completeness of the forward-looking statements. Except as
required by law, we undertake no obligation to update publicly
any forward-looking statements for any reason after the date of
this prospectus to conform these statements to actual results or
to changes in our expectations.
You should read this prospectus, and the documents that we
reference in this prospectus and have filed as exhibits to the
related registration statement with the Securities and Exchange
Commission, completely and with the understanding that our
actual future results, levels of activity, performance and
achievements may materially differ from what we expect. We
qualify all of our forward-looking statements by these
cautionary statements.
33
USE OF PROCEEDS
We will not receive any proceeds from the sale of ordinary
shares in the form of ADSs by the selling security holders
listed in this prospectus and any prospectus supplement, except
for funds received from the exercise of warrants and options
held by selling security holders, if and when exercised. We plan
to use the net proceeds received from the exercise of any
warrants and options for working capital and general corporate
purposes. The actual allocation of proceeds realized from the
exercise of these securities will depend upon the amount and
timing of such exercises, our operating revenues and cash
position at such time and our working capital requirements.
There can be no assurances that any of the outstanding warrants
and options will be exercised. The total maximum proceeds
possible from the exercise of options and warrants at
September 30, 2005 was approximately $34.9 million and
$1.1 million, respectively.
RESCISSION OFFER
Under our 2000 Option Scheme, we granted options to purchase
ordinary shares to certain of our employees, directors and
consultants. California state securities laws generally require
qualification for the offer and sale of securities subject to
California law. Under California law, the grant of an option
constitutes a sale of the underlying shares at the time of the
option grant and not at the exercise of the option. Our option
grants were not qualified and may not have been exempt from
qualification under California state securities laws. As a
result, we may have potential liability to those employees,
directors and consultants to whom we granted options under the
2000 Option Scheme. In order to address that issue, we may elect
to make a rescission offer to the holders of outstanding options
under the 2000 Option Scheme to give them the opportunity to
rescind the grant of their options.
As of September 30, 2005, assuming every eligible optionee
were to accept a rescission offer, we estimate the total cost to
us to complete the rescission would be approximately
$4.0 million including statutory interest at 7% per
annum. These amounts reflect the costs of offering to rescind
the issuance of the outstanding options by paying an amount
equal to 20% of the aggregate exercise price for the entire
option, which we believe would comply with California state
securities laws.
In addition, issuances of securities upon exercise of options
granted under our 2000 Option Scheme may not have been exempt
from registration and qualification under California state
securities laws as a result of the option grants themselves, but
also may not have been exempt from registration under federal
securities laws. Federal securities laws prohibit the offer or
sale of securities unless the sales are registered or exempt
from registration. The issuances of ordinary shares upon the
exercise of our options were not registered and may not have
been exempt from registration under California state and federal
securities laws. As a result, we may have potential liability to
those employees, directors and consultants to whom we issued
securities upon the exercise of these options. In order to
address that issue, we may elect to make a rescission offer to
those persons who exercised all, or a portion, of those options
and continue to hold the shares issued upon exercise, to give
them the opportunity to rescind the issuance of those shares
(Option Shares).
As of September 30, 2005, assuming every eligible person
that continues to hold the securities issued upon exercise of
options granted under the 2000 Option Scheme were to accept a
rescission offer, we estimate the total cost to us to complete
the rescission would be approximately $3.8 million
including statutory interest at 7% per annum, accrued since
the date of exercise of the options. These amounts are
calculated by reference to the acquisition price of the Option
Shares.
For the purposes of English company law, a rescission offer in
respect of our Option Shares would take the form of a purchase
by our company of the relevant Option Shares. The Companies Act
1985 (Companies Act) provides that we may only
purchase our own shares using our distributable
profits (as defined by the Companies Act), also known as
distributable reserves (Distributable Reserves), or
the proceeds from the issuance of new shares for that purpose.
When we issue shares at a value which represents a premium over
their nominal value, we are required by the Companies Act
34
to transfer the premium (subject to certain limited exceptions)
to a share premium account. Under the Companies Act, our ability
to utilize our share premium account is very limited and does
not include the payment of dividends. However, in accordance
with a procedure set out in the Companies Act, we have obtained
approval from our shareholders and from the High Court of
Justice in England and Wales (the Court) to reduce
our share premium account by US$44,000,000 with effect from
December 8, 2005 (the Effective Date) in order
to reduce or eliminate the deficit on our profit and loss
account, which had arisen as a result of previous accumulated
losses. This will enable profits, if any, arising after
December 31, 2005 to give rise to Distributable Reserves,
which we could use to purchase our own Shares pursuant to a
rescission offer. In connection with the approval from the
Court, we have given an undertaking to the Court for the
protection of our creditors, which requires us to transfer to a
non-distributable reserve (the Special Reserve) the
amount (if any) by which the deficit on our profit and loss
account at December 31, 2005 falls short of the amount of
the reduction (being US$44,000,000), and any profits made by us
or any of our subsidiaries prior to December 31, 2005,
until our non-consenting creditors at the Effective Date
(Non-Consenting Creditors) have been paid off. In
other words, if there is a surplus on our profit and loss
account after application of the $44.0 million from the
share premium reduction and any additional profits made by us
prior to December 31, 2005 (Special Reserve
Surplus), then we would not be permitted to use the
Special Reserve Surplus to purchase our own shares until all
Non-Consenting Creditors are paid . However, we do not currently
expect that any sums will be required to be transferred to the
Special Reserve since we do not anticipate that there will be a
surplus on our profit and loss account after application of the
share premium reduction and any profits made before
December 31, 2005, although this will need to be confirmed
when we prepare our audited UK GAAP profit and loss account and
balance sheet for the year ended December 31, 2005.
Although we believe we have substantially reduced our
accumulated profit and loss account deficit pursuant to the
Companies Act, we are not permitted to purchase any of our own
shares until we have sufficient Distributable Reserves in order
to fund such purchases of our own shares or sufficient proceeds
of a new issuance of shares made for the purposes of such
purchases of our own shares. As of September 30, 2005, if
every eligible person holding Option Shares were to accept the
rescission offer, we estimate that the amount we would need in
Distributable Reserves is approximately $3.8 million. After
application of the share premium reduction to the accumulated
profit and loss account deficit, we anticipate that the deficit
will be substantially reduced; however, we will not have any
Distributable Reserves, which we will accumulate to the extent
that we make any distributable profits in the future. We do not
intend to make a rescission offer until we have the
Distributable Reserves required to make a rescission offer of
the Option Shares.
The undertaking to the Court also prevents us from making any
distribution to shareholders, or redeeming or purchasing our own
shares, until we have obtained approval at a shareholders
general meeting of our audited UK GAAP balance sheet for the
year ended December 31, 2005. It is likely that our UK GAAP
balance sheet for the year ended December 31, 2005 will be
ready for approval by shareholders on or about May 31,
2006. The share premium reduction will only be reflected on our
UK GAAP balance sheet for the purposes of UK law. It will not be
reflected on our US GAAP balance sheet.
Any purchase of the Option Shares pursuant to a rescission offer
would not only need to be made out of Distributable Reserves,
but would also require shareholder approval given in accordance
with the requirements of the Companies Act.
Such approval must be given by resolution passed with a majority
of at least 75% of the votes cast on the resolution (excluding
votes carried by the Option Shares proposed to be purchased),
having made a copy of the contract for the purchase of the
Option Shares available for inspection both at our registered
office for at least 15 days prior to the date of the meeting to
approve the purchase and at the meeting itself. Once a purchase
has been completed, we would be subject to further disclosure
obligations in relation to information about the purchase.
35
We do not intend to seek shareholder approval for a purchase of
Option Shares until we have made a rescission offer which has
been accepted by any one or more shareholders and it has become
necessary to seek such approval.
In summary, in order to effectuate a rescission offer and
repurchase any of our own shares upon any acceptances of the
rescission offer, we must satisfy the following conditions:
(1) obtain shareholder approval of our audited UK GAAP
balance sheet for the year ended December 31, 2005;
(2) obtain additional shareholder approval, as further
discussed above, of any acceptances of the rescission offer to
repurchase shares; and (3) have sufficient Distributable
Reserves to repurchase shares subject to the rescission offer.
We have terminated and no longer grant options under our 2000
Option Scheme, but options previously granted under 2000 Option
Scheme remain in full force and effect. We filed a registration
statement on
Form S-8 to cover
the issuance of future shares upon exercise of presently
unexercised options under the 2000 Option Scheme. However, none
of the shares (including shares underlying unexercised options)
registered on the
Form S-8 will be
eligible for resale if they are tendered as part of the
rescission offer.
36
PRICE RANGE OF GLOBAL DEPOSITARY SHARES
Our GDSs are currently traded on the Frankfurt Stock Exchange
under the symbol MHJG.
The following table summarizes the high and low sales prices of
our GDSs in euros as reported by the Frankfurt Stock Exchange
for the periods noted below, and as translated into
U.S. dollars at the currency exchange rate in effect on the
date the price was reported on the Frankfurt Stock Exchange. The
currency exchange rate is based on the average bid and ask
exchange price as reported by OANDA for such date.
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Year ended December 31, 2004
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First Quarter
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11.85 |
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$ |
14.68 |
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4.20 |
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$ |
5.39 |
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Second Quarter
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9.85 |
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$ |
11.79 |
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6.30 |
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$ |
7.63 |
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Third Quarter
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8.00 |
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$ |
9.62 |
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2.85 |
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$ |
3.49 |
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Fourth Quarter
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7.33 |
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$ |
9.68 |
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4.75 |
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$ |
6.06 |
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Year ended December 31, 2005
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First Quarter
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8.25 |
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$ |
10.66 |
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6.16 |
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$ |
8.02 |
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Second Quarter
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8.00 |
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$ |
10.37 |
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5.26 |
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$ |
6.47 |
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Third Quarter
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7.50 |
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$ |
9.28 |
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5.25 |
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$ |
6.85 |
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Fourth Quarter
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6.29 |
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$ |
7.50 |
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4.45 |
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$ |
5.22 |
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Year ended December 31, 2006
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First Quarter (through February 7, 2006)
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6.48 |
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$ |
7.78 |
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5.06 |
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$ |
6.19 |
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The last reported sales price of our GDSs on the Frankfurt Stock
Exchange on February 7, 2006 was
6.48 per GDS, or
$7.78 per GDS.
As of December 6, 2005, there were approximately
122 holders of record of our shares, including each account
held by our depository and its record holder. These figures do
not include beneficial owners who hold shares in nominee name.
DIVIDEND POLICY
We have never declared or paid cash dividends on our ordinary
shares. We do not anticipate paying any cash dividends on our
ordinary shares in the foreseeable future. We currently intend
to retain all available funds and any future earnings to fund
the development and growth of our business.
Under English law, any payment of dividends would be subject to
the Companies Act 1985, as amended, which requires that all
dividends be approved by our board of directors and, in some
cases, our shareholders. Moreover, under English law, we may pay
dividends on our shares only out of profits available for
distribution determined in accordance with the Companies Act
1985, as amended, and accounting principles generally accepted
in the United Kingdom, which differ in some respects from
U.S. GAAP. We also may incur indebtedness in the future
that may prohibit or effectively restrict the payment of
dividends on our ordinary shares. Any future determination
related to our dividend policy will be made at the discretion of
our Board of Directors. In the event that dividends are paid in
the future, holders of the ADSs will be entitled to receive
payments in U.S. dollars in respect of dividends on the
underlying shares in accordance with the deposit agreement. See
Description of Share Capital Description of
Ordinary Shares Dividends and
Description of Share Capital Description of
American Depositary Shares Dividends and
Distributions.
37
CAPITALIZATION
The following table summarizes our cash, cash equivalents and
marketable securities and capitalization as of
September 30, 2005.
You should read this table in conjunction with Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
|
|
(in thousands | |
|
|
except per share | |
|
|
data) | |
Notes payable, including current portion
|
|
$ |
11,417 |
|
Other liabilities
|
|
|
240 |
|
Shares subject to rescission
|
|
|
3,819 |
|
Shareholders equity:
|
|
|
|
|
|
Ordinary shares, £0.01 par value,
80,000,000 shares authorized; 26,209,496 shares issued
and outstanding
|
|
|
432 |
|
|
Additional paid-in-capital
|
|
|
57,119 |
|
|
Deferred share-based compensation
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(299 |
) |
|
Notes receivable from employees
|
|
|
(83 |
) |
|
Accumulated deficit
|
|
|
(44,670 |
) |
|
|
|
|
|
|
Total shareholders equity
|
|
|
12,499 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
39,473 |
|
|
|
|
|
The number of our ordinary shares shown above is based on
26,209,496 shares outstanding as of September 30,
2005. This information excludes:
|
|
|
|
|
8,755,438 ordinary shares issuable upon the exercise of
outstanding options as of September 30, 2005, with exercise
prices ranging from $0.88 to $9.51 per share and a weighted
average exercise price of $3.99 per share; |
|
|
|
430,000 ordinary shares issuable upon the exercise of warrants
outstanding as of September 30 2005, with an exercise price
of $2.51 per share; and |
|
|
|
14,381,062 ordinary shares available for issuance under our
share option schemes. |
38
DILUTION
Since this offering is being made solely by the selling
shareholders and none of the proceeds will be paid to us, except
for funds received from the exercise of warrants and options
held by selling shareholders, if and when exercised, our net
tangible book value per share will not be affected by this
offering.
39
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated
financial data. The data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements, related notes, and other financial
information included herein. The following selected consolidated
statement of operations data and balance sheet data for the nine
months ended September 30, 2005 and September 30, 2004
are derived from our unaudited consolidated financial statements
presented elsewhere is this registration statement. The
following selected consolidated statement of operations data for
each of the three years in the period ended December 31,
2004, and the selected consolidated balance sheet data as of
December 31, 2003 and 2004, are derived from the audited
consolidated financial statements of our company included
elsewhere in this prospectus. The consolidated statement of
operations data for the year ended December 31, 2001 and
the selected consolidated balance sheet data as of
December 31, 2001 and 2002 are derived from the audited
consolidated financial statements of our company not included in
this prospectus. The consolidated statement of operations data
for the year ended December 31, 2000 and the selected
consolidated balance sheet data as of December 31, 2000 are
derived from unaudited consolidated financial statements not
included in this prospectus. Our ordinary shares in the form of
GDSs currently trade on the Frankfurt Stock Exchange, in
Germany. Pursuant to the laws governing this exchange, we
publicly reported our quarterly and annual operating results. On
April 28, 2004, we publicly announced that we had
discovered accounting inaccuracies in previously reported
financial statements. As a result, following consultation with
our new auditors, we restated our financial statements for the
first three quarters of 2003 and for each of the years ended
December 31, 2002 and 2001 to correct inappropriate
accounting entries. Based in part on the fact that our 2001 and
2002 annual and 2003 interim financial statements were restated,
it is likely that our 2000 unaudited financial statements would
have been subject to adjustments, which could have been
material, had they been subjected to an audit and do not reflect
accounting treatment or presentation consistent with audited
financial statements for the years ended and as of
December 31, 2002, 2003 and 2004. You should therefore not
rely on data derived from such financial statements. The
historical results are not necessarily indicative of results to
be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31,(1) | |
|
September 30,(1) | |
|
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003(7) | |
|
2004(7) | |
|
2004(7) | |
|
2005(7) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
(in thousands, except per share data and paying subscriber data) | |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
6,670 |
|
|
$ |
10,434 |
|
|
$ |
16,352 |
|
|
$ |
36,941 |
|
|
$ |
65,052 |
|
|
$ |
48,000 |
|
|
$ |
48,925 |
|
Direct marketing expenses
|
|
|
5,257 |
|
|
|
2,044 |
|
|
|
5,396 |
|
|
|
18,395 |
|
|
|
31,240 |
|
|
|
24,612 |
|
|
|
18,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
1,413 |
|
|
|
8,390 |
|
|
|
10,956 |
|
|
|
18,546 |
|
|
|
33,812 |
|
|
|
23,388 |
|
|
|
30,573 |
|
Operating
expenses:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
|
953 |
|
|
|
540 |
|
|
|
403 |
|
|
|
986 |
|
|
|
2,607 |
|
|
|
2,060 |
|
|
|
758 |
|
|
Customer service
|
|
|
402 |
|
|
|
641 |
|
|
|
1,207 |
|
|
|
2,536 |
|
|
|
3,379 |
|
|
|
2,601 |
|
|
|
1,787 |
|
|
Technical operations
|
|
|
628 |
|
|
|
1,772 |
|
|
|
1,587 |
|
|
|
4,481 |
|
|
|
7,184 |
|
|
|
5,201 |
|
|
|
4,848 |
|
|
Product development
|
|
|
138 |
|
|
|
359 |
|
|
|
603 |
|
|
|
959 |
|
|
|
2,013 |
|
|
|
1,376 |
|
|
|
2,949 |
|
|
General and administrative
|
|
|
6,215 |
|
|
|
5,496 |
|
|
|
7,996 |
|
|
|
18,537 |
|
|
|
29,253 |
|
|
|
21,559 |
|
|
|
20,013 |
|
|
Amortization of intangible assets other than goodwill
|
|
|
1,127 |
|
|
|
2,137 |
|
|
|
524 |
|
|
|
555 |
|
|
|
860 |
|
|
|
670 |
|
|
|
848 |
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
3,997 |
|
|
|
|
|
|
|
1,532 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,463 |
|
|
|
14,942 |
|
|
|
12,320 |
|
|
|
29,586 |
|
|
|
45,504 |
|
|
|
33,467 |
|
|
|
31,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
|
(8,050 |
) |
|
|
(6,552 |
) |
|
|
(1,364 |
) |
|
|
(11,040 |
) |
|
|
(11,692 |
) |
|
|
(10,079 |
) |
|
|
(630 |
) |
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31,(1) | |
|
September 30,(1) | |
|
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003(7) | |
|
2004(7) | |
|
2004(7) | |
|
2005(7) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
(in thousands, except per share data and paying subscriber data) | |
Interest (income) and other expenses, net
|
|
|
1,113 |
|
|
|
1,627 |
|
|
|
(840 |
) |
|
|
(188 |
) |
|
|
(66 |
) |
|
|
(14 |
) |
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before income taxes
|
|
|
(9,163 |
) |
|
|
(8,179 |
) |
|
|
(524 |
) |
|
|
(10,852 |
) |
|
|
(11,626 |
) |
|
|
(10,065 |
) |
|
|
(915 |
) |
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$ |
(9,163 |
) |
|
$ |
(8,179 |
) |
|
$ |
(524 |
) |
|
$ |
(10,852 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,066 |
) |
|
$ |
(1,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic and
diluted(3)
|
|
$ |
(0.69 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.45 |
) |
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and
diluted(3)
|
|
|
13,213 |
|
|
|
17,460 |
|
|
|
18,460 |
|
|
|
18,970 |
|
|
|
22,667 |
|
|
|
22,139 |
|
|
|
25,621 |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$ |
160 |
|
|
$ |
544 |
|
|
$ |
874 |
|
|
$ |
1,441 |
|
|
$ |
3,065 |
|
|
$ |
2,721 |
|
|
$ |
3,558 |
|
Additional Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average paying
subscribers(4)
|
|
|
|
|
|
|
|
|
|
|
58,700 |
|
|
|
125,800 |
|
|
|
226,100 |
|
|
|
225,200 |
|
|
|
218,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
September 30, | |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
(unaudited) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$ |
11,410 |
|
|
$ |
7,569 |
|
|
$ |
7,755 |
|
|
$ |
5,815 |
|
|
$ |
7,423 |
|
|
$ |
8,668 |
|
Total assets
|
|
|
23,409 |
|
|
|
16,352 |
|
|
|
17,461 |
|
|
|
16,969 |
|
|
|
27,359 |
|
|
|
39,473 |
|
Deferred revenue
|
|
|
362 |
|
|
|
993 |
|
|
|
1,535 |
|
|
|
3,232 |
|
|
|
3,933 |
|
|
|
4,099 |
|
Capital lease obligations and notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487 |
|
|
|
1,873 |
|
|
|
10,517 |
|
Total liabilities
|
|
|
6,156 |
|
|
|
3,238 |
|
|
|
3,998 |
|
|
|
11,659 |
|
|
|
16,872 |
|
|
|
23,155 |
|
Shares subject to rescission
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,819 |
|
|
|
3,819 |
|
Accumulated deficit
|
|
|
(12,453 |
) |
|
|
(20,632 |
) |
|
|
(21,156 |
) |
|
|
(32,008 |
) |
|
|
(43,635 |
) |
|
|
(44,670 |
) |
Total shareholders equity
|
|
|
17,253 |
|
|
|
13,114 |
|
|
|
13,463 |
|
|
|
5,310 |
|
|
|
6,668 |
|
|
|
12,499 |
|
|
|
(1) |
Refer to Managements Discussion and Analysis of
Financial Condition and Results of Operations for a
discussion of certain asset and business acquisitions. |
(2) |
In 2004, general and administrative expenses included an expense
of approximately $2.4 million related to an employee
severance, $2.1 million related to the United States
initial public offering of MatchNet, Inc. that was planned for
mid-2004, but which was withdrawn shortly after the related
registration statement was filed in the third quarter of 2004,
as well as one legal settlement resulting in the recognition of
$900,000 in expenses in the third quarter and two legal
settlements resulting in the recognition of $2.1 million in
expenses in the fourth quarter of 2004. In 2003, general and
administrative expenses included a charge of $1.7 million
primarily related to a settlement with Comdisco. |
(3) |
For information regarding the computation of per share amounts,
refer to note 1 of our consolidated financial statements. |
(4) |
Average paying subscribers for each month are calculated as the
sum of the paying subscribers at the beginning and the end of
the month, divided by two. Average paying subscribers for
periods longer than one month are calculated as the sum of the
average paying subscribers for each month, divided by the number
of months in such period. Additionally, refer to
Managements Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of
business metrics we use to evaluate our business. We did not
track data for the years ended December 31, 2000 and 2001
sufficient to accurately set forth the number of average paying
subscribers for the respective periods. |
(5) |
Under our 2000 Executive Share Option Scheme (2000 Option
Scheme), we granted options to purchase ordinary shares to
certain of our employees, directors and consultants. The
issuances of securities upon exercise of options granted under
our |
41
|
|
|
2000 Option Scheme may not have
been exempt from registration and qualification under federal
and California state securities laws, and as a result, we may
have potential liability to those employees, directors and
consultants to whom we issued securities upon the exercise of
these options. In order to address that issue, we may elect to
make a rescission offer to those persons who exercised all, or a
portion, of those options and continue to hold the shares issued
upon exercise, to give them the opportunity to rescind the
issuance of those shares. However, it is the Securities and
Exchange Commissions position that a rescission offer will
not bar or extinguish any liability under the Securities Act of
1933 with respect to these options and shares, nor will a
rescission offer extinguish a holders right to rescind the
issuance of securities that were not registered or exempt from
the registration requirements under the Securities Act of 1933.
As of September 30, 2005, assuming every eligible person
that continues to hold the securities issued upon exercise of
options granted under the 2000 Option Scheme were to accept a
rescission offer, we estimate the total cost to us to complete
the rescission would be approximately $3.8 million
including statutory interest at 7% per annum, accrued since
the date of exercise of the options. The rescission acquisition
price is calculated as equal to the original exercise price paid
by the optionee to our company upon exercise of their option.
|
|
(6) |
Operating expenses include
share-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
Year Ended | |
|
Ended | |
|
|
December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Indirect marketing
|
|
$ |
79 |
|
|
$ |
156 |
|
|
$ |
128 |
|
|
$ |
10 |
|
Customer service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Technical operations
|
|
|
140 |
|
|
|
22 |
|
|
|
22 |
|
|
|
168 |
|
Product development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
General and administrative
|
|
|
1,652 |
|
|
|
1,526 |
|
|
|
1,012 |
|
|
|
1,000 |
|
|
|
(7) |
For the purposes of this and all future filings, prior period
classification of share-based compensation was reclassified to
conform to current period classification. |
42
PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial information
gives effect to the acquisition on May 19, 2005, by Spark
Networks plc (formerly MatchNet plc) of MingleMatch, Inc., a
corporation based in Provo, Utah. The purchase price for the
acquisition was $12 million in cash, which will be paid
over 12 months (as discussed further in note 9, notes
payable), as well as 150,000 shares of the Companys
ordinary shares which, on the date of the acquisition, carried a
value of approximately $1.2 million. For the fiscal year
ended December 31, 2004, MingleMatch reported net revenues
of approximately $2.5 million and a loss of $443,000.
The unaudited pro forma combined financial information is for
illustrative purposes only and reflects certain estimates and
assumptions. These unaudited pro forma combined financial
statements should be read in conjunction with the accompanying
notes, our historical consolidated financial statements and
MingleMatchs historical financial statements, including
the notes thereto, and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
all of which are included elsewhere in this prospectus.
The unaudited pro forma combined statements of operation for the
year ended December 31, 2004 and the nine months ended
September 30, 2005 give effect to the acquisition of
MingleMatch, Inc. as if it had been completed on January 1,
2004. Our combined financial statements include the results of
operations of MingleMatch, Inc. from its acquisition date
May 19, 2005 to September 30, 2005. The MingleMatch
column for the nine months ended September 30, 2005
includes MingleMatch activity for the period prior to its
acquisition date from January 1, 2005 to May 18, 2005.
The unaudited pro forma combined financial statements are not
necessarily indicative of operating results which would have
been achieved had the foregoing transaction actually been
completed at the beginning of the subject periods and should not
be construed as representative of future operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004(4) | |
|
Nine Months ended September 30, 2005 | |
|
|
| |
|
| |
|
|
Spark | |
|
Mingle | |
|
Pro Forma | |
|
Pro Forma | |
|
Spark | |
|
Mingle | |
|
Pro Forma | |
|
Pro Forma | |
|
|
Networks | |
|
Match | |
|
Adjustments | |
|
Combined | |
|
Networks | |
|
Match | |
|
Adjustments | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands except per share amounts) | |
|
(in thousands except per share amounts) | |
Net revenues
|
|
$ |
65,052 |
|
|
$ |
2,504 |
|
|
$ |
|
|
|
$ |
67,556 |
|
|
$ |
48,925 |
|
|
$ |
1,453 |
|
|
$ |
|
|
|
$ |
50,378 |
|
Direct marketing expenses
|
|
|
31,240 |
|
|
|
1,432 |
|
|
|
|
|
|
|
32,672 |
|
|
|
18,352 |
|
|
|
741 |
|
|
|
|
|
|
|
19,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
33,812 |
|
|
|
1,072 |
|
|
|
|
|
|
|
34,884 |
|
|
|
30,573 |
|
|
|
712 |
|
|
|
|
|
|
|
31,285 |
|
Operating
expenses:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
|
2,607 |
|
|
|
54 |
|
|
|
|
|
|
|
2,661 |
|
|
|
758 |
|
|
|
79 |
|
|
|
|
|
|
|
837 |
|
|
Customer service
|
|
|
3,379 |
|
|
|
100 |
|
|
|
|
|
|
|
3,479 |
|
|
|
1,787 |
|
|
|
147 |
|
|
|
|
|
|
|
1,934 |
|
|
Technical operations
|
|
|
7,184 |
|
|
|
353 |
|
|
|
|
|
|
|
7,537 |
|
|
|
4,848 |
|
|
|
350 |
|
|
|
|
|
|
|
5,198 |
|
|
Product development
|
|
|
2,013 |
|
|
|
77 |
|
|
|
|
|
|
|
2,090 |
|
|
|
2,949 |
|
|
|
113 |
|
|
|
|
|
|
|
3,062 |
|
|
General and administrative
|
|
|
29,253 |
|
|
|
947 |
|
|
|
|
|
|
|
30,200 |
|
|
|
20,013 |
|
|
|
986 |
|
|
|
|
|
|
|
20,999 |
|
|
Amortization of intangible assets other than goodwill
|
|
|
860 |
|
|
|
4 |
|
|
|
1,197 |
(1) |
|
|
2,061 |
|
|
|
848 |
|
|
|
2 |
|
|
|
313 |
(2) |
|
|
1,163 |
|
|
Impairment of long lived assets
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
45,504 |
|
|
|
1,535 |
|
|
|
1,197 |
|
|
|
48,236 |
|
|
|
31,203 |
|
|
|
1,677 |
|
|
|
313 |
|
|
|
33,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004(4) | |
|
Nine Months ended September 30, 2005 | |
|
|
| |
|
| |
|
|
Spark | |
|
Mingle | |
|
Pro Forma | |
|
Pro Forma | |
|
Spark | |
|
Mingle | |
|
Pro Forma | |
|
Pro Forma | |
|
|
Networks | |
|
Match | |
|
Adjustments | |
|
Combined | |
|
Networks | |
|
Match | |
|
Adjustments | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands except per share amounts) | |
|
(in thousands except per share amounts) | |
Operating (loss)
|
|
|
(11,692 |
) |
|
|
(463 |
) |
|
|
(1,197 |
) |
|
|
(13,352 |
) |
|
|
(630 |
) |
|
|
(965 |
) |
|
|
(313 |
) |
|
|
(1,908 |
) |
Interest (income) and other expenses, net
|
|
|
(66 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
(86 |
) |
|
|
285 |
|
|
|
(209 |
) |
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)
|
|
|
(11,626 |
) |
|
|
(443 |
) |
|
|
(1,197 |
) |
|
|
(13,266 |
) |
|
|
(915 |
) |
|
|
(756 |
) |
|
|
(313 |
) |
|
|
(1,984 |
) |
Income taxes
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$ |
(11,627 |
) |
|
$ |
(443 |
) |
|
$ |
(1,197 |
) |
|
$ |
(13,267 |
) |
|
$ |
(1,035 |
) |
|
$ |
(756 |
) |
|
$ |
(313 |
) |
|
($ |
2,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per ordinary share basic and
diluted
|
|
$ |
(0.51 |
) |
|
|
|
|
|
|
|
|
|
$ |
(0.58 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
$ |
(0.08 |
) |
Weighted average ordinary shares outstanding basic
and diluted
|
|
|
22,667 |
|
|
|
|
|
|
|
150 |
|
|
|
22,817 |
|
|
|
25,621 |
|
|
|
|
|
|
|
|
|
|
|
25,621 |
|
|
|
(1) |
Represents the amortization of intangible assets that would have
occurred if the purchase had happened on January 1, 2004.
Calculated as follows: |
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Stub Period Ending | |
|
|
December 31, 2004 | |
|
May 18, 2005 | |
|
|
| |
|
| |
Domain Names
|
|
$ |
786 |
|
|
$ |
297 |
|
Subscriber Databases
|
|
|
370 |
|
|
|
|
|
Developed Software
|
|
|
41 |
|
|
|
16 |
|
|
|
|
|
|
|
|
Total Amortization
|
|
$ |
1,197 |
|
|
$ |
313 |
|
|
|
|
|
|
|
|
|
|
(2) |
Amortization of intangible assets that would have occurred if
the purchase had happened on January 1, 2004. |
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition.
|
|
|
|
|
|
|
|
As of May 19, 2005 | |
|
|
| |
|
|
(in thousands) | |
Current assets (including cash acquired of $221)
|
|
$ |
295 |
|
Property and equipment, net
|
|
|
162 |
|
Goodwill
|
|
|
7,919 |
|
Domain names and databases
|
|
|
4,655 |
|
|
|
|
|
|
Total assets acquired
|
|
|
13,031 |
|
Current liabilities
|
|
|
41 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
12,990 |
|
Of the $4,655,000 of acquired intangible assets, $2,360,000 was
assigned to member databases and will be amortized over three
years, $370,000 was assigned to subscriber databases which will
be amortized over three months, $205,000 was assigned to
developed software which will be amortized over five years, and
$1,720,000 was assigned to domain names which are not subject to
amortization.
Of the $7,919,000 of acquired goodwill, $400,000 was assigned to
assembled workforce.
|
|
(3) |
Operating expenses include share-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Nine months ended | |
|
|
December 31, 2004 | |
|
September 30, 2005 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Indirect marketing
|
|
$ |
156 |
|
|
$ |
10 |
|
Customer service
|
|
|
|
|
|
|
22 |
|
Technical operations
|
|
|
22 |
|
|
|
168 |
|
Product development
|
|
|
|
|
|
|
124 |
|
General & administrative
|
|
|
1,526 |
|
|
|
1,000 |
|
|
|
(4) |
For the purposes of this and all future filings, prior period
classification of share-based compensation was reclassified to
conform to current period classification. |
44
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read in conjunction with our
unaudited and audited consolidated financial statements and the
related notes thereto included elsewhere in this prospectus.
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains forward-looking statements that
involve substantial risks and uncertainties. All statements
other than statements of historical facts contained in this
prospectus, including statements regarding our future financial
position, business strategy and plans and objectives of
management for future operations, are forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as believes,
expects, anticipates,
intends, estimates, may,
will, continue, should,
plan, predict, potential or
the negative of these terms or other similar expressions. We
have based these forward-looking statements on our current
expectations and projections about future events and financial
trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
Our actual results could differ materially from those
anticipated in these forward-looking statements, which are
subject to a number of risks, uncertainties and assumptions
described in Risk Factors section and elsewhere in
this prospectus.
General
We are a public limited company incorporated under the laws of
England and Wales and our ordinary shares in the form of GDSs
currently trade on the Frankfurt Stock Exchange. We are a
leading provider of online personals services in the United
States and internationally. Our Web sites enable adults to meet
online and participate in a community, become friends, date,
form a long-term relationship or marry.
Our revenues have grown from $659,000 in 1999 to
$65.1 million in 2004. For the nine month period ended
September 30, 2005, we had approximately 218,700 average
paying subscribers, representing a decrease of 2.9% from the
same period in 2004. We define a member as an individual who has
posted a personal profile during the immediately preceding
12 months or an individual who has previously posted a
personal profile and has subsequently logged on to one of our
Web sites at least once in the preceding 12 months. Paying
subscribers are defined as individuals who have paid a monthly
fee for access to communication and Web site features beyond
those provided to our members, and average paying subscribers
for each month are calculated as the sum of the paying
subscribers at the beginning and the end of the month, divided
by two. Our key Web sites are JDate.com, which targets the
Jewish singles community in the United States, at a current
subscription fee of $34.95 for a one month subscription, and
AmericanSingles.com, which targets the U.S. mainstream
online singles community, at a current subscription fee of
$29.85 for a one month subscription. Our subscription fees are
charged on a monthly basis, with discounts for longer-term
subscriptions ranging from three to twelve months. Longer-term
subscriptions are charged up-front and we recognize revenue over
the terms of such subscriptions.
We have grown both internally and through acquisitions of
entities, and selected assets of entities, offering online
personals services and related businesses. As a result of each
of these acquisitions, we have been able to expand and
cross-promote into vertical affinity markets, combine the target
entitys existing database of online personals customers
into one of our Web sites databases, with the goal of
attracting new members to our Web sites, retaining as many of
them as possible and converting them into paying subscribers.
Through our business acquisitions, we have expanded into new
markets,
45
leveraged and enhanced our existing brands to improve our
position within new markets, and gained valuable intellectual
property. During the last three years, we made the following
acquisitions:
|
|
|
|
|
In May 2005, we acquired MingleMatch, Inc., a company that
operates religious, ethnic, special interest and geographically
targeted online singles communities. The acquisition of
MingleMatch fits with our strategy of creating affinity-focused
online personals that provide quality experiences for our
members. We expect that our purchase of MingleMatch will allow
for numerous cost savings and revenue synergies. Expected cost
savings include savings from cost reductions in customer service
and marketing, where we plan to be able to market to existing
members of our other Web sites, particularly
AmericanSingles. Expected revenue synergies include
cross-promotion and bundled subscription opportunities with
members of our other Web sites, particularly AmericanSingles. |
|
|
|
In September 2004, we purchased a 20% equity interest, with an
option to acquire the remaining interest, in Duplo AB, an online
provider of social networking products and services in Sweden,
with the intent of expanding into new markets and strengthening
our existing brands. |
|
|
|
In January 2004, we purchased Point Match Ltd., a competitor of
JDate.co.il in Israel. |
Our future performance will depend on many factors, including:
|
|
|
|
|
continued acceptance of online personals services; |
|
|
|
our ability to attract a large number of new members and paying
subscribers, and retain those members and paying subscribers; |
|
|
|
our ability to increase brand awareness, both domestically and
internationally; |
|
|
|
our ability to sustain and, when possible, increase subscription
fees for our services; and |
|
|
|
our ability to introduce new targeted Web sites, affiliate
programs, fee-based services and advertising as additional
sources of revenues. |
Our ability to compete effectively will depend on the timely
introduction and performance of our future Web sites, services
and features, the ability to address the needs of our members
and paying subscribers and the ability to respond to Web sites,
services and features introduced by competitors. To address this
challenge, we have invested and will continue to invest existing
personnel resources, namely internet engineers and programmers,
in order to enhance our existing services and introduce new
services, which may include new Web sites as well as new
features and functions designed to increase the probability of
communication among our members and paying subscribers and to
enhance their online personals experiences. Our software
development team consisted of 34 employees as of
September 30, 2005, who are focused on expanding and
improving the features and functionality of our Web sites. The
Company believes that it has sufficient cash resources on hand
to accomplish the enhancements that are currently contemplated.
Critical Accounting Policies, Estimates and Assumptions
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make certain estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those
related to revenue recognition, prepaid advertising, Web site
and software development costs, goodwill, intangible and other
long-lived assets, accounting for business combinations,
contingencies and income taxes. We base our estimates on
historical experience
46
and on various other assumptions that we believe are reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
Management has discussed the development and selection of our
critical accounting policies, estimates and assumptions with our
Board of Directors and the Board has reviewed these disclosures.
We believe the following critical accounting policies reflect
the more significant judgments and estimates we used in the
preparation of our consolidated financial statements:
Revenue Recognition and Deferred Revenue
Substantially all of our revenues are derived from subscription
fees. Revenues are presented net of credits and credit card
chargebacks. We recognize revenue in accordance with accounting
principles generally accepted in the United States and with
Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition.
Recognition occurs ratably over the subscription period,
beginning when there is persuasive evidence of an arrangement,
delivery has occurred (access has been granted), the fees are
fixed and determinable, and collection is reasonably assured.
Paying subscribers primarily pay in advance using a credit card
and all purchases are final and nonrefundable. Subscription fees
collected in advance are deferred and recognized as revenue,
using the straight-line method, over the term of the
subscription. We reserve for potential credit card chargebacks
based on our historical chargeback experience.
Direct Marketing Expenses
We incur substantial expenses related to our advertising in
order to generate traffic to our Web sites. These advertising
costs are primarily online advertising, including affiliate and
co-brand arrangements, and are directly attributable to the
revenues we receive from our subscribers. We have entered into
numerous affiliate arrangements, under which our affiliate
advertises or promotes our Web site on its Web site, and earns a
fee whenever visitors to its Web site click though the
advertisement to one of our Web sites and registers or
subscribes on our Web site. Affiliate deals may fall in the
categories of either CPS, CPA, CPC, or CPM, as discussed below.
We do not typically have any exclusivity arrangements with our
affiliates, and some of our affiliates may also be affiliates
for our competitors. Under our co-branded arrangements, our
co-brand partners may operate their own separate Web sites where
visitors can register and subscribe to our Web sites. Our
co-brand arrangements are usually CPS type arrangements.
Our advertising expenses are recognized based on the terms of
each individual contract. The majority of our advertising
expenses are based on four pricing models:
|
|
|
|
|
Cost per subscription (CPS) where we pay an online
advertising provider a fee based upon the number of new paying
subscribers that it generates; |
|
|
|
Cost per acquisition (CPA) where we pay an online
advertising provider a fee based on the number of new member
registrations it generates; |
|
|
|
Cost per click (CPC) where we pay an online advertising
provider a fee based on the number of clicks to our Web sites it
generates; and |
|
|
|
Cost per thousand for banner advertising (CPM) where we pay
an online advertising provider a fee based on the number of
times it displays our advertisements. |
We estimate in certain circumstances the total clicks or
impressions delivered by our vendors in order to determine
amounts due under these contracts.
47
Prepaid Advertising Expenses
In certain circumstances, we pay in advance for Internet-based
advertising on other Web sites, and expense the prepaid amounts
as direct marketing expenses over the contract periods as the
contracted Web site delivers on its commitment. We evaluate the
realization of prepaid amounts at each reporting period and
expense prepaid amounts if the contracted Web site is unable to
deliver on its commitment.
Web Site and Software Development Costs
We capitalize costs related to developing or obtaining
internal-use software. Capitalization of costs begins after the
conceptual formulation stage has been completed. Product
development costs are expensed as incurred or capitalized into
property and equipment in accordance with Statement of Position
(SOP) 98-1
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
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. We
exercise judgment in determining which stage of development a
software project is in at any point in time.
In accordance with Emerging Issues Task Force
(EITF) 00-2
Accounting for Web Site Development Costs, we
expense costs related to the planning and post-implementation
phases of our Web site development efforts. Direct costs
incurred in the development phase are capitalized. Costs
associated with minor enhancements and maintenance for the Web
site are included in expenses in the accompanying consolidated
statements of operations.
Capitalized Web site and software development costs are included
in internal-use software in property and equipment and amortized
over the estimated useful life of the products, which is usually
three years. In accordance with the above accounting literature,
we estimate the amount of time spent by our engineers in
developing our software and enhancements to our Web sites.
On a regular basis, management reviews the capitalized costs of
Web sites and software developed to ensure that these costs
relate to projects that will be completed and placed in service.
Any projects determined not to be viable will be reviewed for
impairment in accordance with SFAS No. 144.
Valuation of Goodwill, Identified Intangibles and Other
Long-lived Assets
We test goodwill and intangible assets for impairment in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets and test property, plant and equipment
for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. We assess goodwill, and other indefinite-lived
intangible assets at least annually, or more frequently when
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important and which could
trigger an impairment review include the following:
|
|
|
|
|
a significant decline in actual projected revenue; |
|
|
|
a significant decline in the market value of our depositary
shares; |
|
|
|
a significant decline in performance of certain acquired
companies relative to our original projections; |
|
|
|
an excess of our net book value over our market value; |
|
|
|
a significant decline in our operating results relative to our
operating forecasts; |
|
|
|
a significant change in the manner of our use of acquired assets
or the strategy for our overall business; |
|
|
|
a significant decrease in the market value of an asset; |
48
|
|
|
|
|
a shift in technology demands and development; and |
|
|
|
a significant turnover in key management or other personnel. |
When we determine that the carrying value of goodwill, other
intangible assets and other long-lived assets may not be
recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk
inherent in our current business model. In the case of the other
intangible assets and other long-lived assets, this measurement
is only performed if the projected undiscounted cash flows for
the asset are less than its carrying value. No indicators of
impairment in goodwill were present in 2003. We had impairment
charges related to long-lived assets of $1.5 million in
2003 in accordance with SFAS No. 144.
Accounting for Business Combinations
We have acquired the stock or specific assets of a number of
companies from 1999 through 2004 some of which were considered
to be business acquisitions. Under the purchase method of
accounting, the cost, including transaction costs, are allocated
to the underlying net assets, based on their respective
estimated fair values. The excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as
goodwill.
The judgments made in determining the estimated fair value and
expected useful life assigned to each class of assets and
liabilities acquired can significantly impact net income.
Different classes of assets will have useful lives that differ.
For example, the useful life of member database, which is three
years, is not the same as the useful life of a paying subscriber
list, which is three months, or a domain name, which is
indefinite. Consequently, to the extent a longer-lived asset is
ascribed greater value under the purchase method than a
shorter-lived asset, there may be less amortization recorded in
a given period or no amortization for indefinite lived
intangibles.
Determining the fair value of certain assets and liabilities
acquired is subjective in nature and often involves the use of
significant estimates and assumptions.
The value of our intangible and other long-lived assets,
including goodwill, is exposed to future adverse changes if we
experience declines in operating results or experience
significant negative industry or economic trends or if future
performance is below historical trends. We review intangible
assets and goodwill for impairment at least annually or more
frequently when circumstances indicate that the carrying value
may not be recoverable using the guidance of applicable
accounting literature. We continually review the events and
circumstances related to our financial performance and economic
environment for factors that would provide evidence of the
impairment of goodwill, identifiable intangibles and other
long-lived assets.
We use the equity method of accounting for our investments in
affiliates over which we exert significant influence.
Significant influence is generally having a 20% to 50% ownership
interest. At September 30, 2005, we owned a 20% interest in
Duplo AB which we account for using the equity method.
Legal Contingencies
We are currently involved in certain legal proceedings, as
discussed in the notes to the financial statements and under
Business Legal Proceedings. To the
extent that a loss related to a contingency is reasonably
estimable and probable, we accrue an estimate of that loss.
Because of the uncertainties related to both the amount and
range of loss on certain pending litigation, we may be unable to
make a reasonable estimate of the liability that could result
from an unfavorable outcome of such litigation. As additional
information becomes available, we will assess the potential
liability related to our pending litigation and make or, if
necessary, revise our estimates. Such revisions in our estimates
of the potential liability could materially impact our results
of operations and financial position.
49
Accounting for Income Taxes
We account for income taxes using the asset and liability
method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and tax bases
of the assets and liabilities. In accordance with the provisions
of SFAS No. 109, Accounting for Income
Taxes, we record a valuation allowance to reduce deferred
tax assets to the amount expected to more likely than not be
realized in our future tax returns. As of December 31, 2004
and 2003, we had a valuation allowance that completely offset
our deferred tax asset. Should we determine in the future that
we will likely realize all or part of our net deferred tax
assets, we will adjust the valuation allowance so that we will
have a deferred tax asset available that will be realized in our
future tax returns.
At December 31, 2004, we had net operating loss
carry-forwards of approximately $42.0 million and
$38.0 million available to reduce future federal and state
taxable income, respectively. Under Section 382 of the
Internal Revenue Code, the utilization of the net operating loss
carry-forwards can be limited based on changes in the percentage
ownership of our company. Of the net operating losses available,
approximately $1.5 million and $800,000 for federal and
state purposes, respectively, are attributable to losses
incurred by an acquired subsidiary. Such losses are subject to
other restrictions on usage including the requirement that they
are only available to offset future income of the subsidiary. In
addition, the available net operating losses do not include any
amounts generated by the acquired subsidiary prior to the
acquisition date due to substantial uncertainty regarding our
ability to realize the benefit in the future.
Adoption of SFAS 123(R)
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement No. 123 (revised 2004),
Share-Based Payment
(Statement 123(R)), a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) requires a company to
recognize compensation expense based on the fair value at the
date of grant for stock options and other stock-based
compensation, eliminating the use of the intrinsic value method.
We adopted Statement 123(R) on July 1, 2005, and as a
result, our loss before income taxes for the three and nine
month periods ended September 30, 2005, is
$1.4 million lower than if we had continued to account for
share-based compensation under APB Opinion No. 25. Basic
earnings or (loss) per share for the three and nine month
periods ended September 30, 2005 would have been $(0.03)
and $0.01, respectively, if we had not adopted
Statement 123(R), compared to reported basic and diluted
(loss) per share of $(0.08) and $(0.04), respectively. Diluted
earnings per share for the nine months ended September 30,
2005 would have been $0.01.
At September 30, 2005, we had two share-based employee
compensation plans, which are described more fully in
Note 10 of the consolidated financial statements included
herein. Prior to July 1, 2005, we accounted for those plans
under the recognition and measurement provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and related Interpretations, as permitted by FASB Statement
No. 123. Only share-based employee compensation related to
variable accounting (as discussed in Note 10,
Shareholders Equity) was recognized in our Statements of
Operations for the years ended December 31, 2004 or 2003,
and the six month period ended June 30, 2005, as all
options granted under those plans had an exercise price equal to
the market value of the underlying ordinary share on the date of
grant. Effective July 1, 2005, we adopted the fair value
recognition provisions of Statement 123(R), using the
modified-prospective-transition method. Under that transition
method, compensation cost recognized in the second half of 2005
includes: (i) compensation cost for all share-based
payments granted prior to, but not yet vested as of July 1,
2005, based on the grant date fair value estimated in accordance
with the original provisions of Statement 123, and
(ii) compensation cost for all share-based payments granted
subsequent to July 1, 2005, based on the grant-date fair
value estimated in accordance with the provisions of
Statement 123(R). Results for prior periods have not been
restated.
50
Prior to our adoption of Statement 123(R), we did not
record tax benefits of deductions resulting from the exercise of
share options because of the uncertainty surrounding the timing
of realizing the benefits of our deferred tax assets in future
tax returns. Statement 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows.
Had we recognized a tax benefit from deductions resulting from
the exercise of stock options, we would have classified the
benefit as a financing cash inflow on the cash flow statement.
The following table illustrates the effect on net income and
earnings per share if we had applied the fair value recognition
provisions of Statement 123(R) to options granted under our
share option plans in all periods presented. For purposes of
this pro forma disclosure, the value of the options is estimated
using a Black-Scholes option-pricing model and amortized to
expense over the options vesting periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net loss as reported
|
|
$ |
(524 |
) |
|
$ |
(10,852 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,066 |
) |
|
$ |
(1,035 |
) |
Add: SFAS 123(R) share based employee compensation expense
included in reported net income, net of related tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,409 |
|
Add: share based employee compensation expense recorded in the
accompanying consolidated statements of operations
Pre-SFAS 123(R)
|
|
|
|
|
|
|
75 |
|
|
|
367 |
|
|
|
233 |
|
|
|
48 |
|
Deduct: Total share based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(3,438 |
) |
|
|
(3,645 |
) |
|
|
(3,452 |
) |
|
|
(2,256 |
) |
|
|
(4,067 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(3,962 |
) |
|
$ |
(14,422 |
) |
|
$ |
(14,712 |
) |
|
$ |
(12,089 |
) |
|
$ |
(3,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic & diluted
|
|
$ |
(0.03 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.04 |
) |
Pro forma basic & diluted
|
|
$ |
(0.21 |
) |
|
$ |
(0.76 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.55 |
) |
|
$ |
(0.14 |
) |
Note that the above pro forma disclosures are provided for 2004,
2003 and 2002 because employee share options were not accounted
for using the fair-value method during those periods.
Disclosures for 2005 are presented because employee share
options were not accounted for using the fair-value method
during the first six months of 2005. When we present our
financial statements for 2006, it will present pro forma
disclosures only for 2005 and 2004 because share-based payments
will have been accounted for under Statement 123(R)s
fair-value method for all of 2006.
In accordance with Statement 123(R), the fair value of each
option grant was estimated as of the grant date using the
Black-Scholes option pricing model with the following
assumptions used for grants:
|
|
|
|
|
|
|
|
|
|
|
Three and nine | |
|
|
months ended | |
|
|
September 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Expected life in years
|
|
|
4 |
|
|
|
4 |
|
Dividend per share
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
70.0 |
% |
|
|
76.2 |
% |
Risk-free interest rate
|
|
|
3.5 |
% |
|
|
3.5 |
% |
In accordance with Statement 123(R), we used historical and
empirical data to assess different forfeiture rates for three
different groups of employees. We must reassess forfeiture rates
when deemed
51
necessary and we must calibrate actual forfeiture behavior to
what has already been recorded. For the three month period
ending September 30, 2005, we had three groups of employees
whose behavior was significantly different than those of other
groups, therefore we estimated different forfeiture rates for
each group.
Prospective compensation expense was calculated using a
bi-nomial or lattice model with a volatility rate of 75%, a risk
free rate of 3.5% and a term of 4 years for options granted
subsequent to June 30, 2005. The volatility rate was
derived by examining historical share price behavior and
assessing managements expectations of share price behavior
during the term of the option.
The concepts that underpin lattice models and the
Black-Scholes-Merton formula are the same, but the key
difference between a lattice model and a closed-form model such
as the Black-Scholes-Merton formula is the flexibility of the
former. A lattice model can explicitly use dynamic assumptions
regarding the term structure of volatility, dividend yields, and
interest rates. Further, a lattice model can incorporate
assumptions about how the likelihood of early exercise of an
employee stock option may increase as the intrinsic value of
that option increases or how employees may have a high
propensity to exercise options with significant intrinsic value
shortly after vesting. Because of the versatility of lattice
models, we believe that we can provide a more accurate estimate
of an employee share options fair value than an estimate
based on a closed-form Black-Scholes-Merton formula.
We account for shares issued to non-employees in accordance with
the provisions of SFAS No. 123(R) and
EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods and Services.
52
The following table describes our pro forma statement of
consolidated operations and EBITDA (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, | |
|
|
| |
|
|
|
|
2005 | |
|
|
|
2004 | |
|
|
2005 | |
|
|
|
Consolidated | |
|
2004 | |
|
|
|
Consolidated | |
|
|
Spark | |
|
2005 | |
|
Before | |
|
Spark | |
|
2004 | |
|
Before | |
|
|
Networks | |
|
Share-Based | |
|
Share-Based | |
|
Networks | |
|
Share-Based | |
|
Share-Based | |
|
|
Consolidated(1) | |
|
Compensation(2) | |
|
Compensation | |
|
Consolidated(1)(4) | |
|
Compensation(2)(4) | |
|
Compensation(4) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues
|
|
$ |
48,925 |
|
|
$ |
|
|
|
$ |
48,925 |
|
|
$ |
48,000 |
|
|
$ |
|
|
|
$ |
48,000 |
|
Direct marketing expenses
|
|
|
18,352 |
|
|
|
|
|
|
|
18,352 |
|
|
|
24,612 |
|
|
|
|
|
|
|
24,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
30,573 |
|
|
|
|
|
|
|
30,573 |
|
|
|
23,388 |
|
|
|
|
|
|
|
23,388 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
|
758 |
|
|
|
10 |
|
|
|
748 |
|
|
|
2,060 |
|
|
|
128 |
|
|
|
1,932 |
|
|
Customer service
|
|
|
1,787 |
|
|
|
22 |
|
|
|
1,765 |
|
|
|
2,601 |
|
|
|
|
|
|
|
2,601 |
|
|
Technical operations
|
|
|
4,848 |
|
|
|
168 |
|
|
|
4,680 |
|
|
|
5,157 |
|
|
|
22 |
|
|
|
5,135 |
|
|
Product development
|
|
|
2,949 |
|
|
|
124 |
|
|
|
2,825 |
|
|
|
1,376 |
|
|
|
|
|
|
|
1,376 |
|
|
General and administrative
|
|
|
20,013 |
|
|
|
1,000 |
|
|
|
19,013 |
|
|
|
21,603 |
|
|
|
1,012 |
|
|
|
20,591 |
|
|
Amortization of intangible assets other than goodwill
|
|
|
848 |
|
|
|
|
|
|
|
848 |
|
|
|
670 |
|
|
|
|
|
|
|
670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31,203 |
|
|
|
1,324 |
|
|
|
29,879 |
|
|
|
33,467 |
|
|
|
1,162 |
|
|
|
32,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(630 |
) |
|
|
(1,324 |
) |
|
|
694 |
|
|
|
(10,079 |
) |
|
|
(1,162 |
) |
|
|
(8,917 |
) |
Interest (income) and other expenses, net
|
|
|
285 |
|
|
|
|
|
|
|
285 |
|
|
|
(14 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income
|
|
|
(915 |
) |
|
|
(1,324 |
) |
|
|
409 |
|
|
|
(10,065 |
) |
|
|
(1,162 |
) |
|
|
(8,903 |
) |
Income taxes
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(1,035 |
) |
|
$ |
(1,324 |
) |
|
$ |
289 |
|
|
$ |
(10,066 |
) |
|
$ |
(1,162 |
) |
|
$ |
(8,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
112 |
|
|
|
|
|
|
|
112 |
|
|
|
(14 |
) |
|
|
|
|
|
|
(14 |
) |
Income taxes
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Depreciation
|
|
|
2,710 |
|
|
|
|
|
|
|
2,710 |
|
|
|
2,208 |
|
|
|
|
|
|
|
2,208 |
|
Amortization of intangible assets
|
|
|
848 |
|
|
|
|
|
|
|
848 |
|
|
|
670 |
|
|
|
|
|
|
|
670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
$ |
2,755 |
|
|
$ |
(1,324 |
) |
|
$ |
4,079 |
|
|
$ |
(7,201 |
) |
|
$ |
(1,162 |
) |
|
$ |
(6,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reported in accordance with generally accepted accounting
principles (GAAP). |
|
(2) |
We believe it is useful in measuring our operations to exclude
share-based compensation expense, which is a non-cash charge
recorded in our income statements for the first time in the
quarter ended September 30, 2005 as a result of the
implementation of SFAS 123(R). Using the non-GAAP measure limits
the users ability to judge true expenses of our company in
the current period. However, traditionally investors and
analysts using financial information discount GAAP operating
results to provide a better picture of the cash generating
potential of an company. To avoid the limitation, management
provides the GAAP measure in all of its financial information
other than the information listed in the chart above. We believe
that the non-GAAP measure provides useful information to
management and investors regarding how the expenses associated
with the application of SFAS 123(R) are reflected on the
statements of operations and facilitates comparisons to our
historical operating results. Our management uses this
information internally for reviewing the financial results,
forecasting and budgeting. |
|
(3) |
EBITDA is defined as earnings before interest, taxes,
depreciation and amortization. EBITDA should not be construed as
a substitute for net income (loss) or net cash provided by (used
in) operating activities (all as determined in accordance with
GAAP) for the purpose of analyzing our operating performance,
financial position and cash flows, as EBITDA is not defined by
GAAP. We utilize EBITDA as a financial measure because
management believes that investors find it to be a useful tool
to perform more meaningful comparisons of past, present and
future operating results and as a means to evaluate the results
of core on-going operations. We believe it is a complement to
net income and other GAAP financial performance measures. |
|
(4) |
For the purposes of this and all future filings, prior period
classification of share-based compensation was reclassified to
conform to current period classification. |
53
Segment Reporting
We divide our business into three operating segments:
(1) the JDate segment, which consists of our JDate.com Web
site and its co-branded Web sites, (2) the AmericanSingles
segment, which consists of our AmericanSingles.com Web site and
its co-branded Web sites, and (3) the Other Businesses
segment, which consists of all of our other Web sites and
businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
8,372 |
|
|
$ |
16,091 |
|
|
$ |
23,820 |
|
|
$ |
17,623 |
|
|
$ |
19,161 |
|
|
AmericanSingles
|
|
|
6,644 |
|
|
|
19,253 |
|
|
|
35,224 |
|
|
|
26,584 |
|
|
|
22,526 |
|
|
Other Businesses
|
|
|
1,336 |
|
|
|
1,597 |
|
|
|
6,008 |
|
|
|
3,793 |
|
|
|
7,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,352 |
|
|
$ |
36,941 |
|
|
$ |
65,052 |
|
|
$ |
48,000 |
|
|
$ |
48,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Marketing Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
224 |
|
|
$ |
739 |
|
|
$ |
1,740 |
|
|
$ |
1,152 |
|
|
$ |
2,110 |
|
|
AmericanSingles
|
|
|
3,970 |
|
|
|
15,887 |
|
|
|
24,954 |
|
|
|
20,288 |
|
|
|
11,570 |
|
|
Other Businesses
|
|
|
1,202 |
|
|
|
1,769 |
|
|
|
4,546 |
|
|
|
3,172 |
|
|
|
4,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,396 |
|
|
$ |
18,395 |
|
|
$ |
31,240 |
|
|
$ |
24,612 |
|
|
$ |
18,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
8,148 |
|
|
$ |
15,352 |
|
|
$ |
22,080 |
|
|
$ |
16,471 |
|
|
$ |
17,051 |
|
|
AmericanSingles
|
|
|
2,674 |
|
|
|
3,366 |
|
|
|
10,270 |
|
|
|
6,296 |
|
|
|
10,956 |
|
|
Other Businesses
|
|
|
134 |
|
|
|
(172 |
) |
|
|
1,462 |
|
|
|
621 |
|
|
|
2,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,956 |
|
|
$ |
18,546 |
|
|
$ |
33,812 |
|
|
$ |
23,388 |
|
|
$ |
30,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Business Metrics
We regularly review certain operating metrics in order to
evaluate the effectiveness of our operating strategies and
monitor the financial performance of our business. The key
business metrics that we utilize include the following:
|
|
|
|
|
Average Paying Subscribers: Paying subscribers are
defined as individuals who have paid a monthly fee for access to
communication and Web site features beyond those provided to our
members. Average paying subscribers for each month are
calculated as the sum of the paying subscribers at the beginning
and the end of the month, divided by two. Average paying
subscribers for periods longer than one month are calculated as
the sum of the average paying subscribers for each month,
divided by the number of months in such period. |
|
|
|
Average Monthly Net Revenue per Paying Subscriber:
Average monthly net revenue per paying subscriber represents the
total net subscriber revenue for the period divided by the
number of average paying subscribers for the period, divided by
the number of months in the period. |
|
|
|
Direct Subscriber Acquisition Cost: Direct
subscriber acquisition cost is defined as total direct marketing
costs divided by the number of new paying subscribers during the
period. This represents the average cost of acquiring a new
paying subscriber during the period. |
|
|
|
Monthly Subscriber Churn: Monthly subscriber churn
represents the ratio expressed as a percentage of (i) the
number of paying subscriber cancellations during the period
divided by the number of average paying subscribers during the
period and (ii) the number of months in the period. |
54
Unaudited selected statistical information regarding our key
operating metrics for the years ended December 31, 2002,
2003, and 2004 and the nine month periods ended
September 30, 2005 and 2004 is shown in the table below.
The references to Other Businesses in this table
indicate metrics data for our Other Businesses segment,
excluding travel and events. Our Other Businesses
segment includes all MingleMatch Web sites, along with
JDate.co.il (Israel), Cupid (Israel), Date.ca (Canada),
Matchnet.co.uk (United Kingdom), Matchnet.de (Germany),
Matchnet.com.au (Australia), Glimpse.com (United States) and
CollegeLuv.com (United States). At the time of acquisition in
May 2005, MingleMatch had approximately 23,000 average paying
subscribers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Average Paying Subscribers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
|
27.7 |
|
|
|
50.7 |
|
|
|
69.8 |
|
|
|
70.3 |
|
|
|
69.4 |
|
|
AmericanSingles
|
|
|
29.5 |
|
|
|
71.5 |
|
|
|
132.5 |
|
|
|
133.5 |
|
|
|
109.8 |
|
|
Other Businesses
|
|
|
1.5 |
|
|
|
3.6 |
|
|
|
23.8 |
|
|
|
21.4 |
|
|
|
39.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58.7 |
|
|
|
125.8 |
|
|
|
226.1 |
|
|
|
225.2 |
|
|
|
218.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Monthly Net Revenue per Paying Subscriber:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
25.20 |
|
|
$ |
26.44 |
|
|
$ |
28.42 |
|
|
|
27.88 |
|
|
|
30.69 |
|
|
AmericanSingles
|
|
|
18.77 |
|
|
|
22.43 |
|
|
|
22.16 |
|
|
|
22.43 |
|
|
|
22.87 |
|
|
Other Businesses
|
|
|
33.17 |
|
|
|
23.72 |
|
|
|
16.75 |
|
|
|
16.44 |
|
|
|
17.74 |
|
|
All Segments
|
|
|
22.17 |
|
|
|
24.09 |
|
|
|
23.53 |
|
|
|
23.53 |
|
|
|
24.36 |
|
Direct Subscriber Acquisition Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
2.90 |
|
|
$ |
4.39 |
|
|
$ |
8.09 |
|
|
|
7.27 |
|
|
|
12.89 |
|
|
AmericanSingles
|
|
|
38.68 |
|
|
|
45.70 |
|
|
|
43.29 |
|
|
|
45.39 |
|
|
|
35.42 |
|
|
Other Businesses
|
|
|
78.43 |
|
|
|
80.32 |
|
|
|
34.74 |
|
|
|
34.73 |
|
|
|
35.17 |
|
|
All Segments
|
|
|
25.56 |
|
|
|
33.84 |
|
|
|
33.85 |
|
|
|
35.25 |
|
|
|
28.67 |
|
Monthly Subscriber Churn:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
|
18.2 |
% |
|
|
22.4 |
% |
|
|
25.8 |
% |
|
|
25.7 |
|
|
|
26.2 |
|
|
AmericanSingles
|
|
|
24.3 |
|
|
|
32.1 |
|
|
|
35.6 |
|
|
|
35.4 |
|
|
|
36.7 |
|
|
Other Businesses
|
|
|
32.6 |
|
|
|
33.4 |
|
|
|
26.8 |
|
|
|
25.4 |
|
|
|
24.3 |
|
|
All Segments
|
|
|
21.6 |
|
|
|
28.2 |
|
|
|
31.7 |
|
|
|
31.4 |
|
|
|
31.2 |
|
For the three years ended December 31, 2004, the larger
increase in average paying subscribers for AmericanSingles as
compared to the increase for JDate was primarily due to JDate
possessing a larger portion of its market, while AmericanSingles
possessed a smaller portion of its market and its average paying
subscribers has, as a result, grown more quickly. For the nine
month period ending September 30, 2005, the larger decrease
in average paying subscribers for AmericanSingles as compared to
the decrease for JDate was primarily due to a corporate
initiative to reduce marketing spending related to
AmericanSingles and increase spending related to JDate.
We have embarked on increases in marketing spending for JDate,
primarily in the area of off-line marketing. Such marketing
initiatives are targeted at brand building and name recognition.
The marketing programs most prominently include print and
billboard advertising. We include the costs of these marketing
programs in the direct marketing expense for the JDate segment.
As these are new marketing initiatives and spending that we have
not previously undertaken, it has resulted in an increase in our
customer acquisition cost for JDate. Even after these increased
spending programs, the
55
cost of customer acquisition for JDate is significantly lower
than for our other segments due to the strong brand perception
and word of mouth reputation of JDate. Our recent marketing
initiatives are targeted specifically at maintaining that strong
word of mouth name reputation and brand recognition.
We expect the cost of customer acquisition for JDate to remain
below the acquisition cost for our other segments.
AmericanSingles and our other Web sites operate in much more
competitive environments, and therefore we generally must spend
more on marketing to attract new subscribers.
Monthly subscriber churn rate is somewhat independent from an
increasing number of subscribers opting for multi-month
contracts. During a period where the number of total new
subscribers and subscribers canceling are both increasing, but
more new subscribers are choosing longer term contracts, then
churn rate can increase while average revenue per subscriber
falls. We are constantly striving to improve our Web sites to
retain our existing subscribers. However, we do not forecast
churn rates, and lack the ability to accurately do so.
Results of Operations
The following is a more detailed discussion of our financial
condition and results of operations for the periods presented.
The following table presents our historical operating results as
a percentage of net revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Direct marketing expenses
|
|
|
33.0 |
|
|
|
49.8 |
|
|
|
48.0 |
|
|
|
51.3 |
|
|
|
37.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
67.0 |
|
|
|
50.2 |
|
|
|
52.0 |
|
|
|
48.7 |
|
|
|
62.5 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
|
2.5 |
|
|
|
2.7 |
|
|
|
4.0 |
|
|
|
4.3 |
|
|
|
1.5 |
|
|
Customer service
|
|
|
7.4 |
|
|
|
6.9 |
|
|
|
5.2 |
|
|
|
5.4 |
|
|
|
3.7 |
|
|
Technical operations
|
|
|
9.7 |
|
|
|
12.1 |
|
|
|
11.0 |
|
|
|
10.8 |
|
|
|
9.9 |
|
|
Product development
|
|
|
3.7 |
|
|
|
2.6 |
|
|
|
3.1 |
|
|
|
2.9 |
|
|
|
6.0 |
|
|
General and administrative
|
|
|
48.8 |
|
|
|
50.2 |
|
|
|
45.1 |
|
|
|
44.9 |
|
|
|
41.0 |
|
|
Amortization of intangible assets other than goodwill
|
|
|
3.2 |
|
|
|
1.5 |
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.7 |
|
|
Impairment of long-lived assets and goodwill
|
|
|
|
|
|
|
4.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
75.3 |
|
|
|
80.1 |
|
|
|
70.0 |
|
|
|
69.7 |
|
|
|
63.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8.3 |
) |
|
|
(29.9 |
) |
|
|
(18.0 |
) |
|
|
(21.0 |
) |
|
|
(1.3 |
) |
Interest (income) and other expenses, net
|
|
|
(5.1 |
) |
|
|
(0.5 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(3.2 |
) |
|
|
(29.4 |
) |
|
|
(17.9 |
) |
|
|
(21.0 |
) |
|
|
1.9 |
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(3.2 |
)% |
|
|
(29.4 |
)% |
|
|
(17.9 |
)% |
|
|
(21.0 |
)% |
|
|
(2.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the purposes of this and all future filings, prior period
classification of share-based compensation was reclassified to
conform to current period classification.
56
Nine Months Ended September 30, 2005 Compared to Nine
Months Ended September 30, 2004.
Business Metrics
For the nine months ended September 30, 2005, average
paying subscribers for the JDate segment decreased 1.3% to
69,400 compared to 70,300 for the same period last year. For the
nine months ended September 30, 2005, average paying
subscribers for the AmericanSingles segment decreased 17.8% to
109,800 compared to 133,500 for the same period last year. For
the nine months ended September 30, 2005, average paying
subscribers for Web sites in our Other Businesses segment
increased 84.6% to 39,500 compared to 21,400 for the same period
last year. The decrease in average paying subscribers for the
nine months ended September 30, 2005 for JDate is due to a
maturing of the service after several years of growth, as well
as consolidation of the subscriber base to a size consistent
with demand for the service based on a price increase introduced
in 2004. The number of average paying subscribers for JDate in
the third quarter of 2005 was higher than in the second quarter
of 2005 and thus we expect that this size consolidation is
largely complete and further declines from the number of average
paying subscribers for the nine months ended September 30,
2005 are not expected. The decrease in average paying
subscribers for AmericanSingles is due to a decline in the total
marketing expenditures in 2005 compared to 2004. In the second
quarter and third quarter of 2005, we have stabilized our
marketing spending rate for AmericanSingles, and accordingly we
expect that the number of average paying subscribers for
American Singles will begin to stabilize as well. The increase
in average paying subscribers for our Other Businesses segment
is due primarily to the acquisitions of MingleMatch in May 2005
and the launch of our Cupid website in Israel, as well as
increases in our international Web sites which began operations
in early 2004.
For the nine months ended September 30, 2005, average
monthly net revenue per paying subscriber for the JDate segment
increased 10.0% to $30.69 compared to $27.88 for the nine months
ended September 30, 2004. The increase was due to an
increase in net revenue associated with new subscriptions at a
higher price point. We believe JDate, which experienced more
average daily visitors and more page views than any other
religious online personals service for the first nine months of
2005 according to a report by comScore Media Metrix, is the
market leader for online personals in the Jewish singles market
and a market leader in raising our price for this service in
2004. We believe JDate will continue to be the market leader for
online personals in the Jewish singles market, and thus we
expect that we will continue to be a pricing leader in that
market. For the nine months ended September 30, 2005,
average monthly net revenue per paying subscriber for the
AmericanSingles segment increased 2.0% to $22.87 from $22.43 for
the nine months ended September 30, 2004. The increase was
due to a price increase for AmericanSingles implemented in June
2005. We believe AmericanSingles, which was ranked as the third
largest provider of online personals services in the United
States in terms of total unique visitors for the first nine
months of 2005 according to comScore Media Metrix, is a leading
service in the general online personals market but does not have
a dominant position. Our price increase in June 2005 followed
price increases at competing Web sites. We expect we will
continue to have to consider competitive pressures in setting
pricing for AmericanSingles. For the nine months ended
September 30, 2005, average monthly net revenue per paying
subscriber for Web sites in our Other Businesses segment
increased 7.9% to $17.74, compared to $16.44 for the nine months
ended September 30, 2004. The increase was primarily due to
the addition of MingleMatch during the second quarter of 2005.
For the nine months ended September 30, 2005, direct
subscriber acquisition cost for JDate increased 77.2% to $12.89,
compared to $7.27 for the same period in 2004. The increase in
direct subscriber acquisition costs for JDate is due to new
marketing initiatives for the JDate site in order to attract new
subscribers. For the nine months ended September 30, 2005,
direct subscriber acquisition costs for AmericanSingles
decreased 22.0% to $35.42, compared to $45.39 for the same
period ended September 30, 2004 due to a decrease in
marketing expenditures associated with the AmericanSingles Web
site as well as increased efficiency of marketing spending. For
the nine months ended September 30, 2005, direct subscriber
acquisition cost for the Web sites in our Other Businesses
57
segment increased 1.2% to $35.17, compared to $34.73 for the
same period of 2004. The increase in direct subscriber
acquisition costs for our Other Businesses segment in the first
nine months of 2005 is due to an increased marketing effort to
attract new subscribers to the Web sites that were launched in
early 2004.
For the nine months ended September 30, 2005, monthly
subscriber churn for JDate increased slightly to 26.2%, compared
to 25.7% for the same period in 2004. For the nine months ended
September 30, 2005, monthly subscriber churn for
AmericanSingles increased to 36.7%, compared to 35.4% for the
same period in 2004. For the nine months ended
September 30, 2005, monthly subscriber churn for the Web
sites in our Other Businesses segment decreased to 24.3%,
compared with 25.4% for the same period in 2004. The decrease in
the churn rate in the third quarter of 2005 is due to the
addition of MingleMatch.
Net Revenues
Net revenues for JDate increased 8.7% to $19.2 million for
the nine months ended September 30, 2005 compared to
$17.6 million in 2004. The increase in net revenues for
JDate is due to an increase in pricing in mid-2004 which
contributed to increased revenues despite the decline in average
paying subscribers discussed above. Net revenues for
AmericanSingles decreased 15.3% to $22.5 million for the
nine months ended September 30, 2005, compared to
$26.6 million for the same period in 2004. The decrease in
AmericanSingles net revenue is due to the decrease in average
paying subscribers as discussed above. Net revenues for our
Other Businesses segment increased 90.8% to $7.2 million
for the nine months ended September 30, 2005 compared to
$3.8 million in 2004. The increase in net revenues for our
Other Businesses is attributed to the acquisition of MingleMatch
and the growth of our international Web sites of 55% which were
launched in early 2004.
Direct Marketing Expenses
Direct marketing expenses for JDate increased 83.2% to
$2.1 million for the nine months ended September 30,
2005 compared to $1.2 million in 2004. The increase in
marketing expenses was due to new marketing initiatives for
JDate. Direct marketing expenses for AmericanSingles decreased
43.0% to $11.6 million for the nine months ended
September 30, 2005 compared to $20.3 million in the
same period last year. The decrease in AmericanSingles marketing
was due to a corporate initiative to reduce marketing spending
related to the site. Direct marketing expenses for our Web sites
in our Other Businesses segment increased 47.3% to
$4.7 million for the nine months ended September 30,
2005 compared to $3.2 million in the first nine months of
2004. The increase in spending related to our Web sites in our
Other Businesses segment is attributed to the acquisition of
MingleMatch and additional advertising in order to generate
traffic to our newer international Web sites which commenced
operations early in 2004.
Operating Expenses
Operating expenses consist primarily of indirect marketing,
customer service, technical operations, product development and
general and administrative expenses. Operating expenses
decreased 6.8% to $31.2 million in the first nine months of
2005 compared to $33.5 million in the same period in 2004.
Stated as a percentage of net revenues, operating expenses
decreased to 63.8% in the first nine months of 2005 compared to
69.7% in the same period last year. The decrease is due
primarily to a decrease in indirect marketing expenses as
discussed below.
Indirect Marketing. Indirect marketing expenses consist
primarily of salaries for our sales and marketing personnel and
other associated costs such as public relations. Indirect
marketing expenses decreased 63.2% to $758,000 in the first nine
months of 2005 compared to $2.1 million in the first nine
months of 2004. Stated as a percentage of net revenues, indirect
marketing expenses decreased to 1.5% in the first nine months of
2005 compared to 4.3% in the same period in 2004. The decrease is
58
due to a decrease in headcount in our marketing department, and
the termination of the Chief Marketing Officer in the fourth
quarter of 2004 who has not been replaced offset by share-based
compensation as a result of adoption of SFAS 123(R) of
$10,000 in the third quarter of 2005.
Customer Service. Customer service expenses consist
primarily of costs associated with our member services center.
Customer services expenses decreased 31.3% to $1.8 million
in the first nine months of 2005 compared to $2.6 million
in the first nine months of 2004. Stated as a percentage of net
revenues, customer service expenses decreased to 3.7% in the
first nine months ended September 30, 2005 compared to 5.4%
in the same period in the prior year. The decrease is due to a
decrease in headcount from 2004 to 2005 offset by share based
compensation as a result of adoption of SFAS 123(R) of
$22,000 in the third quarter of 2005. During the first nine
months of 2004, we had higher staffing in our member services
center in order to better serve our customers due to the launch
of new Web sites and new platforms. During the remainder of
2004, we worked to increase our efficiency in handling our call
volume, and therefore reduced our headcount accordingly by the
first nine months of 2005.
Technical Operations. Technical operations expenses
consist primarily of the people and systems necessary to support
our network, Internet connectivity and other data and
communication support. Technical operations expenses decreased
6.8% to $4.8 million in the first nine months of 2005
compared to $5.2 million in 2004. The decrease is primarily
due to a reduction in headcount as well as a restructuring of
workforce which resulted in a decrease of salaries expense. This
reduction was partially offset by an increase in depreciation
expense associated with the increase in hardware to support our
network and an increase in capitalized software amortization
associated with redesigning our operating platform as well as an
increase in share based compensation as a result of adoption of
SFAS 123(R) of $168,000 in the third quarter of 2005. As a
percentage of net revenues, technical operations decreased to
9.9% in the nine months ended September 30, 2005 compared
to 10.8% in the same period last year.
Product Development. Product development expenses consist
primarily of costs incurred in the development, creation and
enhancement of our Web sites and services. Product development
expenses increased 114.3% to $2.9 million in the first nine
months of 2005 compared to $1.4 million in 2004. As a
percentage of net revenues, product development expenses
increased to 6.0% for the nine months ended September 30,
2005 compared to 2.9% in 2004. The increase is due primarily to
an increase in headcount associated with pursuing new business
opportunities as well as improving the infrastructure of our
existing businesses, as well as share based compensation, as a
result of adoption of SFAS 123(R) of $124,000 in the third
quarter of 2005.
General and Administrative. General and administrative
expenses consist primarily of corporate personnel-related costs,
professional fees, credit card processing fees, and occupancy
and other overhead costs. General and administrative expenses
decreased 7.2% to $20.0 million in the first nine months of
2005 compared to $21.6 million in the same period in 2004.
The decrease in general and administrative expenses is due
primarily to accrued legal expenses and capitalized
IPO costs which were expensed in the third quarter of 2004.
The decrease was offset by an increase in consulting services as
well as an increase in credit card processing fees, including
charges and fines, and an increase in share based compensation
expensed in the third quarter 2005 of $1.1 million as a
result of adoption of SFAS 123(R). Stated as a percentage
of net revenues, general and administrative expenses for the
nine months ended September 30, 2005 and 2004 was 41.0% and
44.9%, respectively.
Share-Based Compensation. Share-based compensation
resulted from the issuance of warrants and options that were
treated as variable under accounting principles which, on a
quarterly basis, required us to recognize an increase or
decrease in compensation expense based on the then fair-value of
the subject securities. This expense item existed prior to the
adoption of SFAS 123(R) and should not be confused with the
same. Share-based compensation decreased 107.3% to $(85,000) in
the first nine months of 2005 compared to $1.2 million in
the first nine months of 2004. The difference in expense
59
is due to the fact that the price per share in 2005 is lower
than in 2004 and the majority of options and warrants which were
considered variable in 2004 were fully valued and accounted for
in 2004 and as a result did not impact the results of the first
nine months of 2005. For the purposes of this and all future
filings, prior period classification of share-based compensation
was reclassified to conform to current period classification.
Amortization of Intangible Assets Other Than Goodwill.
Amortization expenses consist primarily of amortization of
intangible assets related to the MingleMatch acquisition as well
as previous acquisitions, primarily SocialNet and PointMatch.
Amortization expense increased 26.6% to $848,000 in the first
nine months of 2005 compared to $670,000 in the first nine
months of 2004. The increase is due to the amortization of
intangible assets resulting from the MingleMatch acquisition in
the second quarter of 2005 partially offset by intangibles
related to older acquisitions being fully amortized in the first
quarter of 2005.
Interest Income/Loss and Other Expenses, Net. Interest
income/ loss and other expenses consist primarily of interest
expense associated with notes payable, interest income from
temporary investments in interest bearing accounts and
marketable securities and income on our investments in
non-controlled affiliates. Expenses increased to $285,000 for
the nine months ended September 30, 2005 from income of
$14,000 for the same period in 2004. The increase was due
primarily to recognition of imputed interest expense on the
notes due to MingleMatch, losses upon liquidation of marketable
securities and loss from Duplo recognized under the equity
method of accounting.
Net Loss. For the nine months ended September 30,
2005, net loss consists primarily of compensation expense
related to the adoption of SFAS 123(R) of
$1.4 million, increased amortization expense related to the
purchase of MingleMatch of $675,000, partially offset by a
decrease in indirect marketing costs of $1.1 million.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Business Metrics
Average paying subscribers for JDate increased 37.7%, to
approximately 69,800 for the year ended December 31, 2004
from approximately 50,700 for the year ended December 31,
2003. Average paying subscribers for AmericanSingles increased
85.3%, to approximately 132,500 for the year ended
December 31, 2004 from approximately 71,500 for the year
ended December 31, 2003. Average paying subscribers for Web
sites in our Other Businesses segment increased to approximately
23,800 for the year ended December 31, 2004 from
approximately 3,600 for the year ended December 31, 2003.
The increase in paying subscribers for all of our segments
corresponds to the increased marketing expenditures for all of
our segments, along with improved marketing efficiency, such
that greater marketing expenditures were made without
significant increases in our average subscriber acquisition
costs. The larger increase in average paying subscribers for
AmericanSingles as compared to the increase for JDate was
primarily due to JDate possessing a larger portion of its
market. The increase in paying subscribers in our Other
Businesses segment was due to growth in our international Web
sites, including PointMatch, which was acquired at the beginning
of 2004, and our Web sites in the United Kingdom and Canada.
Average monthly net revenue per paying JDate subscriber
increased 7.5%, to $28.42 for the year ended December 31,
2004 from $26.44 for the year ended December 31, 2003.
Average monthly net revenue per paying AmericanSingles
subscriber decreased 1.2% to $22.16 for the year ended
December 31, 2004 from $22.43 for the year ended
December 31, 2003. Average monthly net revenue per paying
subscriber for Web sites in our Other Businesses segment
decreased 29.4%, to $16.75 for the year ended December 31,
2004 from $23.72 for the year ended December 31, 2003. The
increase for JDate was primarily due to a price increase which
was put into effect in January 2004. The decrease for
AmericanSingles was due to an increase in the proportion of
subscribers paying for multi-month subscriptions, for which they
receive a discount on the monthly rate compared to the single-
60
month subscription price. The decrease for Web sites in our
Other Businesses segment was primarily due to the growth of new
Web sites with lower subscription prices than those Web sites
that represented our Other Businesses segment in 2003.
Direct subscriber acquisition cost for JDate increased 84.3%, to
$8.09 in 2004 from $4.39 in 2003. Direct subscriber acquisition
cost for AmericanSingles decreased 5.3%, to $43.29 in 2004 from
$45.70 in 2003. Direct subscriber acquisition cost for the Web
sites in our Other Businesses segment decreased 56.7%, to $34.74
in 2004 from $80.32 in 2003. The increase in direct subscriber
acquisition cost for JDate was due primarily to the cost of new
marketing initiatives, including offline billboard campaigns
designed to solidify and expand JDates brand awareness.
Despite this increase, the cost of customer acquisition for
JDate is significantly lower than for our other segments due to
the strong brand perception and name recognition for and word of
mouth reputation for JDate. AmericanSingles and our other Web
sites operate in much more competitive environments, and must
spend more on marketing to attract new subscribers. The decrease
in direct subscriber acquisition cost for AmericanSingles and
the Web sites in our Other Businesses segment was due improved
marketing efficiency, such that greater marketing expenditures
were made without significant increases in our average
subscriber acquisition costs. For AmericanSingles, we began to
put a greater emphasis on pay for performance advertising
models, such as cost per subscription (CPS) and cost per
acquisition (CPA) arrangements, where we are better able to
monitor and manage our cost of subscriber acquisition.
Monthly subscriber churn for JDate increased to 25.8% for the
year ended December 31, 2004 from 22.4% for the year ended
December 31, 2003. Monthly subscriber churn for
AmericanSingles increased to 35.6% for the year ended
December 31, 2004 from 32.1% for the year ended
December 31, 2003. Monthly subscriber churn for Web sites
in our Other Businesses segment decreased to 26.8% for the year
ended December 31, 2004 from 33.4% for the year ended
December 31, 2003. The increase in monthly subscriber churn
for JDate and AmericanSingles was due primarily to
implementation in late 2003 of the
pay-to-respond feature
which required members to upgrade to paying subscriber status
before they could respond to emails from other paying
subscribers. Members who subscribe specifically to utilize the
pay-to-respond feature
are less likely to renew their subscriptions than those who
subscribe to initiate communications. The decrease in monthly
subscriber churn for the Web sites in our Other Business segment
was due to growth and maturity of those businesses. Some of the
Web sites in our Other Businesses segment were launched in late
2003, including our sites in Canada and the UK. During the early
startup period for a Web site which requires a critical mass of
members in order to attract new members, churn rates are higher.
As subscribers see the same other members of the community
repeatedly, they are more prone to quit the service. As the Web
site community grows, churn rates typically decline as
subscribers take longer to feel they have exhausted their
possibilities within the community.
Net Revenues
Substantially all of our net revenues are derived from
subscription fees. The remainder of our net revenues, accounting
for less than 2% of net revenues for the years ended
December 31, 2004 and 2003, are attributable to certain
promotional events. Revenues are presented net of credits and
credit card chargebacks. We expect net revenues from promotional
events to comprise an even smaller percentage of net revenues in
the future. We also expect to generate revenues from advertising
on our Web sites in the future. Our subscriptions are offered in
durations of one, three, six and twelve months. Plans with
durations of longer than one month are available at discounted
rates. Most subscription programs renew automatically for
subsequent periods until subscribers terminate them.
Net revenues for JDate increased 48.0%, to $23.8 million
for the year ended December 31, 2004 from
$16.1 million for the year ended December 31, 2003.
Net revenues for AmericanSingles increased 83.0%, to
$35.2 million for the year ended December 31, 2004,
compared to $19.3 million for the year ended
December 31, 2003. Net revenues for our Other Businesses
segment increased 276.2%, to
61
$6.0 million for the year ended December 31, 2004
compared to $1.6 million for the year ended
December 31, 2003. The increase in JDates net
revenues is primarily attributable to an increase in
JDates monthly subscription price during the first quarter
of 2004. The increase in net revenues for AmericanSingles is
primarily due to an increase in subscriptions, as discussed
above. The increase in net revenues for our Other Businesses
segment is due primarily to the growth of our businesses in
Israel, whose growth was aided by our acquisition of Point Match
Ltd. in the first quarter of 2004, as well as growth in our UK
and Canada Web sites.
Direct Marketing Expenses
Direct marketing expenses primarily consist of advertising costs
and direct costs to obtain new paying subscribers. Direct
marketing expenses for JDate increased 135.5%, to
$1.7 million for the year ended December 31, 2004 from
approximately $739,000 for the year ended December 31,
2003. Direct marketing expenses for AmericanSingles increased
57.1%, to $25.0 million for the year ended
December 31, 2004 compared to $15.9 million for the
year ended December 31, 2003. Direct marketing expenses for
Web sites in our Other Businesses segment increased 157.0%, to
$4.5 million for the year ended December 31, 2004 from
$1.8 million for the year ended December 31, 2003. The
increases for JDate and AmericanSingles are due to an overall
increase in the cost of online advertising, which is our primary
source for advertising, as well as new marketing initiatives for
JDate. In addition, for our American Singles Web site, we
initiated an aggressive marketing program in the second quarter
of 2004. We reduced our marketing for AmericanSingles in
subsequent quarters in 2004 in order to reduce our subscriber
acquisition cost. The cost of customer acquisition for JDate is
significantly lower than for our other segments due to the
strong brand perception and name recognition for and word of
mouth reputation for JDate. AmericanSingles and our other Web
sites operate in much more competitive environments, and must
spend more on marketing to attract new subscribers. For Web
sites in our Other Businesses segment, in addition to the
increase in the cost of online advertising, our direct marketing
expenses also increased because of the additional expenses
associated with the Web site assets acquired in the Point Match
Ltd. acquisition.
As a percentage of revenues, total direct marketing expenses for
JDate increased to 7.3% in 2004 from 4.6% in 2003. The increase
was due to new marketing initiatives for JDate. As a percentage
of revenues, total direct marketing expenses for AmericanSingles
decreased to 70.8% in 2004 from 82.5% in 2003. The decrease was
due to improved marketing efficiency, including greater emphasis
on pay for performance advertising models, such that greater
marketing expenditures were made without significant increases
in our average subscriber acquisition costs. As a percentage of
revenues, total direct marketing expenses for our Other
Businesses segment decreased to 75.7% in 2004 from 110.8% in
2003. The decrease was due to improved marketing efficiency,
including greater emphasis on pay for performance advertising
models, as well as emphasis on making the contribution of Web
sites in this segment a positive number. Overall, for all of our
segments, total direct marketing expenses decreased to 48.0%
from 49.8% for the years ended December 31, 2004 and 2003
respectively.
Operating Expenses
Operating expenses primarily consist of indirect marketing,
customer service, technical operations, product development and
general and administrative expenses. Operating expenses
increased 53.8% to approximately $45.5 million in 2004 from
approximately $29.6 million in 2003. Stated as a percentage
of net revenues, operating expenses decreased to 70.0% for 2004
from 80.1% in 2003. The increase in total dollars was primarily
the result of a higher level of general and administrative
expenses, as well as an increase in indirect marketing and
technical operations as discussed below. The decrease as a
percentage of revenues was primarily the result of economies of
scale in customer service and technical operations costs
required to support an increasing revenue base.
Indirect Marketing. Indirect marketing expenses primarily
consist of salaries for our sales and marketing personnel and
other associated costs such as public relations. Indirect
marketing expenses
62
increased 164.4%, to approximately $2.6 million in 2004
compared to $986,000 in 2003. Stated as a percentage of net
revenues, indirect marketing expenses increased to 4.0% for 2004
from 2.7% in 2003. The increase in total dollars and as a
percentage of net revenues was largely as a result of an
increase in headcount in our marketing department. We expect
these costs to increase in total dollars as we expand our
marketing initiatives but to decrease as a percentage of net
revenues as we add additional paying subscribers.
Customer Service. Customer service expenses primarily
consist of costs associated with our member service center.
Customer service expenses increased 33.2%, to $3.4 million
in 2004 compared to $2.5 million in 2003. Stated as a
percentage of net revenues, customer service expenses decreased
to 5.2% for 2004 from 6.9% in 2003. The increase in total
dollars was largely as a result of an increase in headcount,
which increase was driven by the larger number of members and
paying subscribers. The decrease as a percentage of revenues was
primarily the result of increased efficiency of usage of our
customer service personnel in supporting a larger member and
subscriber base. We expect these costs to continue to increase
in total dollars as we support our increasing base of members
and subscribers but to decrease as a percentage of net revenues
as we add additional paying subscribers.
Technical Operations. Technical operations expenses
primarily consist of the people and systems necessary to support
our network, Internet connectivity and other data and
communication support. Technical operations expenses increased
60.3% to $7.2 million in 2004 from $4.5 million in
2003. Stated as a percentage of net revenues, technical
operations expenses decreased to 11.0% in 2004 from 12.1% in
2003. The increase in total dollars was due to an increase in
headcount necessary to support the growth in the number of
members, paying subscribers and traffic to our Web sites. The
decrease as a percentage of revenues was primarily the result of
economies of scale in headcount required to support a larger
member and subscriber base. We expect technical operations costs
to increase in total dollars with any increase in traffic,
members or paying subscribers but to decrease as a percentage of
net revenues as we add additional paying subscribers.
Product Development. Product development expenses
primarily consist of costs incurred in the development, creation
and enhancement of our Web sites and services. Product
development expenses increased 109.9%, to $2.0 million in
2004 compared to $959,000 in 2003. Stated as a percentage of net
revenues, product development expenses increased to 3.1% in 2004
from 2.6% in 2003. The increase in total dollars and as a
percentage of net revenues was largely as a result of costs
associated with technical enhancements to our Web sites as well
as an increase in headcount necessary to support these
enhancements. We expense these costs as incurred unless they are
required to be capitalized under generally accepted accounting
principles in the United States. In addition to the expenses set
forth above, our capitalized product development costs were
approximately $658,000 and $825,000 in 2004 and 2003,
respectively. The amortization of those costs is included in
this line item. We expect our product development costs to
increase in total dollars as we launch new Web sites and develop
additional features and functionality on our Web sites to
enhance our members experience and satisfaction and
increase the number, and percentage, of members that become
paying subscribers but to remain constant as a percentage of net
revenues as we add additional paying subscribers.
General and Administrative Expenses. General and
administrative expenses primarily consist of corporate
personnel-related costs, professional fees, credit card
processing fees, and occupancy and other overhead costs. General
and administrative expenses increased 57.8%, to
$29.3 million in 2004 from $18.5 million in 2003.
Stated as a percentage of net revenues, general and
administrative expenses decreased to 45.1% in 2004 from 50.2% in
2003. The increase in total dollars was largely as a result of
an increase in hiring people to support our growth, an employee
severance charge of approximately $2.4 million, as well as
expenses of $2.1 million related to the United States
initial public offering of MatchNet, Inc. that was planned for
mid-2004, but which was withdrawn shortly after the related
registration statement was filed in the third quarter of 2004,
as well as one legal settlement resulting in the recognition of
$900,000 in expenses in the third quarter and two legal
settlements resulting in the recognition of $2.1 million in
expenses in the fourth quarter of 2004. The
63
decrease as a percentage of revenues was primarily the result of
economies of scale in supporting a larger member and subscriber
base. We expect these general and administrative expenses,
excluding the above-referenced severance and expenses related to
the withdrawn offering, to increase in total dollars as we
continue to hire additional personnel, and as sales and the
inherent credit card processing fees increase. We also expect
general and administrative expenses to increase in total dollars
due to the anticipated increase in professional fees resulting
from the filing of this registration statement and related
documents and our subsequent obligations as a public reporting
company in the United States. However, we expect general and
administrative expenses, excluding credit card processing fees,
to decrease as a percentage of net revenues as we add additional
paying subscribers.
Share-based Compensation. Share-based compensation
resulted from the issuance of warrants and options that were
treated as variable under accounting principles which, on a
quarterly basis, required us to recognize an increase or
decrease in compensation expense based upon the then-fair value
of the subject securities. Share-based compensation was
approximately $1.7 million in 2004, which is net of
$1.1 million related to the cancellation of certain
warrants and options, compared to $1.9 million in 2003.
Stated as a percentage of net revenues, share-based compensation
decreased to 2.6% in 2004 from 5.1% in 2003. As a result of
recent changes in accounting rules, we expect share-based
compensation expenses to increase, beginning in the third
quarter of 2005, when we will be required to recognize
compensation expense for share options and other share-based
compensation, which expenses we had not been required to
recognize prior to the change in accounting rules. For the
purposes of this and all future filings, prior period
classification of share-based compensation was reclassified to
conform to current period classification.
Amortization of Intangible Assets Other Than Goodwill.
Amortization expenses consist primarily of amortization of
intangible assets related to previous acquisitions, primarily
SocialNet and Point Match. Amortization expenses increased 55.0%
to $860,000 in 2004, compared to $555,000 in 2003. The increase
was primarily due to amortization related to the Point Match
acquisition, which was completed in January 2004.
Impairment of Long-lived Assets. In December 2004, based
on changes in management and reevaluation of existing projects
we determined that certain internally developed software
projects would not be completed. As such, we recorded an
impairment charge of $208,000.
Interest Income and Other Expenses, Net. Interest income
and other expenses, net primarily consist of gain (loss)
associated with temporary investments in interest bearing
accounts and marketable securities. Interest income and other
expenses, net decreased 64.9%, to approximately $66,000 in 2004
from $188,000 in 2003, principally due to foreign exchange
effects.
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002
Business Metrics
Average paying subscribers for JDate increased 83.0% to
approximately 50,700 for the year ended December 31, 2003,
compared to approximately 27,700 for the year ended
December 31, 2002. Average paying subscribers for
AmericanSingles increased 142.4%, to approximately 71,500 for
the year ended December 31, 2003 from approximately 29,500
for the year ended December 31, 2002. Average paying
subscribers for Web sites in our Other Businesses segment
increased 140.0%, to approximately 3,600 for the year ended
December 31, 2003 from approximately 1,500 for the year
ended December 31, 2002. The increase in paying subscribers
across all of our segments is primarily due to increases in the
number of members on our sites. The larger increase in average
paying subscribers for AmericanSingles as compared to the
increase for JDate was primarily due to JDate possessing a
larger portion of its market, while AmericanSingles possessed a
smaller portion of its market and its average paying subscribers
has, as a result, grown more quickly.
64
Average monthly net revenue per paying JDate subscriber
increased 4.9%, to $26.44 in 2003 compared to $25.20 in 2002.
Average monthly net revenue per paying AmericanSingles
subscriber increased 19.5%, to $22.43 in 2003 from $18.77 in
2002. Average monthly net revenue per paying subscriber for Web
sites in our Other Businesses segment decreased 28.5%, to $23.72
in 2003 from $33.17 in 2002. The increase for JDate was due to
an increase in the proportion of subscribers paying a one month
subscription, as opposed to multi-month subscribers, who receive
a lower price per month in exchange for their longer
commitments. The increase in AmericanSingles was primarily due
to a price increase in 2003. The decrease for Web sites in our
Other Businesses segment was primarily due to the growth of new
Web sites with lower subscription prices than those Web sites
that represented our Other Businesses segment in 2002.
Direct subscriber acquisition cost for JDate increased 51.4%, to
$4.39 for 2003 from $2.90 in 2002. Direct subscriber acquisition
cost for AmericanSingles increased 18.1%, to $45.70 in 2003
compared to $38.68 in 2002. Direct subscriber acquisition cost
for the Web sites in our Other Businesses segment increased
2.4%, to $80.32 in 2003 from $78.43 in 2002. The increase in
direct subscriber acquisition cost for all of our segments was
due primarily to an increase in online marketing efforts
designed to drive additional members to our Web sites.
Monthly subscriber churn for JDate increased to 22.4% in 2003
from 18.2% in 2002. Monthly subscriber churn for AmericanSingles
increased to 32.1% in 2003 from 24.3% in 2002. Monthly
subscriber churn for the Web sites in our Other Businesses
segment increased to 33.4% in 2003 from 32.6% in 2002. The
increase in monthly subscriber churn for all of our segments was
primarily due to the introduction, in late 2003, of our
pay-to-respond feature,
which required members to upgrade to paying subscriber status
before they could respond to emails from other paying
subscribers. Members who subscribe specifically to utilize the
pay-to-respond feature
are less likely to renew their subscriptions than those who
subscribe to initiate communications.
Net Revenues
Net revenues for JDate increased 92.2%, to $16.1 million in
2003 from $8.4 million in 2002. Net revenues for
AmericanSingles increased 189.8% to $19.3 million in 2003
from $6.6 million in 2002. Net revenues for Web sites in
our Other Businesses segment increased 19.5%, to
$1.6 million in 2003 from $1.3 million in 2002. The
increase in net revenues was due to an increase in the overall
use of our services and the increase in the number of paying
subscribers. In addition, a portion of the increase in revenues
for AmericanSingles is attributable to an increase in
AmericanSingles monthly subscription price during 2003.
Direct Marketing Expenses
Direct marketing expenses for JDate increased 229.9%, to
$739,000 in 2003 from $224,000 in 2002. Direct marketing
expenses for AmericanSingles increased 300.2%, to
$15.9 million in 2003 from $4.0 million in 2002.
Direct marketing expenses for Other Businesses increased 47.2%,
to $1.8 million in 2003 from $1.2 million in 2002.
This increase was primarily the result of expanded online
advertising campaigns.
As a percentage of revenues, total direct marketing expenses for
JDate increased to 4.6% in 2003 from 2.7% in 2002. As a
percentage of revenues, total direct marketing expenses for
AmericanSingles increased to 82.5% in 2003 from 59.8% in 2003.
As a percentage of revenues, total direct marketing expenses for
our Other Businesses segment increased to 110.8% in 2003 from
90.0% in 2003. The increases in all segments were due to
increase marketing spending designed to grow revenues. Total
direct marketing expenses for all of our segments increased to
49.8% from 33.0% in 2003 and 2002, respectively.
65
Operating Expenses
Operating expenses increased 140.1%, to $29.6 million in
2003 from $12.3 million in 2002. Stated as a percentage of
net revenues, operating expenses increased to 80.1% in 2003
compared to 75.3% in 2002. The increase in total dollars and as
a percentage of net revenues was primarily the result of
continued investment in customer service and technical
infrastructure, as well as an increase in general and
administrative expenses as discussed below.
Indirect Marketing. Indirect marketing expenses increased
144.7%, to approximately $986,000 in 2003 from approximately
$403,000 in 2002. Stated as a percentage of net revenues,
indirect marketing expenses increased to 2.7% in 2003 from 2.5%
in 2002. The increase in total dollars was largely as a result
of an increase in staffing for the marketing department.
Customer Service. Customer service expenses increased
110.1%, to $2.5 million in 2003 from $1.2 million in
2002. Stated as a percentage of net revenues, customer service
expenses decreased to 6.9% in 2003 from 7.4% in 2002. The
increase in total dollars was largely as a result of an increase
in headcount due required to support our larger numbers of
members and paying subscribers. The decrease as a percentage of
net revenues was primarily the result of increased efficiency of
usage of our customer service personnel in supporting a larger
member and subscriber base.
Technical Operations. Technical operations expenses
increased 182.4%, to $4.5 million in 2003 from
$1.6 million in 2002. Stated as a percentage of net
revenues, technical operations expenses increased to 12.1% in
2003 from 9.7% in 2002. The increase in total dollars and as a
percentage of net revenues was largely as a result of the growth
in the number of members and traffic to our Web sites.
Product Development. Product development expenses
increased 59.0%, to $959,000 in 2003 from $603,000 in 2002.
Stated as a percentage of net revenues, product development
expenses decreased to 2.6% in 2003 from 3.7% in 2002. The
increase in total dollars was largely as a result of costs
associated with technical enhancements to our Web sites. The
decrease as a percentage of net revenues was primarily the
result of economies of scale as additional product enhancements
costs are spread over a larger subscriber/member base. We
expense these costs as incurred, unless they are required to be
capitalized. Capitalized costs in 2003 and 2002 were
approximately $825,000 and $572,000, respectively. The
amortization of these costs are included in this line item.
General and Administrative Expenses. General and
administrative expenses increased 131.8%, to $18.5 million
in 2003 from $8.0 million in 2002. Stated as a percentage
of net revenues, general and administrative expenses increased
to 50.2% in 2003 from 48.8% in 2002. The increase in total
dollars was largely as a result of an increase in hiring people
to support our growth and the addition of new Web sites, as well
as an increase in credit card processing fees as sales grew. The
increase as a percentage of net revenue was primarily due to
share-based charges of $1.7 million incurred in 2003.
General and administrative expenses for 2003 also included
$1.7 million in charges primarily related to a settlement
with Comdisco. Pursuant to the settlement, we issued a
promissory note in September 2004 in the amount of
$1.7 million. The note bears simple interest at the rate of
2.75% per year and is payable in installments, excluding
accrued interest, on (i) September 15, 2005 in the
amount of $400,000; (ii) September 15, 2006 in the
amount of $400,000; and (iii) September 15, 2007 in
the amount of $900,000.
Share-based Compensation. Share-based compensation was
$1.9 million in 2003 compared to zero in 2002. The 2003
charge reflected non-cash expenses associated with the issuance
of share options and warrants to advisors. We treated these
options and warrants as variable in accordance with
SFAS No. 123 and, as a result, were required to
recognize an increase or decrease in operating expense based on
the fair value of such options and warrants on a quarterly
basis. For the purposes of this and all future filings, prior
period classification of share-based compensation was
reclassified to conform to current period classification.
66
Amortization of Intangible Assets Other Than Goodwill.
Amortization expenses consist primarily of amortization of
purchased intangible assets related to previous acquisitions.
Amortization expenses increased 5.9% to $555,000 in 2003,
compared to $524,000 in 2002. The increase was primarily due to
purchases of various databases.
Impairment of Long-lived Assets. In October 2003, based
on business developments that took place in 2003 and on
managements opinion that rapid changes in technology
reduced the fair value of some of our property and equipment,
mostly computer equipment and capitalized software costs, we
recorded an impairment charge of approximately $1.5 million.
Interest Income and Other Expenses, Net. Interest income
and other expenses, net decreased 77.6%, to income of
approximately $188,000 in 2003 from income of approximately
$840,000 in 2002. Interest income and other expenses, net in
2002 was positively affected by a gain of approximately $400,000
recognized on the sale of domain names.
Quarterly Results of Operations
You should read the following tables presenting our quarterly
results of operations in conjunction with the consolidated
financial statements and related notes contained elsewhere in
this prospectus. We have prepared the unaudited information on
substantially the same basis as our audited consolidated
financial statements which, in the opinion of management,
includes all adjustments, consisting only of normal recurring
adjustments, except as otherwise indicated, necessary for the
presentation of the results of operations for such periods. You
should also keep in mind, as you read the following tables, that
our operating results for any quarter are not necessarily
indicative of results for any future quarters or for a full year.
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|
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|
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|
Three months ended(1) | |
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| |
|
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
|
2003(2) | |
|
2003(2) | |
|
2003(2) | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
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|
|
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|
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|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
7,036 |
|
|
$ |
8,423 |
|
|
$ |
9,792 |
|
|
$ |
11,690 |
|
|
$ |
15,050 |
|
|
$ |
15,812 |
|
|
$ |
17,138 |
|
|
$ |
17,052 |
|
|
$ |
16,526 |
|
|
$ |
15,464 |
|
|
$ |
16,935 |
|
Direct marketing expenses
|
|
|
3,576 |
|
|
|
4,680 |
|
|
|
3,955 |
|
|
|
6,184 |
|
|
|
6,539 |
|
|
|
9,325 |
|
|
|
8,748 |
|
|
|
6,628 |
|
|
|
5,228 |
|
|
|
6,051 |
|
|
|
7,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
3,460 |
|
|
|
3,743 |
|
|
|
5,837 |
|
|
|
5,506 |
|
|
|
8,511 |
|
|
|
6,487 |
|
|
|
8,390 |
|
|
|
10,424 |
|
|
|
11,298 |
|
|
|
9,413 |
|
|
|
9,862 |
|
Operating
expenses:(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
|
(61 |
) |
|
|
131 |
|
|
|
488 |
|
|
|
428 |
|
|
|
580 |
|
|
|
568 |
|
|
|
912 |
|
|
|
547 |
|
|
|
265 |
|
|
|
238 |
|
|
|
255 |
|
|
Customer service
|
|
|
563 |
|
|
|
458 |
|
|
|
736 |
|
|
|
779 |
|
|
|
975 |
|
|
|
903 |
|
|
|
723 |
|
|
|
778 |
|
|
|
577 |
|
|
|
560 |
|
|
|
650 |
|
|
Technical operations
|
|
|
819 |
|
|
|
994 |
|
|
|
1,024 |
|
|
|
1,644 |
|
|
|
1,634 |
|
|
|
2,085 |
|
|
|
1,482 |
|
|
|
1,983 |
|
|
|
1,402 |
|
|
|
1,548 |
|
|
|
1,898 |
|
|
Product development
|
|
|
168 |
|
|
|
229 |
|
|
|
82 |
|
|
|
480 |
|
|
|
340 |
|
|
|
531 |
|
|
|
505 |
|
|
|
637 |
|
|
|
830 |
|
|
|
1,060 |
|
|
|
1,059 |
|
|
General and administrative
|
|
|
2,483 |
|
|
|
2,628 |
|
|
|
6,025 |
|
|
|
7,401 |
|
|
|
7,754 |
|
|
|
6,227 |
|
|
|
7,578 |
|
|
|
7,694 |
|
|
|
6,079 |
|
|
|
6,405 |
|
|
|
7,529 |
|
|
Amortization of intangible assets other than goodwill
|
|
|
131 |
|
|
|
58 |
|
|
|
200 |
|
|
|
166 |
|
|
|
244 |
|
|
|
238 |
|
|
|
188 |
|
|
|
190 |
|
|
|
110 |
|
|
|
301 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,103 |
|
|
|
4,498 |
|
|
|
8,555 |
|
|
|
12,430 |
|
|
|
11,527 |
|
|
|
10,552 |
|
|
|
11,388 |
|
|
|
12,037 |
|
|
|
9,263 |
|
|
|
10,112 |
|
|
|
11,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended(1) | |
|
|
| |
|
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
|
2003(2) | |
|
2003(2) | |
|
2003(2) | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
Income (loss) from operations
|
|
|
(643 |
) |
|
|
(755 |
) |
|
|
(2,718 |
) |
|
|
(6,924 |
) |
|
|
(3,016 |
) |
|
|
(4,065 |
) |
|
|
(2,998 |
) |
|
|
(1,613 |
) |
|
|
2,035 |
|
|
|
(699 |
) |
|
|
(1,966 |
) |
Interest (income) and other expenses, net
|
|
|
(53 |
) |
|
|
(57 |
) |
|
|
(22 |
) |
|
|
(56 |
) |
|
|
4 |
|
|
|
28 |
|
|
|
(46 |
) |
|
|
(52 |
) |
|
|
24 |
|
|
|
168 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(590 |
) |
|
|
(698 |
) |
|
|
(2,696 |
) |
|
|
(6,868 |
) |
|
|
(3,020 |
) |
|
|
(4,093 |
) |
|
|
(2,952 |
) |
|
|
(1,561 |
) |
|
|
2,059 |
|
|
|
(867 |
) |
|
|
(2,107 |
) |
Income taxes
|
|
|
1 |
|
|
|
39 |
|
|
|
|
|
|
|
(40 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
(8 |
) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(591 |
) |
|
$ |
(737 |
) |
|
$ |
(2,696 |
) |
|
$ |
(6,828 |
) |
|
$ |
(3,021 |
) |
|
$ |
(4,093 |
) |
|
$ |
(2,952 |
) |
|
$ |
(1,561 |
) |
|
$ |
1,987 |
|
|
$ |
(859 |
) |
|
($ |
2,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
basic(3)
|
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.35 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.08 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.08 |
) |
Net income (loss) per share
diluted(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
(3)
|
|
|
18,707 |
|
|
|
18,736 |
|
|
|
18,960 |
|
|
|
19,449 |
|
|
|
21,286 |
|
|
|
22,264 |
|
|
|
23,356 |
|
|
|
24,234 |
|
|
|
25,117 |
|
|
|
25,661 |
|
|
|
26,080 |
|
Weighted average shares outstanding diluted
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,236 |
|
|
|
|
|
|
|
|
|
Other Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$ |
287 |
|
|
$ |
333 |
|
|
$ |
405 |
|
|
$ |
416 |
|
|
$ |
579 |
|
|
$ |
790 |
|
|
$ |
839 |
|
|
$ |
857 |
|
|
$ |
848 |
|
|
$ |
919 |
|
|
$ |
942 |
|
Additional Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Paying
Subscribers(4)
|
|
|
94,700 |
|
|
|
118,000 |
|
|
|
130,700 |
|
|
|
160,000 |
|
|
|
207,400 |
|
|
|
228,400 |
|
|
|
239,600 |
|
|
|
229,000 |
|
|
|
222,600 |
|
|
|
215,600 |
|
|
|
220,800 |
|
Average monthly net revenue per paying
subscriber(5)
|
|
$ |
24.50 |
|
|
$ |
23.55 |
|
|
$ |
24.20 |
|
|
$ |
24.14 |
|
|
$ |
23.83 |
|
|
$ |
22.74 |
|
|
$ |
23.50 |
|
|
$ |
24.06 |
|
|
$ |
24.32 |
|
|
$ |
23.12 |
|
|
$ |
24.57 |
|
Subscriber
churn(6)
|
|
|
27.9 |
% |
|
|
28.9 |
% |
|
|
29.6 |
% |
|
|
26.8 |
% |
|
|
32.1 |
% |
|
|
30.6 |
% |
|
|
31.6 |
% |
|
|
32.4 |
% |
|
|
31.7 |
% |
|
|
30.8 |
% |
|
|
31.4 |
% |
Average direct subscriber acquisition
cost(7)
|
|
$ |
33.49 |
|
|
$ |
38.38 |
|
|
$ |
31.32 |
|
|
$ |
32.69 |
|
|
$ |
27.82 |
|
|
$ |
40.53 |
|
|
$ |
37.41 |
|
|
$ |
29.37 |
|
|
$ |
23.84 |
|
|
$ |
31.11 |
|
|
$ |
30.23 |
|
|
|
(1) |
Certain financial information for prior periods has been
reclassified to conform to the 2004 periods presentation. |
(2) |
These amounts in consolidated statements of operations data are
restated amounts from amounts contained in previously filed
quarterly reports with the Frankfurt Stock Exchange. See
Risk Factors We Face Risks Related to Our
Recent Accounting Restatements. |
(3) |
For information regarding the computation of per share amounts,
refer to note 1 of our consolidated financial statements. |
(4) |
Represents average paying subscribers calculated as the sum of
the average paying subscribers for each month, divided by the
number of months. Average paying subscribers for each month are
calculated as the sum of the paying subscribers at the beginning
and end of the month, divided by two. |
(5) |
Represents the total net subscriber revenue for the period
divided by the number of average paying subscribers for the
period, divided by the number of months in the period. |
(6) |
Represents the ratio expressed as a percentage of (i) the
number of paying subscriber cancellations during the period
divided by the number of average paying subscribers during the
period and (ii) the number of months in the period. On a
monthly basis, the average number of paying subscribers is
calculated as the sum of the paying subscribers at the beginning
and end of the period divided by two. |
(7) |
Represents direct marketing expense divided by the gross number
of subscribers added during the period. The historic direct
subscriber acquisition cost we reported included indirect
marketing costs. |
68
|
|
(8) |
Operating expenses include share-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended | |
|
|
| |
|
|
Dec 31, | |
|
Mar 31, | |
|
June 30, | |
|
Sep 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
June 30, | |
|
Sep 30, | |
|
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in Thousands) | |
Indirect marketing
|
|
$ |
79 |
|
|
$ |
51 |
|
|
$ |
46 |
|
|
$ |
31 |
|
|
$ |
28 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10 |
|
Customer service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Technical operations
|
|
|
140 |
|
|
|
290 |
|
|
|
111 |
|
|
|
(379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168 |
|
Product development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
General & administrative
|
|
|
1,652 |
|
|
|
1,371 |
|
|
|
532 |
|
|
|
(891 |
) |
|
|
514 |
|
|
|
87 |
|
|
|
(115 |
) |
|
|
1,028 |
|
For the purpose of this and all future filings, prior period
classification of share-based compensation was reclassified to
conform to current period classification.
Restatement of Previous Consolidated Financial Statements for
the Nine Months Ended September 30, 2003
In previous periods, we incorrectly recognized a full month of
revenue in the month in which members paid in advance for their
membership subscription fees, regardless of the effective date
of the subscription, and deferred the balance of the fees for
multi-month subscriptions. In July 2003, we began to defer and
recognize revenue on a daily basis, based on the effective date
of the subscription, and restated prior periods financial
statements to reflect that policy.
In previous periods we had capitalized bounty costs, which
represented amounts paid to third parties for members acquired
on an individual basis through third party Web sites or email
campaigns. These costs were being amortized over a three year
period, on an accelerated basis. In July 2003, we determined
that these costs should be expensed as incurred, and that we
should restate the prior years financial statements to
conform to U.S. generally accepted accounting principles. The
reason for the change was that bounty costs were meant to drive
free memberships or registrations and any resulting member was
not required to become a paying subscriber. Therefore, those
expenses should be recognized immediately, since a conversion
from non-paying member to a paying subscriber is not guaranteed.
Accordingly, we have restated the consolidated financial
statements to expense these costs as incurred.
From 1998 through 2002, we acquired several businesses and
assets. At the time of those acquisitions, the fair values of
the intangible assets acquired were not properly determined. In
2004, we hired a valuation expert to measure the fair value of
such assets at the date of each acquisition. As a result of this
process, we determined that certain allocations previously
reported were inappropriate.
In addition, we did not properly and timely accrue for some
services provided and we identified certain errors in prior
years consolidation process.
Liquidity and Capital Resources
As of September 30, 2005, we had cash, cash equivalents and
marketable securities of $8.7 million. We have historically
financed our operations with internally generated funds and
offerings of equity securities. We have no revolving or term
credit facilities.
Net cash provided by operations was $1.8 million for the
nine months ended September 30, 2005 compared to net cash
used of $2.6 million for the same period in 2004. The
increase is primarily due to a significantly lower loss. In
2004, we had negative operating cash flow due mainly to
increased marketing spending, primarily for AmericanSingles,
which was designed to boost revenues for that segment. During
the second half of 2004, and in the first quarter of 2005,
marketing spending on AmericanSingles was reduced in order to
reduce the subscriber acquisition cost, and improve the
contribution margin (net revenues minus direct marketing costs),
and this also resulted in improvement in cash flow from
operations. Marketing spending for AmericanSingles was again
increased somewhat in the second quarter of 2005, while
maintaining a positive contribution margin, but this caused a
decline in cash flow from operations compared to the first
quarter of 2005. In addition to the earnings impact,
69
operating cash flow was affected by higher non-cash charges for
depreciation and amortization as a result of the MingleMatch
purchase, offset by a decrease in accounts payable and accrued
liabilities.
The effect of exchange rates on cash and cash equivalents during
the first nine months ended September 30, 2005, was due to
a strengthening of the U.S. dollar against the Israeli shekel.
Net cash used by investing activities was $129,000 for the first
nine months of 2005 compared to net cash used of
$9.8 million for the same period in 2004. The decrease in
cash used was as a result of liquidating marketable securities
as well as a reduction in capital expenditures during the first
nine months of 2005, partially offset by the purchase of
MingleMatch in 2005 and Pointmatch in 2004. During the first
nine months of 2004, net cash used by investing activities
included acquisition of businesses, primarily PointMatch of
$4.2 million, as well as capital expenditures for property
and equipment of $4.6 million, mainly for increased server
and internet hosting equipment for our growing Web sites.
During the first nine months of 2005, net cash used by investing
activities included $1.8 million for the acquisition of
MingleMatch (net of cash acquired), as well as capital
expenditures of $1.3 million, primarily for hardware and
software for our Web sites. We anticipate that future capital
expenditures for equipment and software for our Web site
re-architecture will continue to be less than our pace of
spending in 2004 as the
re-architecture project
is primarily focused on software architecture, and which is
intended to make use of our existing hardware capacity.
Net cash provided by financing activities was $2.7 million
for the first nine months of 2005 compared to $14.1 million
for the first nine months of 2004. In the first nine months of
2004, we completed a private placement of 600,000 ordinary
shares which resulted in net proceeds to our company of
$3.7 million, as well as the exercise of stock options and
warrants which resulted in net proceeds of $11.1 million.
Cash provided by financing activities in 2005 was due almost
entirely to the exercise of options and warrants.
As discussed in our financial statements, we issued certain
securities that may in the future be subject to a rescission
offer commenced by us. We do not believe such a rescission offer
would affect our ability to obtain financing in the future, due
to our belief that a rescission offer would not be accepted by
our shareholders or option holders in an amount that would
represent a material expenditure by us. This belief is based on
the fact that a rescission offer, if made, would result in our
offering to repurchase shares at a weighted average price of
$2.09 and to repurchase options with a weighted average exercise
price of $3.04, while the trading price of our securities closed
at $5.57 per share on December 6, 2005. As of
December 6, 2005, the total number of shares subject to a
rescission is 1,829,832 shares, which includes 1,629,832 shares
with purchase prices ranging from $0.86 per share to $5.42 per
share, including statutory interest, and 200,000 shares with a
purchase price of $9.04 per share, including statutory interest,
which are held by our former Co-Chairman. As of December 6,
2005, the cost to rescind shares issued pursuant to options
where the rescission value exceeds the difference between the
exercise price of the underlying option and the market price for
our securities as of the close of trading on the Frankfurt Stock
Exchange would be $1,888,073 including statutory interest, of
which $1,608,808 relates to the 200,000 shares held by our
former Co-Chairman. As of December 6, 2005, assuming every
eligible option holder were to accept a rescission offer, we
estimate the total cost to us to complete the rescission for the
unexercised options would be approximately $1.9 million,
including statutory interest. As of December 6, 2005, the
total number of options subject to a rescission was 2,405,750
with a weighted average rescission offer repurchase price of
$0.80 per share, including statutory interest. As of
December 6, 2005, the cost to rescind unexercised options
where the rescission value exceeds the difference between the
options exercise price and the market price for our securities
as of the close of trading on the Frankfurt Stock Exchange would
be $547,863 including statutory interest. We anticipate
conducting a rescission within a reasonable time after the
effective date of this registration statement.
70
We believe that our current cash and cash equivalents,
marketable securities and cash flow from operations will be
sufficient to meet our anticipated cash needs for working
capital, capital expenditures and contractual obligations,
including promissory note payments to MingleMatch in respect of
that acquisition, for at least the next 12 months. We have
had positive operating cash flow for the year to date and
anticipate continued positive cash flow from operating
activities. This belief is based on our belief stated above that
we do not anticipate that a rescission offer will be accepted by
our shareholders. Thus, we do not anticipate requiring
additional capital; however, if required or desirable, we may
raise additional funds through bank financing or through the
capital markets by the issuance of debt or equity.
As discussed in Note 3 to our financials statements
contained in this prospectus, since December 31, 2004, our
company entered into a contractual obligation to pay notes
payable in the amount of $10 million as part of the
purchase of MingleMatch on May 18, 2005.
The following table describes our contractual commitments and
obligations as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1 year | |
|
1-3 years | |
|
4-5 years |
|
More than 5 years |
|
Total | |
|
|
| |
|
| |
|
|
|
|
|
| |
|
|
(in thousands) | |
Capital leases
|
|
$ |
173 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
173 |
|
Operating leases
|
|
|
711 |
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
1,385 |
|
Other commitments and obligations
|
|
|
1,217 |
|
|
|
1,708 |
|
|
|
|
|
|
|
|
|
|
|
2,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
2,101 |
|
|
$ |
2,382 |
|
|
$ |
|
|
|
|
|
|
|
$ |
4,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commitments and obligations is comprised of contracts with
software licensing, communications, computer hosting, and
marketing service providers. These amounts totaled $817,000 for
less than one year and $408,000 between one and three years.
Contracts with other service providers are for 30 day terms
or less. Also included in Other commitments and obligations are
payments owed to Comdisco. In September 2004, the Company issued
a promissory note to Comdisco in the amount of $1.7 million
as a final settlement for a lawsuit. The note bears simple
interest at the rate of 2.75% per year and is payable in
installments, excluding accrued interest, on
(i) September 15, 2005 in the amount of $400,000;
(ii) September 15, 2006 in the amount of $400,000; and
(iii) September 15, 2007 in the amount of $900,000.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually, narrow or limited
purposes. We do not have any outstanding derivative financial
instruments, off-balance sheet guarantees, interest rate swap
transactions or foreign currency forward contracts.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk attributed to changes in interest
rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates
relates primarily to our investment portfolio. We historically
have not used derivative financial instruments to mitigate such
risk. We invest our excess cash in debt instruments of the
U.S. Government and its agencies.
Investments in both fixed-rate and floating-rate
interest-earning instruments carry a degree of interest rate
risk. Fixed-rate securities may have their fair market values
adversely impacted due to a rise in interest rates, while
floating-rate securities may produce less income than expected
if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to
71
changes in interest rates or we may suffer losses in principal
if forced to sell securities which have declined in market value
due to changes in interest rates. As of December 31, 2004
and 2003 we had investments in short-term mutual funds and
long-term government issued debt. We do not believe that a 10%
change in interest rates would have a material impact on the
fair market value of our investment portfolio due to our ability
to liquidate this portfolio on short notice as market
circumstances dictate.
Foreign Currency Risk
Our exposure to foreign currency risk is due primarily to our
international operations. Revenues and certain expenses related
to our international Web sites are denominated in the functional
currencies of the local countries they serve. Primary currencies
include Israeli shekels, Canadian dollars, British pound
sterling and Euros. Our foreign subsidiary in Israel conducts
business in their local currency. We translate into
U.S. dollars the assets and liabilities using period-end
rates of exchange, and revenues and expenses using average rates
of exchange for the year. Any weakening of the U.S. dollar
against these foreign currencies will result in increased
revenue, expenses and translation gains and losses in our
consolidated financial statements. Similarly, any strengthening
of the U.S. dollar against these currencies will result in
decreased revenues, expenses and translation gains and losses.
Foreign exchange gains and losses were not material to our
earnings for the years ended December 31 2002, 2003 and
2004.
Change in Accountants
On March 23, 2004, upon the authorization of our Board of
Directors, we dismissed Stonefield Josephson, Inc. as our
U.S. auditors and engaged Ernst & Young LLP as our
independent auditors. Chantrey Vellacott DFK resigned as our UK
auditors on the same date.
During the years ended December 31, 2003 and 2002, and the
subsequent period from January 1, 2004 to March 23,
2004, Stonefield Josephson, Inc. did not have any disagreement
with us on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
Stonefield Josephson, Inc., would have caused them to make
reference to the subject matter of the disagreement in
connection with their reports on our financial statements for
such years. The reports of Stonefield Josephson, Inc. on
financial statements for the years ended December 31, 2002
and 2001 did not contain an adverse opinion or disclaimer of
opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. We did not consult with
Ernst & Young LLP on any financial or accounting
reporting matters before its appointment.
Notwithstanding the foregoing, during the course of the
preparation of our financial statements for the year ended
December 31, 2003, we discovered accounting inaccuracies in
previously reported financial statements, including those for
the years ended December 31, 2002 and 2001 that were
covered by reports issued by Stonefield Josephson, Inc.
Difficulties arose from differing views between Ernst &
Young LLP and Stonefield Josephson, Inc. regarding the necessity
and scope of a restatement of 2002 and 2001 financial
statements. Up to that point, we had expected to include
Stonefield Josephson, Inc.s reports on those years in a
registration statement that MatchNet, Inc. filed on
August 4, 2004. However, we were unable to timely obtain
concurrence from Stonefield Josephson, Inc. that restatements
were required and the extent of such restatements. As a result,
we directed Ernst & Young LLP to reaudit the years
ended December 31, 2002 and 2001 and restated our financial
statements for these years and for the first three quarters of
2003 to correct inappropriate accounting entries.
The restatements primarily related to the timing of recognition
of deferred revenue and the capitalization of bounty costs,
which are the amounts paid to online marketers to acquire
members. The restatements, which are in accordance with United
States generally accepted accounting principles,
72
pertained primarily to timing matters and had no impact on cash
flow from operations or our ongoing operations. The impact on
net loss for 2002 and 2001 was an increase of $1.0 million
and $1.5 million, respectively.
Sarbanes-Oxley Compliance and Corporate Governance
As a public company, we will be subject to the reporting
requirement of the Sarbanes-Oxley Act of 2002. Beginning
December 31, 2006, we will be required to establish and
regularly evaluate the effectiveness of internal controls over
financial reporting. In order to maintain and improve the
effectiveness of disclosure controls and procedures and internal
control over financial reporting, significant resources and
management oversight will be required. We also must comply with
all corporate governance requirements of the American Stock
Exchange, including independence of our audit committee and
independence of the majority of our Board of Directors.
We plan to timely satisfy all requirements of the Sarbanes-Oxley
Act and the American Stock Exchange applicable to us. We have
taken, and will continue to take, actions designed to enhance
our disclosure controls and procedures. We expect to adopt a
Code of Business Conduct and Ethics that will be applicable to
all of our directors, officers and employees. We will establish
a confidential and anonymous reporting process for the receipt
of concerns regarding questionable accounting, auditing, or
other business matters from our employees. We intend for our
General Counsel to assist us in the continued enhancement of our
disclosure controls and procedures. In addition, we intend to
put additional personnel and systems in place which we expect
will provide us the necessary resources to be able to timely
file the required periodic reports with the Commission as a
publicly traded company. We intend for our Chief Financial
Officer, Controller and other financial personnel to lead our
existing staff in the performance of the required accounting and
reporting functions. In addition, we plan to install a new
accounting system and implement additional controls and
procedures designed to improve our financial reporting
capabilities and improve reporting efficiencies.
On an ongoing basis we intend to conduct a controls evaluation
to identify control deficiencies and to confirm that appropriate
corrective action, including process improvements, are being
undertaken. We expect to conduct this type of evaluation on a
quarterly basis so that the conclusions concerning the
effectiveness of our controls can be reported in our periodic
reports. The overall goals of these various evaluation
activities will be to monitor our internal controls for
financial reporting and our disclosure controls and procedures
and to make modifications as necessary. Our intent in this
regard is that our internal controls for financial reporting and
our disclosure controls and procedures will be maintained as
dynamic systems that change, including with improvements and
corrections, as conditions warrant.
Our ability to enhance our disclosure controls and procedures,
to conduct controls evaluations and to modify controls and
procedures on an ongoing basis may be limited by the current
state of our staffing, accounting system and internal controls
since any enhancements and modifications may require additional
staffing and improved systems and controls. You should refer to
the discussion under Risk Factors If we fail
to develop or maintain an effective system of internal controls
over financial reporting, we may not be able to accurately
report our financial results or prevent fraud. As a result,
current and potential shareholders could lose confidence in our
financial reporting, which would harm our business and the value
of our depositary shares.
73
Recent Accounting Developments
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a
replacement of Accounting Principles Board Opinion No. 20,
Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements (SFAS 154). SFAS 154
changes the requirements for the accounting for, and reporting
of, a change in accounting principle. Previously, voluntary
changes in accounting principles were generally required to be
recognized by way of a cumulative effect adjustment within net
income during the period of the change. SFAS 154 requires
retrospective application to prior periods financial
statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005; however, the
statement does not change the transition provisions of any
existing accounting pronouncements. We do not believe adoption
of SFAS 154 will have a material effect on our financial
position, cash flows or results of operations.
74
BUSINESS
Throughout this prospectus, we refer to Spark Networks plc
(known as MatchNet plc until January 10, 2005), an English
company, and our subsidiaries as we, us,
our, our company, Spark
Networks and MatchNet unless otherwise
indicated. Spark Networks, MatchNet, JDate, AmericanSingles and
MingleMatch are our trademarks. Trade names, trademarks and
service marks of other companies appearing in this prospectus
are the property of the respective holders.
Our Business
We are a leading provider of online personals services in the
United States and internationally. Our Web sites enable adults
to meet online and participate in a community, become friends,
date, form a long-term relationship or marry. We provide this
opportunity through the many features on our Web sites, such as
detailed profiles, onsite email centers, real-time chat rooms
and instant messaging services. According to comScore Media
Metrix, we averaged approximately 3.4 million total unique
visitors per month to our Web sites in the United States during
the first nine months of 2005, which ranked us as the third
largest provider of online personals services in the United
States in terms of total unique visitors. comScore Media Metrix
defines total unique visitors as the estimated
number of different individuals (in thousands) that visited any
content of a Web site, a category, a channel, or an application
during the reporting period. The number of total unique
visitors to our Web sites as measured by comScore Media
Metrix does not correspond to the number of members we have in
any given period. Currently, our key Web sites are JDate.com and
AmericanSingles.com. We operate several international Web sites
and maintain operations in both the United States and Israel.
Information regarding the geographical source of our revenues
can be found in Note 12 to our Consolidated Financial
Statements included in this prospectus. Membership on our sites
is free and allows a registered user to post a personal profile
and to access our searchable database of member profiles and our
24 hours a day, 7 days a week customer service. The
ability to initiate most communication with other members
requires the payment of a monthly subscription fee, which
represents our primary source of revenue. We also offer
discounted subscription rates for members who subscribe for
three-, six-and twelve-month periods. Our subscription programs
renew automatically for subsequent one-month periods until
paying subscribers terminate them.
For the nine month period ended September 30, 2005, we had
approximately 218,700 average paying subscribers, representing a
decrease of 2.9% from the same period in 2004. Our JDate and
AmericanSingles segments had approximately 69,400 and 109,800
average paying subscribers for the nine months ended
September 30, 2005, a decrease of 1.3% and 17.8%,
respectively, compared to the same period in 2004.
Our Industry
Overview
We believe that online personals fulfill significant needs for
Americas single adults who are looking to meet a companion
or date. Traditional methods such as printed personals
advertisements, offline dating services and public gathering
places often do not meet the needs of time-constrained single
people. Printed personals advertisements offer individuals
limited personal information and interaction before meeting.
Offline dating services are time-consuming, expensive and offer
a smaller number of potential partners. Public gathering places
such as restaurants, bars and social venues provide a limited
ability to learn about others prior to an in-person meeting. In
contrast, online personals services facilitate interaction
between singles by allowing them to screen and communicate with
a large number of potential companions. With features such as
detailed personal profiles, email and instant messaging, this
medium allows users to communicate with other singles at their
convenience and affords them the ability to meet multiple people
in a safe and secure online setting.
75
Our Competitive Strengths
|
|
|
|
|
Strength of JDate Brand. We believe that JDate and
its strong brand recognition in the Jewish community is a
valuable asset. A report by comScore Media Metrix for the first
nine months of 2005 indicated that JDate.com experienced more
average daily visitors and more page views than any other
religious online personals service. We believe the strength of
the JDate brand will continue to allow us to market to the
Jewish community profitably while maintaining a high penetration
rate. Because of the strength of the JDate brand, we are not
required to spend as much on marketing JDate as we are our other
Web sites, and other personals Web sites in the industry. |
|
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Web Site Functionality. We continually evaluate
the functionality of our Web sites to improve our members
online personals experience. Many of the features that we offer,
such as onsite emails, real-time chat rooms and instant
messaging, increase the probability of communication between our
members, which we believe increases the number and percentage of
members who become paying subscribers. We believe this
functionality drives return visits to our Web sites and helps
retain paying subscribers who might otherwise consider switching
to our competitors Web sites. |
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Customer Service Focus. We believe that our
customer service offers a competitive advantage and
differentiates us from our major competitors. Our multi-lingual
call center is staffed 24 hours a day, 7 days a week
with customer service consultants. These consultants help
members with such matters as completing personal profiles and
choosing photos for their profiles, as well as answering
questions about billing and technical issues. We believe that
the quality of our customer service increases member
satisfaction, which improves the number and percentage of
members that become and remain paying subscribers. |
Our Online Personals Services
Our online personals services offer single adults a convenient
and secure setting for meeting other singles. Visitors to our
Web sites are encouraged to become registered members by posting
profiles. Posting a profile is a process where visitors are
asked various questions about themselves, including information
such as their tastes in food, hobbies and desired attributes of
potential partners. Members are also urged to post photos, since
this is likely to improve their chances of making successful
contact with other members. Members can perform detailed
searches of other profiles and save their preferences, and their
profiles can be viewed by other members. In most cases, in order
for a member to initiate email and instant message communication
with others, that member must purchase a subscription. A
subscription affords access to the paying subscribers
on-site email and
instant messaging systems, enabling such subscribers to
communicate with other members and paying subscribers. Our
subscription fees are charged on a monthly basis, with discounts
for longer-term subscriptions ranging from three to twelve
months.
Our Web Sites. We believe we are a unique company in the
online personals industry because, in addition to servicing mass
markets, we operate Web sites targeted at selected vertical
affinity markets. We currently offer Web sites in English,
German and Hebrew. Our key Web sites are as follows:
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JDate.com. JDate was our first Web site and is dedicated
to the Jewish community and culture, and those who are seeking
to be part of it. A report by comScore Media Metrix for the
first nine months of 2005 indicated that JDate.com experienced
more average daily visitors and more page views than any other
religious online personals service. JDate members are primarily
concentrated in the New York, Los Angeles, Miami and Chicago
metropolitan areas. The current fee for a one-month subscription
on JDate is $34.95. |
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AmericanSingles.com. AmericanSingles is our mainstream
U.S. online personals community, targeted at an audience of
singles between the ages of 25 and 49. The Web site caters to
singles of all races, ethnicities and interests. AmericanSingles
members are primarily concentrated in major metropolitan areas
across the United States. The current fee for a one-month
subscription on AmericanSingles is $29.85. |
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Other Web sites. |
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Web site |
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Target markets |
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AdventistSinglesConnection.com*
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Adventist singles |
AsianSinglesConnection.com*
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Asian singles |
BBWPersonalsPlus.com*
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Big beautiful women and admirers |
BlackSinglesConnection.com*
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African American singles |
CanadianPersonals.net*
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Canadian singles |
CatholicMingle.com*
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Catholic singles |
ChristianMingle.com*
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Christian singles |
CollegeLuv.com
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College singles |
Cupid.co.il
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Jewish singles (Israel only) |
Date.ca
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Canadian singles |
DeafSinglesConnection.com*
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Deaf singles |
FaceLink.com
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Individuals wishing to share photographs |
Glimpse.com
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Gay, lesbian and transgender singles |
GreekSinglesConnection.com*
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Greek singles |
IndianMatrimonialNetwork.com*
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Indian singles |
InterracialSingles.net*
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Interracial singles |
ItalianSinglesConnection.com*
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Italian singles |
JDate.co.il
|
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Jewish singles (Israel only) |
JewishMingle.com*
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Jewish singles |
LatinSinglesConnection.com*
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Latin singles |
LDSMingle.com*
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Mormon singles |
MatchNet.co.uk
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UK singles |
MatchNet.com.au
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Australian singles |
MatchNet.de
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German singles |
MilitarySinglesConnection.com*
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Military singles |
PrimeSingles.net*
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Mature singles |
SilverSingles.com
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Aging baby boomers |
SingleParentsMingle.com*
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Single parents |
UKSinglesConnection.com*
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UK singles |
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* |
Acquired through our acquisition of MingleMatch, Inc. |
Web Site Features. We strive to offer traditional
as well as new and different ways for our members to
communicate. Examples of ways our members and paying subscribers
can communicate include:
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On-site Email. We provide all paying subscribers with
private message centers, dedicated exclusively to communications
with other paying subscribers. These personal
on-site email boxes
offer features such as customizable folders for storing
correspondence, the ability to know when sent messages were
read, as well as block and ignore functions, which afford a
paying subscriber the ability to control future messages from
specific paying subscribers. |
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Hot Lists and Favorites. Among the most popular features
on our Web sites, Hot Lists enable paying
subscribers to see whos interested in them and to save
those favorite members that they are interested in. Lists
include (1) who has viewed your profile, (2) your
favorites and (3) who has emailed you. Paying subscribers
can group their favorites into customized folders and add their
own notes, including details included in a members profile. |
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Real-time Chat Rooms. Paying subscribers can utilize our
exclusive chat rooms to mix and mingle in real-time, building a
sense of community through group discussions. |
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Additional features enable users to add customized graphics such
as emoticons to their conversations. |
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Ice Breakers. Members can send pre-packaged opening
remarks, referred to on the Web sites as flirts and
teases, to other members or paying subscribers. |
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Click!. Our patented Click! feature connects
members who think they would be compatible with each other. A
member simply clicks yes, no or
maybe in another members profile. When two
members click yes in each others profiles, our
patented feature sends an email to both of them alerting them of
a possible match. |
Travel and Events. As a complement to our online
services, we offer travel and other promotional events which
allow individuals to meet in a more personal environment. Our
travel and events are typically cruises, dinners or other mixer
events designed to facilitate social interaction. Less than 4%
of our revenues for the nine months ended September 30,
2005 were generated from travel and events.
Business Strategy
We intend to grow our subscription-based revenue by driving
additional traffic to our Web sites, through integrated and
targeted marketing geographic expansion and cross-promotion into
vertical affinity markets such as those acquired in the
MingleMatch, Inc. acquisition. In addition, by providing strong
customer service and improved features and functionality on our
Web sites, we intend to provide more reasons for visitors to our
Web sites to become subscribers.
Drive Traffic. We believe there are significant
opportunities to drive additional traffic to our Web sites and
identify new markets, where we can leverage our existing
infrastructure to increase subscriptions.
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Integrated and targeted marketing. We believe that
targeting potential members with consistent and compelling
marketing messages, delivered through a broad mix of marketing
channels, will be effective in driving more traffic and a higher
percentage of relationship-oriented singles to our Web sites. We
intend to use a variety of channels to build our brand and
increase our base of subscribers including online and offline
advertising customer relationship management tools, public
relations, promotional alliances and special events. |
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Geographic expansion. We plan to expand into new
geographic markets where we can introduce one or more of our
existing products in multiple languages. We believe that our
recently introduced multi-currency payment system will aid the
growth in our international subscriber base. |
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Cross-Promote Into Vertical Affinity Markets. Our
large base of members provides us with a significant amount of
consumer data to evaluate cross-promotion opportunities for
growth into vertical affinity markets such as those acquired in
the MingleMatch acquisition. We are able to analyze different
groups of members by key metrics such as total potential
subscribers and average revenue per paying subscriber and
identify those targeted groups that may prefer a service
dedicated to their particular affinity groups. We |
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intend to target and cross-promote into vertical affinity
markets that we believe are receptive to paid online personals
and are large enough to attain a critical mass of members and
paying subscribers. |
Increase Subscription Rates. We had approximately
218,700 average paying subscribers for the nine months ended
September 30, 2005. We believe that a significant growth
opportunity lies in our ability to increase the number of
visitors to our Web sites who become paying subscribers.
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Improved technology. We believe that the more successful
members are in finding matches in our database, the more likely
they are to want to communicate with those members. To initiate
email and instant message communication, members must become
paying subscribers. We intend to continue to enhance our
technology and the quality and relevance of our search results
to provide fast, relevant suggestions. |
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Leveraging strong customer service. Each time a member or
potential member contacts our customer service center by email
or phone, he or she represents a potential new paying subscriber
to our services. By training our customer service
representatives on upselling opportunities, we believe they will
continue to be successful in selling and building loyalty to our
subscription-based services. |
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Improved member communications. We believe that enhanced
member communications is a key component to growing our
business. We continue to focus on improving and enhancing our
Web site functionality and features to encourage communications
between members. Most of these communications require that
members become paying subscribers. We will also continue to
inform members of new features and functions with the goal of
increasing the number of visitors to our Web sites who become
paying subscribers. |
Customer Service
Our customer support and service function operates 24 hours
a day, 7 days a week. As of September 30, 2005, we
employed 43 customer service representatives at our Beverly
Hills, California facility, 15 representatives in Provo,
Utah and 14 customer service representatives at our Israeli
facility who serve our Hebrew-speaking members. Our team of
customer service representatives helps members with matters such
as completing personal essays and choosing photos for their
profiles, as well as answering questions about billing and
technical issues. Customer service representatives receive
ongoing training in an effort to better personalize the
experience for members and paying subscribers that call in and
to capitalize on upselling opportunities. On average, our
customer service center receives approximately 1,500 phone calls
and 5,000 emails per day, and our average wait time for phone
calls and response time for emails are approximately three
minutes and four hours, respectively.
Marketing
We engage in a variety of marketing activities intended to drive
consumer traffic to our Web sites and to allow us the
opportunity to introduce our products and services to
prospective members. Our marketing efforts are principally
focused online, where we employ a combination of banner and
other display advertising on Web portals and other specialized
sites. We also rely on commercial search listings and direct
email campaigns to attract potential members and paying
subscribers, and utilize a network of online affiliates, through
which we acquire traffic. None of these affiliates individually
represent a material portion of our revenue. These affiliate
arrangements are easily cancelable, often with only one day
notice. Typically, we do not have any exclusivity arrangement
with our affiliates, and some of our affiliates may also be
affiliates for our competitors.
In addition to our current online marketing efforts, we
supplement our online marketing by employing a variety of
offline marketing activities. These include print and outdoor
advertising, public relations, event sponsorship and promotional
alliances. We believe that a more targeted marketing message,
79
delivered through an array of available marketing channels, will
improve consumer awareness of our brands, drive more traffic to
our Web sites and, therefore, increase the numbers of our
members and paying subscribers. We have embarked in increases in
marketing spending for JDate, primarily in the area of offline
marketing. Such marketing initiatives are targeted at brand
building and name recognition. The JDate marketing programs most
prominently include print and billboard advertising.
Technology
Our software development team consisted of 32 employees as
of September 30, 2005, who are focused on expanding and
improving the features and functionality of our Web sites. Since
feature and functionality development is an important element of
our strategy, we plan to expand that team. In addition to our
development team, an additional 30 technology employees
maintain our software and hardware infrastructure.
Our network infrastructure and operations are designed to
deliver high levels of availability, performance, security and
scalability in a cost-effective manner. The majority of our
software architecture is based on standard modular Microsoft
technology, and is designed for maximum flexibility and
scalability, which we believe facilitates the addition of new
Web sites and features.
We are in the process of completing a
re-architecture of our
primary system based on distributed Service Oriented
Architecture principles and built using the Microsoft.Net
platform. This
re-architecture
includes changes to our server and network configurations,
database schemas and deployment, web presentation methodologies
and introduces a variety of new application services. We believe
that this new architecture will enable us to more rapidly
develop new capabilities and enhance our ability to scale our
Web sites.
Our primary email system runs on dedicated appliances with each
server capable of sending approximately 2 million messages
per hour. In addition to our email servers, we operate other Web
and database servers, which are co-located at a data center
facility in El Segundo, California that is operated by a third
party. We plan to increase redundant hardware and software
systems supporting our services within the next nine months.
Intellectual Property
We rely on a combination of patent, trademark, copyright and
trade secret laws in the United States and other jurisdictions
as well as confidentiality procedures and contractual provisions
to protect our proprietary technology and our brands. We also
enter into confidentiality and invention assignment agreements
with our employees and consultants and confidentiality
agreements with other third parties.
Spark Networks, JDate, AmericanSingles and MatchNet are some of
our trademarks, whether registered or not, in the United States
and several other countries. AmericanSingles, MatchNet, and
JDate are registered trademarks in the United States. MatchNet
and JDate are also registered trademarks in the EU and Australia
and JDate is also a registered trademark in Israel and Canada.
We have filed trademark applications for Spark Networks in the
United States and EU. Our rights to these registered trademarks
are perpetual as long as we use them and renew them
periodically. We also have a number of other registered and
unregistered trademarks. In addition, we hold a United States
patent to Click!, which lasts until January 24,
2017, that pertains to an automated process for confidentially
determining whether people feel mutual attraction or have mutual
interests. Click! is important to our business in that it
is a method and apparatus for detection of reciprocal interests
or feelings and subsequent notification of such results. The
patent describes the method and apparatus for the identification
of a persons level of attraction and the subsequent
notification when the feeling or attraction is mutual.
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Competition
We operate in a highly competitive environment with minimal
barriers to entry. We believe that the primary competitive
factors in creating a community on the Internet are
functionality, brand recognition, critical mass of members,
member affinity and loyalty, ease-of-use, quality of service and
reliability. We compete with a number of large and small
companies, including vertically integrated Internet portals and
specialty-focused media companies that provide online and
offline products and services to the markets we serve. Our
principal online personals services competitors include Yahoo!
Personals, Match.com, a wholly-owned subsidiary of
InterActiveCorp., and eHarmony, all of which operate primarily
in North America. In addition, we face competition from social
networking Web sites such as MySpace and Friendster. There are
also numerous other companies offering online personals services
that compete with us, but are smaller than we are in terms of
paying subscribers and annual revenue generation.
Employees
As of September 30, 2005, we had 188 full-time
employees. We are not subject to any collective bargaining
agreements and we believe that our relationship with our
employees is good.
Facilities
We do not own any real property. Our headquarters are located in
Beverly Hills, California, where we occupy approximately
26,500 square feet of office space that houses our
technology department, customer service operations, and most of
our corporate and administrative personnel. This lease expires
on July 31, 2006. Our monthly base rent for this facility
is $53,850 per month. We also lease office space in Provo,
Utah; Cupertino, California; Israel; England and Germany. We
believe that our facilities are adequate for our current needs
and suitable additional or substitute space will be available in
the future to replace our existing facilities, if necessary, or
accommodate expansion of our operations.
Legal Proceedings
Three separate yet similar class action complaints have been
filed against us. On June 21, 2002, Tatyana Fertelmeyster
filed an Illinois class action complaint against us in the
Circuit Court of Cook County, Illinois, based on an alleged
violation of the Illinois Dating Referral Services Act. On
September 12, 2002, Lili Grossman filed a New York class
action complaint against us in the Supreme Court in the State of
New York based on alleged violations of the New York Dating
Services Act and the Consumer Fraud Act. On November 14,
2003, Jason Adelman filed a nationwide class action complaint
against us in the Los Angeles County Superior Court based on an
alleged violation of California Civil Code section 1694 et seq.,
which regulates businesses that provide dating services. In each
of these cases, the complaint included allegations that we are a
dating service as defined by the applicable statutes and, as an
alleged dating service, we are required to provide language in
our contracts that allows (i) members to rescind their
contracts within three days, (ii) reimbursement of a
portion of the contract price if the member dies during the term
of the contract and/or (iii) members to cancel their
contracts in the event of disability or relocation. Causes of
action include breach of applicable state and/or federal laws,
fraudulent and deceptive business practices, breach of contract
and unjust enrichment. The plaintiffs are seeking remedies
including declaratory relief, restitution, actual damages
although not quantified, treble damages and/or punitive damages,
and attorneys fees and costs.
Huebner v. InterActiveCorp., Superior Court of the State of
California, County of Los Angeles, Case No. BC 305875
involves a similar action, involving the same
plaintiffs counsel as Adelman, brought against
InterActiveCorps Match.com that has been ruled related to
Adelman, but the two cases have not been consolidated. We
have not been named a defendant in the Huebner case.
Adelman and
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Huebner each seek to certify a nationwide class action
based on their complaints. Because the cases are class actions,
they have been assigned to the Los Angeles Superior Court
Complex Litigation Program. The court has ordered a bifurcation
of the liability issue. At an August 15, 2005 Status
Conference, the court set the bifurcated trial on the issue of
liability for March 27, 2006. The parties have agreed in
principle to continue the bifurcated trial to approximately
May 15, 2006 and extend the time for filing briefs and
completing discovery, in Adelman, with respect to the
bifurcated trial. In addition, the parties are in the process of
scheduling a mediation in Adelman which in all
probability will occur before the end of February, 2006.
On March 25, 2005, the court in Fertelmeyster
entered its Memorandum Opinion and Order (Memorandum
Opinion) granting summary judgment in our favor on the
grounds that Fertelmeyster lacks standing to seek injunctive
relief or restitutionary relief under the Illinois Dating
Services Act, Fertelmeyster did not suffer any actual damages,
and we were not unjustly enriched as a result of our contract
with Fertelmeyster. The Memorandum Opinion disposes of all
matters in controversy in the litigation and also provides
that we are subject to the Illinois Dating Services Act and, as
such, our subscription agreements violate the act and are void
and unenforceable. This ruling may subject us to potential
liability for claims brought by the Illinois Attorney General or
customers that have been injured by our violation of the
statute. Fertelmeyster filed a Motion for Reconsideration of the
Memorandum Opinion and, on August 26, 2005, the court
issued its opinion denying Fertelmeysters Motion for
Reconsideration. In the opinion, the court, among other things:
(i) decertified the class, eliminating the last remnant of
the litigation; (ii) rejected each of the plaintiffs
arguments based on the arguments and law that we provided in our
opposition; (iii) stated that the court would not
judicially amend the Illinois statute to provide for restitution
when the legislature selected damages as the sole remedy;
(iv) noted that the cases cited by plaintiff in connection
with plaintiffs Motion for Reconsideration actually
support the courts prior order granting summary judgment
in our favor; and (v) denied plaintiffs Motion for
Reconsideration in its entirety. The time for filing an appeal
from the Memorandum Opinion and the courts order denying
Fertelmeysters Motion for Reconsideration has now lapsed
and as a result thereof, this litigation has concluded.
In December 2002, the Supreme Court of New York dismissed the
case brought by Ms. Grossman. Although the plaintiff
appealed the decision, in October 2004, the New York Supreme
Court, Appellate Division upheld the lower courts
dismissal. In addition, two Justices wrote concurring opinions
stating their opinion that our services were not covered under
the New York Dating Services Act.
A lawsuit has been filed against us in the United States
District Court for the Central District of California by
Datingcity, Ltd, Case No. CV05-4463 SJO (SSx). The
Complaint alleges causes of action for (1) Breach of
Contract, (2) Unjust Enrichment, (3) Promissory
Estoppel, and (4) Accounting. Datingcity alleges that it
entered into a contract with us for the sale of a database owned
by Datingcity. Datingcity further alleges that we did not pay
Datingcity the agreed upon price for the purchase of the
database. We contend that the contract at issue was signed in
error, Datingcity misrepresented the quality of its database,
and the information contained in the database was virtually
useless and without value. Accordingly, on July 15, 2005,
we filed an Answer and Counterclaim against Datingcity alleging
claims for (1) Rescission based on Unilateral Mistake,
(2) Rescission based on Mutual Mistake, (3) Rescission
based on Failure of Consideration, (4) Rescission based on
Fraud in the Inducement, (5) Fraud, (6) Negligent
Misrepresentation, and (7) Declaratory Relief. At a status
conference that was held on August 22, 2005, the court
scheduled this matter for a jury trial on April 25, 2006,
however, in September 2005 we settled this litigation for
$75,000.
On July 21, 2005, Leonard Kristal (Kristal) and
MatchPower Ltd. (MatchPower) filed an action in the
Los Angeles County Superior Court, Civil Action
No. SC086367, entitled LEONDARD KRISTAL, and
MATCHPOWER, LTD., Plaintiffs, v. MATCHNET, PLC; SPARK NETWORKS,
PLC, and DOES 1 through 25, inclusive, Defendants (the
Kristal/ MatchPower Action). In their complaint,
Kristal and MatchPower assert claims for a breach of contract,
wrongful termination in violation of
82
public policy, and solicitation of employee by
misrepresentation. MatchPower alleges that it entered into an
agreement with us to pay MatchPower the sum of $15,000 per month
from March 30, 2004 through April 2005 and that we now owe
MatchPower the sum of $90,000 under the agreement. We filed a
Motion to Dismiss and/or for Forum Non Conveniens under the
MatchPower agreement, which provides that the exclusive
jurisdiction for disputes is the English courts, in
order to require that MatchPower litigate its claims, if any, in
England. The Court granted that Motion and MatchPower is no
longer a party to the case. Kristal alleges that (i) we
entered into an employment agreement pursuant to which Kristal
was employed on a part-time basis at the rate of $10,000 per
month through April 2005, (ii) the employment agreement was
amended in July 2004 to increase Kristals monthly salary
to $15,000 per month, (iii) Kristal was required to move
and establish residency in Los Angeles and (iv) the
employment agreement was terminated on December 22, 2004.
Kristal alleges that we owe him $85,000 under the agreement,
plus a waiting time penalty of $15,000. Kristal also alleges
that, in August 2004, we orally promised Kristal the right to
purchase at least 110,000 shares of the our stock at a purchase
price of $2.50 and that he was terminated because he made a
written complaint that he had not been paid according to his
contract and as a result, his termination was a retaliatory
termination in violation of public policy. Kristal claims that
he is entitled to recover damages for pain and suffering and
emotional distress and punitive damages based on his retaliatory
termination. In addition, Kristal claims that he was induced to
move to Los Angeles for the purpose of accepting employment from
us in Los Angeles and that we promised Kristal employment at
least through April 2005, together with wages for employment at
the rate of $15,000 per month. According to Kristal, we
misrepresented to Kristal the length of his employment and the
compensation therefore, and as a result, he claims he is
entitled to double damages caused by misrepresentations
allegedly made by us to Kristal pursuant to California Labor
Code § 972. A mediation occurred in Kristal on
January 17, 2006. At the mediation, the parties entered
into a binding settlement stipulation (the
Stipulation). According to the terms of the
Stipulation, we will pay to Kristal the sum of $150,000 in equal
monthly installments of $8,333.33 commencing February 1,
2007, and Kristal and MatchPower will: (i) execute general
releases of known and unknown claims in favor of us and
(ii) dismiss with prejudice the action they have filed
against us.
We have filed an action in the Los Angeles County Superior Court
(the JetPay Action) against JetPay Merchant
Services, LLC. In the Complaint in the JetPay Action, we assert
causes of action against JetPay for breach of oral contract,
intentional misrepresentation, fraudulent inducement,
intentional interference with economic advantage, breach of
fiduciary duty, negligence, unfair business practices, and
declaratory relief. We seek compensatory damages against JetPay
in the sum of $2,277,095.38 together with punitive damages to
the extent permitted by applicable California law as provided in
the Complaint in the JetPay Action. JetPay has provided a
written memorandum to us in which JetPay claims that it suffered
actual damages of $439,012.70 as of January 10, 2006 and is
entitled to recover liquidated damages in the amount of
$682,514.54. For the reasons set forth in our Complaint in the
JetPay action, among others, we believe that we are not indebted
to JetPay in any amount whatsoever, intend to vigorously defend
any claim filed by JetPay against us, whether in the JetPay
action or otherwise, and are in the process of prosecuting the
JetPay Action against JetPay for the recovery of the damages set
forth above suffered by our company as a result of the acts and
omissions of JetPay.
We intend to defend vigorously against each complaint and/or
cross-complaint filed against us. However, no assurance can be
given that these matters will be resolved in our favor and,
depending on the outcome of these lawsuits, we may choose to
alter our business practices.
We have additional existing legal claims and may encounter
future legal claims in the normal course of business. We believe
that the resolution of the existing legal claims are not
expected to have a material impact on our financial position or
results of operations. We believe we have accrued appropriate
amounts where necessary in connection with the above litigation.
83
MANAGEMENT
Executive Officers and Directors
As of January 31, 2006, our executive officers and
directors are set forth below.
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Name |
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Age | |
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Position |
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| |
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David E. Siminoff
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41 |
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President, Chief Executive Officer and Director |
Gregory R. Liberman
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33 |
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Chief Operating Officer, General Counsel and Company Secretary |
Philip Nelson
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42 |
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Chief Technology Officer |
Mark G. Thompson
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|
|
44 |
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Chief Financial Officer |
Joe Y. Shapira
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52 |
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Chairman of the Board |
Michael A. Brown
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40 |
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Director |
Martial Chaillet
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58 |
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Director |
Benjamin Derhy
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|
|
51 |
|
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Director |
Laura Lauder
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|
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44 |
|
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Director |
Scott L. Shleifer
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27 |
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|
Director |
David E. Siminoff has served as our President and
Chief Executive Officer since August 2004 and as a member of our
Board of Directors since March 2004. From October 2003 to
February 2004, Mr. Siminoff was Chief Financial Officer of
PayByTouch, a company that produces biometric payment services
and during interim periods of employment, Mr. Siminoff was
a private investor of several
start-up companies.
From August 1994 to January 2003, Mr. Siminoff served as a
Research Analyst and Portfolio Manager for Capital Research and
Management Company, where he dealt primarily with Media and
Internet technologies. In 1998 he was named Best of the
Buyside by Institutional Investor Magazine. Prior to his
work with Capital Research, Mr. Siminoff founded EastNet, a
global syndicate barter company. Mr. Siminoff received both
BA and MBA degrees from Stanford University and a Masters degree
in Fine Arts from the University of Southern California film
school.
Gregory R. Liberman was appointed Chief Operating
Officer in September 2005 and has served as our General Counsel
since October 2004 and Company Secretary since January 2005.
From January 2004 to May 2004 Mr. Liberman served as
General Counsel and Corporate Secretary of CytRx Corporation, a
publicly-traded biotechnology company based in Los Angeles.
During his tenure there, Mr. Liberman oversaw legal
affairs, policy and strategy for the company. From January 2002
to December 2003, Mr. Liberman served as an independent
strategic consultant. Immediately prior to that consulting work,
from September 2001 to November 2001, he attended and completed
the Program for Management Development at Harvard Business
School. From March 1999 to August 2001, Mr. Liberman served
in a variety of senior legal and corporate development roles at
telecommunications firm Global Crossing and Internet
infrastructure providers GlobalCenter (then, a subsidiary of
Global Crossing) and Exodus Communications. Mr. Liberman
joined Exodus, where he ultimately served as Vice President,
Legal & Corporate Affairs, after Global Crossings
sale of GlobalCenter to Exodus. Immediately prior to
Exodus acquisition of GlobalCenter, Mr. Liberman
served as GlobalCenters Vice President, Corporate
Development and Associate General Counsel. While at Global
Crossing, Mr. Liberman served as Director, Business
Development Counsel. Mr. Liberman earned a JD, with Honors,
from The Law School at the University of Chicago and an AB, with
University Distinction and Honors in Economics, from Stanford
University.
Philip Nelson has served as our Chief Technology
Officer since October 2004. Previously, Mr. Nelson was
Entrepreneur in Residence at Accel Partners, a Silicon Valley
venture capital firm from June 2003 to October 2004. In May
2001, Mr. Nelson founded and became the CEO of Anteros,
which offers innovative integration technology to connect
personal productivity tools to enterprise applications.
84
From January 1998 to May 2001 he was technical co-founder of
Impresse Corp, a provider of hosted marketing collaboration and
spend management solutions. At Impresse, he served in a
technical and customer facing role. Earlier in his career,
Mr. Nelson held a role similar to the one at Impresse with
Verity, corp. He was also a software engineer with Advanced
Decision Systems, and won awards for his work at Harvard Medical
School improving the design of artificial hip and knee implants.
Mr. Nelson holds an SB from MIT in computer science.
Mark G. Thompson has served as our Chief Financial
Officer since October 2004. He brings 16 years of financial
management and capital markets experience to his current role.
From December 2002 to October 2003 and from February 2004 to
September 2004 Mr. Thompson served as CFO of Pay By Touch,
the leading provider of biometric payment authentication and
payment processing services. From October 2003 to February 2004
Mr. Thompson was Vice President Finance of Pay By Touch.
From August 2001 to October 2002 Mr. Thompson was CFO of
Vectiv and from July 1999 to July 2001 he was CFO of
MarketTools, a provider of online marketing research.
Previously, he was Corporate Treasurer of PeopleSoft and
Assistant Treasurer of Chiron. Mr. Thompson also held
senior positions in finance and engineering at Chevron. He holds
a BS degree in electrical engineering from Texas A&M
University and an MBA from The Haas School of Business at The
University of California at Berkeley.
Joe Y. Shapira has served as our Executive
Chairman of the Board of Directors since February 2005 but has
resigned from his executive operating role effective
December 31, 2005. Mr. Shapira remains Chairman of the
Board. From February 2004 to February 2005, Mr. Shapira
served as our Executive Co-Chairman of the Board of Directors.
From our inception in September 1998 to February 2004,
Mr. Shapira served as Chief Executive Officer and Chairman
of the Board. He was a co-founder and director of NetCorp, the
original developer and owner of JDate. In 1995, Mr. Shapira
developed a concept for dating over the Internet and oversaw the
software development, design and implementation of the business
model of JDate.com. Previously, from 1991 until 1994,
Mr. Shapira co-founded and served as a director and officer
of Matrix Video Duplication Corporation, a publicly listed
company on the Tel Aviv Stock Exchange. From 1987 until
1991, Mr. Shapira co-founded and served as a director and
officer of Video Tape Industries, Inc. From 1983 to 1987,
Mr. Shapira was a principal in Sha-Rub Investment Co., a
Southern California real estate development company.
Mr. Shapira graduated from the Ort Singlavosky Institution
of Technology in Tel Aviv, Israel in 1972.
Michael A. Brown has served as a member of our
Board of Directors since December 2004. Since September 2002,
Mr. Brown has been a managing partner at government and
public affairs consulting firm Alcalde & Fay, based in
Washington, D.C. At Alcalde & Fay, Mr. Brown
is focused on international trade, foreign relations, federal
and state representation and public policy. In addition to
serving on the Board of Directors of Spark Networks,
Mr. Brown serves on the Board of Directors of Comcast of
Washington, DC. From June 1996 to September 2002, he
practiced law at Washington-based Patton Boggs LLP, where he
concentrated on a range of municipal issues. Mr. Brown has
twice been appointed as a member to the U.S. Presidential
Delegations to Africa and serves as the president of the Ronald
H. Brown Foundation, which seeks to carry on the work of
Mr. Browns father, who was U.S. Secretary of
Commerce under former President Bill Clinton. Mr. Brown
earned a BA degree from Clark University and a JD from Widener
University School of Law.
Martial Chaillet has served as a member of our
Board of Directors since February 2005. Mr. Chaillet
founded MediaWin & Partners in January 2003. MediaWin
is a private investment firm that focuses primarily on
investments in media and media-related companies. Prior to
founding MediaWin, Mr. Chaillet served in a variety of
roles at The Capital Group for thirty years, most recently as
Senior Vice President and Global Portfolio Manager of Capital
Research and Management, the mutual fund arm of the financial
institution. In addition to serving on our Board of Directors,
Mr. Chaillet sits on the Boards of Directors of Infosearch,
Wisekey, Snap TV and Media Partners. Mr. Chaillet earned a
degree in Econometrics from the University of Geneva and
graduated, with honors, from the Swiss Technical School.
85
Benjamin Derhy has served as a member of our Board
of Directors since October 2004. Over the last five years,
Mr. Derhy has not held any employment positions but has
been a private investor and entrepreneur, focusing on Internet,
consumer products and real estate sectors as well as
start-up companies in
Europe and Israel. His experience also includes working with
American companies and their expansion internationally. In 1984,
Mr. Derhy co-founded Turbo Sportswear, a successful
clothing manufacturer, and was employed there until 1997.
Previously, he was controller at the Hebrew University in
Jerusalem, responsible for annual budgets, financial planning
and cost accounting. Mr. Derhy holds both BA and MBA
degrees from the Hebrew University.
Laura Lauder has served as a member of our Board
of Directors since January 2005. Mrs. Lauder has served as
a General Partner at Lauder Partners, a Silicon Valley-based
venture capital fund, for the past ten years. At Lauder
Partners, Mrs. Lauder focuses primarily on Internet and
cable-related investments. In addition to her work at Lauder
Partners, Mrs. Lauder is involved in a variety of
philanthropic initiatives, particularly in the Jewish community.
In the past, she has served on the boards of numerous
organizations, including the San Francisco Jewish Community
Federation and its Endowment Committee, the Jewish Education
Service of North America, the Jewish Funders Network, American
Jewish World Service and the National Public Radio Foundation.
In 2004, Mrs. Lauder was named one of 10 Women to
Watch by Jewish Woman magazine. Mrs. Lauder
earned a BA in International Relations from the University of
North Carolina Chapel Hill and the Universidad de
Sevilla, Spain.
Scott L. Shleifer has served as a member of our
Board of Directors since December 2004. Mr. Shleifer joined
Tiger Global Management, L.L.C. in July 2002. Tiger Global
Management is an equity investment firm currently managing
approximately $1 billion. Mr. Shleifer is a Managing
Director focusing primarily on investments in the Internet,
for-profit education, and business services sectors. In addition
to serving on the Board of Directors of Spark Networks,
Mr. Shleifer sits on the Board of Directors of PRC.EDU, an
online, for-profit education company in China. Prior to joining
Tiger Global Management, Mr. Shleifer was a private equity
investor at The Blackstone Group from July 1999 to June 2002. He
received a BS in Economics from the Wharton School at the
University of Pennsylvania, where he graduated magna cum laude.
There are no family relationships among any of our executive
officers or directors.
Compensation of Directors
We pay non-employee directors an annual compensation of $30,000
for their services, except Scott Shleifer who does not receive
compensation as a director. In addition, non-employee directors
receive a fee of $1,000 for each board and committee meeting
attended in person and $500 for each such meeting attended by
phone. Non-employee directors are also reimbursed for reasonable
costs and expenses that are approved and incurred in the
performance of their duties. Officers of our company who are
members of the Board of Directors are not paid any
directors fees. Directors are eligible to receive, from
time to time, grants of options to purchase shares under our
2004 Share Option Scheme as determined by the Board of
Directors. In 2004, we granted options to purchase 80,000
ordinary shares, which vest over a four-year period, to Michael
Brown and Benjamin Derhy, and in February 2005 we made a similar
grant of options to purchase 80,000 ordinary shares to
Laura Lauder and Martial Chaillet.
Election of Directors
Our Articles of Association provide that all directors appointed
by the Board since the last annual general meeting are subject
to election by shareholders at the first annual general meeting
following their appointment. Our Articles of Association also
provide that the re-election of our Board of Directors shall be
performed through a retirement by rotation system.
At each annual general meeting one-third, or the number nearest
to but not exceeding one-third, of our Board of Directors
86
shall retire from office by rotation. Any retiring
director shall be eligible for re-election. Our directors who
retire by rotation include (1) any director who wishes to
retire and not to offer himself for re-election and (2) any
further directors who retire by rotation are those who have been
longest in office since their last election or re-election.
Where two or more persons became or were re-elected as directors
on the same day, those to retire, unless they otherwise agree
among themselves, are determined by lot.
Board Committees
Audit Committee. The audit committee consists of
Martial Chaillet, Michael Brown and Benjamin Derhy, each of whom
are independent directors. Mr. Chaillet, Chairman of the
audit committee, is an audit committee financial
expert as defined under Item 401(h) of
Regulation S-K.
The purpose of the audit committee is to represent and assist
our Board of Directors in its general oversight of our
accounting and financial reporting processes, audits of the
financial statements and internal control and audit functions.
The audit committees responsibilities include:
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The appointment, replacement, compensation, and oversight of
work of the independent auditor, including resolution of
disagreements between management and the independent auditor
regarding financial reporting, for the purpose of preparing or
issuing an audit report or performing other audit, review or
attest services. |
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Reviewing and discussing with management and the independent
auditor various topics and events that may have significant
financial impact on our company or that are the subject of
discussions between management and the independent auditors. |
Compensation Committee. The compensation committee
consists of Scott Shleifer, Benjamin Derhy and Laura Lauder,
each of whom are independent directors. Mr. Shleifer is the
Chairman of the compensation committee. The compensation
committee is responsible for the design, review, recommendation
and approval of compensation arrangements for our directors,
executive officers and key employees, and for the administration
of our share option schemes, including the approval of grants
under such schemes to our employees, consultants and directors.
The compensation committee also reviews and determines
compensation of our executive officers, including our Chief
Executive Officer.
Nominating Committee. The nominating committee
consists of Michael Brown, Martial Chaillet and Laura Lauder,
each of whom are independent directors. Mr. Brown is the
Chairman of the nominating committee. The nominating committee
assists in the selection of director nominees, approves director
nominations to be presented for shareholder approval at our
annual general meeting and fills any vacancies on our Board of
Directors, considers any nominations of director candidates
validly made by shareholders, and reviews and considers
developments in corporate governance practices.
Compensation Committee Interlocks and Insider
Participation
To date, we have not had a compensation committee or other Board
committee performing equivalent functions. All members of our
Board of Directors, some of whom were executive officers,
participated in deliberations concerning executive officer
compensation. No interlocking relationship exists between our
Board of Directors and the board of directors or compensation
committee of any other company.
Summary Executive Compensation Table
The following table sets forth information concerning the annual
and long-term compensation earned by our Chief Executive Officer
and each of the other executive officers who served during the
year
87
ended December 31, 2005, and whose annual salary and bonus
during the fiscal years ended December 31, 2003, 2004 and
2005 exceeded $100,000 (the Named Executive
Officers).
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Long-Term | |
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Compensation | |
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Annual Compensation | |
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Securities | |
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Other Annual | |
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Underlying | |
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All Other | |
Name and Principal Position |
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Year | |
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Salary | |
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Bonus | |
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Compensation(3) | |
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Options | |
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Compensation(4) | |
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David E.
Siminoff(1)
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2005 |
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$ |
480,000 |
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$ |
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$ |
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$ |
14,000 |
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President and Chief |
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2004 |
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164,701 |
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1,275,000 |
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800 |
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Executive Officer |
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Joe Y.
Shapira(2)
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2005 |
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365,833 |
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250,000 |
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14,000 |
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Chairman of |
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2004 |
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370,207 |
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20,000 |
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12,645 |
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the Board |
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2003 |
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528,000 |
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1,372,000 |
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20,000 |
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14,000 |
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Gregory R.
Liberman(5)
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2005 |
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186,742 |
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25,000 |
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150,000 |
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7,500 |
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Chief Operating |
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2004 |
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33,409 |
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100,000 |
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Officer and
General Counsel |
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Philip C.
Nelson(6)
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2005 |
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250,000 |
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10,000 |
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Chief Information |
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2004 |
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61,553 |
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250,000 |
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10,000 |
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Officer |
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Mark G.
Thompson(7)
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2005 |
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200,000 |
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25,000 |
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8,000 |
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Chief Financial Officer |
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2004 |
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49,242 |
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250,000 |
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1,083 |
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(1) |
Mr. Siminoff became our President and Chief Executive
Officer in August 2004 and has served on the Board of Directors
since March 2004. |
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(2) |
Mr. Shapira served as our Chief Executive Officer in 2004
and 2003 and until he became Executive Co-Chairman in February
2004. Mr. Shapira became sole Executive Chairman in
February 2005. Mr. Shapira resigned from an executive
operating role with our company effective December 31,
2005, but remains Chairman of the Board. Compensation amounts
for 2005 exclude a severance payment of $125,000 from us to
Mr. Shapira pursuant to a Separation Agreement entered into
on January 27, 2006 with effect from January 1, 2006. |
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(3) |
Represents an annual automobile allowance. |
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(4) |
Represents the amount of our annual matching contribution to
each individuals 401(k) account. |
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(5) |
Mr. Liberman has served as our General Counsel since
October 2004 and Chief Operating Officer since September 2005. |
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(6) |
Mr. Nelson became our Chief Technology Officer in October
2004. |
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(7) |
Mr. Thompson became our Chief Financial Officer in October
2004. |
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Employment Agreements
We hired David E. Siminoff as our President and Chief Executive
Officer in August 2004 at an annual salary of $480,000. In
addition, we granted Mr. Siminoff options to
purchase 1,250,000 ordinary shares at a per share exercise
price of $4.24. Of these options, 156,250 vested and became
exercisable on February 12, 2005, and 156,250 options
vested and became exercisable on August 12, 2005 and
312,500 vest each of the three
12-month periods
thereafter. If Mr. Siminoff is terminated, including
voluntary termination, within six months after a change of
control, which is defined in Mr. Siminoffs option
agreement as an acquisition of more than 45% of our then
outstanding shares, or other acquisition of effective control of
our company, all of his options will vest immediately. If
Mr. Siminoff is terminated without cause or if he
terminates his employment with us for good reason, 30% of his
unvested options will be accelerated and he will also be
entitled to payment of his monthly salary in effect at the time
of termination for a period of nine months following such
termination. Pursuant to the terms of his Employment Agreement,
Mr. Siminoff may not directly or indirectly compete with us
or solicit our customers during the term of his Employment
Agreement and he may not disclose any confidential information
during or after his employment. In August 2004,
Mr. Siminoff also agreed to continue to serve as a member
of our Board of Directors. For his services as director,
Mr. Siminoff received options to purchase 25,000
ordinary shares at a per share exercise price of $9.55, all of
which are currently vested.
88
Pursuant to the offer letter and executive employment agreement
with Mark Thompson, we hired Mr. Thompson as our Chief
Financial Officer in October 2004 at an annual salary of
$200,000 and upon a successful listing of our shares or a
derivative security of our shares on a national exchange or the
Nasdaq National Market in the United States, we will pay him a
bonus of $80,000. In addition, we granted Mr. Thompson
options to purchase 250,000 ordinary shares at a per share
exercise price of $6.69. Those options will vest at a rate of
12,500 shares per quarter for quarterly periods commencing
three months after the date his employment commenced; provided,
however, that options to purchase 50,000 of those shares
will accelerate upon a successful listing of our shares or a
derivative security of our shares on a national exchange or the
Nasdaq National Market in the United States. In addition, all of
the options will accelerate upon a change of control of our
company, which is defined in Mr. Thompsons employment
agreement as the acquisition of more than 50% of our outstanding
shares. Pursuant to the terms of his Employment Agreement,
Mr. Thompson may not directly or indirectly solicit our
customers using confidential information for a period of
12 months following the termination of his Employment
Agreement and he may not disclose any confidential information
during or after his employment.
We hired Philip Nelson as our Chief Technology Officer in
October 2004 at an annual salary of $250,000. In addition, we
granted Mr. Nelson options to purchase 250,000
ordinary shares at a per share exercise price of $6.69.
Mr. Nelsons options will vest at a rate of
15,625 shares per quarter, with the first vesting date
occurring in January 2005. In addition, all unvested options
will become vested upon a change of control of our company,
which is defined in Mr. Nelsons employment agreement
as the acquisition of more than 50% of our outstanding shares.
Pursuant to the terms of his Employment Agreement,
Mr. Nelson may not directly or indirectly solicit our
customers using confidential information for a period of
12 months following the termination of his Employment
Agreement and he may not disclose any confidential information
during or after his employment.
Pursuant to the Executive Employment Agreement with Joe Y.
Shapira, effective March 1, 2005, Mr. Shapira serves
as the Executive Chairman of our Board of Directors at an annual
salary of $350,000. On December 5, 2005, Mr. Shapira
announced that he is resigning from an executive operating role
with our company effective December 31, 2005. On
January 27, 2006, we entered into a separation agreement
with Mr. Shapira (the Separation Agreement)
with effect from January 1, 2006 pursuant to which
Mr. Shapiras Employment Agreement was terminated.
Mr. Shapira will continue to be a director and serve as
Chairman of our Board of Directors. In connection with
Mr. Shapiras departure from an executive role with
our company, and pursuant to the Separation Agreement,
Mr. Shapira received a one time severance payment of
$125,000. According to the Separation Agreement,
Mr. Shapira will retain all share options previously
awarded to him, and such options will vest and become
exercisable on the terms set forth in the respective option
certificates. In the past, we had granted Mr. Shapira
options to purchase 250,000 ordinary shares at a per share
exercise price of $10.50. The options vest at a rate of
31,250 shares per quarter commencing June 1, 2005 and
will continue to vest so long as Mr. Shapira remains a director.
All unvested options will become vested upon a change in control
of our company, which is defined as the acquisition of more than
50% of our outstanding shares. Mr. Shapira may not disclose
any confidential information during or after his employment.
In August 2005, we entered into an executive employment
agreement with Gregory R. Liberman, our General Counsel and
Corporate Secretary, making Mr. Liberman our Chief
Operating Officer. Pursuant to terms of the employment
agreement, Mr. Liberman will be compensated at an annual
salary of $200,000, and upon a successful listing of our shares
or a derivative security of our shares on a national exchange or
the Nasdaq National Market in the United States, we will pay him
a bonus of $25,000. We also granted Mr. Liberman options,
in addition to options granted to him prior to becoming our
Chief Operating Officer, to purchase 115,000 ordinary
shares at a per share exercise price of $8.74. Those options
will vest at a rate of 6.25% per quarter for quarterly
periods commencing three months after the date his employment
commenced; provided, however, that options
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to purchase 50,000 of those shares will accelerate upon a
successful listing of our shares or a derivative security of our
shares on a national exchange or the Nasdaq National Market in
the United States. In addition, all of the options will
accelerate upon a change of control of our company, which is
defined in Mr. Libermans employment agreement as the
acquisition of more than 50% of our outstanding shares. Pursuant
to the terms of his Employment Agreement, Mr. Liberman may
not directly or indirectly solicit our customers using
confidential information for a period of 12 months
following the termination of his Employment Agreement and he may
not disclose any confidential information during or after his
employment.
Our Compensation Committee typically determines each executive
officers annual bonus and will consider the officers
performance in light of corporate goals and objectives relevant
to executive compensation, such as our net revenues, competitive
market data pertaining to executive compensation at comparable
companies, and such other factors, including factors unrelated
to our financial performance, as it may deem relevant. All of
our executive officers are eligible to receive an annual bonus
at the discretion of the Compensation Committee. There is no
specific limit on the amount of a bonus that an officer may
receive.
Options Granted in the Year Ended December 31, 2005
The following table sets forth information concerning individual
grants of stock options in 2005 to the Named Executive Officers:
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Individual Grants | |
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Potential Realizable | |
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Value at Assumed | |
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Annual Rates of Stock | |
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Securities | |
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Percent of | |
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Price Appreciation | |
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Underlying | |
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Total Options | |
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Exercise or | |
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for Option Term(3) | |
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Options | |
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Granted to | |
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Granted | |
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Employees(1) | |
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Per Share(2) | |
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Date | |
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5% | |
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10% | |
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David E. Siminoff
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% |
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$ |
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$ |
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Joe Y. Shapira
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250,000 |
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18.1 |
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9.12 |
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03/01/12 |
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928,189 |
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2,163,075 |
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Gregory R. Liberman
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35,000 |
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2.5 |
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7.72 |
|
|
|
02/03/12 |
|
|
|
109,999 |
|
|
|
256,343 |
|
|
|
|
115,000 |
|
|
|
8.3 |
|
|
|
8.47 |
|
|
|
08/31/12 |
|
|
|
396,536 |
|
|
|
924,098 |
|
Mark G. Thompson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip C. Nelson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The total number of options granted to our employees, excluding
160,000 shares underlying options granted to non-employee
directors, during 2005 was 1,384,000 shares underlying
options. |
|
|
(2) |
The exercise price per share of options granted represents the
fair market value of the underlying shares on the date the
options were granted and are converted from Euros to
U.S. dollars using the exchange rate as of
December 31, 2005. |
|
|
(3) |
In order to comply with the rules of the SEC, we are including
the gains or option spreads that would exist for the
respective options we granted to the Named Executive Officers.
We calculated these gains by assuming an annual compound stock
price appreciation of 5% and 10% from the date of the option
grant until the termination date of the option, which is the
seventh anniversary of the grant date. These gains do not
represent our estimate or projection of the future price of the
ordinary shares. |
|
90
Options Exercises and Options Values for Year Ended
December 31, 2005
The following table sets forth information concerning option
exercises in 2005 and option values as of December 31, 2005
to the Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
Value of Unexercised | |
|
|
Shares | |
|
|
|
Underlying Unexercised | |
|
In-the-Money Options | |
|
|
Acquired | |
|
|
|
Options at Fiscal Year-End | |
|
at Fiscal Year-End(3) | |
|
|
on | |
|
Value | |
|
| |
|
| |
Name |
|
Exercise(1) | |
|
Realized(2) | |
|
Exercisable | |
|
Un-exercisable | |
|
Exercisable | |
|
Un-exercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
David E. Siminoff
|
|
|
|
|
|
$ |
|
|
|
|
337,500 |
|
|
|
937,500 |
|
|
$ |
1,162,193 |
|
|
$ |
3,486,578 |
|
Joe Y. Shapira
|
|
|
2,500,000 |
|
|
|
10,689,588 |
|
|
|
93,750 |
|
|
|
156,250 |
|
|
|
|
|
|
|
|
|
Gregory R. Liberman
|
|
|
|
|
|
|
|
|
|
|
47,188 |
|
|
|
202,812 |
|
|
|
46,266 |
|
|
|
101,784 |
|
Mark G. Thompson
|
|
|
|
|
|
|
|
|
|
|
62,500 |
|
|
|
187,500 |
|
|
|
99,934 |
|
|
|
299,801 |
|
Philip C. Nelson
|
|
|
|
|
|
|
|
|
|
|
78,125 |
|
|
|
171,875 |
|
|
|
124,917 |
|
|
|
274,818 |
|
|
|
|
(1) |
Shares acquired on exercise includes all shares underlying the
share option or portion of the option exercised, without
deducting shares held to satisfy tax obligations, if any, sold
to pay the exercise price or otherwise disposed of. |
|
|
(2) |
The value realized of exercised options is the product of
(a) the excess of the per share fair market value of the
ordinary share on the date of exercise over the per share option
exercise price and (b) the number of shares acquired upon
exercise. |
|
|
(3) |
The value of unexercised
in-the-money
options is based on a price per share of $7.42, which was the
price of a share as quoted on the Frankfurt Stock Exchange at
the close of business on December 31, 2005, minus the
exercise price, multiplied by the number of shares underlying
the option. |
|
Benefit Plans
2004 Share Option Scheme
Our 2004 Share Option Scheme (2004 Option
Scheme) provides us the ability to grant share options to
employees, consultants and directors, and is administered by our
Board of Directors, which determines the option grant date,
option price and vesting schedule of each option in accordance
with the terms of our 2004 Option Scheme. Although our Board of
Directors determines the exercise prices of options granted
under the 2004 Option Scheme, the exercise price per share may
not be less than 85% of the fair market value, as
defined in the 2004 Option Scheme, on the date of grant. Options
granted under the 2004 Option Scheme vest and terminate over
various periods at the discretion of our Board of Directors, but
subject to the terms of the 2004 Option Scheme. Moreover, the
exercise of options may be made subject to such performance or
other conditions as our Board of Directors may determine.
Options granted under the 2004 Option Scheme are personal to the
option holder to whom they are granted and no transfer or
assignment is permitted, other than a transfer to the option
holders personal representatives on death.
Our 2004 Option Scheme terminates on September 20, 2014,
unless our Board of Directors terminates it earlier.
Nevertheless, options granted under the 2004 Option Scheme may
extend beyond the date of termination. Our Board of Directors
has the discretion, subject to limitations set forth in the 2004
Option Scheme, to determine different exercise and lapse
provisions. If a third party makes an offer to all shareholders
to acquire all or a majority of our issued and outstanding
shares, other than those shares which are already owned by the
offeror, an option holder under the 2004 Option Scheme may
exercise any of his or her options at any time within six months
of the offeror obtaining control of us; provided, however that
the options do not lapse pursuant to a separate provision under
the 2004 Option Scheme prior to exercise. If an effective
resolution in general meeting for our voluntary
winding-up is passed
before the date on which an option lapses, such an outstanding
option then becomes exercisable for a period of three months
after such resolution becomes effective. However, no exercise of
an option is permitted at any time after the option has lapsed
under a separate provision of the 2004 Option Scheme. At the end
of the three month period all options will lapse.
In addition to the terms described above, options granted to
employees and service providers of our Israeli subsidiary who
are resident in Israel are also subject to the
Sub-Plan for Israeli
Employees and
91
Service Providers. The
Sub-Plan, which
incorporates the 2004 Plan by reference, provides additional
rules applicable to options granted to those Israeli Employees
and Service Providers, as defined by the
Sub-Plan.
As of September 30, 2005, 2,618,938 share options were
outstanding under the 2004 Option Scheme at prices ranging from
$5.90 to $9.34 per share.
2000 Share Option Scheme
Under the terms of our 2000 Executive Share Option Scheme
(2000 Option Scheme), our Board of Directors was
able to grant options, in their discretion, to our employees,
directors and consultants. The Board of Directors determined the
option price, vesting schedule and termination provisions of
each option, subject to limitations contained in the 2000 Option
Scheme. In September 2004, our Board of Directors resolved to
cease granting options under the 2000 Option Scheme although,
pursuant to the provisions of the 2000 Option Scheme, all
outstanding options previously granted under the 2000 Option
Scheme continue in full force and effect. Our Board of Directors
intends to use our 2004 Option Scheme to grant options to
employees, consultants and directors in the future.
As of September 30, 2005, 6,136,500 share options were
outstanding under the 2000 Option Scheme at prices ranging from
$0.88 to $9.51 per share.
Employee Benefit Plan
We have a defined contribution plan under Section 401(k) of
the U.S. Internal Revenue Code covering all full-time
employees, and providing for matching contributions by us, as
defined in the plan. Participants in the plan may direct the
investment of their personal accounts to a choice of mutual
funds consisting of various portfolios of stocks, bonds, or cash
instruments. Contributions made by us to the plan for the years
ended December 31, 2002, 2003 and 2004 were approximately
$88,000, $110,000 and $184,000, respectively.
Indemnification of Directors and Officers and Limitation of
Liability
Pursuant to our Articles of Association and in accordance with
the Companies Act 1985, we provide the following indemnification
to our directors and other officers:
|
|
|
(a) Indemnification of directors in
respect of proceedings brought by third parties (covering both
legal costs and the financial costs of any adverse judgment,
except for the legal costs of unsuccessful defenses of criminal
proceedings, fines imposed in criminal proceedings and penalties
imposed by certain regulatory bodies); |
|
|
(b) Payment of directors
defense costs as they are incurred, including if the action is
brought by the company itself. A director in this situation
would still be liable to pay any damages awarded to our company
and to repay his defense costs to the company if his defense
were unsuccessful, other than where the company chooses to
indemnify him in respect of legal costs incurred in certain
types of civil third party proceedings; and |
|
|
(c) Indemnification of our officers
who are not directors without many of the restrictions that
apply to indemnification of directors. |
We have entered into indemnification agreements with our
directors and executive officers that require us to indemnify
them from and against all liabilities, costs, including legal
costs, claims, actions, proceedings, demands, expenses and
damages arising in connection with the performance by them of
their respective duties to the fullest extent permitted by our
Memorandum and Articles of Association and applicable law, each
as modified from time to time.
92
We are required to disclose such indemnities in our annual
directors report which is publicly filed with the
Registrar of Companies for England and Wales. Shareholders are
able to inspect any relevant indemnification agreement.
We maintain a directors and officers insurance
policy. The policy insures directors and other officers against
unindemnified losses arising from certain wrongful acts in their
capacities as directors and officers and reimburses our company
for those losses for which we have lawfully indemnified our
directors and officers. The policy contains various exclusions.
93
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Advances to Executives
Pursuant to then-existing compensation arrangements, we made
advances to two executive employees, Joe Y. Shapira and Alon
Carmel, of approximately $700,000 each as payments under
guaranteed compensation arrangements as of December 31,
2002. During 2003, our Board of Directors declared the
guarantees to have been earned during the year and the
receivable was charged against operating results. As of
December 31, 2003, Joe Y. Shapira was our Chief Executive
Officer and is currently our Chairman of the Board. Alon Carmel
was our President as of December 31, 2003 and is no longer
employed by our company.
Remote Concepts LLC
In 2003, we entered into a verbal marketing arrangement with
Remote Concepts LLC, an entity owned 32.5% by each of Joe
Y. Shapira and Alon Carmel. Remote Concepts LLC has
developed a table top wireless paging system for use by patrons
at restaurants. Further to the verbal arrangement, we expensed
approximately $120,000 paid to Remote Concepts LLC for ad
placement on these systems. The $120,000 was paid and expensed
in 2003. We have not paid or expensed any amounts related to
Remote Concepts LLC since that time.
Severance of Former General Counsel
In 2004, Adam Kravitz resigned as our General Counsel. In
connection with his resignation and further to the terms of his
employment agreement, we paid Mr. Kravitz as severance an
aggregate of approximately $2.4 million. Mr. Kravitz
resigned from our Board of Directors in June 2004.
Efficient Frontier
In 2004, we entered into an agreement with Efficient Frontier, a
provider of online marketing optimization services to procure
and manage a portion of our online paid search and keyword
procurement efforts. The Chief Executive Officer of Efficient
Frontier is Ms. Ellen Siminoff, who is the wife of our
Chief Executive Officer, David E. Siminoff. We paid
approximately $169,000 to Efficient Frontier in the first half
of 2005 and $61,000 in 2004.
Yobon, Inc.
In 2004, we invested $250,000 in Yobon, Inc., a provider of web
toolbar technology. In exchange for our investment in Yobon, we
received a secured convertible promissory note. The note will
automatically convert into equity of Yobon upon its completion
of an equity financing of at least $1,000,000, if such equity
financing is completed within certain timeframes. Our Chief
Technology Officer, Phil Nelson, is the Chairman of Yobon.
Other Relationships
Until August 31, 2005, we employed Elraz Sela, the nephew
of Alon Carmel, our former Co-Executive Chairman of the Board,
in an executive position for which we compensated him
$120,000 per year. In addition, several other relatives of
each of Joe Y. Shapira, currently our Chairman of the Board, and
Alon Carmel hold non-executive positions with us and Spark
Networks Israel for which they are compensated less than $60,000.
Other Agreements
On December 1, 2005, Great Hill Investors, LLC, Great Hill
Equity Partners II Limited Partnership and Great Hill
Affiliate Partners II L.P. purchased an aggregate of
6,000,000 ordinary shares in four
94
privately negotiated transactions. Of the 6,000,000 shares
purchased, (i) 1,250,000 shares were purchased from
Joe Y. Shapira, our Chairman of the Board of Directors, at
$4.60 per share, (ii) 1,250,000 shares were
purchased from Alon Carmel, our former Co-Executive Chairman of
the Board of Directors, at $4.60 per share,
(iii) 1,500,000 shares were purchased from Criterion
Capital Management LLC, a more than 5% holder of our securities,
at $5.35 per share, and (iv) 2,000,000 shares
were purchased from affiliates of Tiger Global Management, L.L.C
at $5.35 per share. Tiger Global Management was our largest
shareholder prior to the sale of the 2,000,000 shares, and
one of our directors, Scott Shleifer, is a limited partner of
Tiger Global, L.P., an affiliate of Tiger Global Management and
one of the sellers of the 2,000,000 shares.
We had entered into a confidentiality agreement dated
October 14, 2005 with Great Hill Equity Partners II
(Great Hill) that contained a provision (the
Standstill Provision) pursuant to which Great Hill
agreed not to, among other things, directly or indirectly
acquire, offer to acquire, or propose to acquire more than 2% of
any class of our securities or rights to acquire more than 2% of
any class of our securities for a period of one year from the
date of the confidentiality agreement without our prior written
consent. On December 1, 2005, we and Great Hill entered
into a standstill agreement (the Standstill
Agreement) pursuant to which we waived the Standstill
Provision and Great Hill agreed that its ability to increase its
beneficial ownership of our securities would be subject to the
terms and conditions of the Standstill Agreement, which has a
term of five years unless terminated earlier. Pursuant to the
Standstill Agreement, for a period of 14 months from the
date of the Standstill Agreement (the Fourteen Month
Period), Great Hill agreed that it would not, without the
prior written consent by us:
|
|
|
|
|
acquire or seek to acquire, directly or indirectly, by purchase
or otherwise, ownership of any of our voting securities (or
rights to acquire any of our class of securities or any
subsidiary thereof) such that Great Hill and its affiliates (the
Great Hill Group) would beneficially own more than
29.9% of our total voting power (the Total Voting
Power), which is defined as the aggregate number of votes
which may be cast by holders of outstanding voting securities on
a poll at a general meeting of ours taking into account any
voting restrictions imposed by our Articles of Association, or
take any action that would require us to make a public
announcement regarding the foregoing under applicable law; |
|
|
|
participate in any of the following with respect to us or our
subsidiaries: (i) any tender, takeover or exchange offer or
other business combination, (ii) any recapitalization,
restructuring, liquidation, dissolution or other extraordinary
transaction, or (iii) any solicitation of proxies or consents to
vote any voting securities; |
|
|
|
form, join or participate in a group as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, in connection with any of the foregoing; |
|
|
|
seek to control our Board of Directors; and |
|
|
|
enter into any arrangements with any third party with respect to
any of the above. |
After the expiration of the Fourteen Month Period, Great Hill
agreed that it would not acquire or seek to acquire beneficial
ownership of any of our voting securities (or rights to acquire
any class of our securities or any subsidiary thereof) or
participate in any tender, takeover or exchange offer or other
business combination, or any recapitalization, restructuring,
dissolution or other extraordinary transaction if
(i) prior to giving effect thereto, the Great Hill
Group beneficially owns less than 60% of Total Voting Power and
(ii) after giving effect, the Great Hill Group would
beneficially own more than 29.9% of Total Voting Power.
Notwithstanding the foregoing, the Great Hill Group, after the
Fourteen Month Period, would not be deemed to beneficially own
any voting securities owned by another person if the sole reason
is being a
95
member of a group with such person and there are no other
indicia of beneficial ownership of such securities that are
attributable to the Great Hill Group.
The provisions of the Standstill Agreement do not apply to
(i) repurchases, redemptions, a rights issue,
recapitalizations and consolidation or a share capital reduction
us, and (ii) offers to acquire securities by the Great Hill
Group to all of the holders of our voting securities.
Furthermore, each member of the Great Hill Group agreed not to
sell or transfer shares purchased pursuant to certain share
purchase agreements for 180 days from the date of the
Standstill Agreement without our written consent.
On December 1, 2005, in connection with the exercise of
options, each of Joe Y. Shapira and Alon Carmel entered into tax
indemnification agreements with us. Mr. Shapira is
currently the Chairman of our Board of Directors.
Mr. Carmel is a co-founder, our former President and former
Executive Co-Chairman of our Board of Directors. Pursuant to the
indemnification agreements, each of Messrs. Shapira and
Carmel agreed to indemnify and to pay us any taxes (including
income, employment or other withholding taxes), interest and/or
penalties and other costs and expenses (including
attorneys fees incurred by us) we are required to pay as a
result of our failure to withhold any federal, state, local or
foreign taxes in respect of the exercise of each of their
options, respectively.
On January 27, 2006, we entered into a separation agreement
with Joe Y. Shapira (the Separation Agreement) with
effect from January 1, 2006 pursuant to which
Mr. Shapiras employment agreement dated March 1,
2005 (the Employment Agreement) was terminated.
Mr. Shapira will continue as the non-executive Chairman of
our Board of Directors. According to the Separation Agreement,
we agreed to pay Mr. Shapira severance pay in the lump sum
amount of $125,000, minus applicable state and federal
withholdings. Mr. Shapira will retain all share options
previously awarded to him, and such options will vest and become
exercisable on the terms set forth in the respective option
certificates. For his services as a director, we will pay
Mr. Shapira a directors fee at the rate of
$30,000 per year, payable in monthly installments of $2,500
each for each month of service. In addition, Mr. Shapira
will receive $1,000 for his in-person attendance at a Board or
committee meeting and $500 for his attendance at a telephonic
Board or committee meeting, in addition to reimbursement for
approved expenses incurred in the performance of his duties.
According to the Separation Agreement, Mr. Shapira is
expected to attend at least four Board meetings and, if
applicable, four committee meetings per year.
Mr. Shapiras appointment to the Board will extend
until our next annual general meeting and continue as long as he
is reelected to the Board by our shareholders, unless
Mr. Shapira resigns or is removed in accordance with our
Memorandum and Articles of Association and applicable law. We
agreed to defend and indemnify Mr. Shapira to the fullest
extent permitted by our charter documents and applicable law
against any demand, claim, cause of action, action, loss, and/or
liability that is made against him arising from or relating to
Mr. Shapiras employment with us, service as a
director of our company, or otherwise. Mr. Shapira agreed
to release and discharge us from any and all employment
termination claims, actions, demands, rights, or damages of any
kind for termination of Mr. Shapiras employment,
Employment Agreement and/or separation from our company.
96
PRINCIPAL AND SELLING SHAREHOLDERS
This prospectus covers the offer and sale by the selling
shareholders from time to time of up to an aggregate of
33,263,996 ordinary shares in the form of ADSs, including
2,595,000 ordinary shares underlying options that were issued to
selling shareholders and 430,000 ordinary shares underlying
warrants that were issued to selling shareholders.
The following table sets forth certain information with respect
to the beneficial ownership of our ordinary shares, as of
December 6, 2005, for:
|
|
|
|
|
each selling shareholder; |
|
|
|
each person or entity who we know beneficially owns more than 5%
of our ordinary shares; |
|
|
|
each of our Named Executive Officers and each of our
directors; and |
|
|
|
all of our executive officers and directors as a group. |
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. The number of
ordinary shares outstanding, on an as-converted basis, used in
calculating the percentage for each listed person or entity
includes ordinary shares underlying options or a warrant held by
the person or entity, all of which are being registered in this
registration statement, but excludes ordinary shares underlying
options or warrants held by any other person or entity. In
addition, each persons or entitys warrants and
options that are exercisable within 60 days of
December 6, 2005 is disclosed below. Percentage of
beneficial ownership is based on 30,238,996 ordinary shares
outstanding as of December 6, 2005.
The term selling shareholders also includes any
transferees, pledgees, donees, or other successors in interest
to the selling shareholders named in the table below. To our
knowledge, except as provided below or in any prospectus
supplements, none of the selling shareholders has had a material
relationship with us within the past three years other than as a
result of the ownership of the shares covered by this
prospectus. To our knowledge, except as indicated by footnote
and subject to applicable community property laws, each person
named in the table has sole voting and investment power with
respect to the ordinary shares set forth opposite such
persons name. Unless otherwise indicated, the address of
our officers and directors is c/o: Spark Networks plc,
8383 Wilshire Blvd., Suite 800, Beverly Hills,
California 90211.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares | |
|
|
Ordinary Shares | |
|
|
|
Beneficially Owned | |
|
|
Beneficially Owned Prior | |
|
|
|
After Completion of | |
|
|
to the Offering | |
|
Number of | |
|
the Offering(1) | |
|
|
| |
|
Ordinary Shares | |
|
| |
|
|
Number of | |
|
Percentage | |
|
Registered for | |
|
Number of | |
|
Percentage | |
Name of Beneficial Owner |
|
Shares | |
|
of Shares | |
|
Sale Hereby | |
|
Shares | |
|
of Shares | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
5% stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Hill Investors,
LLC(2)
|
|
|
6,000,000 |
|
|
|
19.8 |
% |
|
|
6,000,000 |
|
|
|
|
|
|
|
|
% |
Tiger Global Management,
L.L.C.(3)
|
|
|
4,631,085 |
|
|
|
15.3 |
|
|
|
4,631,085 |
|
|
|
|
|
|
|
|
|
Alon
Carmel(4)
|
|
|
3,499,648 |
|
|
|
11.6 |
|
|
|
3,499,648 |
|
|
|
|
|
|
|
|
% |
Capital Research and Management Company
(5)
|
|
|
2,505,000 |
|
|
|
8.3 |
|
|
|
2,505,000 |
|
|
|
|
|
|
|
|
|
Criterion Capital Management
LLC(6)
|
|
|
1,841,337 |
|
|
|
6.1 |
|
|
|
1,841,337 |
|
|
|
|
|
|
|
|
|
FM Fund Management
Limited(7)
|
|
|
2,201,890 |
|
|
|
7.3 |
|
|
|
2,201,890 |
|
|
|
|
|
|
|
|
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David E.
Siminoff(8)
|
|
|
2,124,500 |
|
|
|
6.7 |
|
|
|
2,124,500 |
|
|
|
|
|
|
|
|
|
Joe Y.
Shapira(9)
|
|
|
3,012,639 |
|
|
|
9.9 |
|
|
|
3,012,639 |
|
|
|
|
|
|
|
|
|
97
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares | |
|
|
Ordinary Shares | |
|
|
|
Beneficially Owned | |
|
|
Beneficially Owned Prior | |
|
|
|
After Completion of | |
|
|
to the Offering | |
|
Number of | |
|
the Offering(1) | |
|
|
| |
|
Ordinary Shares | |
|
| |
|
|
Number of | |
|
Percentage | |
|
Registered for | |
|
Number of | |
|
Percentage | |
Name of Beneficial Owner |
|
Shares | |
|
of Shares | |
|
Sale Hereby | |
|
Shares | |
|
of Shares | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gregory R.
Liberman(10)
|
|
|
262,500 |
|
|
|
* |
|
|
|
262,500 |
|
|
|
|
|
|
|
|
|
Mark
Thompson(11)
|
|
|
250,000 |
|
|
|
* |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
Philip
Nelson(12)
|
|
|
250,000 |
|
|
|
* |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
Scott
Shleifer(13)
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Brown(14)
|
|
|
80,000 |
|
|
|
* |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
Benjamin
Derhy(15)
|
|
|
80,000 |
|
|
|
* |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
Laura
Lauder(16)
|
|
|
180,000 |
|
|
|
* |
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
Martial
Chaillet(17)
|
|
|
200,000 |
|
|
|
* |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
All directors and executives as a group
(10 persons)(18)
|
|
|
6,439,639 |
|
|
|
19.6 |
% |
|
|
6,439,639 |
|
|
|
|
|
|
|
|
% |
Other Selling Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europlay Capital Advisors,
LLC(19)
|
|
|
447,711 |
|
|
|
1.5 |
|
|
|
447,711 |
|
|
|
|
|
|
|
|
|
Alex Sandel
|
|
|
141,781 |
|
|
|
* |
|
|
|
141,781 |
|
|
|
|
|
|
|
|
|
Jason Yair Barzilay
|
|
|
127,210 |
|
|
|
* |
|
|
|
127,210 |
|
|
|
|
|
|
|
|
|
The Levy Family Trust of 1997 Dtd 7/10/98 Charles M.
Levy & Lydia Levy TTEEs
|
|
|
96,776 |
|
|
|
* |
|
|
|
96,776 |
|
|
|
|
|
|
|
|
|
Michael McCullough & Ana Rowen McCullough Comm. Prop
|
|
|
82,350 |
|
|
|
* |
|
|
|
82,350 |
|
|
|
|
|
|
|
|
|
John B.
Peterson(20)
|
|
|
75,000 |
|
|
|
* |
|
|
|
75,000 |
|
|
|
|
|
|
|
|
|
Natalie N.
Peterson(21)
|
|
|
75,000 |
|
|
|
* |
|
|
|
75,000 |
|
|
|
|
|
|
|
|
|
Ursula Siekmann
|
|
|
40,000 |
|
|
|
* |
|
|
|
40,000 |
|
|
|
|
|
|
|
|
|
Karen Coster
|
|
|
27,500 |
|
|
|
* |
|
|
|
27,500 |
|
|
|
|
|
|
|
|
|
Yoav Cohen
|
|
|
25,000 |
|
|
|
* |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
Brigitte Kandel
|
|
|
20,000 |
|
|
|
* |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
Peter Kandel
|
|
|
20,000 |
|
|
|
* |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
Yaacov Metzler & Nancy Metzler JTWROS
|
|
|
20,000 |
|
|
|
* |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
Patrick J. Ferrell
|
|
|
18,039 |
|
|
|
* |
|
|
|
18,039 |
|
|
|
|
|
|
|
|
|
Douglas J. Hirsch TTEE of The Douglas Hirsch Living Trust
|
|
|
15,000 |
|
|
|
* |
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
John Benjamin Peterson and Natalie Nicole
Peterson(22)
|
|
|
13,188 |
|
|
|
* |
|
|
|
13,188 |
|
|
|
|
|
|
|
|
|
David Martin
|
|
|
12,300 |
|
|
|
* |
|
|
|
12,300 |
|
|
|
|
|
|
|
|
|
Dr. Eithan Ephrati
|
|
|
11,000 |
|
|
|
* |
|
|
|
11,000 |
|
|
|
|
|
|
|
|
|
Christopher Kandel
|
|
|
10,000 |
|
|
|
* |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
Norman Agran
|
|
|
10,000 |
|
|
|
* |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
Steven G. Small
|
|
|
10,000 |
|
|
|
* |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
Christopher K. Harris
|
|
|
10,000 |
|
|
|
* |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
John J. Lucena Sole TTEE John J. Lucena Living Trust
|
|
|
10,000 |
|
|
|
* |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
Reid Hoffman
|
|
|
9,478 |
|
|
|
* |
|
|
|
9,478 |
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares | |
|
|
Ordinary Shares | |
|
|
|
Beneficially Owned | |
|
|
Beneficially Owned Prior | |
|
|
|
After Completion of | |
|
|
to the Offering | |
|
Number of | |
|
the Offering(1) | |
|
|
| |
|
Ordinary Shares | |
|
| |
|
|
Number of | |
|
Percentage | |
|
Registered for | |
|
Number of | |
|
Percentage | |
Name of Beneficial Owner |
|
Shares | |
|
of Shares | |
|
Sale Hereby | |
|
Shares | |
|
of Shares | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Stefanie Giesen Anderle
|
|
|
9,000 |
|
|
|
* |
|
|
|
9,000 |
|
|
|
|
|
|
|
|
|
Stephen Andrew Nichols
|
|
|
8,000 |
|
|
|
* |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
Barry J. Uphoff and Linda A. Uphoff JTWROS
|
|
|
7,000 |
|
|
|
* |
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
Ron Kenan
|
|
|
6,500 |
|
|
|
* |
|
|
|
6,500 |
|
|
|
|
|
|
|
|
|
Roger Filer
|
|
|
6,250 |
|
|
|
* |
|
|
|
6,250 |
|
|
|
|
|
|
|
|
|
David Pomije
|
|
|
5,918 |
|
|
|
* |
|
|
|
5,918 |
|
|
|
|
|
|
|
|
|
Henry C. McCullough & Dana McCullough JTWROS
|
|
|
5,500 |
|
|
|
* |
|
|
|
5,500 |
|
|
|
|
|
|
|
|
|
Garry Peterson
|
|
|
4,500 |
|
|
|
* |
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
Brent Eric Wood
|
|
|
4,250 |
|
|
|
* |
|
|
|
4,250 |
|
|
|
|
|
|
|
|
|
Greg Lahann
|
|
|
4,143 |
|
|
|
* |
|
|
|
4,143 |
|
|
|
|
|
|
|
|
|
Barry J. Uphoff
|
|
|
4,100 |
|
|
|
* |
|
|
|
4,100 |
|
|
|
|
|
|
|
|
|
Bruce Cunningham
|
|
|
4,034 |
|
|
|
* |
|
|
|
4,034 |
|
|
|
|
|
|
|
|
|
Allen Blue
|
|
|
4,000 |
|
|
|
* |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Chris Saccheri
|
|
|
4,000 |
|
|
|
* |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
David Cullinan
|
|
|
4,000 |
|
|
|
* |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Lauren Jacobsen
|
|
|
4,000 |
|
|
|
* |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Leslie Grant
|
|
|
4,000 |
|
|
|
* |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Catherine Giesecke
|
|
|
4,000 |
|
|
|
* |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Isaac Zaharoni
|
|
|
3,000 |
|
|
|
* |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
Terra Terwilliger
|
|
|
2,959 |
|
|
|
* |
|
|
|
2,959 |
|
|
|
|
|
|
|
|
|
Andres Martinez
|
|
|
2,600 |
|
|
|
* |
|
|
|
2,600 |
|
|
|
|
|
|
|
|
|
Sung J. Chyun
|
|
|
2,500 |
|
|
|
* |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
Steve Kaufman
|
|
|
2,061 |
|
|
|
* |
|
|
|
2,061 |
|
|
|
|
|
|
|
|
|
David Breskin
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
David Rowland
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Michael Gerard
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Michael Grant
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Niel Bennet Brandon
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Sanjay Zaveri
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Vincent Eric Johnson
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
David Lee
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Richard L. Turnure Ex
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Roger Mcomber
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Sheila C. Ruby TTEE Sheila C. Ruby Trust
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Stanley Lee Marshall
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Galli Francesco
|
|
|
1,350 |
|
|
|
* |
|
|
|
1,350 |
|
|
|
|
|
|
|
|
|
Robert E. Enslein Jr.
|
|
|
1,170 |
|
|
|
* |
|
|
|
1,170 |
|
|
|
|
|
|
|
|
|
Nuri Halperin
|
|
|
1,150 |
|
|
|
* |
|
|
|
1,150 |
|
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares | |
|
|
Ordinary Shares | |
|
|
|
Beneficially Owned | |
|
|
Beneficially Owned Prior | |
|
|
|
After Completion of | |
|
|
to the Offering | |
|
Number of | |
|
the Offering(1) | |
|
|
| |
|
Ordinary Shares | |
|
| |
|
|
Number of | |
|
Percentage | |
|
Registered for | |
|
Number of | |
|
Percentage | |
Name of Beneficial Owner |
|
Shares | |
|
of Shares | |
|
Sale Hereby | |
|
Shares | |
|
of Shares | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Amit Korda
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Amit Korda Avk Acct
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Christopher Lee
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Eli Amir
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Gidon Hilb
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Naama Korda
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Jonathan Mazer
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Ohad Safran
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
US Clearing Corp.
|
|
|
1,000 |
|
|
|
* |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Tamara L. Thompson
|
|
|
887 |
|
|
|
* |
|
|
|
887 |
|
|
|
|
|
|
|
|
|
Jedidiah Ben Rosenzweig
|
|
|
875 |
|
|
|
* |
|
|
|
875 |
|
|
|
|
|
|
|
|
|
Alisande M. Rozynko
|
|
|
591 |
|
|
|
* |
|
|
|
591 |
|
|
|
|
|
|
|
|
|
Ronald F. Mcgraw
|
|
|
500 |
|
|
|
* |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
Tim C. Chen
|
|
|
500 |
|
|
|
* |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
Don MacKenzie
|
|
|
357 |
|
|
|
* |
|
|
|
357 |
|
|
|
|
|
|
|
|
|
Niquette Hunt
|
|
|
346 |
|
|
|
* |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
Ryan Koonce
|
|
|
312 |
|
|
|
* |
|
|
|
312 |
|
|
|
|
|
|
|
|
|
Marc De Luise
|
|
|
300 |
|
|
|
* |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
Scott Gerstein
|
|
|
300 |
|
|
|
* |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
Robert Marinelli & Monserrate Marinelli Jt. Ten
|
|
|
273 |
|
|
|
* |
|
|
|
273 |
|
|
|
|
|
|
|
|
|
Michal Freeman-Shor
|
|
|
268 |
|
|
|
* |
|
|
|
268 |
|
|
|
|
|
|
|
|
|
Mike Torgersen
|
|
|
260 |
|
|
|
* |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
Monique Konat Mann
|
|
|
250 |
|
|
|
* |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
Virginia W. Wei
|
|
|
236 |
|
|
|
* |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
Michael Scott Kabrin & Holly Sue Kabrin Jt. Ten
|
|
|
225 |
|
|
|
* |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
Allan Rosenthal TTEE Rosenthal Bypass Trust U/ A
|
|
|
200 |
|
|
|
* |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
Avi Baratz
|
|
|
200 |
|
|
|
* |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
Shawn J. Fried
|
|
|
200 |
|
|
|
* |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
Yehuda Riess & Candi L. Riess
|
|
|
200 |
|
|
|
* |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
Greg Oberfield
|
|
|
180 |
|
|
|
* |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
Edward Kessler
|
|
|
173 |
|
|
|
* |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
Mark Castillo
|
|
|
146 |
|
|
|
* |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
Brian O. Lucena
|
|
|
135 |
|
|
|
* |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
Diana Cruz
|
|
|
99 |
|
|
|
* |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
Yan Pujante
|
|
|
84 |
|
|
|
* |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
Paul Soltoff
|
|
|
83 |
|
|
|
* |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
Karl Fluis
|
|
|
69 |
|
|
|
* |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
Karl Maurer
|
|
|
54 |
|
|
|
* |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares | |
|
|
Ordinary Shares | |
|
|
|
Beneficially Owned | |
|
|
Beneficially Owned Prior | |
|
|
|
After Completion of | |
|
|
to the Offering | |
|
Number of | |
|
the Offering(1) | |
|
|
| |
|
Ordinary Shares | |
|
| |
|
|
Number of | |
|
Percentage | |
|
Registered for | |
|
Number of | |
|
Percentage | |
Name of Beneficial Owner |
|
Shares | |
|
of Shares | |
|
Sale Hereby | |
|
Shares | |
|
of Shares | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Scott J. Boland
|
|
|
50 |
|
|
|
* |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
Linda E. Burgdorf
|
|
|
41 |
|
|
|
* |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
Rima Vogensen
|
|
|
29 |
|
|
|
* |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
Naomi Bloom
|
|
|
26 |
|
|
|
* |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
Donald Oberfield
|
|
|
13 |
|
|
|
* |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
Debra Vernon
|
|
|
10 |
|
|
|
* |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Scott D. Bretschneider
|
|
|
3 |
|
|
|
* |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Nigel Coster
|
|
|
1 |
|
|
|
* |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
All Other Selling
Shareholders(23)
|
|
5,204,603 33,263,996 |
|
|
17.2 |
% |
|
|
5,204,603 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the amount of shares that will be held by the selling
shareholder after completion of this offering based on the
assumption that all shares registered for sale hereby will be
sold. However, the selling shareholders may offer all, some or
none of the shares pursuant to this prospectus and any
prospectus supplement. |
|
(2) |
Consists of 68,862 shares held by Great Hill Investors, LLC
(GHI); 5,713,465 shares held by Great Hill
Equity Partners II, Limited Partnership
(GHEP II); and 217,673 shares held by
Great Hill Affiliate Partners II, L.P.
(GHAP II, and together GHI and GHEP II,
the Funds). Each Fund is an investment fund,
principally engaged in the business of making private equity and
other investments. Great Hill Partners GP II, LLC
(GPII, and together with the Funds, the Great
Hill Entities) is the sole general partner of GHEP II
and GHAP II. Stephen F. Gormley, Christopher S. Gaffney and
John G. Hayes (collectively, the Controlling
Persons) are the managers of GPII and GHI. The principal
business office of the Funds, GPII and the Controlling Persons
is c/o Great Hill Partners, LLC, One Liberty Square,
Boston, Massachusetts 02109. |
|
(3) |
Consists of 3,649,746 shares held by Tiger Global, L.P.;
892,576 shares held by Tiger Global, Ltd.; and
88,763 shares held by Tiger Global II, L.P. Each entity has
sole voting power over the shares it holds; Tiger Global
Management, L.L.C. is the investment manager of Tiger Global,
L.P., Tiger Global, Ltd. and Tiger Global II, L.P. and it
has shared investment power over the 4,631,085 shares;
Charles P. Coleman III is the sole managing member of the
Tiger Global Management, L.L.C. Tiger Global Performance, L.L.C.
is the sole general partner of Tiger Global, L.P.; Charles P.
Coleman III is the sole managing member of the general
partner of Tiger Global, L.P.; Tiger Global Performance, L.L.C.
is the sole general partner of Tiger Global II, L.P.;
Charles P. Coleman III is the sole managing member of Tiger
Global II, L.P. The address for Tiger Global Management,
L.L.C., Tiger Global, L.P. and Tiger Global II, L.P. is 101
Park Avenue, 48th Floor, New York, New York 10178. The
address for Tiger Global, Ltd. is c/o Ironshore Corporate
Services Limited, Queensgate House, South Church Street,
P.O. Box 1234, George Town, Grand Cayman, Cayman
Islands. |
|
|
(4) |
Includes (i) 8,000 shares held by his spouse and
(ii) 550,000 shares held by the Shapira Childrens
Trust of which Mr. Carmel is the trustee. Mr. Carmel is a
co-founder of our company, served as our President in 2003, 2002
and 2001 and became Executive Co-Chairman in February 2004.
Mr. Carmel resigned as Executive Co-Chairman in February
2005. |
|
|
|
(5) |
Capital Research and Management Company, an investment adviser
registered under Section 203 of the Investment Advisers Act
of 1940, is deemed to be the beneficial owner of
2,505,000 shares as a result of acting as investment
adviser to various investment companies registered under
Section 8 of the Investment Company Act of 1940. Capital
Research and Management Company has sole dispositive power over
these shares. Included in the holdings of Capital Research and
Management Company is the holding of SMALLCAP World Fund, Inc.,
an investment company registered under the Investment Company
Act of 1940, which is advised by Capital Research and Management
Company. SMALLCAP World Fund, Inc. is the beneficial owner of
1,850,000 shares, of which it has sole voting power. The
persons controlling the investment decisions with respect to the
shares held by Capital Research and Management Company and
SMALLCAP World Fund are Gordon Crawford, J. Blair Frank,
J. Dale Harvey, Claudia Huntington, Jonathan Knowles and
Mark Denning. The address for both entities is 333 South
Hope Street, Los Angeles, California 90071. |
|
|
|
(6) |
Criterion Capital Management LLC, of which Christopher H. Lord
is the sole manager, purchased shares on the open market with no
special arrangements with the Company. |
|
|
|
(7) |
The registered office of FM Fund Management Limited is
Queensgate House, South Church Street, George Town, Grand
Cayman, Cayman Islands. Florian Homm has voting and investment
powers for the shares held by FM Fund Management Limited. |
|
|
|
(8) |
Includes 1,275,000 shares issuable upon exercise of share
options, 337,500 shares of which underlie options
exercisable within 60 days of December 6, 2005. |
|
|
|
(9) |
Includes (i) 250,000 shares issuable upon exercise of
share options, 93,750 shares of which underlie options
exercisable within 60 days of December 6, 2005,
(ii) 1,062,415 shares held by the Joe Shapira Family
Trust of which Mr. Shapira is trustee,
(iii) 550,000 shares held by the Shapira
Childrens Trust of which Alon Carmel is trustee and
Mr. Shapira has the right to substitute the corpus, and
(iv) 12,000 shares held by a third-party custodian for
Mr. Shapiras children. Mr. Shapira |
|
101
|
|
|
|
|
disclaims beneficial ownership of
the shares held by the Shapira Childrens Trust and by
third-party custodian for his children, except to the extent of
his pecuniary interest.
|
|
|
|
(10) |
Consists of 250,000 ordinary shares issuable upon the exercise
of options, which includes 47,188 shares issuable upon the
exercise of options that are currently exercisable or
exercisable within 60 days of December 6, 2005 and
50,000 shares issuable upon the exercise of options that will
vest upon the listing of our securities on the American Stock
Exchange. Mr. Liberman is our Chief Operating Officer,
General Counsel and Corporate Secretary. |
|
|
(11) |
Consists of 250,000 ordinary shares issuable upon the exercise
of options, which includes 62,500 shares issuable upon exercise
of options that are currently exercisable or exercisable within
60 days of December 6, 2005 and 50,000 shares issuable
upon exercise of options that will vest upon the listing of our
securities on the American Stock Exchange. Mr. Thompson is
our Chief Financial Officer. |
|
|
(12) |
Consists of 250,000 ordinary shares issuable upon the exercise
of options, which includes 78,125 shares issuable upon the
exercise of options that are currently exercisable or
exercisable within 60 days of December 6, 2005 and
50,000 shares issuable upon the exercise of options that
will vest upon the listing of our securities on the American
Stock Exchange. Mr. Nelson is our Chief Technology Officer.
In 2004, we invested $250,000 in Yobon, Inc., a provider of web
toolbar technology. In exchange for our investment in Yobon, we
received a secured convertible promissory note. The note will
automatically convert into equity of Yobon upon its completion
of an equity financing of at least $1,000,000, if such equity
financing is completed within certain timeframes.
Mr. Nelson is the Chairman of Yobon. |
|
|
(13) |
Excludes 3,649,746 shares held by Tiger Global, L.P. and
88,763 shares held by Tiger Global II, L.P., of which
Scott Shleifer is a limited partner. Mr. Shleifer holds the
position of Managing Director at Tiger Global Management, L.L.C. |
|
|
(14) |
Represents shares issuable upon exercise of share options,
20,000 shares of which underlie options exercisable within
60 days of December 6, 2005. |
|
|
(15) |
Represents shares issuable upon exercise of share options,
25,000 shares of which underlie options exercisable within
60 days of December 6, 2005. |
|
|
(16) |
Represents 100,000 shares held by Mrs. Lauders
husband and 20,000 shares issuable to Mrs. Lauder upon
exercise of share options, 20,000 shares of which underlie
options exercisable within 60 days of December 6, 2005. |
|
|
(17) |
Includes 80,000 shares issuable upon exercise of share
options, 15,000 shares of which underlie options
exercisable within 60 days of December 6, 2005. |
|
|
(18) |
Shares beneficially owned by all executive officers and
directors as a group include options to
purchase 2,595,000 shares, 849,063 shares of
which are currently exercisable or exercisable within
60 days of December 6, 2005. |
|
|
(19) |
Includes 430,000 ordinary shares issuable upon the exercise of
warrants that are currently exercisable. In August 2003, we
issued warrants to Europlay Capital Advisors, LLC
(ECA) for the purchase of up to 1,000,000 ordinary
shares at an exercise price of $2.49 per share in exchange for
financial consulting services provided to us by ECA. In December
2004, ECA and our company agreed to accelerate vesting of
250,000 of the remaining 500,000 unvested warrants, and cancel
the remaining 250,000 unvested warrants. Accordingly, we issued
a warrant certificate for 750,000 shares. Pamela Colburn is the
Managing Director of ECA and has investment and voting powers
over the shares held by ECA. Based on information provided to us
by ECA, ECA is an affiliate of a broker-dealer and it acquired
these securities in the ordinary course of business and that at
the time of the acquisition of these securities, it had no
agreements or understandings, directly or indirectly, with any
person to distribute these securities. |
|
|
(20) |
In June 2005, we issued 150,000 ordinary shares to two
shareholders of MingleMatch, Inc., one of which was
Mr. Peterson, in connection with our acquisition of
MingleMatch. |
|
|
(21) |
In June 2005, we issued 150,000 ordinary shares to two
shareholders of MingleMatch, Inc., one of which was
Ms. Peterson, in connection with our acquisition of
MingleMatch. |
|
|
(22) |
In June 2005, each of Mr. and Mrs. Peterson received 75,000
ordinary shares in connection with our acquisition of
MingleMatch, Inc. |
|
|
(23) |
Represents shares for which we are unable to obtain information
regarding the beneficial owners. Our ordinary shares are traded
on the Frankfurt Stock Exchange in the form of GDSs. The
ordinary shares that are traded in the form of GDSs constitute
approximately 75% of our outstanding shares, all of which are on
deposit with The Bank of New York, our depositary bank for the
GDSs. We have been unable to obtain information for beneficial
owners who hold their securities through non-U.S. brokers and
certain beneficial owners who have chosen not to provide
information. We will provide information regarding such
beneficial holders through the filing of prospectus supplements.
We will file a prospectus supplement each time that an ordinary
share is deposited with The Bank of New York to obtain an ADS,
including when selling shareholders that hold their ordinary
shares in the form of GDSs offer and sell their shares in the
United States by surrendering those GDSs to The Bank of New York
and requesting it to deliver ADSs to the order of the purchaser.
When a holder deposits an ordinary share for an ADS, the holder
must provide us with information regarding the beneficial owner,
including, but not limited to, the name, total amount of
shareholdings (including options and warrants), whether the
beneficial owner is a broker-dealer or an affiliate of a
broker-dealer, the name of the natural person with disposition
power if the shares are held by an entity, and whether the
holder has had a material relationship with us within the past
three years. Such information will be used to prepare the
prospectus supplements that we file with the Securities and
Exchange Commission to update the selling shareholders table, if
needed. No ADSs may be delivered until such time as any required
prospectus supplement regarding the selling shareholder is filed
with the SEC. We will (i) identify as underwriters all
sellers who are broker-dealers that did not receive their shares
as underwriting compensation or who are broker-dealer affiliates
that acquired their shares with a view toward distribution; and
(ii) with regard to the resale of shares by broker-dealer
affiliates who did not purchase with a view toward distribution,
disclose that (A) the seller purchased in the ordinary
course of business and (B) at the time of the purchase of
the securities to be resold the seller had no agreements or
understandings, directly or indirectly, with any person to
distribute the securities. |
|
102
DESCRIPTION OF SHARE CAPITAL
Description of Ordinary Shares
We are providing you with a summary description of our
ordinary shares and the material rights of holders of our
ordinary shares. Please remember that summaries by their nature
lack the precision of the information summarized and that a
persons rights and obligations as a holder of our ordinary
shares will be determined by reference to our Memorandum and
Articles of Association and applicable English law, each as
modified from time to time, and not by this summary. We urge you
to review our Memorandum and Articles of Association in their
entirety and to seek appropriate professional advice regarding
their interpretation and applicable English law.
General
Our authorized share capital is £800,000 divided into
80,000,000 ordinary shares of £0.01 each. Set forth below
is information concerning the share capital and related summary
information concerning the material provisions of our Memorandum
and Articles of Association, or Memorandum and Articles, and
applicable English company law.
Voting rights
Every holder of ordinary shares who, being an individual, is
present in person or by proxy or, being a corporation, has an
authorized representative present who is not himself a
shareholder, at a general meeting has one vote on a show of
hands. Proxies voting on a show of hands do not have more than
one vote each, even if they hold a number of proxies or are
shareholders themselves. On a poll, every holder of ordinary
shares present in person, by its authorized representative or by
proxy has one vote for each share held. Voting at a general
meeting is by a show of hands unless a poll is demanded. A poll
may be demanded by:
|
|
|
|
|
the chairman of the meeting; |
|
|
|
not less than three shareholders present at the meeting in
person, by proxy or represented by an authorized representative
and entitled to vote; |
|
|
|
any shareholder or shareholders present at the meeting in
person, by proxy or represented by an authorized representative
and representing not less than one-tenth of the total voting
rights of all shareholders having the right to vote at such
meeting; or |
|
|
|
any shareholder or shareholders present in person, by proxy or
represented by an authorized representative and holding a number
of ordinary shares conferring a right to vote at the meeting,
being shares on which an aggregate sum has been paid up equal to
not less than one-tenth of the total sum paid up on all of the
shares conferring that right. |
Where a poll is not demanded, the interests of beneficial owners
of ordinary shares who hold through a nominee may not be
reflected in votes cast on a show of hands if that nominee does
not attend the meeting or receives conflicting voting
instructions from different beneficial owners for whom it holds
the shares as nominee. Since, under English law, voting rights
are only conferred on registered holders of shares, a person
holding through a nominee may not directly demand a poll.
Unless otherwise required by law or the Memorandum and Articles,
voting in a general meeting is by ordinary resolution. An
ordinary resolution, for example, a resolution for the
appointment of directors, the declaration of a final dividend,
the appointment of the auditors, the increase of authorized
share capital or grant of authority to allot shares, requires
the affirmative vote of a majority of the shareholders
(a) present in person or by an authorized representative or
by proxy, excluding the chairman of the meeting in his role as
proxy, in the case of a vote by show of hands or
(b) present in person, by an authorized representative or
by proxy and holding shares conferring in the aggregate a
103
majority of the votes actually cast on the ordinary resolution,
in the case of a vote by poll. In the case of a tied vote,
whether on a show of hands or on a poll, the chairman of the
meeting is entitled to cast a deciding vote. A special
resolution, for example, a resolution amending the Memorandum
and Articles, changing the name of our company or waiving
statutory pre-emption rights on the issue of shares for cash, or
an extraordinary resolution, for example, modifying the rights
of any class of shares at a meeting of the holders of such class
or relating to matters concerning the liquidation of our
company, requires the affirmative vote of not less than
three-quarters of shareholders present in person, represented by
an authorized representative or by proxy and holding shares
conferring in aggregate at least three-quarters of the votes
actually cast on the resolution, on a vote by poll.
Unless our Board of Directors determines otherwise, no
shareholder is entitled to vote in respect of any share held by
him either personally or by proxy or to exercise any other right
conferred by membership in relation to any shareholders
meetings, if any sum is payable by him to us in respect of that
share. Our Memorandum and Articles of Association do not contain
restrictions on the right of non-UK residents or foreign owners
to be registered holders or exercise voting rights in respect of
our ordinary shares.
Notices of Shareholder Meetings
An Annual General Meeting and any Extraordinary General Meeting
at which it is proposed to pass a Special Resolution or a
resolution of which special notice has been given to our company
shall be called on least 21 days written notice and
any other Extraordinary General Meeting is required to be called
on at least 14 days written notice. The period of
notice in each case is exclusive of the day on which the notice
is served or deemed to be served and of the day of the meeting
itself.
General Meetings may be held on shorter notice than that
specified above if such shorter notice is approved by
(i) in the case of an Annual General Meeting, all the
shareholders entitled to attend and vote at that meeting; and
(ii) in the case of an Extraordinary General Meeting by a
majority in number of the shareholders entitled to attend and
vote at the meeting, such majority holding at least 95% in
nominal value of the shares giving the right to attend and vote
at that meeting.
The accidental omission to give notice to or the non-receipt of
a notice by any shareholder will not invalidate the proceedings
at the relevant meeting.
Our articles provide that where a notice or other document is
served or sent by post, service or delivery is deemed to be
effected on the expiry of 24 hours after the relevant
document is posted.
Dividends
The payment of final dividends with respect to any financial
year must be recommended by our Board of Directors and approved
by the shareholders by ordinary resolution, provided that no
such dividend shall exceed the amount recommended by our Board
of Directors. If, in the opinion of our Board of Directors, our
financial position justifies such payments, the Board of
Directors may also from time to time pay interim dividends of
amounts, on dates and in respect of periods as they think fit.
No dividend can be paid other than out of profits available for
distribution under the provisions of the Companies Act 1985, as
amended, and accounting principles generally accepted in the
United Kingdom, which differ in some respects from
U.S. GAAP. In addition, as a public limited company, we may
make a distribution only if and to the extent that, at the time
of distribution and following the distribution, the amount of
our net assets is not less than the aggregate of the
called-up share capital
and undistributable reserves (as such terms are defined in the
Companies Act 1985) and if, and to the extent that, the
distribution does not reduce the amount of those assets to less
than that aggregate. No dividend or other moneys payable on or
in respect of a share shall bear interest as against us unless
otherwise provided by the rights attached to the share. Any
dividend unclaimed after a period of 12 years from the date
on which it was declared or became due for payment will be
forfeited and will
104
revert to us. Our Memorandum and Articles of Association do not
contain restrictions on the right of non-UK resident holders of
our ordinary shares to receive dividends and other payments.
Winding up
If our company is wound up, the liquidator may, pursuant to the
authority given by an extraordinary resolution of our company
and any other sanction required by English statutory law, divide
among the members, in specie or in kind, the whole or any part
of our assets and, for that purpose, value any assets as he
deems fair and determine how the division is carried out among
shareholders or different classes of shareholders. No
shareholder will be compelled to accept any shares or other
property in respect of which there is a liability. Distributions
to shareholders on a winding up are only usually made after the
settlement of claims of the various classes of creditor and
subject to applicable company and insolvency laws. Early
distributions can be made subject to shareholders providing
appropriate forms of indemnity. Where a distribution is proposed
to be made to a particular class of shareholders on a winding
up, such a distribution is usually made pro rata to their
holdings of shares in the company.
Shareholder Derivative Suits
Under English law, our shareholders generally have no right to
sue on our behalf. When a wrong has been done to or against us,
we are usually the proper plaintiff. There are exceptions
including in the case of fraud on minority shareholders, the
case of a breach of a duty owed personally to a shareholder
where that shareholder has suffered personal loss separate and
distinct from any loss suffered by the company and when the act
complained of is illegal or ultra vires. English law permits an
individual shareholder of ours to apply for a court order when
our affairs are being or have been conducted in a manner
unfairly prejudicial to the interests of one or more of our
shareholders or when any actual or proposed act or omission by
us is or would be prejudicial. When granting relief, a court has
wide discretion and may authorize civil proceedings to be
brought on our behalf by a shareholder on such terms as the
court may direct.
Issues of shares and pre-emption rights
The directors of English companies may only allot shares and
disapply statutory pre-emption rights if authorized by the
shareholders. The current authority for this purpose expires on
December 10, 2009 but we may, before such expiry, make an
offer or agreement which would or might require equity
securities to be allotted after such expiry and our Board of
Directors may allot equity securities pursuant to any such offer
or agreement as if the authority had not expired.
Transfer of shares
Any holder of shares in a certified form may transfer in writing
all, or any, of its shares in any usual or common form or in any
other form which our Board of Directors may approve. The
instrument of transfer of a share must be signed by or on behalf
of the transferor and, except in the case of fully paid shares,
by or on behalf of the transferee. The transferor will remain
the holder of the shares concerned until the name of the
transferee is entered in our register of shareholders. The
transfer of uncertificated shares may be made in accordance with
and be subject to the Uncertificated Securities Regulations 1995.
Our Board of Directors may, in their absolute discretion and
without assigning any reason, refuse to register any transfer of
shares, not being fully paid shares. Our Board of Directors may
also refuse to register an allotment or transfer shares, whether
fully paid or not, to more than four persons jointly. Moreover,
the registration of transfers may be suspended at such times and
for such periods, but not exceeding thirty days in any year, as
our Board of Directors may from time to time determine.
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Our Board of Directors may decline to recognize any instrument
of transfer unless it is in respect of only one class of shares
and is lodged, duly stamped if required, at the Registrars
Office accompanied by the relevant share certificate(s) together
with such other evidence as the Board may reasonably require to
show the right of the transferor to make the transfer. In the
case of a transfer by a recognized clearing house or a nominee
of a recognized clearing house or of a recognized investment
exchange, the lodgment of share certificates is only necessary
if and to the extent that certificates have been issued in
respect of the shares in question.
Disclosure of transactions of ownership
The Companies Act 1985 provides that a person, including a
company and other legal entities, that acquires any interest of
3% or more of any class of our relevant share
capital, which includes ADSs and GDSs representing shares,
is required to notify us in writing of its interest within two
days following the day on which the obligation arises. Relevant
share capital, for these purposes, means our issued share
capital carrying the right to vote in all circumstances at a
general meeting. After the 3% level is exceeded, similar
notifications must be made where the interest falls below the 3%
level or otherwise in respect of increases or decreases of a
whole percentage point.
For purposes of the notification obligation, the interest of a
person in shares means any kind of interest in shares including
interests in any shares:
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in which a spouse, or child or stepchild under the age
of 18, is interested; |
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in which a company is interested, which includes interests held
by other companies over which that company has effective voting
power, and either (a) that company or its directors
generally act in accordance with that persons directions
or instructions or (b) that person controls one-third or
more of the voting power of that company at general
meetings; or |
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in which another party is interested and the person
and that other party are parties to an agreement under
section 204 of the Companies Act 1985. Such an agreement is
one which provides for two or more parties to acquire interests
in shares of a particular public company and imposes obligations
or restrictions on any of the parties as to the use, retention
or disposal of such interests acquired pursuant to such
agreement, if any interest in the companys shares is in
fact acquired by any of the parties pursuant to the agreement. |
Some non-material interests may be disregarded for
the purposes of calculating the 3% threshold, but the obligation
of disclosure will still apply where such interests exceed 10%
or more of any class of our relevant share capital and to
increases or decreases through a whole percentage point.
In addition, pursuant to section 212 of the Companies Act
1985, we may, as a public company and by written notice, require
a person whom we know or have reasonable cause to believe to be,
or to have been at any time during the three years immediately
preceding the date on which the notice is issued, interested in
shares comprised in our relevant share capital to
confirm that fact or to indicate whether or not that is the case.
Where a person holds or during the previous three years had held
an interest in the shares, that person must give any further
information that may be required relating to this interest and
any other interest in the shares of which this person is aware.
Where we serve a notice under the foregoing provisions on a
person who is or was interested in the shares and that person
fails to give us any information required by the notice within
the time specified in the notice, we may apply to the English
courts for an order directing that the shares in question be
subject to restrictions prohibiting, among other things, any
transfer, the exercise of voting rights, the taking up of rights
and, other than during a liquidation, payments in respect of
those shares.
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A person who fails to fulfill the obligations imposed by
sections 198 and 212 of the Companies Act 1985 may be subject to
criminal penalties.
Variation of rights and alteration of share capital
Whenever our share capital is divided into different classes of
shares, the special rights attached to any class may, subject to
the provisions of English statutory law, be varied or abrogated,
either with the consent in writing of the holders of
three-quarters in nominal value of the issued shares of the
class, or with the sanction of an extraordinary resolution
passed at a separate general meeting of the holders of the
shares of the class, but not otherwise, and may be so varied or
abrogated either while our company is a going concern or during
or in contemplation of a winding up. At every such separate
general meeting, the necessary quorum is at least two persons
holding or representing by proxy issued shares of the class and
any holder of shares of the class present in person or by proxy
may demand a poll and will have one vote for every share of the
class held by him. At any adjourned meeting any holder of shares
of the class present in person or by proxy is a quorum.
We may from time to time by ordinary resolution at a general
meeting:
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increase the share capital by the creation of new shares of such
amount as the resolution shall prescribe with such preferred,
deferred or other special rights, or subject to such
restrictions, whether as regards dividend, return of capital,
voting or otherwise as may be determined and which may be
redeemable; |
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consolidate and divide all or any of the share capital into
shares of larger amount than our existing shares; |
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cancel shares which, at the date of the passing of the
resolution, have not been taken, or agreed to be taken, by any
person and diminish the amount of our share capital by the
amount of shares so cancelled; and |
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subdivide all or any of the shares into shares of a smaller
amount than is fixed by the Memorandum and Articles and may by
resolution determine that as between the holders of the shares
resulting from such subdivision one or more of the shares may,
as compared with the others, have any such preferred, deferred
or other special rights or be subject to any restrictions, as we
have the power to attach to unissued or new shares. |
Subject to English statutory law, we may purchase our own shares
of any class, including redeemable shares, but so that if there
shall be in issue any shares convertible into equity share
capital of our own company then no purchase of our own shares
shall be made unless it has first been approved by an
extraordinary resolution passed at a separate meeting of the
holders of such convertible shares.
Subject to the provisions of English statutory law, we may, by
special resolution, reduce our share capital, capital redemption
reserve, share premium account or other undistributable reserve
in any way.
Directors
Unless otherwise determined by ordinary resolution of the
holders of ordinary shares, our Articles provide that there
shall not be less than three directors. At each annual general
meeting one-third (or the number nearest to but not exceeding
one-third) of our Board of Directors shall retire from office by
rotation. Our directors who retire by rotation include any
director who wishes to retire and not to offer himself for
re-election. Any further directors who retire by rotation are
those who have been longest in office since their last
re-election, but, as between persons who become directors on the
same day, those to retire (unless they otherwise agree among
themselves) are determined by lot. A retiring director is
eligible for re-election. Any director may be removed from
office at any time by an ordinary
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resolution of which special notice has been given in accordance
with the Act. Our Memorandum and Articles do not provide for a
maximum age for directors.
Our Articles provide that a director may be party to or be
interested in any contract or transaction to which we are a
party, and a director, or any firm of which he is a member, may
be remunerated for any services provided to us or any office
held (other than the office of Auditor) relating to us. In any
such case, the director may retain all profits and advantages
accruing to him. Our Articles also provide that (subject to
certain exceptions), a director who is in any way interested in
a contract or proposed contract with our company shall declare
his interest to the Board, and, subject to certain exceptions,
will not be entitled to vote at Board meetings in respect of any
contract, arrangement or proposal in which that Director has a
material interest, nor will that Director be counted
towards the quorum in relation to any resolution on which he is
prohibited from voting.
Our Articles provide that our Board of Directors may exercise
all of our powers to borrow money and to mortgage or charge our
undertaking, property, and uncalled capital and, subject to
applicable English law, to issue debentures and other
securities. The Board is required to restrict our borrowings, in
the absence of shareholders approval, in accordance with a
formula set out in the Articles.
The ordinary remuneration of our directors for holding office as
such shall from time to time be determined by our Board of
Directors. However, such remuneration may not exceed
£200,000 per annum in aggregate or such higher amount
as the shareholders may, by ordinary resolution, determine and
will be divisible among our Board of Directors as they agree.
Our Board of Directors may also grant additional remuneration to
any director who holds any executive office or who serves on any
committee of our Board of Directors and, have the power to pay
and agree to pay gratuities, pensions or other retirement, death
or disability benefits to any Director or ex-Director. Our Board
of Directors are also entitled to be repaid all reasonable
expenses incurred by them respectively in the performance of
their duties.
Description of American Depositary Shares
The Bank of New York is the depositary for the American
Depositary Shares, or ADSs. The Deposit Agreement is available
for inspection at the Corporate Trust Office of the Bank of
New York. The Bank of New Yorks principal executive office
is located at One Wall Street, New York, New York 10286.
American Depositary Shares are frequently referred to as
ADSs and represent ownership interests in securities
that are on deposit with the depositary bank. ADSs are normally
evidenced by certificates that are commonly known as
American Depositary Receipts or ADRs.
The depositary bank typically appoints a custodian to safekeep
the securities on deposit.
We are providing you with a summary description of the material
terms of the ADSs and of your material rights as an owner of
ADSs. Please remember that summaries by their nature lack the
precision of the information summarized and that a holders
rights and obligations as an owner of ADSs will be determined by
reference to the terms of the deposit agreement and not by this
summary. We urge you to review the deposit agreement in its
entirety.
Each ADS represents the right to receive one ordinary share on
deposit with the custodian. An ADS will also represent the right
to receive any other property received by the depositary bank or
the custodian on behalf of the owner of the ADS but that has not
been distributed to the owners of ADSs because of legal
restrictions or practical considerations.
If you become an owner of ADSs, you will become a party to the
deposit agreement and therefore will be bound to its terms and
to the terms of the ADR that evidence your ADSs. The deposit
agreement and the ADR specify our rights and obligations as well
as your rights and obligations as an owner of ADSs and those of
the depositary bank. The deposit agreement and the ADRs are
governed by New
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York law. However, our obligations to the holders of ordinary
shares will continue to be governed by the laws of the United
Kingdom, which may be different from the laws in the United
States.
As an owner of ADSs, you may hold your ADSs either by means of
an ADR registered in your name or through a brokerage or
safekeeping account. If you decide to hold your ADSs through
your brokerage or safekeeping account, you must rely on the
procedures of your broker or bank to assert your rights as an
ADS owner. Please consult with your broker or bank to determine
what those procedures are. This summary description assumes you
have opted to own the ADSs directly by means of an ADR
registered in your name and, as such, we will refer to you as
the holder. When we refer to you, we
assume the reader owns ADSs and will own ADSs at the relevant
time.
Dividends and Distributions
As a holder, you generally have the right to receive the
distributions we make on the securities deposited with the
custodian. To date, we have never declared or paid cash
dividends on our ordinary shares, and we do not anticipate
paying any cash dividends on our ordinary shares or the ADSs
that represent our ordinary shares in the foreseeable future. In
addition, your receipt of any dividends and distributions may be
limited, by practical considerations and legal limitations.
These practical considerations and legal limitations include
situations such as where the value of ordinary shares or rights
to be distributed is too small to justify the expense of making
the distribution, as well as the inability to distribute rights
or other securities to holders of ADSs in a jurisdiction where
such distribution would require registration of the securities
to be distributed. Holders will receive such distributions under
the terms of the deposit agreement in proportion to the number
of ADSs held as of a specified record date.
Distributions of Cash
If and whenever we make a cash distribution for the securities
on deposit with the custodian, we will notify the depositary
bank and deposit the funds with the custodian. Upon receipt of
such notice and confirmation of the deposit of the requisite
funds, the depositary bank will arrange for the funds to be
converted into U.S. dollars and for the distribution of the
U.S. dollars to the holders, subject to any restrictions
imposed by the laws and regulations of the United Kingdom.
The conversion into U.S. dollars will take place only if
practicable and if the U.S. dollars are transferable to the
United States. For example, it may not be practicable to convert
foreign currency into U.S. dollars where the depositary
determines the cash to be distributed is too small to be
distributed in light of expenses of conversion into dollars, or
where such conversion or distribution can be effected only with
the approval or license of any government or agency that is
denied or not obtainable. Where a conversion does take place,
the amounts distributed to holders will be net of the fees,
expenses, taxes and governmental charges payable by holders
under the terms of the deposit agreement. The depositary will
apply the same method for distributing the proceeds of the sale
of any property, such as undistributed rights, held by the
custodian in respect of securities on deposit.
Distributions of Shares
If and whenever we make a free distribution of ordinary shares
in respect of the securities on deposit with the custodian, we
will notify the depositary bank and deposit the applicable
number of ordinary shares with the custodian. Upon receipt of
notice of such deposit, the depositary bank will either
distribute to holders new ADSs representing the ordinary shares
deposited or modify the ADS-to-ordinary shares ratio, in which
case each ADS you hold will represent rights and interests in
the additional ordinary shares so deposited. Only whole new ADSs
will be distributed. Fractional entitlements will be sold and
the proceeds of such sale will be distributed as in the case of
a cash distribution.
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The distribution of new ADSs or the modification of the
ADS-to-ordinary shares ratio upon a distribution of ordinary
shares will be made net of the fees, expenses, taxes and
governmental charges payable by holders under the terms of the
deposit agreement. In order to pay such taxes or governmental
charges, the depositary bank may sell all or a portion of the
new ordinary shares so distributed.
No such distribution of new ADSs will be made if it would
violate a law (e.g., the U.S. securities laws) or if
it is not reasonably practicable. It may not be reasonably
practicable to distribute shares where the value of such shares
to be distributed is too small to justify the expense of making
the distribution. If the depositary bank does not distribute new
ADSs as described above, it may sell the ordinary shares
received upon the terms described in the deposit agreement and
will distribute the proceeds of the sale as in the case of a
distribution of cash.
Distributions of Rights
If and whenever we intend to distribute rights to purchase
additional ordinary shares, we will give prior notice to the
depositary bank and we will assist the depositary bank in
determining whether it is lawful and reasonably practicable to
distribute rights to purchase additional ADSs to holders. It may
not be reasonably practicable to distribute rights where the
value of such rights to be distributed is too small to justify
the expense of making the distribution. Moreover, if
registration under the United States Securities Act of 1933, as
amended, or the Securities Act, or other applicable law is
required, the depositary bank will not offer you the rights
unless a registration statement covering the distribution of the
rights and the underlying securities to all our ADS holders is
effective. We are under no obligation to file a registration
statement for any of these rights or underlying securities or to
endeavor to cause a registration statement to be declared
effective.
The depositary bank may establish procedures to distribute
rights to purchase additional ADSs to holders and to enable such
holders to exercise such rights if it is lawful and reasonably
practicable to make the rights available to holders of ADSs, and
if we provide all of the documentation contemplated in the
deposit agreement, such as opinions to address the lawfulness of
the transaction. You may be required to pay fees, expenses,
taxes and other governmental charges to subscribe for the new
ADSs upon the exercise of your rights.
The depositary bank will not distribute the rights to you if:
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We do not timely request that the rights be distributed to you
or we request that the rights not be distributed to you; or |
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We fail to deliver satisfactory documentation to the depositary
bank; or |
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The depositary bank determines that it is not reasonably
practicable to distribute the rights, such as where the value of
the rights to be distributed is too small to justify the expense
of making the distribution. |
The depositary bank may sell the rights that are not exercised
or not distributed if such sale is lawful and reasonably
practicable. The proceeds of such sale will be distributed to
holders as in the case of a cash distribution. If the depositary
bank is unable to sell the rights, it will allow the rights to
lapse.
Other Distributions
If and whenever we intend to distribute property other than
cash, ordinary shares or rights to purchase additional ordinary
shares, we will notify the depositary bank in advance and will
indicate whether we wish such distribution to be made to you. If
so, we will assist the depositary bank in determining whether
such distribution to holders is lawful and reasonably
practicable. Lawful and practicable considerations include
situations such as where the value of distribution is too small
to justify the
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expense of making the distribution, as well as the inability to
make a distribution to holders of ADSs in a jurisdiction where
such distribution would require registration of the securities
to be distributed.
If it is reasonably practicable to distribute such property to
you and if we provide all of the documentation contemplated in
the deposit agreement, the depositary bank will distribute the
property to the holders in the manner it deems practicable.
The distribution will be made net of fees, expenses, taxes and
governmental charges payable by holders under the terms of the
deposit agreement. In order to pay such taxes and governmental
charges, the depositary bank may sell all or a portion of the
property received.
The depositary bank will not distribute the property to you and
will sell the property if:
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We do not deliver satisfactory documentation to the depositary
bank; or |
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The depositary bank determines that all or a portion of the
distribution to you is not reasonably practicable. |
The proceeds of such a sale will be distributed to holders as in
the case of a cash distribution.
Changes Affecting Ordinary Shares
The ordinary shares held on deposit for your ADSs may change
from time to time. For example, there may be a change in nominal
or par value, a split-up, cancellation, consolidation or
reclassification of such ordinary shares or a recapitalization,
reorganization, merger, consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent
permitted by law, represent the right to receive the property
received or exchanged in respect of the ordinary shares held on
deposit. The depositary bank may in such circumstances deliver
new ADSs to you or call for the exchange of your existing ADSs
for new ADSs. If the depositary bank may not lawfully distribute
such property to you, the depositary bank may sell such property
and distribute the net proceeds to you as in the case of a cash
distribution.
Issuance of ADSs Upon Deposit of Ordinary Shares
The depositary bank will create ADSs on your behalf if you or
your broker deposit ordinary shares with the custodian. The
depositary bank will deliver these ADSs to the person you
indicate only after you pay any applicable issuance fees and any
charges and taxes payable for the transfer of the ordinary
shares to the custodian, including stamp duty stamp duty reserve
tax and stock transfer taxes or fees. Your ability to deposit
ordinary shares and receive ADSs may be limited by U.S. and U.K.
legal considerations applicable at the time of deposit.
The issuance of ADSs may be delayed until the depositary bank or
the custodian receives confirmation that all required approvals
have been given and that the ordinary shares have been duly
transferred to the custodian. The depositary bank will only
deliver ADSs in whole numbers.
When you make a deposit of ordinary shares, you will be
responsible for transferring good and valid title to the
depositary bank. As such, you will be deemed to represent and
warrant that:
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The ordinary shares are duly authorized, validly issued, fully
paid, and non-assessable; |
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All preemptive, and similar, rights, if any, with respect to
such ordinary shares have been validly waived or exercised; |
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You are duly authorized to deposit the ordinary shares; and |
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The ordinary shares presented for deposit are not, and the ADSs
issuable upon such deposit will not be, restricted
securities, as defined in the deposit agreement. |
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Furthermore, upon your deposit of ordinary shares with the
depositary bank for ADSs, including any surrender of GDSs to the
depositary bank and request for ADSs, you will be required to
provide certain information to the Company prior to the issuance
of the ADSs, including information regarding (i) the total
number securities (including options and warrants) you
beneficially hold in our company, (ii) whether you are a
registered broker-dealer or an affiliate of a broker-dealer,
(iii) the name of the natural person with disposition power
if the shares are held by an entity, (iv) whether you have
had a material relationship with our company during the past
three years, and (iv) such other information that may be
required to be included in any prospectus supplement for the
sale of the shares pursuant to this prospectus. No ADSs will be
issued until you provide the information to the Company and any
required prospectus supplement is filed with the Securities and
Exchange Commission.
Transfer, Combination and Split-Up of ADRs
As an ADR holder, you will be entitled to transfer, combine or
split up your ADRs and the ADSs evidenced thereby. For transfers
of ADRs, you will have to surrender the ADRs to be transferred
to the depositary bank and also must:
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Ensure that the surrendered ADR certificate is properly endorsed
or otherwise in proper form for transfer; |
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Provide such proof of identity and genuineness of signatures as
the depositary bank deems appropriate; |
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Provide any transfer stamps required by the State of New York or
the United States; and |
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Pay all applicable fees, charges, expenses, taxes and other
government charges payable by ADR holders pursuant to the terms
of the deposit agreement, upon the transfer of ADRs. |
To have your ADRs either combined or split up, you must
surrender the ADRs in question to the depositary bank with your
request to have them combined or split up, and you must pay all
applicable fees, charges and expenses payable by ADR holders,
pursuant to the terms of the deposit agreement, upon a
combination or split-up
of ADRs.
Withdrawal of Ordinary Shares Upon Cancellation of
ADSs
As a holder, you will be entitled to surrender your ADSs to the
depositary bank for cancellation and then receive the
corresponding number of underlying ordinary shares at the
custodians offices. Your ability to withdraw the ordinary
shares may be limited by U.S. and U.K. legal considerations
applicable at the time of withdrawal. In order to withdraw the
ordinary shares represented by your ADSs, you will be required
to pay to the depositary the fees for cancellation of ADSs and
any charges and taxes payable upon the transfer of the ordinary
shares being withdrawn, including stamp duty, stamp duty reserve
tax and stock transfer taxes or fees. You assume the risk for
delivery of all funds and securities upon withdrawal. Once
canceled, the ADSs will not have any rights under the deposit
agreement.
If you hold an ADR registered in your name, the depositary bank
may ask you to provide proof of identity and genuineness of any
signature and such other documents as the depositary bank may
deem appropriate before it will cancel your ADSs. The withdrawal
of the ordinary shares represented by your ADSs may be delayed
until the depositary bank receives satisfactory evidence of
compliance with all applicable laws and regulations. The
depositary bank will only accept ADSs for cancellation that
represent a whole number of securities on deposit. If you
surrender a number of ADSs for withdrawal representing other
than a whole number of ordinary shares, the depositary bank will
either return the number of ADSs representing any remaining
fractional ordinary shares or sell the ordinary shares
represented by the ADSs you surrendered and remit the net
proceeds of that sale to you as in the case of a distribution in
cash.
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You will have the right to withdraw the securities represented
by your ADSs at any time except for:
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Temporary delays that may arise because (1) the transfer
books for the ordinary shares or ADSs are closed, or
(2) ordinary shares are immobilized on account of a
shareholders meeting or a payment of dividends; |
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Obligations to pay fees, taxes and similar charges; and |
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Restrictions imposed because of laws or regulations applicable
to ADSs or the withdrawal of securities on deposit. |
The deposit agreement may not be modified to impair your right
to withdraw the securities represented by your ADSs except to
comply with mandatory provisions of law.
Voting Rights
As a holder, you generally have the right under the deposit
agreement to instruct the depositary bank to exercise the voting
rights for the ordinary shares represented by your ADSs. For a
description of the voting rights of holders of ordinary shares,
see Description of Ordinary Shares
Voting Rights.
At our request and at our expense, the depositary will
distribute to you any notice of shareholders meeting
received from us together with information explaining how to
instruct the depositary bank to exercise the voting rights of
the ordinary shares underlying the ADSs.
The depositary bank will set a record date by which it must
receive valid voting instructions from a holder of ADSs. Upon
the timely receipt of written instructions of a holder of ADSs
in the manner specified by the depositary bank, the depositary
bank shall endeavor, insofar as practicable and permitted under
applicable law and our Memorandum and Articles, to vote the
ordinary shares represented by such holders ADSs in
accordance with such holders instructions.
The depositary bank will only vote or attempt to vote the
ordinary shares underlying your ADSs as you instruct.
If the depositary bank has solicited voting instructions from
you and no instructions are received by the depositary on or
before the date established by the depositary for such purpose,
the depositary will deem that you have instructed the depositary
to give a discretionary proxy to a person designated by us with
respect to your deposited securities and the depositary will
give a discretionary proxy to a person designated by us to vote
your deposited securities, provided, that no such instruction
shall be deemed given and no such discretionary proxy shall be
given with respect to any matter as to which we inform the
depositary that we do not wish such proxy given, substantial
opposition exists or such matter materially and adversely
affects the rights of holders of shares.
We cannot assure you that you will receive the voting materials
in time to ensure that you can instruct the depositary bank to
vote your shares. In addition, the depositary bank and its
agents are not responsible for failing to carry out voting
instructions or for the manner of carrying out voting
instructions as long as they act in good faith.
Notices and Reports
The depositary bank will make available for inspection by
registered holders at its corporate trust office any reports and
communications, including any proxy soliciting material,
received from us, which are both (a) received by the
depositary bank as the holder of the deposited ordinary shares,
and (b) made generally available to the holders of such
deposited ordinary shares by us. The depositary bank will also,
upon our written request, send to the registered holders copies
of such reports when furnished by us pursuant to the deposit
agreement. Any such reports and communications, including any
proxy soliciting materials, furnished to the depositary bank by
us will be furnished in English.
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Fees and Charges
As an ADS holder, you will be required to pay the following
service fees to the depositary bank:
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Fee of $5.00 or less per 100 ADSs or portion thereof for the
execution and delivery of ADRs and the surrender of ADRs; |
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Fee of $0.02 or less per ADS for any cash distribution made
pursuant to the deposit agreement; |
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Fee for the distribution of shares, such fee being in an amount
equal to the fee for the execution and delivery of ADSs referred
to above which would have been charged as a result of the
deposit of such shares but which shares are instead distributed
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Fee not in excess of $1.50 per certificate for an ADR or
ADRs for transfers made pursuant to the terms of the Deposit
Agreement. |
As an ADS holder you will also be responsible to pay certain
fees and expenses incurred by the depositary bank and certain
taxes and governmental charges such as:
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Fees for the transfer and registration of ordinary shares
charged by the registrar and transfer agent for the ordinary
shares in the United Kingdom, e.g., upon deposit and
withdrawal of ordinary shares; |
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Expenses incurred for converting foreign currency into
U.S. dollars; |
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Fees and expenses incurred by the depositary in compliance with
exchange controls or other regulatory requirements; |
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Expenses for cable, telex and fax transmissions and for delivery
of securities; |
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Taxes and duties upon the transfer of securities, e.g., when
ordinary shares are deposited or withdrawn from deposit; and |
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Fees and expenses incurred in connection with the delivery or
servicing of ordinary shares on deposit. |
We have agreed to pay certain other charges and expenses of the
depositary bank. Note that the fees and charges you may be
required to pay may vary over time and may be changed by
agreement between us and the depositary bank. You will receive
prior notice of such changes.
Amendments and Termination
We may agree with the depositary bank to modify the deposit
agreement at any time without your consent. Any modifications
that would materially prejudice any of your substantial rights
under the deposit agreement will not become effective as to
outstanding ADRs until 30 days after notice is given to
registered holders of that amendment.
You will be bound by the modifications to the deposit agreement
if you continue to hold your ADSs after the modifications to the
deposit agreement become effective. The deposit agreement cannot
be amended to prevent you from withdrawing the ordinary shares
represented by your ADSs except to comply with applicable law.
We have the right to direct the depositary bank to terminate the
deposit agreement. Similarly, the depositary bank may in certain
circumstances on its own initiative terminate the deposit
agreement. In either case, the depositary bank must give notice
to the holders at least 30 days before termination.
On and after the date of termination, you will be entitled to
delivery of the amount of our ordinary shares represented by the
ADSs evidenced by your ADRs upon (i) surrender of such ADRs
at the
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Corporate Trust Office of the depositary bank,
(ii) payment of the fee of the depositary bank for the
surrender of ADRs, and (iii) payment of any applicable
taxes or governmental charges. If any ADRs remain outstanding
after the date of termination, the depositary bank will
discontinue the registration of transfers of ADSs and suspend
the distribution of dividends and other distributions to such
ADR holders. In addition, the depositary bank will not give any
further notices or perform any further acts under the deposit
agreement, except that the depositary bank will continue to
collect dividends and other distributions pertaining to
deposited securities, sell rights and other property as provided
in the deposit agreement, and continue to deliver deposited
securities in exchange for ADRs surrendered to the depositary
bank.
At any time after the expiration of one year from the date of
termination, the depositary bank may sell the deposited
securities then held and may thereafter hold uninvested the net
proceeds of any such sale, together with any other cash then
held by it, unsegregated and without liability for interest, for
the pro rata benefit of the holder of ADRs that have not been
surrendered. After making such sale, the depositary bank will be
discharged from all obligations under the deposit agreement,
except to account for the net proceeds and other cash from the
sale, after deducting, in each case, applicable fees, expenses
and taxes. Upon the termination of the deposit agreement, we
will be discharged from all obligations under the deposit
Agreement except for our obligations under certain surviving
provisions, such as indemnification.
Books of Depositary
The depositary bank will maintain ADS holder records at its
depositary office. You may inspect such records at that office
during regular business hours solely for the purpose of
communicating with other holders in the interest of business
matters relating to the ADSs and the deposit agreement.
The depositary bank will maintain in The City of New York
facilities to record and process the issuance, cancellation,
combination, split-up
and transfer of ADRs. These facilities may be closed from time
to time, except to the extent prohibited by law.
Limitations on Obligations and Liabilities
The deposit agreement expressly limits our obligations and the
obligations of the depositary bank. It also limits our liability
and the liability of the depositary bank. We and the depositary
bank:
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are only obligated to take the actions specifically set forth in
the deposit agreement without negligence or bad faith; |
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are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations
under the deposit agreement; |
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are not liable if either of us exercises discretion permitted
under the deposit agreement; |
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have no obligation to become involved in a lawsuit or other
proceeding related to the ADRs or the deposit agreement on your
behalf or on behalf of any other person; |
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may rely upon any documents we believe in good faith to be
genuine and to have been signed or presented by the proper party. |
In the deposit agreement, we agree to indemnify the depositary
bank for acting as depositary, except for losses caused by the
depositarys own negligence or bad faith, and the
depositary bank agrees to indemnify us for losses resulting from
its negligence or bad faith.
Pre-Release Transactions
The deposit agreement permits the depositary bank to deliver
ADSs before deposit of our ordinary shares. This is called a
pre-release of the ADS. The depositary bank may also deliver
shares upon
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surrender of pre-released ADSs (even if the ADSs are surrendered
before the pre-release transaction has been closed out). A
pre-release is closed out as soon as the underlying shares are
delivered to the depositary bank. The depositary bank may
receive ADSs instead of shares to close out a pre-release. The
depositary bank may pre-release ADSs only under the following
conditions: (1) before or at the time of the pre-release,
the person to whom the pre-release is being made represents to
the depositary in writing that it or its customer owns the
shares or ADSs to be deposited; (2) the pre-release is
fully collateralized with cash or other collateral that the
depositary bank considers appropriate; and (3) the
depositary bank must be able to close out the pre-release on not
more than five business days notice. In addition, the
depositary bank will limit the number of ADSs that may be
outstanding at any time as a result of pre-release, although the
depositary bank may disregard the limit from time to time, if it
thinks it is appropriate to do so.
Taxes
You will be responsible for the taxes and other governmental
charges payable on your ADSs and the securities represented by
your ADSs. We, the depositary bank and the custodian may deduct
from any distribution the taxes and governmental charges payable
by holders and may sell any and all property on deposit to pay
the taxes and governmental charges payable by holders. You will
be liable for any deficiency if the sale proceeds do not cover
the taxes that are due on your ADSs and the securities
represented by your ADSs.
The depositary bank may refuse to deliver ADSs, to deliver
transfer, split and combine ADRs or to release securities on
deposit until all taxes and charges are paid by you. The
depositary bank and the custodian may take reasonable
administrative actions to obtain tax refunds and reduced tax
withholding for any distributions on your behalf. However, you
may be required to provide to the depositary bank and to the
custodian proof of taxpayer status and residence and such other
information as the depositary bank and the custodian may require
to fulfill legal obligations.
Foreign Currency Conversion
The depositary bank will arrange for the conversion of all
foreign currency received into U.S. dollars if such
conversion is practical, and it will distribute the
U.S. dollars in accordance with the terms of the deposit
agreement. You may be required to pay fees and expenses incurred
in converting foreign currency, such as fees and expenses
incurred in complying with currency exchange controls and other
governmental requirements.
If the conversion of foreign currency is not practical or
lawful, or if any required approvals are denied or not
obtainable at a reasonable cost or within a reasonable period,
the depositary bank may take the following actions in its
discretion:
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Convert the foreign currency to the extent practical and lawful
and distribute the U.S. dollars to the holders for whom the
conversion and distribution is lawful and practical. |
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Distribute the foreign currency to holders for whom the
distribution is lawful and practical. |
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Hold the foreign currency without liability for interest for the
applicable holders. |
The Custodian
The depositary bank has agreed with the custodian that the
custodian will receive and hold the deposited securities for the
account of the depositary bank in accordance with the deposit
agreement. If the custodian resigns or is discharged from its
duties under the deposit agreement, the depositary bank will
promptly appoint a successor custodian. The resigning or
discharged custodian will deliver the deposited securities and
related records to the custodian designated by the depositary
bank. If the
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depositary bank resigns or is discharged from its duties under
the deposit agreement, the custodian will continue to act as
custodian and will be obligated to comply with the direction of
the successor depositary.
Governing Law
The deposit agreement is governed by the laws of the State of
New York. We and the depositary bank have agreed that the
federal or state courts in The City of New York shall have
jurisdiction to hear and determine any suit, action or
proceeding and to settle any dispute between us that may arise
out of or in connection with the deposit agreement. We also
submitted to the jurisdiction of these courts and we have
appointed an agent for service of process in The City of New
York.
Warrants
As of December 6, 2005, warrants to purchase a total of
430,000 ordinary shares were outstanding with exercise prices of
$2.44 per share. Each warrant contains provisions for the
adjustment of the exercise price and the number of shares
issuable upon the exercise of the warrant in the event of
certain types of reorganizations and significant corporate
transactions. Warrant holders have certain registration rights
once the only trading market for our securities is located
within the United States. These registration rights expire when
the shares can be sold pursuant to Rule 144 of the
Securities Act of 1933.
Registrar
The registrar for our ordinary shares is Capita IRG, plc.
Listing
We intend to apply to have our ADSs approved for quotation on
the American Stock Exchange under the trading symbol
LOV.
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SHARES ELIGIBLE FOR FUTURE SALE
As of December 6, 2005, we had 30,238,996 ordinary shares
issued and outstanding, including those represented by Global
Depository Shares, or GDSs.
This registration statement registers all of our outstanding
ordinary shares, including those represented by GDSs, under the
Securities Act of 1933, as amended. All of our ordinary shares,
represented by ADSs, will be freely tradable within the United
States without restriction or further registration under the
Securities Act, unless these ordinary shares are purchased by
affiliates as that term is defined in Rule 144
under the Securities Act. Immediately prior to this offering,
there was no public market for ADSs in the United States. Our
ordinary shares in the form of GDSs are freely tradable on the
Frankfurt Stock Exchange in Germany. Upon effectiveness, this
registration statement would also have the effect of allowing
holders of our GDSs to surrender the GDSs and hold ordinary
shares in the form of ADSs and publicly trade such ADSs in the
United States, subject to volume and manner of sales limitations
as set forth in Rule 144 with respect to affiliates. Once
GDSs have been surrendered for ordinary shares, the shares may
not be re-deposited for
GDSs, and if and when all GDSs have been surrendered, we intend
to terminate the GDS deposit agreement such that our ordinary
shares will only be traded in the form of ADSs. We do not
currently intend to remove the trading of our shares on the
Frankfurt Stock Exchange, and shareholders may continue to trade
on the Frankfurt Stock Exchange after the effectiveness of the
registration statement. Future sales of substantial amounts of
ADSs or GDSs in the public markets could adversely affect
prevailing market prices of our ADSs.
Rule 144
All 30,238,996 of our ordinary shares are being registered in
this offering and will be freely tradable without restriction or
further registration under the Securities Act of 1933. If shares
are sold by our affiliates, as that term is defined
in Rule 144 under the Securities Act of 1933, pursuant to
Rule 144 their sales of shares would be governed by the
limitations and restrictions that are described below.
In general, under Rule 144, as currently in effect, a
person who owns ordinary shares that were acquired from us or an
affiliate of us at least one year prior to the proposed sale is
entitled to sell within any three-month period, a number of
ordinary shares that does not exceed the greater of:
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1% of the number of ordinary shares then outstanding, which as
of December 6, 2005 will equal approximately 302,390
ordinary shares; or |
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the average weekly trading volume of our ordinary shares in the
form of ADSs on the American Stock Exchange during the four
calendar weeks preceding the filing of a notice on Form 144
with respect to such sale. |
Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability
of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates for purposes of the Securities Act at any
time during the 90 days preceding a sale and who has
beneficially owned the ordinary shares proposed to be sold for
at least two years, including the holding period of any prior
owner other than an affiliate of us, is entitled to sell such
ordinary shares without complying with the manner of sale,
public information, volume limitation or notice provisions of
Rule 144.
Rule 701
In general, under Rule 701 as currently in effect, any of
our employees, consultants or advisors who purchase ordinary
shares from us in connection with a compensatory stock or option
plan or other written agreement will be eligible to resell such
ordinary shares 90 days after we become subject to
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Section 13 or 13(d) of the Exchange Act in reliance on
Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144. Grants
of options under the 2000 Option Scheme, and the exercise
thereof, do not comply with the requirements of Rule 701
and therefore Rule 701 is not applicable to ordinary shares
purchased pursuant to the exercise of such options.
Additional Registration of Ordinary Shares
As of December 6, 2005, options to purchase 4,731,688
ordinary shares were issued and outstanding under our share
option schemes and 14,364,562 ordinary shares were available for
issuance under our share option schemes. On November 18,
2005, we filed a registration statement under the Securities Act
on Form S-8
covering 8,719,688 ordinary shares underlying outstanding
options and 14,358,562 ordinary shares reserved for issuance
upon the exercise of options available for grant under our share
option schemes. After such registration statement becomes
effective, shares registered under that registration statement
will, subject to vesting provisions and Rule 144 volume
limitation, manner of sale, notice and public information
requirements applicable to our affiliates, be available for sale
in the open market.
We also had 430,000 ordinary shares issuable upon the exercise
of warrants outstanding as of December 6, 2005. All of the
ordinary shares underlying these warrants are being registered
in this registration statement.
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PLAN OF DISTRIBUTION
The selling shareholders, and any of their transferees,
pledgees, assignees and
successors-in-interest,
may, from time to time, sell any or all of their shares of our
ordinary shares in the form of ADSs on any stock exchange,
market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated
prices. The selling shareholders may use any one or more of the
following methods when selling shares:
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ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers; |
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block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; |
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purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; |
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an exchange distribution in accordance with the rules of the
applicable exchange; |
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privately negotiated transactions; |
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settlement of short sales entered into after the date of this
prospectus; |
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broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share; |
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a combination of any such methods of sale; or |
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through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise. |
The selling shareholders may also sell shares under
Rule 144 under the Securities Act of 1933, if available,
rather than under this prospectus and any prospectus supplement.
Broker-dealers engaged by the selling shareholders may arrange
for other brokers-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the
selling shareholders (or, if any broker-dealer acts as agent for
the purchaser of shares, from the purchaser) in amounts to be
negotiated, which commissions and discounts are not expected to
exceed what is customary in the types of transactions involved.
In connection with the sale of our ordinary shares in the form
of ADSs or interests therein, the selling shareholders may enter
into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the
ADSs in the course of hedging the positions they assume. The
selling shareholders may also sell shares of our ADSs short and
deliver these securities to close out their short positions, or
loan or pledge the ADSs to broker-dealers that in turn may sell
these securities. The selling shareholders may also enter into
option or other transactions with broker-dealers or other
financial institutions or the creation of one or more derivative
securities which require the delivery to such broker-dealer or
other financial institution of shares offered by this prospectus
and any prospectus supplement, which shares such broker-dealer
or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The selling shareholders and any broker-dealers or agents that
are involved in selling the shares may be deemed to be
underwriters within the meaning of the Securities
Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the
Securities Act. We are not aware of any selling shareholders
that have any agreement or understanding, directly or
indirectly, with any person to distribute our ADSs.
We have paid certain fees and expenses incurred by us incident
to the registration of the shares.
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Because selling shareholders may be deemed to be
underwriters within the meaning of the Securities
Act, they will be subject to the prospectus delivery
requirements of the Securities Act. We are not aware if any
selling shareholder has entered into any agreements,
understandings or arrangements with any underwriter or
broker-dealer regarding the sale of the ordinary shares. There
is no underwriter or coordinating broker acting in connection
with the proposed sale of the ordinary shares by the selling
shareholders.
We intend to keep this prospectus effective until all of the
shares have been sold pursuant to the prospectus and any
prospectus supplement or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if
required under applicable state securities laws. In addition, in
certain states, the ordinary shares may not be sold unless they
have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Securities
Exchange Act of 1934, any person engaged in the distribution of
the ordinary shares may not simultaneously engage in market
making activities with respect to our ADSs for a period of one
or five business days, depending on our public float and average
daily trading volume, prior to the commencement of the
distribution. In addition, the selling shareholders will be
subject to applicable provisions of the Exchange Act and the
rules and regulations thereunder, including Regulation M,
which may limit the timing of purchases and sales of shares of
our ADSs by the selling shareholders or any other person. We
will make copies of this prospectus and any prospectus
supplement available to the selling shareholders and will inform
them of the need to deliver a copy of this prospectus and any
prospectus supplement to each purchaser at or prior to the time
of the sale.
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TAXATION
United Kingdom Tax Considerations
The following is a summary of the U.K. tax considerations
relevant to shareholders and ADS holders. The summary is
intended only as a general guide to current U.K. tax legislation
and Inland Revenue practice and applies only to our shareholders
and ADS holders who hold shares and ADSs as an investment and
who are the absolute beneficial owners thereof. Certain
categories of our shareholders and ADS holders may be subject to
special rules and this summary does not apply to such
shareholders and ADS holders. For example, certain categories of
shareholders or ADS holders such as dealers, and shareholders
and ADS holders who receive such shares and ADSs upon the
exercise of warrants or options to purchase such shares may be
subject to special rules. If you are in any doubt as to your
taxation position or if you are subject to tax in any
jurisdiction other than the U.K., you should consult an
appropriate professional adviser immediately.
This summary does not purport to be a complete analysis or
listing of all of the potential tax consequences of holding our
shares or ADSs. Prospective purchasers of our ADSs and shares
are advised to consult their own tax advisers concerning the
consequences under U.K. laws of the acquisition, ownership and
disposition of the ADSs and/or shares.
This summary is based on the existing tax laws of the United
Kingdom as in effect on the date hereof and what is understood
to be current U.K. Inland Revenue published practice as at the
date hereof, all of which are subject to change or changes in
interpretation, possibly with retroactive effect. In addition,
this summary is based in part upon the representations of The
Bank of New York as at the date hereof and the assumption that
each obligation in the Deposit Agreement and any related
agreement will be performed in accordance with its terms.
Taxation of Dividends
Under current U.K. taxation legislation, no tax will be withheld
or deducted for or on account of income tax from dividends paid
by us.
A U.K. resident individual shareholder will generally be
entitled to a tax credit in respect of any dividend received.
The amount of the tax credit is equal to one-ninth of the cash
dividend or 10% of the aggregate of the cash dividend and the
associated tax credit (the Gross Dividend). An
individual shareholder who, taking account of the Gross Dividend
he or she receives, is liable to income tax at the basic or
starting rate will pay income tax at 10% of the Gross Dividend
so that the tax credit will satisfy his income tax liability on
the Dividend Payment. An individual shareholder must, to the
extent that his income, including the Gross Dividend, exceeds
the threshold for higher rate income tax, pay income tax at
32.5% of the Gross Dividend. After deducting the tax credit, he
would therefore have to account for additional income tax at
22.5% of the Gross Dividend.
U.K. resident shareholders who are not liable to U.K. tax on
dividends, including pension funds and charities, will not be
entitled to claim repayment of the tax credit attaching to
dividends paid by us.
A U.K. resident corporate shareholder will generally not be
subject to U.K. corporation tax on dividends. Such shareholders
will not be able to claim repayment of the tax credit attaching
to dividends paid by us.
A non-U.K. resident shareholder is not generally entitled to the
benefit of a tax credit in respect of any dividend received. A
non-U.K. resident shareholder may also be subject to foreign
taxation on dividend income under local law. A shareholder who
is not resident in the U.K., for tax purposes, should consult
his own tax adviser concerning his tax liabilities on dividends.
The tax treatment described above will also apply where
dividends are received in respect of shares held in ADS form.
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Taxation of Capital Gains
A holder who is not resident or ordinarily resident in the U.K.
and whose shares or ADSs are not attributable to a trade,
profession or vocation carried on in the United Kingdom through
a branch or agency, or permanent establishment, will not be
subject to U.K. tax on any gains realized on a disposal of the
shares or ADSs, except as mentioned below in relation to
temporarily non-U.K. resident individuals. Such a holder may
however be liable to non-U.K. tax under local law.
A disposal of shares by a shareholder, or ADSs by an ADS holder,
who is resident or, in the case of an individual, ordinarily
resident for tax purposes in the United Kingdom or who is not
U.K.-resident but carries on a trade, profession or vocation in
the United Kingdom through a branch or agency, or permanent
establishment, to which the shares or ADSs are attributable,
may, depending on the holders circumstances and subject to
any available exemption or relief, give rise to a chargeable
gain or allowable loss for the purposes of the taxation of
chargeable gains.
A holder who is an individual and who has, on or after
March 17, 1998, ceased to be resident or ordinarily
resident for tax purposes in the United Kingdom for a period of
less than 5 complete tax years and who disposes of the shares or
ADSs during that period may also be liable to U.K. taxation of
chargeable gains, subject to any available exemption or relief,
if that holder returns to the United Kingdom as resident or
ordinarily resident within that period.
On a disposal of shares or ADSs by an individual who is resident
or ordinarily resident in the United Kingdom for taxation
purposes, the shares or ADSs may attract taper relief, which
reduces the amount of chargeable gains according to how long the
shares or ADSs have been held.
A holder of shares or ADSs who is a company resident in the
United Kingdom for tax purposes will benefit from indexation
allowance which, in general terms, increases the capital gains
tax base cost of an asset in accordance with changes in the
retail prices index and reduces any chargeable gain accordingly.
U.K. Inheritance and Gift Taxes
Our shares and ADSs will be assets situated in the U.K. for the
purposes of U.K. inheritance tax. A gift of such assets by, or
the death of, an individual holder of such assets may, subject
to certain exemptions and reliefs, give rise to a liability to
U.K. inheritance tax even if the holder is neither domiciled in
the U.K. nor deemed to be domiciled in the U.K. under certain
rules relating to long residence or previous domicile. For U.K.
inheritance tax purposes, a transfer of assets at less than full
market value may be treated as a gift and particular rules apply
to gifts where the donor reserves or retains a benefit. Special
rules also apply to close companies and to trustees of
settlements who hold shares bringing them within the charge to
U.K. inheritance tax.
An individual who is domiciled in the U.S. for the purposes
of the United Kingdom/ United States Estate and Gift Tax
Convention (the Estate Tax Treaty) and who is not a
national of the U.K. for the purposes of the Estate Tax Treaty
will generally not be subject to U.K. inheritance tax in respect
of our shares or ADSs on the individuals death or on a
lifetime gift of shares or ADSs, provided that the applicable
U.S. federal gift or estate tax liability is paid, unless
the shares or ADSs are part of the business property or a
permanent establishment of an enterprise in the U.K. or pertain
to a fixed base in the U.K. of an individual used for the
performance of independent personal services. Where the shares
or ADSs have been placed in trust by a settlor who, at the time
of the settlement, was a U.S. national, the shares or ADSs
will generally not be subject to U.K. inheritance tax provided
that the settlor, at the time of the settlement, was treated as
domiciled in the U.S. for the purposes of the Estate Tax
Treaty. In the exceptional case where the shares or ADSs are
subject to both U.K. inheritance tax and to U.S. federal
gift or estate tax, the Estate Tax Treaty generally provides for
the tax paid in the U.K. to be credited against the tax paid in
the U.S. or for tax paid in the U.S., to be credited
against tax payable in the U.K. based on priority rules set out
in that Treaty.
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Shareholders should consult an appropriate professional adviser
if they make a gift of any kind of the shares or ADSs or intend
to hold any shares or ADSs through trust arrangements.
U.K. Stamp Duty and Stamp Duty Reserve Tax
The transfer on sale of a share in an English company will
generally be liable to ad valorem stamp duty at the rate of 0.5%
of the amount or value of the consideration for the transfer
rounded up to the nearest £5. An exception to this
principle is where shares are traded on CREST, an electronic
share trading settlement system, which does not currently apply
to our shares. The purchaser normally pays the stamp duty.
An unconditional agreement to sell a share will generally give
rise to a liability on the purchaser to stamp duty reserve tax
(SDRT) at the rate of 0.5% of the amount or value of the
consideration for the sale. If a duly stamped transfer in
respect of the agreement is produced within six years of the
date on which the agreement is entered into or, if later, the
date on which it becomes unconditional, any SDRT paid is
repayable, generally with interest, and any unpaid SDRT charge
is cancelled. There is no reciprocal treaty between the U.K. and
the U.S. relating to U.K. stamp duties.
Issues or transfers of shares (1) to, or to a nominee or
agent for, a person whose business is or includes issuing
depositary receipts or (2) to, or to a nominee or agent
for, a person whose business is or includes providing clearance
services, will generally be subject to stamp duty or SDRT at
1.5% of the amount or value of the consideration or the issue
price, or, in certain circumstances, the value of the shares
transferred, rounded up to the nearest £5 in the case of
stamp duty. Strictly, the depositary or clearance operator, or
its nominee, as the case may be, will be accountable for this
liability for stamp duty or SDRT. However, it is anticipated
that any stamp duty or SDRT payable by the Depositary will be
charged to the holder of the ADS or the depositor of any
security represented by the ADS.
No U.K. stamp duty will be payable on the acquisition or
transfer of an ADS following its initial issuance provided that
the transfer and any separate instrument of transfer remains at
all times outside the United Kingdom and that the instrument of
transfer is not executed in or brought into the United Kingdom.
An agreement to transfer an ADS will not give rise to SDRT. On a
transfer of shares from the custodian or depositary to a holder
of an ADS upon cancellation of the ADS, a fixed stamp duty of
£5 per instrument of transfer will be payable.
Any transfer for value of the underlying shares represented by
ADSs or agreement to transfer these underlying shares may give
rise to a liability on the transferee to stamp duty or SDRT at
0.5% of the value of the consideration for the transfer.
124
United States Tax Considerations
The following summary describes the material United States
federal income tax consequences that are relevant to the
acquisition, ownership and disposition of ordinary shares or
ADSs acquired by holders in this initial offering. This summary
is based on the U.S. Internal Revenue Code of 1986, as
amended, its legislative history, existing final, temporary and
proposed Treasury Regulations, rulings and judicial decisions,
all as currently in effect and all of which are subject to
prospective and retroactive rulings and changes. We will not
seek a ruling from the Internal Revenue Service with regard to
the United States federal income tax treatment relating to
investment in our equity shares or ADSs and, therefore, there
can be no assurance that the IRS will agree with the conclusions
stated herein.
This summary is not a comprehensive description of all United
States federal income tax consequences that may be relevant to a
particular investor, and you are urged to consult your own tax
advisor regarding your specific tax situation. This summary does
not address the state, local and foreign tax consequences of an
investment in our equity shares or ADSs. In addition, this
summary applies only to holders who are not the selling
shareholders, who hold equity shares or ADSs as capital
assets (generally, property held for investment) under the
U.S. Internal Revenue Code, and it does not address the tax
consequences that may be relevant to investors subject to
special tax treatment, such as:
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tax-exempt organizations; |
|
|
|
regulated investment companies and real estate investment
trusts; |
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|
|
insurance companies; |
|
|
|
broker-dealers and traders in securities; |
|
|
|
banks or other financial institutions; |
|
|
|
investors whose functional currency is not the United States
dollar; |
|
|
|
investors that hold our equity shares or ADSs as part of a
hedge, straddle or conversion transaction; |
|
|
|
investors that own, directly, indirectly, or by attribution
10% or more of our total combined voting stock; |
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|
investors subject to the United States alternative minimum
tax; |
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United States expatriates and those investors who are
U.S. Holders (as defined below) and who are also tax
residents of any other country; or |
|
|
|
persons holding ADSs or ordinary shares through partnerships
or other pass through entities. |
You should consult your own tax advisor regarding the United
States federal, state, local and foreign and other tax
consequences of purchasing, owning, and disposing of our equity
shares or ADSs in your particular circumstances.
We believe that we were not a passive foreign
investment company, as defined in Section 1297(a) of
the U.S. Internal Revenue Code, in 2004 or 2005 and do not
expect to become a passive foreign investment
company in the future, and this summary so assumes.
125
Taxation of U.S. Holders
You are a U.S. Holder if you are a beneficial
owner of equity shares or ADSs and you are for United States
federal income tax purposes:
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a citizen or resident of the United States; |
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|
a corporation, or any other entity taxable as a corporation,
created or organized in or under the laws of the United States
or any state thereof, including the District of Columbia; |
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|
an estate the income of which is subject to United States
federal income tax regardless of its source; or |
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|
|
a trust if a court within the United States is able to exercise
primary supervision over its administration and one or more
United States persons have the authority to control all
substantial decisions of the trust, or if the trust has made a
valid election under U.S. Treasury regulations to be
treated as a United States person. |
If a partnership holds equity shares or ADSs, the tax treatment
of a partner will generally depend upon the status of the
partner and upon the activities of the partnership. Partners of
partnerships holding our equity shares or ADSs should consult
their own tax advisors.
Distributions on Equity Shares or ADSs
The gross amount of any distribution (other than in
liquidation), including the fair market value of all
distributions of ordinary shares whenever a U.S. Holder may
elect to receive cash distributions in lieu of ordinary share
distributions, that you receive with respect to our ordinary
shares or ADSs (before reduction for U.K. income tax, if any,
withheld from such distributions) generally will be included in
your gross income on the day on which you, in the case where you
own ordinary shares, or the Depositary, in the case where you
own ADSs, receive the distribution. This distribution will be
taxed to you as a dividend to the extent such distribution does
not exceed our current or accumulated earnings and profits, as
calculated for U.S. federal income tax purposes. Dividends
received by an individual U.S. Holder during taxable years
before 2009 will generally be taxed at a maximum rate of 15%,
provided certain holding period requirements and other
conditions are satisfied. Although no such rules are currently
in effect, the U.S. Internal Revenue Service may require in
the future that, as a prerequisite to the application of the
reduced maximum 15% rate on our dividends, we certify that we
are not a passive foreign investment company. We
will undertake reasonable steps to provide such a certification,
if so required; however, if we are unable to so certify because
we determine that we are in fact a passive foreign
investment company or the certification process is
materially burdensome to us, our dividends will be taxed at
ordinary income tax rates, currently, up to 35%.
To the extent any distribution exceeds our earnings and profits,
the distribution will first be treated as a tax-free return of
capital to the extent of your adjusted tax basis in our ordinary
shares or ADSs, as applicable, and will be applied against and
reduce such basis. To the extent that such distribution exceeds
your adjusted tax basis, the distribution will be taxed as gain
recognized on a sale or exchange of our ordinary shares or ADSs,
as applicable. See Sale or Exchange of Equity
Shares or ADSs, below. Because we are not a United States
corporation, generally, no dividends-received deduction will be
allowed to a corporate U.S. Holder with respect to
dividends paid by us, except as provided in Section 245 of
the U.S. Internal Revenue Code.
Unless we are treated as a
U.S.-owned
foreign corporation, dividends paid by us to individual
U.S. Holders should generally be treated as foreign source
income for U.S. foreign tax credit limitation purposes, and
subject to certain limitations, U.K. taxes, if any, withheld
from a distribution will be eligible, at the election of the
U.S. Holder, for credit or deduction against such Holders
U.S. federal income tax liability. Generally, it will be
more advantageous to claim a credit because a credit reduces
U.S. federal income taxes on a dollar-for-dollar basis, while a
deduction merely reduces the taxpayers income subject to
tax. We will be treated as a
U.S.-owned
foreign corporation if fifty percent or more of the total
combined voting power of all classes of our stock or of its
total value is owned,
126
directly or indirectly, by U.S. Holders, in which case only
part of our dividend that is apportioned to our earnings and
profits from
non-U.S. sources
would be treated as foreign source income for U.S. foreign
tax credit limitation purposes. If a refund of the tax withheld
is available to you under the laws of the U.K. or under an
applicable treaty, the amount of tax withheld that is refundable
will not be eligible for such credit against your
U.S. federal income tax liability and will not be eligible
for the deduction against your U.S. federal taxable income.
If the dividends are qualified dividend income, the amount of
the dividend taken into account for purposes of calculating the
foreign tax credit limitation will in general be limited to the
gross amount of the dividend, multiplied by the reduced rate
divided by the highest rate of tax normally applicable to
dividends. The limitation on foreign taxes eligible for credit
is calculated separately with respect to specific classes of
income. For this purpose, dividends distributed by us with
respect to ADSs or shares will generally constitute
passive income or, in the case of certain
U.S. Holders, financial services income.
Recently enacted legislation will modify the foreign tax credit
limitation by reducing the number of classes of foreign source
income to two for taxable years beginning after
December 31, 2006. Under this recently enacted legislation,
dividends distributed by us with respect to ADSs or ordinary
shares would generally constitute passive category
income but could, in the case of certain
U.S. Holders, constitute general category
income. The rules regarding the availability of foreign
tax credits are complex, and U.S. Holders may be subject to
different rules regarding the source of income on dividends and
to various limitations on the amount of foreign tax credits that
are available. We therefore urge you to consult your own tax
advisor regarding the availability of the foreign tax credit
under your particular circumstances.
Sale or Exchange of Equity Shares or ADSs
A U.S. Holder will generally recognize capital gain or loss
upon the sale, exchange or other disposition of the equity
shares or ADSs measured by the difference between the
U.S. dollar value of the amount received and the
U.S. Holders tax basis (determined in
U.S. dollars) in the equity shares or ADSs. Any such gain
or loss will generally be U.S. source gain or loss and will
be treated as long-term capital gain or loss, if your holding
period in the ADSs or the shares exceeds one year. If you are a
non-corporate U.S. Holder, any capital gain generally will
be subject to U.S. federal income tax at preferential rates if
specified minimum holding periods are met. The deductibility of
capital losses is subject to significant limitations.
Passive Foreign Investment Company Rules
U.S. Holders generally will be subject to a special tax
regime that would differ in certain material respects from the
tax treatment described above if we are, or were to become, a
passive foreign investment company for United States
federal income tax purposes. We would be classified as a
passive foreign investment company for any taxable
year if either: (a) at least 75% of our gross income is
passive income, or (b) at least 50% of our assets
(determined on the basis of a quarterly average) produce or are
held for the production of passive income. Although the
determination of whether a corporation is a passive
foreign investment company is made annually, and thus may
be subject to change, we do not believe that in 2004 or 2005 we
were a passive foreign investment company as defined
in Section 1297(a) of the U.S. Internal Revenue Code,
and we do not expect to become a passive foreign
investment company in the future. We urge you to consult
your own tax advisor regarding the adverse tax consequences of
owning the equity shares or ADSs of a passive foreign
investment company.
Taxation of
Non-U.S. Holders
A
Non-U.S. Holder
is a beneficial owner of equity shares or ADSs that is not a
U.S. Holder.
Distributions on Equity Shares or ADSs
Non-U.S. Holders
generally will not be subject to United States federal income or
withholding tax on dividends received from us with respect to
equity shares or ADSs, unless such income is considered
effectively connected with the
Non-U.S. Holders
conduct of a United States trade or business (and, if
127
required by an applicable income tax treaty, the income is
attributable to a permanent establishment maintained in the
United States).
Sale or Exchange of Equity Shares or ADSs
Non-U.S. Holders
generally will not be subject to United States federal income
tax on any gain realized upon the sale, exchange or other
disposition of equity shares or ADSs unless:
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|
|
such gain is considered effectively connected with the
Non-U.S. Holders
conduct of a United States trade or business (and, if required
by an applicable income tax treaty, the income is attributable
to a permanent establishment maintained in the United
States); or |
|
|
|
if such
Non-U.S. Holder is
an individual that is present in the United States for
183 days or more during the taxable year of the disposition
and certain other conditions are met. |
In addition, if you are a corporate
Non-U.S. Holder,
any effectively connected dividend income or gain (subject to
certain adjustments) may be subject to an additional branch
profits tax at a rate of 30% (or such lower rate as may be
specified by an applicable income tax treaty).
Backup Withholding and Information Reporting
In general, dividends on equity shares or ADSs, and payments of
the proceeds of a sale, exchange or other disposition of equity
shares or ADSs, paid to a U.S. Holder within the United
States or through certain United States-related financial
intermediaries are subject to information reporting and may be
subject to backup withholding at a rate currently equal to 28%
unless the holder:
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|
|
|
|
is a corporation or other exempt recipient; or |
|
|
|
provides an accurate taxpayer identification number and makes
any other required certification. |
Non-U.S. Holders
generally are not subject to information reporting or backup
withholding. However, such holders may be required to provide a
certification to establish their
non-U.S. status in
connection with payments received within the United States or
through certain
U.S.-related financial
intermediaries.
You generally will be allowed a credit of the amount of any
backup withholding against your United States federal income tax
liability, or you may obtain a refund of any amounts withheld
under the backup withholding rules that exceed your income tax
liability by filing a refund claim with the U.S. Internal
Revenue Service.
THE ABOVE SUMMARIES REFLECT CERTAIN ASPECTS OF CURRENT LAW
AND PRACTICE IN THE UNITED KINGDOM AND THE UNITED STATES.
PROSPECTIVE SHAREHOLDERS AND ADS HOLDERS SHOULD CONSULT THEIR
PROFESSIONAL ADVISERS REGARDING THE UNITED KINGDOM AND THE
UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
OF PURCHASING, OWNING, AND DISPOSING OF SUCH HOLDERS
EQUITY SHARES OR ADSs IN SUCH HOLDERS PARTICULAR
CIRCUMSTANCES.
128
LEGAL MATTERS
Steptoe & Johnson, London, England will pass for us as
to the valid issuance under English law of the ordinary shares
being offered by this prospectus.
EXPERTS
The consolidated financial statements of Spark Networks plc at
December 31, 2004 and 2003, and for each of the three years
in the period ended December 31, 2004, appearing in this
prospectus and registration statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of MingleMatch, Inc. at
December 31, 2004 and 2003, and for each of the two years
in the period ended December 31, 2004, appearing in this
prospectus and registration statement have been audited by
Tanner LC, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
129
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1 with the
SEC for the ADSs that the selling shareholders are offering by
this prospectus. This prospectus does not include all of the
information contained in the registration statement. You should
refer to the registration statement and its exhibits for
addition information. Whenever we make reference in this
prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you
should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other
document. We will be required to file annual, quarterly and
special reports, proxy statements and other information with the
SEC commencing sixty days from the date on which we file a
registration statement on Form 10 with the SEC.
You can read our SEC filings, including the registration
statement, over the Internet at the SECs Web site at
http://www.sec.gov. You may also read and copy any document we
file with the SEC at its public reference facilities at
100 F Street, N.E. Washington, DC 20549. You may also
obtain copies of the documents at prescribed rates by writing to
the Public Reference Section of the SEC at
100 F Street, N.E., Washington, DC 20549. Please call
the SEC at
1-800-SEC-0330 for
further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of
the American Stock Exchange. For further information on
obtaining copies of our public filings at the American Stock
Exchange, you should call
(212) 306-1000.
We maintain a corporate Web site at www.spark.net. You may
access our annual report on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and
amendments to those reports filed with, or furnished to, the SEC
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, with the SEC free of charge at
our Web site as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.
The reference to our Web address is provided for informational
purposes only and does not constitute incorporation by reference
of the information contained at this Web site.
130
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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|
Spark Networks plc (formerly known as MatchNet plc)
|
|
|
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
MingleMatch, Inc.
|
|
|
|
|
F-33 |
|
|
F-34 |
|
|
F-35 |
|
|
F-36 |
|
|
F-37 |
|
|
F-38 |
F-1
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Spark Networks plc (formerly known as MatchNet plc):
We have audited the accompanying consolidated balance sheets of
Spark Networks plc (formerly known as MatchNet plc) as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Spark Networks plc (formerly known as
MatchNet plc) as of December 31, 2004 and 2003, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting
principles.
Los Angeles, California
March 7, 2005
F-2
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
September 30, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
2,035 |
|
|
$ |
4,265 |
|
|
$ |
8,471 |
|
|
Marketable securities
|
|
|
3,780 |
|
|
|
3,158 |
|
|
|
197 |
|
|
Restricted cash
|
|
|
|
|
|
|
1,330 |
|
|
|
1,401 |
|
|
Accounts receivable, net of allowance of $13 for
September 30, 2005 and December 31, 2004
|
|
|
410 |
|
|
|
641 |
|
|
|
1,151 |
|
|
Advances to employees
|
|
|
330 |
|
|
|
20 |
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
902 |
|
|
|
879 |
|
|
|
1,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,457 |
|
|
|
10,293 |
|
|
|
12,407 |
|
Property and equipment, net
|
|
|
4,273 |
|
|
|
6,467 |
|
|
|
5,237 |
|
Goodwill, net
|
|
|
2,024 |
|
|
|
7,955 |
|
|
|
15,528 |
|
Intangible assets, net
|
|
|
987 |
|
|
|
1,069 |
|
|
|
4,862 |
|
Investment in noncontrolled affiliate
|
|
|
|
|
|
|
1,167 |
|
|
|
1,112 |
|
Deposits and other assets
|
|
|
2,228 |
|
|
|
408 |
|
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
16,969 |
|
|
$ |
27,359 |
|
|
$ |
39,473 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
3,385 |
|
|
$ |
3,014 |
|
|
$ |
2,597 |
|
|
Accrued liabilities
|
|
|
4,555 |
|
|
|
8,052 |
|
|
|
4,802 |
|
|
Deferred revenue
|
|
|
3,232 |
|
|
|
3,933 |
|
|
|
4,099 |
|
|
Notes payable current portion
|
|
|
|
|
|
|
400 |
|
|
|
10,517 |
|
|
Current portion of obligations under capital leases
|
|
|
316 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,488 |
|
|
|
15,572 |
|
|
|
22,015 |
|
Obligations under capital leases, net of current portion
|
|
|
171 |
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
240 |
|
Notes payable long term
|
|
|
|
|
|
|
1,300 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,659 |
|
|
|
16,872 |
|
|
|
23,155 |
|
Shares subject to rescission (Note 10)
|
|
|
|
|
|
|
3,819 |
|
|
|
3,819 |
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized capital £800,000 divided into 80,000,000
ordinary shares of 1p each; issued and outstanding
26,209,496 shares as of September 30, 2005,
24,587,351 shares as of December 31, 2004,
19,556,699 shares as of December 31, 2003 at a stated
value of:
|
|
|
313 |
|
|
|
401 |
|
|
|
432 |
|
|
Additional paid-in-capital
|
|
|
39,737 |
|
|
|
50,423 |
|
|
|
57,119 |
|
|
Deferred share-based compensation
|
|
|
(2,572 |
) |
|
|
(305 |
) |
|
|
|
|
|
Accumulated other comprehensive (loss)
|
|
|
(40 |
) |
|
|
(13 |
) |
|
|
(299 |
) |
|
Notes receivable from employees
|
|
|
(120 |
) |
|
|
(203 |
) |
|
|
(83 |
) |
|
Accumulated deficit
|
|
|
(32,008 |
) |
|
|
(43,635 |
) |
|
|
(44,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
5,310 |
|
|
|
6,668 |
|
|
|
12,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
16,969 |
|
|
$ |
27,359 |
|
|
$ |
39,473 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Years ended December 31, | |
|
September 30 | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Net revenues
|
|
$ |
16,352 |
|
|
$ |
36,941 |
|
|
$ |
65,052 |
|
|
$ |
48,000 |
|
|
$ |
48,925 |
|
Direct marketing expenses
|
|
|
5,396 |
|
|
|
18,395 |
|
|
|
31,240 |
|
|
|
24,612 |
|
|
|
18,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
10,956 |
|
|
|
18,546 |
|
|
|
33,812 |
|
|
|
23,388 |
|
|
|
30,573 |
|
Operating
expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
|
403 |
|
|
|
986 |
|
|
|
2,607 |
|
|
|
20,060 |
|
|
|
758 |
|
|
Customer service
|
|
|
1,207 |
|
|
|
2,536 |
|
|
|
3,379 |
|
|
|
2,601 |
|
|
|
1,787 |
|
|
Technical operations
|
|
|
1,587 |
|
|
|
4,481 |
|
|
|
7,184 |
|
|
|
55,201 |
|
|
|
4,848 |
|
|
Product development
|
|
|
603 |
|
|
|
959 |
|
|
|
2,013 |
|
|
|
1,376 |
|
|
|
2,949 |
|
|
General and administrative
|
|
|
7,996 |
|
|
|
18,537 |
|
|
|
29,253 |
|
|
|
21,559 |
|
|
|
20,013 |
|
|
Amortization of intangible assets other than goodwill
|
|
|
524 |
|
|
|
555 |
|
|
|
860 |
|
|
|
670 |
|
|
|
848 |
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
1,532 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,320 |
|
|
|
29,586 |
|
|
|
45,504 |
|
|
|
33,467 |
|
|
|
31,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
|
(1,364 |
) |
|
|
(11,040 |
) |
|
|
(11,692 |
) |
|
|
(10,079 |
) |
|
|
(630 |
) |
Interest (income) and other expenses, net
|
|
|
(840 |
) |
|
|
(188 |
) |
|
|
(66 |
) |
|
|
(14 |
) |
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before income taxes
|
|
|
(524 |
) |
|
|
(10,852 |
) |
|
|
(11,626 |
) |
|
|
(10,065 |
) |
|
|
(915 |
) |
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$ |
(524 |
) |
|
$ |
(10,852 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,066 |
) |
|
$ |
(1,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic and diluted
|
|
$ |
(0.03 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.51 |
) |
|
|
(0.45 |
) |
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and diluted
|
|
|
18,460 |
|
|
|
18,970 |
|
|
|
22,667 |
|
|
|
22,139 |
|
|
|
25,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Operating expenses include share-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months | |
|
|
Years ended | |
|
ended | |
|
|
December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Indirect marketing
|
|
$ |
79 |
|
|
$ |
156 |
|
|
$ |
128 |
|
|
$ |
10 |
|
Customer service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Technical operations
|
|
|
140 |
|
|
|
22 |
|
|
|
22 |
|
|
|
168 |
|
Product development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
General & administrative
|
|
|
1,652 |
|
|
|
1,526 |
|
|
|
1,012 |
|
|
|
1,000 |
|
See accompanying notes.
F-4
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Notes | |
|
|
|
|
|
|
Ordinary shares | |
|
Additional | |
|
Deferred | |
|
other | |
|
receivable | |
|
|
|
Total | |
|
|
| |
|
paid-in | |
|
share | |
|
comprehensive | |
|
from | |
|
Accumulated | |
|
shareholders | |
|
|
Shares | |
|
Amount | |
|
capital | |
|
compensation | |
|
income (loss) | |
|
employees | |
|
deficit | |
|
equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
BALANCE, December 31, 2001
|
|
|
17,937 |
|
|
$ |
288 |
|
|
$ |
33,458 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(20,632 |
) |
|
$ |
13,114 |
|
|
Issuance of ordinary shares upon exercise of share options and
warrants
|
|
|
770 |
|
|
|
11 |
|
|
|
779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790 |
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(524 |
) |
|
|
(524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2002
|
|
|
18,707 |
|
|
|
299 |
|
|
|
34,237 |
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
(21,156 |
) |
|
|
13,463 |
|
|
Issuance of ordinary shares upon exercise of share options and
warrants
|
|
|
850 |
|
|
|
14 |
|
|
|
1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,071 |
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
(123 |
) |
|
Share compensation
|
|
|
|
|
|
|
|
|
|
|
4,443 |
|
|
|
(2,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,871 |
|
|
Issuance of loans to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
(120 |
) |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,852 |
) |
|
|
(10,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2003
|
|
|
19,557 |
|
|
|
313 |
|
|
|
39,737 |
|
|
|
(2,572 |
) |
|
|
(40 |
) |
|
|
(120 |
) |
|
|
(32,008 |
) |
|
|
5,310 |
|
|
Issuance of ordinary shares upon exercise of share options and
warrants
|
|
|
4,430 |
|
|
|
77 |
|
|
|
7,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,680 |
|
|
Private placement of ordinary shares
|
|
|
600 |
|
|
|
11 |
|
|
|
3,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,657 |
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
(73 |
) |
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
(563 |
) |
|
|
2,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,704 |
|
|
Issuance of loans to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83 |
) |
|
|
|
|
|
|
(83 |
) |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,627 |
) |
|
|
(11,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2004
|
|
|
24,587 |
|
|
|
401 |
|
|
|
50,423 |
|
|
|
(305 |
) |
|
|
(13 |
) |
|
|
(203 |
) |
|
|
(43,635 |
) |
|
|
6,668 |
|
|
Issuance of ordinary shares upon exercise of share option and
warrants (unaudited)
|
|
|
1,273 |
|
|
|
24 |
|
|
|
2,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,827 |
|
|
Issuance of ordinary shares for acquisition (unaudited)
|
|
|
150 |
|
|
|
3 |
|
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,079 |
|
|
Issuance of ordinary shares for settlement
|
|
|
200 |
|
|
|
4 |
|
|
|
1,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,801 |
|
|
Unrealized loss on marketable securities (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
Foreign currency translation adjustment (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(400 |
) |
|
|
|
|
|
|
|
|
|
|
(400 |
) |
|
Share based compensation (unaudited)
|
|
|
|
|
|
|
|
|
|
|
1,020 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,325 |
|
|
Impairment of loans to employees (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
|
Net loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,035 |
) |
|
|
(1,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2005 (unaudited)
|
|
|
26,210 |
|
|
$ |
432 |
|
|
$ |
57,119 |
|
|
$ |
|
|
|
$ |
(299 |
) |
|
$ |
(83 |
) |
|
$ |
(44,670 |
) |
|
$ |
12,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Years ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$ |
(524 |
) |
|
$ |
(10,852 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,066 |
) |
|
$ |
(1,035 |
) |
|
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,398 |
|
|
|
1,996 |
|
|
|
3,925 |
|
|
|
2,721 |
|
|
|
3,558 |
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
1,532 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
1,871 |
|
|
|
1,704 |
|
|
|
1,162 |
|
|
|
1,325 |
|
|
|
Shares issued for legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97 |
|
|
|
Gain (loss) from sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
106 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
54 |
|
|
|
(318 |
) |
|
|
(231 |
) |
|
|
(533 |
) |
|
|
(510 |
) |
|
|
Advances to employees
|
|
|
(266 |
) |
|
|
1497 |
|
|
|
45 |
|
|
|
226 |
|
|
|
140 |
|
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
(1,330 |
) |
|
|
|
|
|
|
(71 |
) |
|
|
Prepaid expenses and other assets
|
|
|
781 |
|
|
|
(297 |
) |
|
|
146 |
|
|
|
(1,415 |
) |
|
|
116 |
|
|
|
Accounts payable and accrued liabilities
|
|
|
153 |
|
|
|
5,477 |
|
|
|
3,126 |
|
|
|
4,376 |
|
|
|
(2,168 |
) |
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
1,700 |
|
|
|
|
|
|
|
(43 |
) |
|
|
Deferred revenue
|
|
|
542 |
|
|
|
1,697 |
|
|
|
701 |
|
|
|
973 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
2,138 |
|
|
|
2603 |
|
|
|
(1,636 |
) |
|
|
2,556 |
|
|
|
1,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of marketable securities
|
|
|
3,012 |
|
|
|
5,422 |
|
|
|
3,553 |
|
|
|
3,399 |
|
|
|
2,967 |
|
|
Purchases of marketable securities
|
|
|
(5,373 |
) |
|
|
(2,033 |
) |
|
|
(3,000 |
) |
|
|
(3,000 |
) |
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,833 |
) |
|
|
(2,733 |
) |
|
|
(5,467 |
) |
|
|
(4,554 |
) |
|
|
(1,318 |
) |
|
Purchases of businesses and intangible assets
|
|
|
(993 |
) |
|
|
(151 |
) |
|
|
(5,077 |
) |
|
|
(5,616 |
) |
|
|
|
|
|
Purchase of noncontrolled affiliate
|
|
|
|
|
|
|
|
|
|
|
(1,167 |
) |
|
|
|
|
|
|
|
|
|
Deposit for acquisition of business
|
|
|
|
|
|
|
(2,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of MingleMatch, Inc., net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,187 |
) |
|
|
(1,541 |
) |
|
|
(11,158 |
) |
|
|
(9,771 |
) |
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares
|
|
|
790 |
|
|
|
1,071 |
|
|
|
15,156 |
|
|
|
14,378 |
|
|
|
2,827 |
|
|
Principal payments of capital lease obligations
|
|
|
|
|
|
|
(176 |
) |
|
|
(314 |
) |
|
|
(235 |
) |
|
|
(173 |
) |
|
Advances to employees for exercise of stock options
|
|
|
|
|
|
|
(265 |
) |
|
|
265 |
|
|
|
|
|
|
|
|
|
|
Loans to employees
|
|
|
|
|
|
|
(120 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
790 |
|
|
|
510 |
|
|
|
15,024 |
|
|
|
14,143 |
|
|
|
2,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(2,259 |
) |
|
|
1,572 |
|
|
|
2,230 |
|
|
|
1,816 |
|
|
|
4,206 |
|
Cash and cash equivalents at beginning of period
|
|
|
2,722 |
|
|
|
463 |
|
|
|
2,035 |
|
|
|
2,035 |
|
|
|
4,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
463 |
|
|
$ |
2,035 |
|
|
$ |
4,265 |
|
|
|
3,851 |
|
|
|
8,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for interest
|
|
$ |
(320 |
) |
|
$ |
75 |
|
|
$ |
41 |
|
|
|
(25 |
) |
|
|
2 |
|
|
Cash paid (received) for income taxes
|
|
$ |
192 |
|
|
$ |
|
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment capital lease financing
|
|
|
|
|
|
$ |
662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of debt in exchange for property and equipment
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable for sale of domain names
|
|
$ |
405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MingleMatch, Inc. acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,000 |
|
|
Fair value of ordinary shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,079 |
|
|
Accrued transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
165 |
|
|
Shares issued for legal settlement expensed in prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,793 |
|
See accompanying notes.
F-6
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
The Company and Summary of Significant Accounting Policies |
The Company
Spark Networks plc (formerly known as MatchNet plc) (the
Company) is a public limited company incorporated
under the laws of England and Wales and our global depositary
receipts are traded on the Frankfurt Stock Exchange. The Company
and its consolidated subsidiaries provide Internet personals
services, in the United States and internationally, whereby
adults are able to post information about themselves
(profiles) on the Companys Web sites and
search and contact other individuals who have posted profiles.
Membership on the Companys online services, which includes
the posting of a personal profile and photos, and access to its
database of profiles is free. The Company charges a subscription
fee for one, three, six and twelve-month subscriptions to
members allowing them to initiate communication with other
members and subscribers via the Companys confidential
email communications platform. Two way communications through
the Companys confidential email platform can only take
place between paying subscribers.
Restatement
The Companys global depositary shares have publicly traded
since the Company completed its initial public offering in June
2000. The Company files periodic reports as required by the
Frankfurt Stock Exchange. In 2004, we discovered a number of
errors in our 2001 and 2002 Annual Reports and restated these
periods and the first nine months of 2003 in the Companys
2003 Annual Report as filed with the Frankfurt Stock Exchange.
The restatements primarily related to the timing of recognition
of deferred revenue and the capitalization of bounty costs,
which are the amounts paid to online marketers to acquire
members. The restatements, which are in accordance with United
States generally accepted accounting principles, pertained
primarily to timing matters and had no impact on cash flow from
operating activities or our ongoing operations. As a result of
the restatement, net loss increased by $1.0 million in 2002.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the parent Company and all of its majority owned
subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The financial statements of the Companys foreign
subsidiary are prepared using the local currency as the
subsidiarys functional currency. The Company translates
the assets and liabilities using period-end rates of exchange,
and revenues and expenses using average rates of exchange for
the year. The resulting gain or loss is included in accumulated
other comprehensive income (loss) and are excluded from net
income (loss).
Interim Financial Information
The accompanying unaudited interim consolidated financial
statements as of and for the nine months ended
September 30, 2004 and 2005 have been prepared in
accordance with accounting principles generally accepted in the
United States. Certain information and note disclosures normally
included in the consolidated annual financial statements
prepared in accordance with generally accepted accounting
principles in the United States have been omitted from the
unaudited interim consolidated
F-7
financial statements. In the opinion of the Companys
management, the unaudited interim consolidated financial
statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments
(consisting of normal recurring accruals) necessary for the fair
presentation of the Companys financial position, results
of operations and cash flows as of and for the periods
presented. The results of operations for such periods are not
necessarily indicative of the results expected for the full year
or for any future period.
Revenue Recognition and Deferred Revenue
Substantially all of the Companys revenues are derived
from subscription fees. Revenues are presented net of credits
and credit card chargebacks. The Company recognizes revenue in
accordance with accounting principles generally accepted in the
United States and with Securities and Exchange Commission Staff
Accounting Bulletin No. 104, Revenue
Recognition. Recognition occurs ratably over the
subscription period, beginning when there is persuasive evidence
of an arrangement, delivery has occurred (access has been
granted), the fees are fixed and determinable, and collection is
reasonably assured. Subscribers pay in advance, primarily by
using a credit card, and all purchases are final and
nonrefundable. Fees collected in advance for subscriptions are
deferred and recognized as revenue using the straight line
method over the term of the subscription.
The Company derives a small amount of revenues (less than 2% in
2004 and 2003 and less than 5% in 2002) from certain promotional
events. Revenues and the related expenses associated with these
events are recognized at the conclusion of each event.
The Company also earns a small amount of revenue from barter
arrangements. The Company provides internet banner advertising
space to a marketing associate in exchange for similar
advertising space on the marketing associates website.
Barter transactions are valued based on amounts realized in
similar cash transactions occurring within six months prior to
the date of the barter transaction. Marketing expenses that
would have been paid in cash, had these been cash arrangements,
totaled $0, $66,000, and $93,000 for the years ended
December 31, 2002, 2003, and 2004 respectively. The Company
recorded these barter arrangements as direct marketing expense
and related revenue based on the number of new registrations
generated from the marketing associates and the average historic
member acquisition costs.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended
December 31, 2002, 2003, and 2004 the Company incurred
advertising costs amounting to approximately $4.8 million,
$18.1 million, and $29.1 million respectively.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three
months or less are considered cash and cash equivalents.
Marketable Securities
The Company makes temporary investments of cash in liquid
interest bearing accounts and marketable securities. Marketable
securities are classified as available for sale, in accordance
with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and are stated
at fair market value, with any unrealized gains or losses
reported as other comprehensive income (loss) under
shareholders equity in the accompanying consolidated
balance sheets. Realized gains or losses and declines in value
that are other than temporary, if any, on available-for-sale
securities are calculated using the specific identification
method and are reported in other income or expense as incurred.
For the years ended December 31, 2002, 2003 and 2004,
realized gains and recorded losses were insignificant.
F-8
Accounts Receivable
Accounts receivable are composed of credit card payments for
membership fees pending collection from the credit card issuers.
The Company provides an allowance for doubtful accounts based on
the historical charge back levels experienced over the preceding
twelve-month period. The allowance for doubtful accounts as of
December 31, 2004 was approximately $13,000, which
increased from approximately $10,000 as of December 31,
2003.
Prepaid Advertising Expenses
In certain circumstances, the Company pays in advance for
Internet based advertising on other contracted Web sites, and
expenses the prepaid amounts over the contract periods as the
contracted Web site delivers on their commitment. The Company
evaluates the realization of prepaid amounts at each reporting
period, and expenses prepaid amounts if it determines that the
contracted Web site will be unable to deliver on their
commitment.
Web Site and Software Development Costs
The Company capitalizes costs related to developing or obtaining
internal-use software. Capitalization of costs begins after the
conceptual formulation stage has been completed. Product
development costs are expensed as incurred or capitalized into
property and equipment in accordance with Statement of Position
(SOP) 98-1
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
SOP 98-1 requires
that cost incurred in the preliminary project and
post-implementation stages of an internal use software project
be expensed as incurred and that certain costs incurred in the
application development stage of a project be capitalized.
In accordance with Emerging Issues Task Force
(EITF) 00-2
Accounting for Web Site Development Costs, the
Company expenses costs related to the planning and post
implementation phases of Web site development efforts. Direct
costs incurred in the development phase are capitalized. Costs
associated with minor enhancements and maintenance for the Web
site are included in expenses in the accompanying consolidated
statements of operations.
Capitalized Web site and software development costs are included
in internal-use software in property and equipment and amortized
over the estimated useful life of the products, which is usually
three years. For the years ended December 31, 2002, 2003,
and 2004, the Company capitalized approximately $572,000,
$825,000, and $658,000, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation, which is provided using the straight-line method
over the estimated useful life of the asset. Amortization of
leasehold improvements is calculated using the straight-line
method over the remaining term of the lease. Amortization of
assets recorded under capital leases is included in depreciation
expense over the term of the leases. Upon the sale or retirement
of property or equipment, the cost and related accumulated
depreciation and amortization are removed from the
Companys financial statements with the resulting gain or
loss, if any, reflected in the Companys results of
operations.
In October 2003 the Company changed the estimated useful life
over which property and equipment are depreciated from a range
of five to seven years previously used, to three years based on
business developments that took place in 2003, and on
managements opinion that rapid changes in technology
reduced the useful life of the Companys assets. The effect
of the change in estimate is immaterial to the financial
statements.
F-9
Goodwill
Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired resulting from business
acquisitions and had been amortized over a five year period
using the straight-line method until 2001. On January 1,
2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, which no longer requires the
periodic amortization of goodwill. As of December 31, 2003
and 2004, the Company had unamortized goodwill of approximately
$2.0 million and $8.0 million respectively. Goodwill
has been tested for impairment under the provisions of
SFAS No. 142 and these tests indicated that there was
no impairment.
Intangible Assets
Intangible assets resulting from the acquisitions of entities
accounted for using the purchase method of accounting are
estimated by management based on the fair value of assets
received. Identifiable intangible assets are comprised mainly of
purchased member and subscriber databases, domain names, and
acquired technologies. Domain names were determined to have
indefinite useful lives, thus, they are not amortized.
Intangible assets with finite useful lives are amortized using
the straight-line method over their estimated useful lives
(three years for member databases, three months for subscriber
databases and five years for acquired technologies).
Impairment of Long-lived Assets
The Company assesses the impairment of long-lived assets, which
include property and equipment and identifiable intangible
assets, whenever events or changes in circumstances indicate
that such assets might be impaired and the carrying value may
not be recoverable. Events and circumstances that may indicate
that an asset is impaired may include significant decreases in
the market value of an asset or common stock, a significant
decline in actual and projected revenue, a change in the extent
or manner in which an asset is used, shifts in technology, loss
of key management or personnel, changes in the Companys
operating model or strategy and competitive forces as well as
other factors.
If events and circumstances indicate that the carrying amount of
an asset may not be recoverable and the expected undiscounted
future cash flows attributable to the asset are less than the
carrying amount of the asset, an impairment loss equal to the
excess of the assets carrying value over its fair value is
recorded. Fair value is determined based on the present value of
estimated expected future cash flows using a discount rate
commensurate with the risk involved, quoted market prices or
appraised values, depending on the nature of the assets.
In October 2003, based on business developments that took place
in 2003, and on managements opinion that rapid changes in
technology reduced the fair value of some of its property and
equipment (mostly computer equipment and capitalized software
costs), the Company recorded an impairment charge of
approximately $1.5 million.
In December 2004, based on changes in management and the
reevaluation of our existing projects, the Company determined
that certain internally developed software projects would not be
necessary to be completed. As such, the Company recorded an
impairment charge of $208,000.
Income Taxes
The Company accounts for income taxes under
SFAS No. 109, Accounting for Income Taxes.
Accordingly, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to
F-10
be recovered or settled. Valuation allowances are established
when necessary to reduce deferred taxes to the amount expected
to be realized.
In assessing the potential realization of deferred tax assets,
the Company considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which the Companys tax loss carry-forwards remain
deductible.
Direct Marketing
The Companys direct marketing expenses consist primarily
of amounts the Company pays for advertising in order to generate
traffic to its Web sites. These advertising costs are primarily
online advertising and are directly attributable to the revenues
received from paying subscribers.
Indirect Marketing
The Companys indirect marketing expenses relate primarily
to salaries for sales and marketing personnel and other
associated costs such as public relations.
Customer Service
The Companys customer service expenses relate primarily to
the salaries and wages associated with operating the member
service center, as well as depreciation expense for customer
service related assets.
Technical Operations
The Companys technical operations expenses relate
primarily to the people and systems necessary to support its
network, Internet connectivity and other data and communication
support. Also included is depreciation expense for technical
operations related assets.
Product Development
The Companys product development expenses relate primarily
to salaries and wages for personnel involved in the development,
creation, and enhancement of its Web sites and services and
depreciation expense for product development related assets.
General and Administrative
The Companys general and administrative expenses relate
primarily to corporate personnel related costs, professional
fees, occupancy, credit card collection fees, depreciation and
other overhead costs.
Share-based Compensation Unaudited
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement No. 123 (revised 2004),
Share-Based Payment (Statement 123(R)),
a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) requires a
company to recognize compensation expense based on the fair
value at the date of grant for share options and other
share-based compensation, eliminating the use of the intrinsic
value method. The Company adopted Statement 123(R) on
July 1, 2005, and as a result, its loss before income taxes
for the nine month period ended September 30, 2005, is
$1.4 million lower, than if it had continued to account for
share-based compensation under APB Opinion No. 25. Basic
loss per share for the three and nine month periods ended
September 30, 2005 would have been $(0.03) and $0.01,
respectively, if the Company had not adopted Statement 123(R),
compared to reported basic and diluted earnings per share of
$(0.08) and $(0.04), respectively. Diluted earnings per share
for the nine months ended September 30, 2005 would have
been $0.01.
F-11
At September 30, 2005, the Company had two share-based
employee compensation plans, which are described more fully in
Note 10. Prior to July 1, 2005, the Company accounted
for those plans under the recognition and measurement provisions
of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, as permitted by FASB
Statement No. 123, Accounting for Stock-Based
Compensation. Only share-based employee compensation related
to variable accounting (as discussed in Note 10,
Shareholders Equity) was recognized in the Companys
Statements of Operations for the years ended December 31,
2004 or 2003, and in the six month period ended June 30,
2005, as all options granted under those plans had an exercise
price equal to the market value of the underlying ordinary share
on the date of grant. Effective July 1, 2005, the Company
adopted the fair value recognition provisions of Statement
123(R), using the modified-prospective-transition method. Under
that transition method, compensation cost recognized in the
second half of 2005 includes: (i) compensation cost for all
share-based payments granted prior to, but not yet vested as of
July 1, 2005, based on the grant date fair value estimated
in accordance with the original provisions of Statement 123, and
(ii) compensation cost for all share-based payments granted
subsequent to July 1, 2005, based on the grant-date fair
value estimated in accordance with the provisions of Statement
123(R). Results for prior periods have not been restated.
Prior to its adoption of Statement 123(R), the Company did not
record tax benefits of deductions resulting from the exercise of
share options because of the uncertainty surrounding the timing
of realizing the benefits of its deferred tax assets in future
tax returns. Statement 123(R) requires the cash flows resulting
from the tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those options (excess tax
benefits) to be classified as financing cash flows. Had the
Company recognized a tax benefit from deductions resulting from
the exercise of stock options, it would have classified the
benefit as a financing cash inflow on the cash flow statement.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of Statement 123(R) to options granted
under its share option plans in all periods presented. For
purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes option-pricing model and
amortized to expense over the options vesting periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net loss as reported
|
|
$ |
(524 |
) |
|
$ |
(10,852 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,066 |
) |
|
$ |
(1,035 |
) |
Add: SFAS 123(R) share based employee compensation expense
included in reported net income, net of related tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,409 |
|
Add: share based employee compensation expense recorded in the
accompanying consolidated statements of operations
pre-SFAS 123 (R)
|
|
|
|
|
|
|
75 |
|
|
|
367 |
|
|
|
233 |
|
|
|
48 |
|
Deduct: Total share based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(3,438 |
) |
|
|
(3,645 |
) |
|
|
(3,452 |
) |
|
|
(2,256 |
) |
|
|
(4,067 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(3,962 |
) |
|
$ |
(14,422 |
) |
|
$ |
(14,712 |
) |
|
$ |
(12,089 |
) |
|
$ |
(3,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic & diluted
|
|
$ |
(0.03 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.04 |
) |
Pro forma basic & diluted
|
|
$ |
(0.21 |
) |
|
$ |
(0.76 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.55 |
) |
|
$ |
(0.14 |
) |
Note that the above pro forma disclosures are provided for 2004,
2003 and 2002 because employee share options were not accounted
for using the fair-value method during those periods.
Disclosures for
F-12
2005 are presented because employee share options were not
accounted for using the fair-value method during the first six
months of 2005. When the Company presents its financial
statements for 2006, it will present pro forma disclosures only
for 2005 and 2004 because share-based payments will have been
accounted for under Statement 123(R)s fair-value method
for all of 2006.
In accordance with Statement 123(R), the fair value of each
option grant was estimated as of the grant date using the
Black-Scholes option pricing model with the following
assumptions used for grants:
|
|
|
|
|
|
|
|
|
|
|
Three and Nine | |
|
|
Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Expected life in years
|
|
|
4 |
|
|
|
4 |
|
Dividend per share
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
70.0 |
% |
|
|
76.2 |
% |
Risk-free interest rate
|
|
|
3.5 |
% |
|
|
3.5 |
% |
In accordance with Statement 123(R), the Company used historical
and empirical data to assess different forfeiture rates for
three different groups of employees. The Company must reassess
forfeiture rates when deemed necessary and it must calibrate
actual forfeiture behavior to what has already been recorded.
For the three month period ending September 30, 2005, the
Company had three groups of employees whose behavior was
significantly different than those of other groups, therefore we
estimated different forfeiture rates for each group.
Prospective compensation expense was calculated using a
bi-nomial or lattice
model with a volatility rate of 75%, a risk free rate of 3.5%
and a term of 4 years for options granted subsequent to
June 30, 2005. The volatility rate was derived by examining
historical share price behavior and assessing managements
expectations of share price behavior during the term of the
option.
The concepts that underpin lattice models and the
Black-Scholes-Merton formula are the same, but the key
difference between a lattice model and a closed-form model such
as the Black-Scholes-Merton formula is the flexibility of the
former. A lattice model can explicitly use dynamic assumptions
regarding the term structure of volatility, dividend yields, and
interest rates. Further, a lattice model can incorporate
assumptions about how the likelihood of early exercise of an
employee stock option may increase as the intrinsic value of
that option increases or how employees may have a high
propensity to exercise options with significant intrinsic value
shortly after vesting. Because of the versatility of lattice
models, the Company believes that it can provide a more accurate
estimate of an employee share options fair value than an
estimate based on a closed-form Black-Scholes-Merton
formula.
The Company accounts for shares issued to non-employees in
accordance with the provisions of SFAS No. 123(R) and
EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods and Services.
Earnings Per Share
The Company calculates net income (loss) per share in accordance
with SFAS No. 128 Earnings per Share,
which requires the presentation of both basic and diluted net
income (loss) per share. Basic net income (loss) per share is
computed by dividing net income (loss) available to ordinary
shareholders by the weighted average number of ordinary shares
outstanding. Diluted net income (loss)per share includes the
effect of potential shares outstanding, including dilutive share
options and warrants, using the treasury stock method.
The effect of share options and warrants on diluted weighted
average shares outstanding has been excluded from the
calculation of income (loss) per share for the nine months ended
September 30, 2005 and 2004 and the years ended
December 31, 2002, 2003, and 2004 because it would have been
F-13
anti-dilutive. Had the Companys net income been positive
for the nine months ended September 30, 2005 and 2004, the
weighted average shares outstanding for the diluted earnings per
share calculation would have been approximately
29.1 million and 26.0 million, respectively
(unaudited). Had the Companys net income been positive for
the years ended December 31, 2003 and 2004, the weighted
average shares outstanding for the diluted earnings per share
calculation would have been approximately 26.4 million and
26.9 million shares, respectively, using the treasury stock
method.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. For the
Company, comprehensive income (loss) consists of its reported
net income (loss), the net unrealized gains or losses on
marketable securities and translation adjustments. Comprehensive
income (loss) for each of the periods presented is comprised as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Net (loss)
|
|
$ |
(524 |
) |
|
$ |
(10,852 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,066 |
) |
|
$ |
(1,035 |
) |
Changes in unrealized gains/losses in available for sale
securities
|
|
|
83 |
|
|
|
(123 |
) |
|
|
(73 |
) |
|
|
(60 |
) |
|
|
114 |
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
(153 |
) |
|
|
(400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$ |
(441 |
) |
|
$ |
(10,975 |
) |
|
$ |
(11,600 |
) |
|
$ |
(10,279 |
) |
|
$ |
(1,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (loss) consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Nine months ended | |
|
|
December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Gain/loss on marketable securities
|
|
$ |
(40 |
) |
|
$ |
(113 |
) |
|
$ |
1 |
|
Foreign currency translation
|
|
|
|
|
|
|
100 |
|
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(40 |
) |
|
$ |
(13 |
) |
|
$ |
(299 |
) |
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
The Companys financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, notes
payable and obligations under capital leases are carried at
cost, which approximates their fair value due to the short-term
maturity of these instruments and the relatively stable interest
rate environment.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Recent Accounting Developments
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a
replacement of Accounting Principles Board Opinion No. 20,
Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements (SFAS 154). SFAS 154
changes the
F-14
requirements for the accounting for, and reporting of, a change
in accounting principle. Previously, voluntary changes in
accounting principles were generally required to be recognized
by way of a cumulative effect adjustment within net income
during the period of the change. SFAS 154 requires
retrospective application to prior periods financial
statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005; however, the
statement does not change the transition provisions of any
existing accounting pronouncements. The Company does not believe
adoption of SFAS 154 will have a material effect on its
financial position, cash flows or results of operations.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the
net income for the period by the weighted average number of
shares outstanding during the period. Diluted net income per
share is computed by dividing the net income for the period by
the weighted average number of shares and potentially dilutive
shares outstanding during the period. Potentially dilutive
shares, are composed of shares issuable upon the exercise of
options and warrants and are computed using the treasury stock
method. As seen in the chart below, diluted earnings per share
are calculated only for those periods having income since
diluting a loss is prohibited under generally accepted
accounting principles (in thousands except earnings per share).
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
ended September 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
(unaudited) | |
(Loss) Per Common Share Basic
|
|
|
|
|
|
|
|
|
Net (loss) applicable to common shares
|
|
$ |
(10,066 |
) |
|
$ |
(1,035 |
) |
Weighted average shares outstanding basic
|
|
|
22,139 |
|
|
|
25,621 |
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$ |
(0.45 |
) |
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
Diluted earnings per common share is not applicable in a loss
position.
Current state income tax expense was $1,600 for the year ended
December 31, 2004 and was less than $1,000 for each of the
years ended December 31, 2003 and 2002. Federal income tax
expense was $0 for each of the tax years ended December 31,
2002, 2003, and 2004. The Companys effective tax rate
differs from the statutory federal income tax rate of 35% as per
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Provision on earnings at federal statutory rate
|
|
|
(35.0 |
) |
|
|
(35.0 |
) |
|
|
(35.0 |
) |
State tax provision, net of federal tax effect
|
|
|
(6.0 |
) |
|
|
(6.0 |
) |
|
|
(7.6 |
) |
Permanent items and other
|
|
|
|
|
|
|
|
|
|
|
(1.3 |
) |
Valuation allowance
|
|
|
41.0 |
|
|
|
41.0 |
|
|
|
43.9 |
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although the Company is incorporated as a public limited company
in the United Kingdom, the majority of its global operations are
currently subject to tax in the U.S. As a result, the
Company believes it is more appropriate to use the
U.S. Federal statutory rate in its reconciliation of the
statutory rate to its reported income tax rate.
F-15
The components of the deferred income tax asset for the periods
presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(amounts in thousands) | |
Deferred income tax assets (liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
$ |
4,700 |
|
|
$ |
7,810 |
|
|
$ |
18,131 |
|
Depreciation and amortization
|
|
|
1,873 |
|
|
|
1,388 |
|
|
|
2,274 |
|
Compensation accruals
|
|
|
35 |
|
|
|
994 |
|
|
|
1,574 |
|
Accruals and reserves
|
|
|
90 |
|
|
|
750 |
|
|
|
878 |
|
State taxes
|
|
|
(409 |
) |
|
|
(613 |
) |
|
|
(1,555 |
) |
(Loss) on disposal of assets
|
|
|
(607 |
) |
|
|
(607 |
) |
|
|
(129 |
) |
Excess capital loss over capital gain
|
|
|
605 |
|
|
|
605 |
|
|
|
605 |
|
Credits
|
|
|
|
|
|
|
|
|
|
|
204 |
|
Other
|
|
|
521 |
|
|
|
501 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
Total before valuation allowance
|
|
|
6,808 |
|
|
|
10,828 |
|
|
|
22,075 |
|
Less: Valuation allowance
|
|
|
(6,808 |
) |
|
|
(10,828 |
) |
|
|
(22,075 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred income tax asset
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Due to the uncertainty surrounding the timing of realizing the
benefits of its deferred tax assets in future tax returns, the
Company has recorded a valuation allowance against its deferred
tax assets. The valuation allowance increased by approximately
$11.2 million for year ended December 31, 2004.
Approximately $6.4 million of this increase is attributable
to deductions associated with the exercise of stock options. The
remaining increase is attributable to current operations. If
there is a reversal of the valuation allowance associated with
these items, such reversal will be credited directly to equity.
At December 31, 2004, the Company has gross net operating
loss carry-forwards of approximately $42.0 million and
$38.0 million available to reduce future federal and state
taxable income, respectively, which expire beginning in the
years 2018 through 2023 for federal and in 2005 through 2013 for
state purposes. Under Section 382 of the Internal Revenue
Code, the utilization of the net operating loss carry-forwards
can be limited based on changes in the percentage ownership of
the Company. Of the net operating losses available,
approximately $1.5 million and $800,000 for federal and
state purposes, respectively, are attributable to losses
incurred by an acquired subsidiary. Such losses are subject to
other restrictions on usage including the requirement that they
are only available to offset future income of the subsidiary. In
addition, the available net operating losses do not include any
amounts generated by the acquired subsidiary prior to the
acquisition date due to substantial uncertainty regarding the
Companys ability to realize the benefit in the future.
|
|
3. |
Acquisitions of Businesses |
MingleMatch, Inc.
On May 19, 2005 the Company completed the purchase of
MingleMatch, Inc., a company that operates religious, ethnic,
special interest and geographically targeted online singles
communities. The acquisition of MingleMatch fits with the
Companys strategy of creating affinity-focused online
personals that provide experiences for its members. The Company
expects that its purchase of MingleMatch will allow for numerous
cost savings and revenue synergies, which is reflected in the
amount of goodwill included in the purchase price. The results
of MingleMatchs operations have been included in the
consolidated financial statements since that date. The purchase
price for the acquisition was $12 million in cash, which
will be paid over 12 months (as discussed further in
note 9, notes payable), as well as 150,000 shares of
the Companys ordinary shares which, on the date of the
acquisition carried a value of approximately $1.1 million
and capitalized acquisition costs of approximately $100,000. For
the fiscal year ended December 31, 2004, MingleMatch
reported net revenues of approximately $2.5 million and a
loss of $443,000.
F-16
The following unaudited pro forma financial information presents
the combined results of the Company and MingleMatch as if the
acquisition had occurred as of January 1, 2004 after
applying certain adjustments. The pro forma results are not
necessarily indicative of what actually would have occurred had
the acquisition been in effect for the periods presented (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended | |
|
|
Year ended | |
|
September 30, | |
|
|
December 31, 2004 | |
|
2005 | |
|
|
| |
|
| |
Net revenues
|
|
$ |
67,556 |
|
|
$ |
50,378 |
|
Net (loss)
|
|
$ |
(13,267 |
) |
|
$ |
(2,104 |
) |
Net (loss) per share basic and diluted
|
|
$ |
(0.58 |
) |
|
$ |
(0.08 |
) |
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition. The initial purchase price allocations may be
adjusted within one year of the purchase date for changes in
estimates of the fair value of assets acquired and liabilities
assumed.
|
|
|
|
|
|
|
|
As of May 19, 2005 | |
|
|
| |
|
|
(in thousands) | |
Current assets (including cash acquired of $221)
|
|
$ |
295 |
|
Property and equipment, net
|
|
|
162 |
|
Goodwill
|
|
|
7,919 |
|
Domain names and databases
|
|
|
4,655 |
|
|
|
|
|
|
Total assets acquired
|
|
|
13,031 |
|
Current liabilities
|
|
|
41 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
12,990 |
|
Of the $4,655,000 of acquired intangible assets, $2,360,000 was
assigned to member databases and will be amortized over three
years, $370,000 was assigned to subscriber databases which will
be amortized over three months, $205,000 was assigned to
developed software which will be amortized over five years and
$1,720,000 was assigned to domain names which are not subject to
amortization.
Of the $7,919,000 of acquired goodwill, $400,000 was assigned to
assembled workforce.
Point Match
On January 16, 2004, the Company acquired the assets of
Point Match Ltd., an Israeli corporation, in exchange for cash
of $6.3 million of which $2.0 million was placed in
escrow in 2003. The purchase of Point Match, a competitor of
JDate.co.il, increases the Companys market penetration in
the Israeli Singles website segment while also allowing for cost
savings due to efficiencies from consolidating the operations of
the two Web sites. This transaction was recorded under the
purchase method of accounting with $5.7 million being
allocated to goodwill, $560,000 to databases, and $30,000 to
domain name.
Duplo AB
On September 9, 2004, the Company acquired a 20% interest
in Duplo AB for approximately $1.2 million including
professional fees related to the transaction. The Company
purchased its stake in Duplo, a Swedish-located online provider
of social networking products and services, with the intent of
expanding into new markets and strengthening its existing
brands. The Company has the right but not the obligation to
acquire the remaining 80% interest of Duplo AB by
September 9, 2006. The Company also has the right, but not
the obligation, to sell back its shares for the full purchase
price, or an amount exceeding the full purchase price, within
18 months from September 9, 2004. The Company received
two of five board seats in connection with the purchase. Given
the Companys
F-17
ownership, and Board representation, the Company has accounted
for its ownership interests under the equity method of
accounting.
Duplo AB owns and operates Playahead.com, a community site
primarily focused on the Swedish market, whose members range in
age primarily from 16-35.
Our investment in Duplo AB was approximately $1.0 million
higher than our ownership interest in their net assets at
September 30, 2005 (unaudited). This amount is considered
Goodwill and is recorded on the balance sheet within the
investment in non-controlled affiliates account. The
Company has recorded a loss of $55,000 in the nine months ended
September 30, 2005 (unaudited) and earnings of $14,000 in
the year ended 2004 related to its investment in Duplo AB.
In connection with the acquisition, the Company entered into a
two year operating agreement with Duplo AB to provide them with
quarterly payments to share in the operating costs incurred by
Duplo AB. The agreement calls for quarterly payments of $120,000
in advance commencing on January 1, 2005 ($120,000 for the
quarter ended September 30, 2005). The agreement, if
extended, calls for the Company to pay Duplo AB a one time fee
of $150,000 for each Company Web site using the technology
licensed under this agreement as well as an annual license fee
of $20,000 per Web site using the technology.
On April 20, 2005, the Companys Board of Directors
authorized the exercise of the call option the Company holds to
purchase the remaining 80% of Duplo AB that the Company
does not already own. The purchase price for these remaining
shares is $4 million. Duplo AB was formally notified of the
authorization to purchase.
|
|
4. |
Employee and Officer Advances |
The Company provided loans to employees which are repaid in
installments through payroll deductions; short-term advances to
employees to facilitate the exercise of Company share options,
in what is equivalent to a cashless exercise; and long-term
loans to employees to facilitate the exercise of share options
which call for repayment in the future based on the individual
terms of the notes. The short-term advances are repaid by the
employee immediately after they receive the proceeds from the
sale of the shares purchased from the exercise of the Company
share options. The long-term loans are reported on the
consolidated balance sheet as reduction to shareholders
equity. As of December 31, 2003, and 2004, the Company had
advances receivable from employees of approximately $330,000 and
$20,000, respectively.
Advances to executives of $1.4 million as of
December 31, 2002 represent bonus advances under long-term
guaranteed compensation arrangements, which were made to certain
of the Companys officers. During 2003, the Board of
Directors declared that the guarantees were considered to have
been earned during the year. As a result, the amounts were
expensed in the accompanying consolidated statement of
operations for the year ended December 31, 2003.
F-18
|
|
5. |
Property and Equipment |
Property and equipment consists of the following (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
As of December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Computer equipment
|
|
$ |
2,960 |
|
|
$ |
4,228 |
|
|
$ |
4,766 |
|
Computer software
|
|
|
4,009 |
|
|
|
7,475 |
|
|
|
8,372 |
|
Furniture, fixtures, and equipment
|
|
|
261 |
|
|
|
593 |
|
|
|
629 |
|
Leasehold improvements
|
|
|
292 |
|
|
|
390 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,522 |
|
|
|
12,686 |
|
|
|
14,167 |
|
Less: Accumulated depreciation
|
|
|
(3,249 |
) |
|
|
(6,219 |
) |
|
|
(8,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,273 |
|
|
$ |
6,467 |
|
|
$ |
5,237 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the nine months ended
September 30, 2005 was $2.7 million
(unaudited) and for the years ended December 31, 2002,
2003, and 2004, was $874,000, $1.4 million and
$3.1 million, respectively.
Computer equipment as of December 31, 2003 and 2004
includes $662,000 of assets purchased under capital leases.
|
|
6. |
Goodwill and Other Intangible Assets |
The Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets on January 1, 2002. Under the
provisions of SFAS No. 142, amortization of goodwill
ceased and the remaining book value is tested for impairment at
least annually at the reporting unit level using a two step
impairment test. The Company determined the fair value of each
reporting unit and compared it to the carrying amount of the
reporting unit. No impairment charges resulted from this
evaluation since the fair value of each reporting unit exceeded
the carrying amount.
Goodwill of $2.0 million as of December 31, 2003 and
$8.0 million as of December 31, 2004 is mainly related
to the purchase of the PointMatch Ltd. business in January 2004
and AmericanSingles and JDate businesses in 1999.
Finite-lived intangible assets consist of purchased databases
and technologies, and are amortized over the expected periods of
benefits (three years for member databases, three months for
subscriber databases and five years for technologies).
Indefinite-lived intangible assets consist of purchased domain
names and, in accordance with the provisions of
SFAS No. 142, are not amortized. Intangible assets
consists of the following at the following periods (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
Gross | |
|
Accumulated | |
|
Gross | |
|
Accumulated | |
|
Gross | |
|
Accumulated | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
Member databases
|
|
$ |
1,717 |
|
|
$ |
1,247 |
|
|
$ |
2,277 |
|
|
$ |
1,913 |
|
|
$ |
4,610 |
|
|
$ |
2,367 |
|
Subscriber databases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370 |
|
|
|
370 |
|
Purchased technologies
|
|
|
757 |
|
|
|
563 |
|
|
|
757 |
|
|
|
757 |
|
|
|
961 |
|
|
|
771 |
|
Domain names
|
|
|
323 |
|
|
|
|
|
|
|
705 |
|
|
|
|
|
|
|
2,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,797 |
|
|
$ |
1,810 |
|
|
$ |
3,739 |
|
|
$ |
2,670 |
|
|
$ |
8,370 |
|
|
$ |
3,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for finite-lived intangible assets for the
six months ended September 30, 2005 was $848,000
(unaudited), and in the years ended December 31, 2002, 2003
and 2004 was $524,000,
F-19
$555,000, and $860,000, respectively. Amortization expense is
expected to be $238,000 for the last three months of 2005, and
$952,000, $845,000, $343,000 and $57,000 for 2006, 2007, 2008
and thereafter, respectively.
In 2002, the Company sold certain domain names that were not in
use. As a result of these sales, a gain of $400,000 was recorded
in interest (income) and other expenses, net in the accompanying
consolidated statement of operations for the year ended
December 31, 2002.
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Advertising
|
|
$ |
1,406 |
|
|
$ |
3,356 |
|
|
$ |
1,215 |
|
Loss contingencies
|
|
|
1,700 |
|
|
|
2,280 |
|
|
|
|
|
Software & service agreement
|
|
|
|
|
|
|
920 |
|
|
|
268 |
|
Other accrued liabilities
|
|
|
1,449 |
|
|
|
1,496 |
|
|
|
3,319 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,555 |
|
|
$ |
8,052 |
|
|
$ |
4,802 |
|
|
|
|
|
|
|
|
|
|
|
In 2003, a loss contingency of $1.7 million was accrued as
a current liability. This contingency was offset in 2004 by a
note payable, as discussed in Note 9 below, upon settlement
of litigation.
Included in loss contingencies in 2004 is an accrual for
$1.7 million related to the value of shares that will be
issued in 2005 pursuant to the settlement of a contract dispute
(that existed prior to December 31, 2004) between the
Company and a partner, and $400,000 paid in March 2005 to settle
the Companys litigation with LiveWorld Inc. See further
discussion regarding LiveWorld Inc. in Note 13
Commitments and Contingencies.
|
|
8. |
Obligations Under Capital Leases |
The Company leased certain office equipment under capital lease
agreements effective through October 2005, providing for minimum
lease payments for the year ended December 31, 2005 of
approximately $173,000. As of September 30, 2005, the
company has met its minimum lease payment obligations
(unaudited).
The Companys total payments under capital lease
obligations were approximately $314,000 for the year ended
December 31, 2004 and approximately $173,000 (unaudited)
and $235,000 (unaudited) for the nine months ended
September 30, 2005 and 2004, respectively.
In May 2005, the Company issued five short term promissory notes
in connection with the MingleMatch acquisition, in the
cumulative face value amount of ten million dollars with a
computed principal of $9.7 million after imputed interest
and discount of $253,000, computed at a 3.08% interest rate. The
discount will be amortized over the term of the notes and
recognized as interest expense. The notes bear no actual
interest if paid on the due date of each note. All of the notes
except for the one dated May 31, 2006 in the amount of
$1,350,000 are subject to a 75% acceleration clause
F-20
in the event of an initial public offering prior to the due date
of the note. The notes become due as follows:
|
|
|
|
|
October 31, 2005
|
|
$ |
1,000,000 |
|
January 10, 2006
|
|
$ |
2,000,000 |
|
March 31, 2006
|
|
$ |
3,000,000 |
|
May 31, 2006
|
|
$ |
2,650,000 |
|
May 31, 2006
|
|
$ |
1,350,000 |
|
In September 2004, the Company issued a promissory note in the
amount of $1.7 million as a final settlement for a lawsuit.
The note bears simple interest at the rate of 2.75% per year and
is payable in installments, excluding accrued interest, on
(i) September 15, 2005 in the amount of $400,000;
(ii) September 15, 2006 in the amount of $400,000; and
(iii) September 15, 2007 in the amount of $900,000. On
September 15, 2005, the Company paid the first installment
of the note in the amount of $440,000 including accrued interest
of $40,000.
Shares Issued for Settlement (unaudited)
On July 27, 2005, the Company issued 200,000 shares
with a value of approximately $1.8 million at time of
issuance, as final distribution for a legal settlement regarding
a contract dispute that existed prior to December 31, 2004
and was accrued for at that time.
Warrants
In August 2003, the Company agreed to issue warrants to
consultants to subscribe for up to 1,000,000 shares of the
Companys ordinary shares at an exercise price of
$2.50 per share. Of these warrants, 500,000 vested
immediately and were exercisable and non-forfeitable; however, a
warrant certificate was never issued yet the warrants were
treated as issued and outstanding in our financial statements.
The Company recorded expense of approximately $1.1 million
in 2003, related to the 500,000 vested warrants. In December
2004, the Company agreed to accelerate vesting of 250,000 of the
remaining 500,000 unvested warrants, and cancel the remaining
250,000 unvested warrants. Accordingly, the Company issued a
warrant certificate for 750,000 shares. Prior to the
vesting of the 250,000 warrants in December 2004, the Company
treated the 500,000 unvested warrants as variable and,
accordingly, recorded expenses in 2004 and 2003 of approximately
$914,000 and $505,000, respectively. Because the warrants fully
vested in December 2004, a final valuation and related expense
was recorded in 2004 in the amount of $955,000. Since the
Company was accounting for the warrants using variable
accounting, the accounting modification resulting from the
acceleration of the 250,000 warrants was insignificant, and the
cancellation of the remaining 250,000 warrants resulted in
reversing previously recognized expense in the amount of
$710,000. As a result of the December 2004 vesting, the Company
is no longer required to recognize an increase or decrease in
compensation expense based on the then fair value of such
warrants. In the first nine months of 2005, 320,000 warrants
were exercised. As of September 30, 2005, 430,000 warrants,
which expire in 2007 are vested and outstanding (unaudited).
Employee Share Option Schemes
The Company has two share option schemes, the MatchNet plc 2000
Executive Share Option Scheme (the 2000 Plan) and Spark Networks
plc 2004 Share Option Scheme (the 2004 Plan and,
collectively, with the 2000 Plan, the Plans), that provide for
the granting of share options by the Board of Directors of the
Company to employees, consultants, and directors of the Company.
In addition, options granted to employees or service providers
of our Israeli subsidiary who are residents of Israel
F-21
are also subject to the
Sub-Plan for Israeli
Employees and Service providers, which
Sub-Plan incorporates
the terms of the 2004 Plan by reference.
The exercise price of options granted under the Plans are based
on the estimated fair market value of the ordinary shares on the
date of grant. Options granted under the Plans vest and
terminate over various periods as defined by each option grant
and in accordance with the terms of the Plans. In September
2004, the Board of Directors resolved to cease granting options
under the 2000 Plan. However, pursuant to the provisions of the
2000 Plan, all outstanding options previously granted under the
2000 Plan continue in full force and effect. The Company intends
to use the 2004 Plan to grant options to employees, consultants,
and directors in the future. The 2004 Plan terminates in
September 2014, and restricts shares to be issued to a maximum
of 17,000,000, with approximately 14,381,000 shares
available for future grant as of September 30, 2005
(unaudited).
In July 2003, options were issued to consultants for the
purchase of up to 225,000 ordinary shares at an exercise price
of $1.90 per share. The Company treated these options as
variable and accordingly recorded expenses in 2003 of
approximately $219,000 resulting from this transaction. This
transaction also resulted in a deferred share compensation
balance of approximately $767,000 at December 31, 2003. Of
these options, 150,000 were cancelled in the third quarter of
2004 when our relationship with a consultant was terminated and
as a result, any expense or deferred compensation previously
recognized in the amount of $378,000 was reversed. In 2004, the
remaining 75,000 options were treated as fixed due to a change
in employee status. In the first quarter of 2005, the Company
realized that 37,500 options would not vest. Based on this, the
Company recorded a credit of $132,000 (unaudited) related to
these options. For the three months ended September 30,
2005 the Company recorded an expense of approximately $18,500
(unaudited). As of September 30, 2005, the deferred
compensation balance that resulted from this transaction was
fully amortized.
In July 2003 and April 2004, loans were made to employees for
the exercise of 100,000 and 15,000 options respectively. The
loans were deemed a synthetic repricing under
EITF 00-23
Issues Related to the Accounting for Share Compensation
under APB Opinion No. 25 and FASB Interpretation
No. 44 and resulted in variable accounting. For the
nine months ended September 30, 2005 and 2004, the Company
recorded a reduction in expenses of approximately $29,000
(unaudited) and an expense of $121,000, respectively, resulting
from these transactions. As of September 30, 2005, the
deferred compensation balances that resulted from these
transactions were fully amortized. In the third quarter of 2005,
the loan made for the 15,000 options was extended until March
2006. The extension of the loan is considered a modification and
a grant of a new award and is accounted for under
SFAS 123(R).
As of September 30, 2005, total unrecognized compensation
cost related to non-vested stock options was $12.0 million
(unaudited). This cost is expected to be recognized over a
weighted-average period of 4 years. The following table
describes option activity for the nine months ended
September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(unaudited) | |
Granted, weighted average fair value per share
|
|
$ |
3.44 |
|
|
$ |
1.75 |
|
Exercised, weighted average intrinsic value per share
|
|
$ |
5.45 |
|
|
$ |
4.58 |
|
F-22
Information relating to outstanding share options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
Number of | |
|
average price | |
|
|
shares | |
|
per share | |
|
|
| |
|
| |
|
|
(in thousands) | |
|
|
Outstanding at December 31, 2000
|
|
|
2,345 |
|
|
$ |
4.57 |
|
|
Granted
|
|
|
3,460 |
|
|
$ |
1.35 |
|
|
Exercised
|
|
|
(100 |
) |
|
$ |
0.89 |
|
|
Cancelled
|
|
|
(1,000 |
) |
|
$ |
3.19 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2001
|
|
|
4,705 |
|
|
$ |
2.58 |
|
|
Granted
|
|
|
6,043 |
|
|
$ |
2.11 |
|
|
Exercised
|
|
|
(160 |
) |
|
$ |
0.99 |
|
|
Cancelled
|
|
|
(65 |
) |
|
$ |
1.56 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
10,523 |
|
|
$ |
2.34 |
|
|
Granted
|
|
|
1,367 |
|
|
$ |
2.41 |
|
|
Exercised
|
|
|
(816 |
) |
|
$ |
1.39 |
|
|
Cancelled
|
|
|
(765 |
) |
|
$ |
3.33 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
10,309 |
|
|
$ |
2.35 |
|
|
Granted
|
|
|
5,302 |
|
|
$ |
6.42 |
|
|
Exercised
|
|
|
(4,308 |
) |
|
$ |
2.64 |
|
|
Cancelled
|
|
|
(2,306 |
) |
|
$ |
6.54 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
8,997 |
|
|
$ |
3.81 |
|
|
Granted (unaudited)
|
|
|
1,521 |
|
|
$ |
8.38 |
|
|
Exercised (unaudited)
|
|
|
(1,038 |
) |
|
$ |
2.69 |
|
|
Cancelled (unaudited)
|
|
|
(724 |
) |
|
$ |
7.05 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2005 (unaudited)
|
|
|
8,756 |
|
|
$ |
3.98 |
|
|
|
|
|
|
|
|
Most options are priced in foreign currency, weighted average
price per share calculations are impacted by foreign exchange
fluctuations.
The following summarizes unaudited information relating to
shares options outstanding and exercisable at September 30,
2005. Amounts in thousands, except price per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding | |
|
Options exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
Number | |
|
remaining life | |
|
average | |
|
Number | |
|
average | |
Range of exercise prices |
|
of shares | |
|
(years) | |
|
exercise price | |
|
of shares | |
|
exercise price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.88 to $1.87
|
|
|
145 |
|
|
|
3 |
|
|
$ |
1.19 |
|
|
|
120 |
|
|
$ |
1.05 |
|
$2.01
|
|
|
4,010 |
|
|
|
0 |
|
|
$ |
2.01 |
|
|
|
4,010 |
|
|
$ |
2.01 |
|
$2.04 to $5.24
|
|
|
1,736 |
|
|
|
3 |
|
|
$ |
3.43 |
|
|
|
602 |
|
|
$ |
3.10 |
|
$5.90 to $7.28
|
|
|
1,670 |
|
|
|
5 |
|
|
$ |
6.26 |
|
|
|
216 |
|
|
$ |
6.14 |
|
$7.59 to $9.51
|
|
|
1,195 |
|
|
|
6 |
|
|
$ |
8.58 |
|
|
|
195 |
|
|
$ |
8.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,756 |
|
|
|
2 |
|
|
$ |
3.98 |
|
|
|
5,143 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes information relating to share options
outstanding and exercisable at December 31, 2004. On
March 27, 2004 a change of control triggered the immediate
vesting of
F-23
certain options when Tiger Technologies acquired more than a 30%
share ownership in our Company. Amounts in thousands, except
price per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding | |
|
Options exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
average | |
|
Weighted | |
|
|
|
Weighted | |
|
Aggregate | |
|
|
Number | |
|
remaining life | |
|
average | |
|
Number | |
|
average | |
|
Intrinsic | |
Range of exercise prices |
|
of shares | |
|
(years) | |
|
exercise price | |
|
of shares | |
|
exercise price | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$2.31 to $12.01
|
|
|
4,218 |
|
|
|
4 |
|
|
$ |
5.68 |
|
|
|
561 |
|
|
$ |
4.66 |
|
|
|
|
|
$2.28
|
|
|
4,060 |
|
|
|
1 |
|
|
$ |
2.28 |
|
|
|
4,060 |
|
|
$ |
2.28 |
|
|
|
|
|
$0.96 to $2.11
|
|
|
719 |
|
|
|
0 |
|
|
$ |
1.46 |
|
|
|
679 |
|
|
$ |
1.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,997 |
|
|
|
|
|
|
$ |
3.81 |
|
|
|
5,300 |
|
|
$ |
2.42 |
|
|
$ |
21,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes information relating to share options
outstanding and exercisable at December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding | |
|
Options exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
average | |
|
Weighted | |
|
|
|
Weighted | |
|
Aggregate | |
|
|
Number | |
|
remaining life | |
|
average | |
|
Number | |
|
average | |
|
Intrinsic | |
Range of exercise prices |
|
of shares | |
|
(years) | |
|
exercise price | |
|
of shares | |
|
exercise price | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$2.28 to $7.50
|
|
|
1,020 |
|
|
|
2 |
|
|
$ |
6.50 |
|
|
|
910 |
|
|
$ |
6.83 |
|
|
|
|
|
$1.40 to $2.27
|
|
|
6,914 |
|
|
|
3 |
|
|
$ |
2.11 |
|
|
|
200 |
|
|
$ |
2.16 |
|
|
|
|
|
$0.89 to $1.39
|
|
|
2,375 |
|
|
|
2 |
|
|
$ |
1.26 |
|
|
|
2,340 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,309 |
|
|
|
|
|
|
$ |
2.35 |
|
|
|
3,450 |
|
|
$ |
2.78 |
|
|
$ |
22,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Subject to Rescission
Under our 2000 Executive Share Option Scheme (2000 Option
Scheme), the Company granted options to purchase ordinary
shares to certain of our employees, directors and consultants.
The issuances of securities upon exercise of options granted
under our 2000 Option Scheme may not have been exempt from
registration and qualification under federal and California
state securities laws, and as a result, the Company may have
potential liability to those employees, directors and
consultants to whom we issued securities upon the exercise of
these options. In order to address that issue, the Company may
elect to make a rescission offer to those persons who exercised
all, or a portion, of those options and continue to hold the
shares issued upon exercise, to give them the opportunity to
rescind the issuance of those shares. With respect to option
grants under the 2000 Option Scheme where the holder exercised
all or a portion of the options and sold all of the securities
issued upon the exercise of such options on the Frankfurt Stock
Exchange following exercise, the Company believes that each of
these persons sold for prices in excess of the applicable option
exercise prices. Therefore, the Company does not believe that
any such person has a claim for damages under federal or
California state securities laws.
As of December 31, 2004, assuming every eligible person
that continues to hold the securities issued upon exercise of
options granted under the 2000 Option Scheme were to accept a
rescission offer, the Company estimates the total cost to
complete the rescission for such issued securities would be
approximately $3.6 million, excluding statutory interest,
and $3.8 million including statutory interest at
7% per annum, accrued since the date of exercise of the
options. The rescission acquisition price is calculated as equal
to the original exercise price paid by the optionee to the
Company upon exercise of their option.
The valuation of the rescission offer has not been changed and
interest has not been accrued because we believe that a
rescission offer would not be accepted by the Companys
shareholders in an amount that would represent a material
expenditure by the Company. This belief is based on the fact
that a rescission offer, if made, would result in an offering to
repurchase shares at a weighted average price of $2.09 while the
Companys stock closed at $6.62 per share on
September 30, 2005.
F-24
The Company accounts for shares which have been issued that may
be subject to rescission claims as a put liability based on the
price to be paid for equity to be repurchased. Since equity
instruments subject to rescission are redeemable at the
holders option or upon the occurrence of an uncertain
event not solely within the Companys control, such equity
instruments are outside the scope of SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, and its
related interpretations. Under the SECs interpretation of
generally accepted accounting principles, reporting such claims
outside of stockholders equity is required, regardless of
how remote the redemption event may be. Thus, the Company has
reported $3.8 million as shares subject to rescission in
the accompanying September 30, 2005 (unaudited)
consolidated balance sheet.
In addition to shares which have resulted from stock option
exercises, it is possible that option grants under the 2000
Option Scheme, which have not yet been exercised, may not have
been exempt from qualification under California state securities
laws. As a result, we may have potential liability to those
employees, directors and consultants to whom we granted options
under the 2000 Option Scheme but who have not yet exercised
those options. In order to address that issue, we may elect to
make a rescission offer to the holders of outstanding options
under the 2000 Option Scheme to give them the opportunity to
rescind the grant of their options.
Prior to the implementation of SFAS 123(R) in July 2005,
the Company accounted for stock options under APB 25. Since
all of the options under the 2000 Option Scheme were granted at
fair market value at the time of grant, no expense is recorded
in our financial statements related to options that were vested
prior to June 30, 2005. Under SFAS 123(R), the third
quarter results of 2005 included expense related to options that
were granted prior to June 30, 2005 but had not vested at
that date. Accordingly, no provision is made in our financial
statements for options that were vested as of June 30,
2005, that were granted under the 2000 Option Scheme which are
not yet exercised, but may be subject to a rescission offer, if
and when made. Should any optionees accept the rescission offer
and put their options back to the Company, the Company will
reflect such activity in our financial statements at that time.
As of December 31, 2004, assuming every eligible holder of
unexercised options were to accept a rescission offer, we
estimate the total cost to us to complete the rescission for the
unexercised options would be approximately $4.0 million,
excluding statutory interest at 7% per annum. This amount
reflect the costs of offering to rescind the issuance of the
outstanding options by paying an amount equal to 20% of the
aggregate exercise price for the options.
|
|
11. |
Employee Benefit Plan |
The Company has a defined contribution plan under
Section 401(k) of the Internal Revenue Code covering all
full-time employees, and providing for matching contributions by
the Company, as defined in the plan. Participants in the plan
may direct the investment of their personal accounts to a choice
of mutual funds consisting of various portfolios of stocks,
bonds, or cash instruments. Contributions made by the Company to
the plan for the years ended December 31, 2002, 2003 and
2004 were approximately $88,000, $110,000, and $184,000,
respectively.
The Company operates several online personals websites that we
have aggregated into three reportable segments, (1) JDate,
which consists of our JDate.com Web site and its co-branded Web
sites, (2) AmericanSingles, which consists of our
AmericanSingles.com Web site and its co-branded Web sites, and
(3) Other Businesses, which consists of all our other Web
sites and businesses, in accordance with the provisions of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company has
aggregated several of its smaller websites into the Other
Businesses segment. As a result of this change occurring in the
fourth quarter of 2004, we have presented
F-25
re-segmented
information for the periods presented below. Information for our
segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
(unaudited) | |
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
8,372 |
|
|
$ |
16,091 |
|
|
$ |
23,820 |
|
|
$ |
17,623 |
|
|
$ |
19,161 |
|
|
|
AmericanSingles
|
|
|
6,644 |
|
|
|
19,253 |
|
|
|
35,224 |
|
|
|
26,584 |
|
|
|
22,526 |
|
|
|
Other Businesses
|
|
|
1,336 |
|
|
|
1,597 |
|
|
|
6,008 |
|
|
|
3,793 |
|
|
|
7,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,352 |
|
|
$ |
36,941 |
|
|
$ |
65,052 |
|
|
$ |
48,000 |
|
|
$ |
48,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Marketing Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
224 |
|
|
$ |
739 |
|
|
$ |
1,740 |
|
|
$ |
1,152 |
|
|
$ |
2,110 |
|
|
|
AmericanSingles
|
|
|
3,970 |
|
|
|
15,887 |
|
|
|
24,954 |
|
|
|
20,288 |
|
|
|
11,570 |
|
|
|
Other Businesses
|
|
|
1,202 |
|
|
|
1,769 |
|
|
|
4,546 |
|
|
|
3,172 |
|
|
|
4,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,396 |
|
|
$ |
18,395 |
|
|
$ |
31,240 |
|
|
$ |
24,612 |
|
|
$ |
18,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDate
|
|
$ |
8,148 |
|
|
$ |
15,352 |
|
|
$ |
22,080 |
|
|
$ |
16,471 |
|
|
$ |
17,051 |
|
|
|
AmericanSingles
|
|
|
2,674 |
|
|
|
3,366 |
|
|
|
10,270 |
|
|
|
6,296 |
|
|
|
10,956 |
|
|
|
Other Businesses
|
|
|
134 |
|
|
|
(172 |
) |
|
|
1,462 |
|
|
|
621 |
|
|
|
2,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,956 |
|
|
$ |
18,546 |
|
|
$ |
33,812 |
|
|
$ |
23,388 |
|
|
$ |
30,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to our integrated business structure, operating expenses,
other than direct marketing expenses, are not allocated to the
individual reporting segments. As such, we do not measure
operating profit or loss by segment for internal reporting
purposes. Assets are not allocated to the different business
segments for internal reporting purposes. Depreciation and
amortization are included in total operating expenses in the
individual line items to which the assets provide service.
The Company operates several international websites, however,
many of them are operated and managed by our
U.S. operations. Foreign revenues represent sales generated
outside the U.S. where we have principal operations. Net
revenues and identifiable assets by geographical area are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
16,352 |
|
|
$ |
36,941 |
|
|
$ |
62,604 |
|
|
$ |
46,468 |
|
|
$ |
46,251 |
|
|
Israel
|
|
|
|
|
|
|
|
|
|
|
2,448 |
|
|
|
1,532 |
|
|
|
2,674 |
|
|
|
$ |
16,352 |
|
|
$ |
36,941 |
|
|
$ |
65,052 |
|
|
$ |
48,000 |
|
|
$ |
48,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
7,367 |
|
|
$ |
9,506 |
|
|
$ |
11,327 |
|
|
$ |
11,396 |
|
|
$ |
21,645 |
|
|
Israel
|
|
|
|
|
|
|
6 |
|
|
|
5,857 |
|
|
|
5,625 |
|
|
|
5,432 |
|
|
|
$ |
7,367 |
|
|
$ |
9,512 |
|
|
$ |
17,184 |
|
|
$ |
17,021 |
|
|
$ |
27,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
|
|
13. |
Commitments and Contingencies |
Operating Leases
The Company leases its office facilities under operating lease
agreements effective through March 2007, providing for annual
minimum lease payments as follows (amounts in thousands):
|
|
|
|
|
|
Year Ending |
|
|
|
|
|
|
2005
|
|
$ |
711 |
|
|
2006
|
|
|
589 |
|
|
2007
|
|
|
85 |
|
|
|
|
|
Total
|
|
$ |
1,385 |
|
|
|
|
|
The Company recognized rent expense under operating leases of
$246,000, $444,000, and $847,000 for the years ended
December 31, 2002, 2003, and 2004, respectively.
Other Commitments and Obligations
The Company has other commitments and obligations consisting of
contracts with software licensing, communications, computer
hosting and marketing service providers. These amounts totaled
$817,000 for less than one year and $408,000 between one and
three years. Contracts with other service providers are for
30 day terms or less.
Litigation
Three separate yet similar class action complaints have been
filed against the Company. On June 21, 2002, Tatyana
Fertelmeyster filed an Illinois class action complaint against
the Company in the Circuit Court of Cook County, Illinois, based
on an alleged violation of the Illinois Dating Referral Services
Act. On September 12, 2002, Lili Grossman filed a New York
class action complaint against the Company in the Supreme Court
in the State of New York based on alleged violations of the New
York Dating Services Act and the Consumer Fraud Act. On
November 14, 2003, Jason Adelman filed a nationwide class
action complaint against the Company in the Los Angeles County
Superior Court based on an alleged violation of California Civil
Code section 1694 et seq., which regulates businesses that
provide dating services. In each of these cases, the complaint
included allegations that the Company is a dating service as
defined by the applicable statutes and, as an alleged dating
service, the Company is required to provide language in its
contracts that allows (i) members to rescind their
contracts within three days, (ii) reimbursement of a
portion of the contract price if the member dies during the term
of the contract and/or (iii) members to cancel their
contracts in the event of disability or relocation. Causes of
action include breach of applicable state and/or federal laws,
fraudulent and deceptive business practices, breach of contract
and unjust enrichment. The plaintiffs are seeking remedies
including declaratory relief, restitution, actual damages
although not quantified, treble damages and/or punitive damages,
and attorneys fees and costs.
Huebner v. InterActiveCorp., Superior Court of the State of
California, County of Los Angeles, Case No. BC 305875
involves a similar action, involving the same
plaintiffs counsel as Adelman, brought against
InterActiveCorps Match.com that has been ruled related to
Adelman, but the two cases have not been consolidated.
The Company has not been named a defendant in the
Huebnercase. Adelman and Huebner each seek
to certify a nationwide class action based on their complaints.
Because the cases are class actions, they have been assigned to
the Los Angeles Superior Court Complex Litigation Program. The
court has ordered a bifurcation of the liability issue. At an
August 15, 2005 Status Conference, the court set the
bifurcated trial on the issue of liability for March 27,
2006. The parties have agreed in principle to continue the
bifurcated trial to approximately May 15, 2006 and extend
the time for filing briefs and completing discovery, in
Adelman, with respect to the bifurcated trial. In
F-27
addition, the parties are in the process of scheduling a
mediation in Adelman which in all probability will occur
before the end of February, 2006.
On March 25, 2005, the court in Fertelmeyster
entered its Memorandum Opinion and Order (Memorandum
Opinion) granting summary judgment in its favor on the
grounds that Fertelmeyster lacks standing to seek injunctive
relief or restitutionary relief under the Illinois Dating
Services Act, Fertelmeyster did not suffer any actual damages,
and the Company was not unjustly enriched as a result of its
contract with Fertelmeyster. The Memorandum Opinion
disposes of all matters in controversy in the
litigation and also provides that the Company is subject to the
Illinois Dating Services Act and, as such, its subscription
agreements violate the act and are void and unenforceable. This
ruling may subject the Company to potential liability for claims
brought by the Illinois Attorney General or customers that have
been injured by its violation of the statute. Fertelmeyster
filed a Motion for Reconsideration of the Memorandum Opinion
and, on August 26, 2005, the court issued its opinion
denying Fertelmeysters Motion for Reconsideration. In the
opinion, the court, among other things: (i) decertified the
class, eliminating the last remnant of the litigation;
(ii) rejected each of the plaintiffs arguments based
on the arguments and law that the Company provided in its
opposition; (iii) stated that the court would not
judicially amend the Illinois statute to provide for restitution
when the legislature selected damages as the sole remedy;
(iv) noted that the cases cited by plaintiff in connection
with plaintiffs Motion for Reconsideration actually
support the courts prior order granting summary judgment
in its favor; and (v) denied plaintiffs Motion for
Reconsideration in its entirety. The time for filing an appeal
from the Memorandum Opinion and the courts order denying
Fertelmeysters Motion for Reconsideration has now lapsed
and as a result thereof, this litigation has concluded.
In December 2002, the Supreme Court of New York dismissed the
case brought by Ms. Grossman. Although the plaintiff
appealed the decision, in October 2004, the New York Supreme
Court, Appellate Division upheld the lower courts
dismissal. In addition, two Justices wrote concurring opinions
stating their opinion that its services were not covered under
the New York Dating Services Act.
A lawsuit has been filed against the Company in the United
States District Court for the Central District of California by
Datingcity, Ltd, Case No. CV05-4463 SJO (SSx). The
Complaint alleges causes of action for (1) Breach of
Contract, (2) Unjust Enrichment, (3) Promissory
Estoppel, and (4) Accounting. Datingcity alleges that it
entered into a contract with the Company for the sale of a
database owned by Datingcity. Datingcity further alleges that
the Company did not pay Datingcity the agreed upon price for the
purchase of the database. The Company contends that the contract
at issue was signed in error, Datingcity misrepresented the
quality of its database, and the information contained in the
database was virtually useless and without value. Accordingly,
on July 15, 2005, the Company filed an Answer and
Counterclaim against Datingcity alleging claims for
(1) Rescission based on Unilateral Mistake,
(2) Rescission based on Mutual Mistake, (3) Rescission
based on Failure of Consideration, (4) Rescission based on
Fraud in the Inducement, (5) Fraud, (6) Negligent
Misrepresentation, and (7) Declaratory Relief. At a status
conference that was held on August 22, 2005, the court
scheduled this matter for a jury trial on April 25, 2006,
however, in September 2005 the Company settled this litigation
for $75,000.
On July 21, 2005, Leonard Kristal (Kristal) and
MatchPower Ltd. (MatchPower) filed an action in the
Los Angeles County Superior Court, Civil Action
No. SC086367, entitled LEONDARD KRISTAL, and
MATCHPOWER, LTD., Plaintiffs, v. MATCHNET, PLC; SPARK NETWORKS,
PLC, and DOES 1 through 25, inclusive, Defendants (the
Kristal/ MatchPower Action). In their complaint,
Kristal and MatchPower assert claims for a breach of contract,
wrongful termination in violation of public policy, and
solicitation of employee by misrepresentation. MatchPower
alleges that it entered into an agreement with the Company to
pay MatchPower the sum of $15,000 per month from March 30,
2004 through April 2005 and that the Company now owes MatchPower
the sum of $90,000 under the agreement. The Company filed a
Motion to Dismiss and/or for Forum Non
F-28
Conveniens under the MatchPower agreement, which provides that
the exclusive jurisdiction for disputes is the English
courts, in order to require that MatchPower litigate its
claims, if any, in England. The Court granted that Motion and
MatchPower is no longer a party to the case. Kristal alleges
that (i) the Company entered into an employment agreement
pursuant to which Kristal was employed on a part-time basis at
the rate of $10,000 per month through April 2005, (ii) the
employment agreement was amended in July 2004 to increase
Kristals monthly salary to $15,000 per month,
(iii) Kristal was required to move and establish residency
in Los Angeles and (iv) the employment agreement was
terminated on December 22, 2004. Kristal alleges that the
Company owes him $85,000 under the agreement, plus a waiting
time penalty of $15,000. Kristal also alleges that, in August
2004, the Company orally promised Kristal the right to purchase
at least 110,000 shares of its stock at a purchase price of
$2.50 and that he was terminated because he made a written
complaint that he had not been paid according to his contract
and as a result, his termination was a retaliatory termination
in violation of public policy. Kristal claims that he is
entitled to recover damages for pain and suffering and emotional
distress and punitive damages based on his retaliatory
termination. In addition, Kristal claims that he was induced to
move to Los Angeles for the purpose of accepting employment from
the Company in Los Angeles and that the Company promised Kristal
employment at least through April 2005, together with wages for
employment at the rate of $15,000 per month. According to
Kristal, the Company misrepresented to Kristal the length of his
employment and the compensation therefore, and as a result, he
claims he is entitled to double damages caused by
misrepresentations allegedly made by the Company to Kristal
pursuant to California Labor Code § 972. A mediation
occurred in Kristal on January 17, 2006. At the mediation,
the parties entered into a binding settlement stipulation (the
Stipulation). According to the terms of the
Stipulation, the Company will pay to Kristal the sum of $150,000
in equal monthly installments of $8,333.33 commencing
February 1, 2007, and Kristal and MatchPower will:
(i) execute general releases of known and unknown claims in
favor of the Company and (ii) dismiss with prejudice the
action they have filed against the Company.
The Company has filed an action in the Los Angeles County
Superior Court (the JetPay Action) against JetPay
Merchant Services, LLC. In the Complaint in the JetPay Action,
the Company asserts causes of action against JetPay for breach
of oral contract, intentional misrepresentation, fraudulent
inducement, intentional interference with economic advantage,
breach of fiduciary duty, negligence, unfair business practices,
and declaratory relief. The Company seeks compensatory damages
against JetPay in the sum of $2,277,095.38 together with
punitive damages to the extent permitted by applicable
California law as provided in the Complaint in the JetPay
Action. JetPay has provided a written memorandum to the Company
in which JetPay claims that it suffered actual damages of
$439,012.70 as of January 10, 2006 and is entitled to
recover liquidated damages in the amount of $682,514.54. For the
reasons set forth in its Complaint in the JetPay action, among
others, the Company believes that it is not indebted to JetPay
in any amount whatsoever, intend to vigorously defend any claim
filed by JetPay against the Company, whether in the JetPay
action or otherwise, and is in the process of prosecuting the
JetPay Action against JetPay for the recovery of the damages set
forth above suffered by the Company as a result of the acts and
omissions of JetPay.
The Company intend to defend vigorously against each complaint
and/or cross-complaint filed against the Company. However, no
assurance can be given that these matters will be resolved in
its favor and, depending on the outcome of these lawsuits, the
Company may choose to alter its business practices.
The Company has additional existing legal claims and may
encounter future legal claims in the normal course of business.
The Company believes that the resolution of the existing legal
claims are not expected to have a material impact on its
financial position or results of operations. The Company
believes it has accrued appropriate amounts where necessary in
connection with the above litigation.
F-29
|
|
14. |
Related Party Transactions |
Pursuant to then-existing compensation arrangements, the Company
made advances to two executive employees, Joe Y. Shapira and
Alon Carmel, of approximately $700,000 each as payments under
guaranteed compensation arrangements as of December 31,
2002. During 2003, the Board of Directors declared the
guarantees to have been earned during the year and the
receivable was charged against operating results. As of
December 31, 2003, Joe Y. Shapira was the Chief Executive
Officer and is currently the Chairman of the Board. Alon Carmel
was the President as of December 31, 2003 and is no longer
employed by the Company.
In 2003, the Company entered into a verbal marketing arrangement
with Remote Concepts LLC, an entity owned 32.5% by each of
Joe Y. Shapira and Alon Carmel. Remote Concepts LLC has
developed a table top wireless paging system for use by patrons
at restaurants. Further to the verbal arrangement, the Company
expensed $120,000 paid to Remote Concepts LLC for ad
placement on these systems. The $120,000 was paid and expensed
in 2003. The Company has not paid or expensed any amounts
related to Remote Concepts LLC since that time.
In 2004, Adam Kravitz resigned as our General Counsel. In
connection with his resignation and further to the terms of his
employment agreement, the Company paid Mr. Kravitz as
severance an aggregate of approximately $2.4 million.
Mr. Kravitz resigned from the Board of Directors in June
2004.
In 2004, the Company entered into an agreement with Efficient
Frontier, a provider of online marketing optimization services
to procure and manage a portion of our online paid search and
keyword procurement efforts.
The Chief Executive Officer of Efficient Frontier is
Ms. Ellen Siminoff, who is the wife of the current Chief
Executive Officer, David E. Siminoff. The Company paid
approximately $169,000 to Efficient Frontier in the first half
of 2005.
In 2004, the Company invested $250,000 in Yobon, Inc., a
provider of web toolbar technology. The investment was in the
form of convertible debt, which will convert into equity upon
Yobons completion of an equity financing, if such equity
financing is completed within certain timeframes. The Chief
Technology Officer, Phil Nelson, is the Chairman of Yobon.
Until August 31, 2005, Elraz Sela, the nephew of Alon
Carmel, the Companys former Co-Executive Chairman of the
Board, was employed by the Company in an executive position for
which he was compensated $120,000 per year. In addition,
several other relatives of each of Joe Y. Shapira, the
Companys current Chairman of the Board, and Alon Carmel
hold non-executive positions with the Company and Spark Networks
Israel for which they are compensated less than $60,000.
15. Subsequent Events
(unaudited)
On December 1, 2005, Great Hill Investors, LLC, Great Hill
Equity Partners II Limited Partnership and Great Hill
Affiliate Partners II L.P. purchased an aggregate of
6,000,000 ordinary shares in four privately negotiated
transactions. Of the 6,000,000 shares purchased,
(i) 1,250,000 shares were purchased from Joe Y.
Shapira, the Companys Chairman of the Board of Directors,
at $4.60 per share (ii) 1,250,000 shares were
purchased from Alon Carmel, the Companys former
Co-Executive Chairman of the Board of Directors, at $4.60 per
share (iii) 1,500,000 shares were purchased from
Criterion Capital Management LLC, a more than 5% holder of the
Companys securities, at $5.35 per share and
(iv) 2,000,000 shares were purchased from the
affiliates of Tiger Global Management, L.L.C. at $5.35 per
share. Tiger Global Management was the Companys largest
shareholder prior to the sale of the 2,000,000 shares, and
one of the Companys directors, Scott Shleifer, is a
limited partner of Tiger Global, L.P., an affiliate of Tiger
Global Management and one of the sellers of the
2,000,000 shares.
F-30
The Company had entered into a confidentiality agreement dated
October 14, 2005 with Great Hill Equity Partners II
(the Shareholder) that contained a provision (the
Standstill Provision) pursuant to which the
Shareholder agreed not to, among other things, directly or
indirectly acquire, offer to acquire, or propose to acquire more
than 2% of any class of the Companys securities or rights
to acquire more than 2% of any class of the Companys
securities for a period of one year from the date of the
confidentiality agreement without the Companys prior
written consent. On December 1, 2005, the Company and the
Shareholder entered into a standstill agreement (the
Standstill Agreement) pursuant to which the Company
waived the Standstill Provision and the Shareholder agreed that
its ability to increase its beneficial ownership of the
Companys securities would be subject to the terms and
conditions of the Standstill Agreement, which has a term of five
years unless terminated earlier. Pursuant to the Standstill
Agreement, for a period of 14 months from the date of the
Standstill Agreement (the Fourteen Month Period),
the Shareholder agreed that it would not, without the prior
written consent of the Company:
|
|
|
|
|
acquire or seek to acquire, directly or indirectly, by purchase
or otherwise, ownership of any voting securities of the Company
(or rights to acquire any class of securities of the Company or
any subsidiary thereof) such that the Shareholder and its
affiliates (the Shareholder Group) would
beneficially own more than 29.9% of the total voting power (the
Total Voting Power) of the Company, which is defined
as the aggregate number of votes which may be cast by holders of
outstanding voting securities on a poll at a general meeting of
the Company taking into account any voting restrictions imposed
by the Companys Articles of Association, or take any
action that would require the Company to make a public
announcement regarding the foregoing under applicable law; |
|
|
|
participate in any of the following with respect to the Company
or its subsidiaries: (i) any tender, takeover or exchange
offer or other business combination, (ii) any
recapitalization, restructuring, liquidation, dissolution or
other extraordinary transaction, or (iii) any solicitation of
proxies or consents to vote any voting securities; |
|
|
|
form, join or participate in a group as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, in connection with any of the foregoing; |
|
|
|
seek to control the Board of Directors of the Company; and |
|
|
|
enter into any arrangements with any third party with respect to
any of the above. |
After the expiration of the Fourteen Month Period, the
Shareholder agreed that it would not acquire or seek to acquire
beneficial ownership of any voting securities of the Company (or
rights to acquire any class of securities of the Company or any
subsidiary thereof) or participate in any tender, takeover or
exchange offer or other business combination, or any
recapitalization, restructuring, dissolution or other
extraordinary transaction if (i) prior to giving
effect thereto, the Shareholder Group beneficially owns less
than 60% of Total Voting Power and (ii) after giving
effect, the Shareholder Group would beneficially own more than
29.9% of Total Voting Power.
Notwithstanding the foregoing, the Shareholder Group, after the
Fourteen Month Period, would not be deemed to beneficially own
any voting securities owned by another person if the sole reason
is being a member of a group with such person and there are no
other indicia of beneficial ownership of such securities that
are attributable to the Shareholder Group.
The provisions of the Standstill Agreement do not apply to
(i) repurchases, redemptions, a rights issue,
recapitalizations and consolidation or a share capital reduction
by the Company, and (ii) offers to acquire securities by
the Shareholder Group to all of the holders of voting securities
of the Company.
Furthermore, each member of the Shareholder Group agreed not to
sell or transfer shares purchased pursuant to certain share
purchase agreements for 180 days from the date of the
Standstill Agreement without the written consent of the Company.
F-31
On December 1, 2005, Joe Y. Shapira and Alon Carmel each
exercised options for 2,000,000 ordinary shares. In return for
the issuance of a total of 4,000,000 shares underlying these two
option grants, the Company received net proceeds of
approximately $7,800,000 in cash.
On December 1, 2005, in connection with the exercise of
options, each of Joe Y. Shapira and Alon Carmel entered into tax
indemnification agreements with the Company. Mr. Shapira is
currently the Executive Chairman of the Companys Board of
Directors. Mr. Carmel is a co-founder, former President and
former Executive Co-Chairman of the Companys Board of
Directors. Pursuant to the indemnification agreements, each of
Messrs. Shapira and Carmel agreed to indemnify and pay to
the Company any taxes (including income, employment or other
withholding taxes), interest and/or penalties and other costs
and expenses (including attorneys fees incurred by the
Company) the Company is required to pay as a result of the
Companys failure to withhold any federal, state, local or
foreign taxes in respect of the exercise of each of their
options, respectively.
On January 27, 2006, the Company and Joe Y. Shapira entered
into a separation agreement (the Separation
Agreement) with effect from January 1, 2006 pursuant
to which the Company and Mr. Shapira terminated
Mr. Shapiras employment agreement dated March 1,
2005 (the Employment Agreement). Mr. Shapira
will continue as the non-executive Chairman of the Board of
Directors. According to the Separation Agreement, the Company
agreed to pay Mr. Shapira severance pay in the lump sum
amount of $125,000, minus applicable state and federal
withholdings. Mr. Shapira will retain all share options
previously awarded to him, and such options will vest and become
exercisable on the terms set forth in the respective option
certificates. For his services as a director, the Company will
pay Mr. Shapira a directors fee at the rate of
$30,000 per year, payable in monthly installments of $2,500
each for each month of service. In addition, Mr. Shapira
will receive $1,000 for his in-person attendance at a Board or
committee meeting and $500 for his attendance at a telephonic
Board or committee meeting, in addition to reimbursement for
approved expenses incurred in the performance of his duties.
According to the Separation Agreement, Mr. Shapira is
expected to attend at least four Board meetings and, if
applicable, four committee meetings per year.
Mr. Shapiras appointment to the Board will extend
until the Companys next annual general meeting and
continue as long as he is reelected to the Board by the
shareholders of the Company, unless Mr. Shapira resigns or
is removed in accordance with the Companys Memorandum and
Articles of Association and applicable law. The Company agreed
to defend and indemnify Mr. Shapira to the fullest extent
permitted by the Companys charter documents and applicable
law against any demand, claim, cause of action, action, loss,
and/or liability that is made against him arising from or
relating to Mr. Shapiras employment with the Company,
service as a director of the Company, or otherwise.
Mr. Shapira agreed to release and discharge the Company
from any and all employment termination claims, actions,
demands, rights, or damages of any kind for termination of
Mr. Shapiras employment, Employment Agreement and/or
separation from the Company.
F-32
REPORT OF TANNER LC
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
MingleMatch, Inc.
We have audited the accompanying consolidated balance sheet of
MingleMatch, Inc. and subsidiaries (collectively, the Company)
as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders
deficit, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of MingleMatch, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows
for the years then ended in conformity with U.S. generally
accepted accounting principles.
Salt Lake City, Utah
May 17, 2005
F-33
MINGLEMATCH, INC.
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Assets |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
295,471 |
|
|
$ |
226,022 |
|
|
Marketable securities
|
|
|
180,635 |
|
|
|
|
|
|
Notes receivable
|
|
|
200,000 |
|
|
|
|
|
|
Prepaid advertising
|
|
|
618,111 |
|
|
|
152,217 |
|
|
Other current assets
|
|
|
26,359 |
|
|
|
1,650 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,320,576 |
|
|
|
379,889 |
|
Property and equipment, net
|
|
|
164,509 |
|
|
|
59,077 |
|
Web site development costs, net
|
|
|
6,480 |
|
|
|
10,800 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,491,565 |
|
|
$ |
449,766 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
8,467 |
|
|
$ |
11,366 |
|
|
Accrued liabilities
|
|
|
62,714 |
|
|
|
8,593 |
|
|
Deferred revenue
|
|
|
263,126 |
|
|
|
94,080 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
334,307 |
|
|
|
114,039 |
|
Deferred revenue, net of current portion
|
|
|
2,877,809 |
|
|
|
1,191,185 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,212,116 |
|
|
|
1,305,224 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
|
Common stock, no par value: 50,000,000 shares authorized;
10,000,000 shares issued and outstanding
|
|
|
30,422 |
|
|
|
30,422 |
|
|
Accumulated deficit
|
|
|
(1,834,178 |
) |
|
|
(885,880 |
) |
|
Accumulated other comprehensive income
|
|
|
83,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(1,720,551 |
) |
|
|
(855,458 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$ |
1,491,565 |
|
|
$ |
449,766 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-34
MINGLEMATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Years Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
|
(unaudited) | |
Sales
|
|
$ |
2,503,702 |
|
|
$ |
734,230 |
|
|
$ |
975,894 |
|
|
$ |
510,081 |
|
Selling, general and administrative expenses
|
|
|
2,967,384 |
|
|
|
1,256,873 |
|
|
|
1,128,463 |
|
|
|
615,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(463,682 |
) |
|
|
(522,643 |
) |
|
|
(152,569 |
) |
|
|
(105,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) on sale of marketable securities
|
|
|
(2,580 |
) |
|
|
|
|
|
|
194,235 |
|
|
|
|
|
|
Interest income
|
|
|
22,939 |
|
|
|
8,606 |
|
|
|
12,019 |
|
|
|
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income
|
|
|
20,359 |
|
|
|
8,606 |
|
|
|
206,254 |
|
|
|
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(443,323 |
) |
|
$ |
(514,037 |
) |
|
$ |
53,685 |
|
|
$ |
(105,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-35
MINGLEMATCH, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Stock | |
|
|
|
|
|
Other | |
|
|
|
|
| |
|
Accumulated | |
|
Comprehensive | |
|
Comprehensive | |
|
|
|
|
Shares | |
|
Amount | |
|
Deficit | |
|
Income (Loss) | |
|
Income | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2003
|
|
|
10,000,000 |
|
|
$ |
30,422 |
|
|
$ |
(149,156 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(118,734 |
) |
|
Distributions to stockholders
|
|
|
|
|
|
|
|
|
|
|
(222,687 |
) |
|
|
|
|
|
|
|
|
|
|
(222,687 |
) |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(514,037 |
) |
|
|
(514,037 |
) |
|
|
|
|
|
|
(514,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(514,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
10,000,000 |
|
|
|
30,422 |
|
|
|
(885,880 |
) |
|
$ |
|
|
|
|
|
|
|
|
(855,458 |
) |
|
Distributions to stockholders
|
|
|
|
|
|
|
|
|
|
|
(504,975 |
) |
|
|
|
|
|
|
|
|
|
|
(504,975 |
) |
|
Unrealized gains on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,205 |
|
|
|
83,205 |
|
|
|
83,205 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(443,323 |
) |
|
|
(443,323 |
) |
|
|
|
|
|
|
(443,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(360,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
10,000,000 |
|
|
|
30,422 |
|
|
|
(1,834,178 |
) |
|
$ |
|
|
|
|
83,205 |
|
|
|
(1,720,551 |
) |
|
Distributions to stockholders (unaudited)
|
|
|
|
|
|
|
|
|
|
|
(599,505 |
) |
|
|
|
|
|
|
|
|
|
|
(599,505 |
) |
|
Realized gains on marketable securities (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,205 |
) |
|
|
(83,205 |
) |
|
Net income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
53,685 |
|
|
|
53,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,685 |
|
|
|
|
|
|
|
53,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2005
|
|
|
10,000,000 |
|
|
$ |
30,422 |
|
|
$ |
(2,379,998 |
) |
|
|
|
|
|
$ |
|
|
|
$ |
(2,349,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-36
MINGLEMATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended | |
|
|
Years Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
|
(unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(443,323 |
) |
|
$ |
(514,037 |
) |
|
$ |
53,685 |
|
|
$ |
(105,538 |
) |
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
39,375 |
|
|
|
9,859 |
|
|
|
15,227 |
|
|
|
5,829 |
|
|
Realized gain on sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(83,205 |
) |
|
|
|
|
|
Decrease (increase) in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid advertising
|
|
|
(465,894 |
) |
|
|
(152,217 |
) |
|
|
454,730 |
|
|
|
135,840 |
|
|
|
Other current assets
|
|
|
(24,709 |
) |
|
|
(1,085 |
) |
|
|
(7,447 |
) |
|
|
(334 |
) |
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(2,899 |
) |
|
|
11,331 |
|
|
|
214,437 |
|
|
|
(11,366 |
) |
|
|
Accrued liabilities
|
|
|
54,121 |
|
|
|
7,474 |
|
|
|
(7,208 |
) |
|
|
18,602 |
|
|
|
Deferred revenue
|
|
|
1,855,670 |
|
|
|
1,051,559 |
|
|
|
484,111 |
|
|
|
402,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,012,341 |
|
|
|
412,884 |
|
|
|
1,124,330 |
|
|
|
445,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(140,487 |
) |
|
|
(64,616 |
) |
|
|
(17,497 |
) |
|
|
(53,702 |
) |
|
Purchase of marketable securities
|
|
|
(404,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of marketable securities
|
|
|
307,415 |
|
|
|
|
|
|
|
180,635 |
|
|
|
(100,000 |
) |
|
Issuance of notes receivable
|
|
|
(500,000 |
) |
|
|
|
|
|
|
(52,000 |
) |
|
|
(200,000 |
) |
|
Repayments of notes receivable
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
(437,917 |
) |
|
|
(64,616 |
) |
|
|
111,138 |
|
|
|
(353,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders
|
|
|
(504,975 |
) |
|
|
(222,687 |
) |
|
|
(599,505 |
) |
|
|
(35,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
69,449 |
|
|
|
125,581 |
|
|
|
635,963 |
|
|
|
56,308 |
|
Cash at beginning of period
|
|
|
226,022 |
|
|
|
100,441 |
|
|
|
295,471 |
|
|
|
226,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$ |
295,471 |
|
|
$ |
226,022 |
|
|
$ |
931,434 |
|
|
$ |
282,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
MINGLEMATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Description of Organization and Summary of Significant
Accounting Policies |
Organization and Business
MingleMatch, Inc. and its subsidiaries (collectively, the
Company) manage and maintain demographically targeted singles
communities online. A separate limited liability company has
been established for each web site maintained. The Company has
approximately 20 niche personals sites that maintain
profiles of single men and women. The Company attempts to
provide a clean, safe, friendly, and anonymous online
environment where subscribers meet and converse with each other.
Principles of Consolidation
The consolidated financial statements include the accounts of
MingleMatch, Inc. and its wholly owned limited liability
companies. All intercompany balances and transactions have been
eliminated in consolidation.
Interim Financial Information
The accompanying unaudited interim consolidated financial
statements as of and for the three months ended March 31,
2004 and 2005 have been prepared in accordance with U.S.
generally accepted accounting principles. Certain information
and note disclosures normally included in the consolidated
annual financial statements prepared in accordance with U.S.
generally accepted accounting principles have been omitted from
the unaudited interim consolidated financial statements. In the
opinion of the Companys management, the unaudited interim
consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and
include all adjustments (consisting of normal recurring
accruals) necessary for the fair presentation of the
Companys financial position, results of operations and
cash flows as of and for the periods presented. The results of
operations for such periods are not necessarily indicative of
the results expected for the full year or for any future period.
Use of Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect
reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an
initial maturity of three months or less to be cash equivalents.
Marketable Securities
The Company classifies its marketable debt and equity securities
as held to maturity if it has the positive intent
and ability to hold the securities to maturity. All other
marketable debt and equity securities are classified as
available for sale. Securities classified as
available for sale are carried in the financial
statements at fair value. Realized gains and losses, determined
using the specific identification method, are included in
operations; unrealized holding gains and losses, net of tax, are
reported as accumulated other comprehensive income which is a
separate component of stockholders deficit. Securities
classified as held to maturity are carried at amortized cost.
F-38
For both categories of securities, declines in fair value below
amortized cost that are other than temporary are included in
operations.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated
economic useful lives of the assets or over the related lease
terms (if shorter) as follows:
|
|
|
|
|
Asset Class |
|
Useful Life | |
|
|
| |
Computers and equipment
|
|
|
3 - 5 years |
|
Expenditures that materially increase values or capacities or
extend useful lives of property and equipment are capitalized.
Routine maintenance, repairs, and renewal costs are expensed as
incurred. Gains or losses from the sale or retirement of
property and equipment are recorded in operations.
The Company reviews its property and equipment for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may be impaired. If it is
determined that the undiscounted future cash flows are not
sufficient to recover the carrying value of the asset, an
impairment loss is recognized for the difference between the
carrying value and the fair value of the asset. As of
December 31, 2004 and 2003, the Companys property and
equipment were not impaired.
Web Site Development Costs
Web site development costs are amortized on a straight-line
basis over five years. The Company determines recoverability of
this intangible asset by assessing the future expected
undiscounted operating cash flows. If the undiscounted cash
flows are inadequate, the Company discounts the projected
discounted future operating cash flows using a rate which
reflects the Companys average cost of funds to determine
the amount of impairment.
Concentration of Credit Risk
The Company maintains its cash in demand deposit accounts with
banks, which at times may exceed federally insured limits. The
Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk with
respect to its cash.
Revenue Recognition and Deferred Revenue
Substantially all of the Companys revenues are derived
from subscription fees. Revenues are presented net of credits
and credit card chargebacks. The Company recognizes revenue in
accordance with accounting principles generally accepted in the
United States and with Securities and Exchange Commission Staff
Accounting Bulletin No. 104, Revenue
Recognition. Recognition occurs ratably over the
subscription period, beginning when there is persuasive evidence
of an arrangement, delivery has occurred (access has been
granted), the fees are fixed and determinable, and collection is
reasonably assured. Subscribers pay in advance, primarily by
using a credit card, and all purchases are final and
non-refundable. Fees collected in advance for subscriptions are
deferred and recognized as revenue using the straight-line
method over the term of the subscription and classified as
current or deferred based on the expected recognition period.
The Company has sold approximately $2,900,000 of lifetime
subscriptions. Since the Company has limited historical
information and data to determine the expected life of the
lifetime subscriptions, no revenue has been recognized. Deferred
revenue for lifetime subscriptions will be recognized when
adequate historical data has been accumulated to accurately
estimate the expected life of the lifetime subscriptions.
F-39
Advertising Expenses
In certain circumstances, the Company pays in advance for
Internet- based advertising on other contracted Web sites, and
expenses the prepaid amounts over the contract periods as the
contracted Web site delivers on its commitment. The Company
evaluates the realization of prepaid amounts at each reporting
period, and expenses prepaid amounts if it determines that the
contracted Web site will be unable to deliver on its commitment.
The Company expenses the cost of non-direct response advertising
as incurred. For the years ended December 31, 2004 and
2003, advertising expenses totalled $1,433,804 and $564,028,
respectively.
Income Taxes
MingleMatch, Inc. has elected to be taxed under the provisions
of subchapter S of the Internal Revenue Code and its
subsidiaries are limited liability companies. Consequently,
income taxes are paid by the individual stockholders or members
rather than by the Company.
Fair Value of Financial Instruments
The Companys financial instruments, including cash, notes
receivable and accounts payable, are carried at cost, which
approximates their fair value due to the short-term maturity of
these instruments and the relatively stable interest rate
environment.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share-Based
Payments, that upon implementation, will impact the
Companys operating results and change the classification
of certain elements of the statement of cash flows.
SFAS No. 123(R) requires stock options and other
share-based payments made to employees to be accounted for as
compensation expense and recorded at fair value, and to reflect
the related tax benefit received upon exercise of the options in
the statement of cash flows as a financing activity inflow
rather than an adjustment of operating activity as currently
presented. The Company has not yet determined either the method
of adoption or the impact that the new standard is expected to
have on our financial statements.
No other recent accounting pronouncements are expected to have a
material impact on the Company.
Marketable securities consist of investments in equity
securities, classified as available for sale with a fair market
value of $180,635, cost of $97,430, and unrealized gain of
$83,205 at December 31, 2004. Proceeds from the sale of
available for sale securities were $307,415 and realized loss of
$2,580 for the year ended December 31, 2004.
Notes receivable consist of unsecured demand notes due from an
unrelated entity with interest at an annual rate of 12%. The
notes are callable at any time upon 30 days notice.
|
|
4. |
Property and Equipment |
Property and equipment consist of the following as of
December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Computers and equipment
|
|
$ |
219,770 |
|
|
$ |
79,283 |
|
Less accumulated depreciation
|
|
|
(55,261 |
) |
|
|
(20,206 |
) |
|
|
|
|
|
|
|
|
|
$ |
164,509 |
|
|
$ |
59,077 |
|
|
|
|
|
|
|
|
F-40
Depreciation of property and equipment for the years ended
December 31, 2004 and 2003 was $35,055 and $5,539,
respectively.
Accrued liabilities consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Payroll taxes
|
|
$ |
58,645 |
|
|
$ |
8,593 |
|
Vacation
|
|
|
4,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62,714 |
|
|
$ |
8,593 |
|
|
|
|
|
|
|
|
|
|
6. |
Web Site Development Costs |
Web site development costs consist of the following as of
December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Web site development costs
|
|
$ |
21,600 |
|
|
$ |
21,600 |
|
Less accumulated amortization
|
|
|
(15,120 |
) |
|
|
(10,800 |
) |
|
|
|
|
|
|
|
|
|
$ |
6,480 |
|
|
$ |
10,800 |
|
|
|
|
|
|
|
|
Amortization expense was $4,320 for each of 2004 and 2003.
|
|
7. |
Supplemental Cash Flow Information |
No payments were made for interest and income taxes during 2004
and 2003 and the three months ended March 31, 2005 and 2004.
During the year ended December 31, 2004, the Company had
unrealized gains on marketable securities totaling $83,205 and
realized gains of $83,205 during the three months ended
March 31, 2005 (unaudited).
|
|
8. |
Commitments and Contingencies |
Litigation
The Company and its subsidiaries have unasserted and other
claims and may encounter future legal claims in the normal
course of business. In the opinion of the Company, the
resolution of the existing legal matters are not expected to
have a material impact on the Companys financial position
or results of operations.
Operating Lease
The Company has entered into a non-cancelable operating lease
for office space. Future minimum lease payments under this
non-cancelable operating lease are as follows:
|
|
|
|
|
2005
|
|
$ |
38,823 |
|
2006
|
|
|
26,400 |
|
|
|
|
|
|
|
$ |
65,223 |
|
|
|
|
|
Rental expense under operating leases totaled $32,041 and
$13,255 for the years ended December 31, 2004 and 2003,
respectively.
F-41
During 2004, the Company began offering its employees a
multi-employer 401(k) Retirement Savings Plan (the Plan). All
employees are eligible to participate in the Plan after one year
of service. The Company may contribute up to 50% of
participants contributions up to 4% of annual compensation
on a discretionary basis.
The Company contributions vest over a six-year period. The
Company has not made significant contributions to the Plan.
|
|
10. |
Subsequent Event (unaudited) |
The Company was acquired by Spark Networks plc on May 19,
2005.
F-42
33,263,996 American Depositary Shares
SPARK NETWORKS PLC
Representing 33,263,996 Ordinary Shares
PROSPECTUS
,
2006
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 13. |
Other Expenses of Issuance and Distribution |
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, payable by the
Registrant in connection with the sale of ordinary shares (in
the form of ADSs) being registered. All amounts are estimates
except the SEC registration fee.
|
|
|
|
|
|
SEC registration fee
|
|
$ |
27,876 |
|
American Stock Exchange listing fee
|
|
$ |
55,000 |
|
Printing and engraving costs
|
|
$ |
93,500 |
|
Legal fees and expenses
|
|
$ |
350,000 |
|
Accounting fees and expenses
|
|
$ |
700,000 |
|
Transfer agent and registrar fees
|
|
$ |
|
|
Miscellaneous expenses
|
|
$ |
23,624 |
|
|
|
|
|
|
Total
|
|
$ |
1,250,000 |
|
|
|
|
|
|
|
Item 14. |
Indemnification of Directors and Officers |
Pursuant to our Articles of Association and in accordance with
the Companies Act 1985, we provide the following indemnification
to our directors and other officers:
|
|
|
(a) Indemnification of directors in
respect of proceedings brought by third parties (covering both
legal costs and the financial costs of any adverse judgment,
except for the legal costs of unsuccessful defenses of criminal
proceedings, fines imposed in criminal proceedings and penalties
imposed by certain regulatory bodies); |
|
|
(b) Payment of directors
defense costs as they are incurred, including if the action is
brought by the company itself. A director in this situation
would still be liable to pay any damages awarded to our company
and to repay his defense costs to the company if his defense
were unsuccessful, other than where the company chooses to
indemnify him in respect of legal costs incurred in certain
types of civil third party proceedings; and |
|
|
(c) Indemnification of our officers
who are not directors without many of the restrictions that
apply to indemnification of directors. |
We have entered into indemnification agreements with our
directors and executive officers that require us to indemnify
them from and against all liabilities, costs, including legal
costs, claims, actions, proceedings, demands, expenses and
damages arising in connection with the performance by them of
their respective duties to the fullest extent permitted by our
Memorandum and Articles of Association and applicable law, each
as modified from time to time.
We are required to disclose such indemnities in our annual
directors report which is publicly filed with the
Registrar of Companies for England and Wales. Shareholders are
able to inspect any relevant indemnification agreement.
We maintain a directors and officers insurance
policy. The policy insures directors and other officers against
unindemnified losses arising from certain wrongful acts in their
capacities as directors and officers and reimburses our company
for those losses for which we have lawfully indemnified our
directors and officers. The policy contains various exclusions.
II-1
|
|
Item 15. |
Recent Sales of Unregistered Securities |
During the last three years, we have issued unregistered
securities to the persons described below. None of these
transactions involved any underwriters, underwriting discounts
or commissions, except as specified below, or any public
offering, and we believe that each transaction was exempt from
the registration requirements of the Securities Act of 1933 by
virtue of Section 4(2) thereof and/or Regulation D
promulgated thereunder, except as specified below. All
recipients had adequate access, through their relationships with
us, to information about us.
During the last three years, we have issued unregistered
securities to the persons, described as follows:
|
|
|
1. In January 2004, we issued 600,000 ordinary shares to
two institutional investors, Jacob Internet Fund and Mellon
Nominees UK, which were accredited investors as defined in
Rule 501(a), at
4.80 per
share in a private placement for aggregate cash consideration of
$3,700,000. The private placement was exempt from registration
under Rule 506 of Regulation D. |
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|
2. In August 2003, we issued warrants to Europlay Capital
Advisors, LLC (ECA), an accredited investor as
defined in Rule 501(a) under Regulation D, for the
purchase of up to 1,000,000 ordinary shares at an exercise price
of $2.44 per share in exchange for financial consulting
services provided to us by ECA. In December 2004, ECA and our
company agreed to accelerate vesting of 250,000 of the remaining
500,000 unvested warrants, and cancel the remaining 250,000
unvested warrants. Accordingly, we issued a warrant certificate
for 750,000 shares. Pursuant to the terms of the warrant
agreement, ECA has effected cashless exercises of warrants
accounting for a total of 320,000 ordinary shares at a per share
exercise price of $2.44 and we, after accounting for ECAs
cashless exercises, have issued a total of 226,536 ordinary
shares pursuant to the exercises. |
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|
3. From December 1, 2002 to
November 30, 2005, we have issued an aggregate of 166,000
ordinary shares for cash consideration of $222,440 upon the
exercise of warrants issued in connection with a 1998 private
placement pursuant to Regulation S of the Securities Act.
Of the 166,000 ordinary shares issued, 103,000 ordinary shares
were issued to two executive officers at the time, Joe
Y. Shapira and Alon Carmel, in November 2004 upon exercise
of warrants for cash consideration of $138,020. |
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|
4. In June 2005, we issued 150,000
ordinary shares to two shareholders of MingleMatch, Inc., each
of which were accredited investors, in connection with our
acquisition of MingleMatch. The issuance of the shares was
exempt from registration requirements of the Securities Act of
1933 by virtue of Section 4(2) thereof and/or
Regulation D promulgated thereunder. |
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|
5. In July 2005, we issued 200,000
ordinary shares to Sharman Networks Ltd., a Vanuatu corporation,
in exchange for services. The issuance of securities was exempt
from registration requirements of the Securities Act of 1933 by
virtue of Regulation S. |
In addition, from December 1, 2002 to November 30,
2005, we issued an aggregate of 6,189,909 ordinary shares upon
the conversion of options granted to directors, officers,
employees and consultants for services provided to the Company
under our 2000 Executive Share Option Scheme (2000 Option
Scheme) with per share exercise prices ranging from $0.86
to $7.50, and a weighted average exercise price of
$2.38 per share. The issuances of securities upon exercise
of options granted under our 2000 Option Scheme may not have
been exempt from qualification under California state and
federal securities laws, and as a result, we may have potential
liability to those employees, directors and consultants to whom
we issued securities upon the exercise of these options. In
order to address that issue, we may elect to make a rescission
offer to those persons who exercised all, or a portion, of those
options and continue to hold the shares issued upon exercise, to
give them the opportunity to rescind the issuance of those
shares.
II-2
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Item 16. |
Exhibits and Financial Statement Schedule |
(a) Exhibits
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Exhibit |
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|
|
|
Number |
|
|
|
Description of Exhibit |
|
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|
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3 |
.1** |
|
|
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Memorandum of Association of Registrant dated September 3,
1998 |
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3 |
.2** |
|
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Certificate Confirming Incorporation and Change of Name dated
January 31, 2005 |
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3 |
.3** |
|
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|
Articles of Association of Registrant, as amended April 11,
2000, December 10, 2004, September 2, 2005 and
November 14, 2005 (incorporated by reference to
Exhibit 3.1 of the Registrants current report on
Form 8-K filed with the Securities and Exchange Commission
on November 18, 2005). |
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4 |
.1 |
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Form of Deposit Agreement |
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4 |
.2 |
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Form of ADR (included in Exhibit 4.1 herein) |
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4 |
.3** |
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Specimen ordinary share certificate |
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5 |
.1 |
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Opinion of Steptoe & Johnson |
|
10 |
.1** |
|
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Lease dated September 1, 2000 between Arden Realty Limited
Partnership and the Registrant regarding 8383 Wilshire Boulevard
(incorporated by reference to exhibit 10.1 of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(a)** |
|
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|
First Amendment to Lease, dated September 5, 2000
(incorporated by reference to exhibit 10.1(a) of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(b)** |
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|
Second Amendment to Lease, dated January 16, 2003
(incorporated by reference to exhibit 10.1(b) of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(c)** |
|
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|
Third Amendment to Lease, dated October 30, 2003
(incorporated by reference to exhibit 10.1(c) of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(d)** |
|
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|
Fourth Amendment to Lease, dated May 14, 2004 (incorporated
by reference to exhibit 10.1(d) of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.2** |
|
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2004 Share Option Scheme |
|
10 |
.2(a)** |
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Form of Option Agreement for 2004 Share Option Scheme |
|
10 |
.3** |
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2000 Executive Share Option Scheme |
|
10 |
.3(a)** |
|
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|
Form of Option Agreement for 2000 Executive Share Option Scheme |
|
10 |
.4** |
|
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|
Asset Purchase Agreement, dated November 27, 2003, between
the Registrant and Point Match USA, Inc. (incorporated by
reference to exhibit 10.4 of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.4(a)** |
|
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|
First Amendment to Asset Purchase Agreement, January 7,
2004, between the Registrant and Point Match USA, Inc. |
|
10 |
.5** |
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|
Asset Purchase Agreement, dated November 27, 2003, between
MatchNet (Israel) Ltd., a subsidiary of the Registrant, and
Point Match Ltd. (incorporated by reference to exhibit 10.5
of MatchNet, Inc.s registration statement on Form S-1
(file no. 333-117940) filed with the Securities and Exchange
Commission on August 4, 2004) |
|
10 |
.5(a)** |
|
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|
First Amendment to Asset Purchase Agreement, dated
January 7, 2004, between MatchNet (Israel) Ltd., a
subsidiary of the Registrant, and Point Match Ltd. (incorporated
by reference to exhibit 10.5(a) of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.6** |
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Executive Employment Agreement, dated August 12, 2004,
between the Registrant and David Siminoff |
II-3
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Exhibit |
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Number |
|
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|
Description of Exhibit |
|
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10 |
.7** |
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Executive Employment Agreement, dated October 4, 2004,
between the Registrant and Mark Thompson |
|
10 |
.8** |
|
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|
Executive Employment Agreement, dated October 4, 2004,
between the Registrant and Phillip Nelson |
|
10 |
.9** |
|
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|
Executive Employment Agreement, dated March 1, 2005,
between the Registrant and Joe Y. Shapira |
|
10 |
.9(a) |
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|
Separation Agreement entered into by and between the Registrant
and Joe Y. Shapira effective as of January 1, 2006
(incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 1, 2006). |
|
10 |
.10** |
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Form of Indemnification Agreement for Officers and Directors |
|
10 |
.10(a)** |
|
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|
List of Parties executing Form of Indemnification Agreement for
Officers and Directors |
|
10 |
.11** |
|
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|
Deal Documents and Purchase Agreement for investment in Yobon,
Inc. dated October 19, 2004 |
|
10 |
.12** |
|
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|
Warrant Agreement, dated December 30, 2004, between the
Registrant and Europlay Capital Advisors LLC |
|
10 |
.13** |
|
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|
Executive Employment Agreement, dated August 31, 2005,
between the Registrant and Gregory R. Liberman |
|
10 |
.14** |
|
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|
Stock Purchase Agreement dated May 19, 2005 by and among
the Registrant, MingleMatch, Inc., The Corporation of the
President of the Church of Jesus Christ of Latter-day Saints,
and shareholders of MingleMatch, Inc. |
|
10 |
.15** |
|
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|
Standstill Agreement entered into by the Registrant and Great
Hill Equity Partners II on December 1, 2005 (incorporated by
reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 7, 2005). |
|
10 |
.16** |
|
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|
Tax Indemnification Agreement entered into by the Registrant and
Joe Y. Shapira on December 1, 2005 (incorporated by reference to
Exhibit 10.2 of the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission
on December 7, 2005). |
|
10 |
.17** |
|
|
|
Tax Indemnification Agreement entered into by the Registrant and
Alon Carmel on December 1, 2005 (incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission
on December 7, 2005). |
|
16 |
.1** |
|
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|
Letter re: Change in Certifying Accountant (incorporated by
reference to exhibit 16.1 of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
21 |
.1** |
|
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|
List of subsidiaries |
|
23 |
.1 |
|
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|
Consent of Ernst & Young |
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23 |
.2 |
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Consent of Tanner LC |
|
23 |
.3 |
|
|
|
Consent of Steptoe & Johnson (contained in
exhibit 5.1) |
|
24 |
.1** |
|
|
|
Power of attorney |
II-4
(b) Financial Statement
Schedules
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Schedules have been omitted because they are not applicable or
not required or because the information is included elsewhere in
the consolidated financial statements or the related notes. |
The undersigned registrant hereby undertakes:
1. To file, during any period in
which offers or sales are being made, a post-effective amendment
to this registration statement:
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i. To include any prospectus
required by section 10(a)(3) of the Securities Act of 1933; |
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ii. To reflect in the prospectus
any facts or events arising after the effective date of the
registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate
offering price set forth in the Calculation of
Registration Fee table in the effective registration
statement. |
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|
iii. To include any material
information with respect to the plan of distribution not
previously disclosed in the registration statement or any
material change to such information in the registration
statement; |
2. That, for the purpose of
determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
3. To remove from registration by
means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
4. That, for the purpose of
determining liability of the registrant under the Securities Act
of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a
primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and
will be considered to offer or sell such securities to such
purchaser:
|
|
|
(i) Any preliminary prospectus or
prospectus of the undersigned registrant relating to the
offering required to be filed pursuant to Rule 424; |
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|
(ii) Any free writing prospectus
relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant; |
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|
(iii) The portion of any other free
writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities
provided by or on behalf of the undersigned registrant; and |
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|
(iv) Any other communication that
is an offer in the offering made by the undersigned registrant
to the purchaser. |
II-5
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused Amendment No. 6 to this
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Beverly
Hills, State of California, on February 8, 2006.
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Spark Networks plc |
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/s/ David E. Siminoff
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David E. Siminoff |
|
Chief Executive Officer and President |
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
Amendment No. 6 to this Registration Statement has
been signed by the following persons in the capacities and on
the dates indicated.
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Name |
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Position |
|
Date |
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/s/ David E. Siminoff
David E. Siminoff |
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Chief Executive Officer and President
(Principal Executive Officer) |
|
February 8, 2006 |
|
/s/ Mark Thompson
Mark Thompson |
|
Chief Financial Officer (Principal Financial and Accounting
Officer) |
|
February 8, 2006 |
|
*
Joe Shapira |
|
Chairman of the Board |
|
February 8, 2006 |
|
*
Michael Brown |
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Director |
|
February 8, 2006 |
|
*
Martial Chaillet |
|
Director |
|
February 8, 2006 |
|
*
Benjamin Derhy |
|
Director |
|
February 8, 2006 |
|
*
Laura Lauder |
|
Director |
|
February 8, 2006 |
|
*
Scott Shleifer |
|
Director |
|
February 8, 2006 |
|
*By |
|
/s/ David E. Siminoff
Attorney-in-fact |
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|
II-8
INDEX TO EXHIBITS
|
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|
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|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
|
|
|
|
|
3 |
.1** |
|
|
|
Memorandum of Association of Registrant dated September 3,
1998 |
|
3 |
.2** |
|
|
|
Certificate Confirming Incorporation and Change of Name dated
January 31, 2005 |
|
3 |
.3** |
|
|
|
Articles of Association of Registrant, as amended April 11,
2000, December 10, 2004, September 2, 2005 and
November 14, 2005 (incorporated by reference to
Exhibit 3.1 of the Registrants current report on
Form 8-K filed with the Securities and Exchange Commission
on November 18, 2005). |
|
4 |
.1 |
|
|
|
Form of Deposit Agreement |
|
4 |
.2 |
|
|
|
Form of ADR (included in Exhibit 4.1 herein) |
|
4 |
.3** |
|
|
|
Specimen ordinary share certificate |
|
5 |
.1 |
|
|
|
Opinion of Steptoe & Johnson |
|
10 |
.1** |
|
|
|
Lease dated September 1, 2000 between Arden Realty Limited
Partnership and the Registrant regarding 8383 Wilshire Boulevard
(incorporated by reference to exhibit 10.1 of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(a)** |
|
|
|
First Amendment to Lease, dated September 5, 2000
(incorporated by reference to exhibit 10.1(a) of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(b)** |
|
|
|
Second Amendment to Lease, dated January 16, 2003
(incorporated by reference to exhibit 10.1(b) of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(c)** |
|
|
|
Third Amendment to Lease, dated October 30, 2003
(incorporated by reference to exhibit 10.1(c) of MatchNet,
Inc.s registration statement on Form S-1 (file no.
333-117940) filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.1(d)** |
|
|
|
Fourth Amendment to Lease, dated May 14, 2004 (incorporated
by reference to exhibit 10.1(d) of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.2** |
|
|
|
2004 Share Option Scheme |
|
10 |
.2(a)** |
|
|
|
Form of Option Agreement for 2004 Share Option Scheme |
|
10 |
.3** |
|
|
|
2000 Executive Share Option Scheme |
|
10 |
.3(a)** |
|
|
|
Form of Option Agreement for 2000 Executive Share Option Scheme |
|
10 |
.4** |
|
|
|
Asset Purchase Agreement, dated November 27, 2003, between
the Registrant and Point Match USA, Inc. (incorporated by
reference to exhibit 10.4 of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.4(a)** |
|
|
|
First Amendment to Asset Purchase Agreement, January 7,
2004, between the Registrant and Point Match USA, Inc |
|
10 |
.5** |
|
|
|
Asset Purchase Agreement, dated November 27, 2003, between
MatchNet (Israel) Ltd., a subsidiary of the Registrant, and
Point Match Ltd. (incorporated by reference to exhibit 10.5
of MatchNet, Inc.s registration statement on Form S-1
(file no. 333-117940) filed with the Securities and Exchange
Commission on August 4, 2004) |
|
10 |
.5(a)** |
|
|
|
First Amendment to Asset Purchase Agreement, dated
January 7, 2004, between MatchNet (Israel) Ltd., a
subsidiary of the Registrant, and Point Match Ltd. (incorporated
by reference to exhibit 10.5(a) of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
10 |
.6** |
|
|
|
Executive Employment Agreement, dated August 12, 2004,
between the Registrant and David Siminoff |
|
10 |
.7** |
|
|
|
Executive Employment Agreement, dated October 4, 2004,
between the Registrant and Mark Thompson |
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
|
|
|
|
|
10 |
.8** |
|
|
|
Executive Employment Agreement, dated October 4, 2004,
between the Registrant and Phillip Nelson |
|
10 |
.9** |
|
|
|
Executive Employment Agreement, dated March 1, 2005,
between the Registrant and Joe Y. Shapira |
|
10 |
.9(a) |
|
|
|
Separation Agreement entered into by and between the Registrant
and Joe Y. Shapira effective as of January 1, 2006
(incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 1, 2006). |
|
10 |
.10** |
|
|
|
Form of Indemnification Agreement for Officers and Directors |
|
10 |
.10(a)** |
|
|
|
List of Parties executing Form of Indemnification Agreement for
Officers and Directors |
|
10 |
.11** |
|
|
|
Deal Documents and Purchase Agreement for investment in Yobon,
Inc. dated October 19, 2004 |
|
10 |
.12** |
|
|
|
Warrant Agreement, dated December 30, 2004, between the
Registrant and Europlay Capital Advisors LLC |
|
10 |
.13** |
|
|
|
Executive Employment Agreement, dated August 31, 2005,
between the Registrant and Gregory R. Liberman |
|
10 |
.14** |
|
|
|
Stock Purchase Agreement dated May 19, 2005 by and among
the Registrant, MingleMatch, Inc., The Corporation of the
President of the Church of Jesus Christ of Latter-day Saints,
and shareholders of MingleMatch, Inc. |
|
10 |
.15** |
|
|
|
Standstill Agreement entered into by the Registrant and Great
Hill Equity Partners II on December 1, 2005 (incorporated by
reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 7, 2005). |
|
|
10 |
.16** |
|
|
|
Tax Indemnification Agreement entered into by the Registrant and
Joe Y. Shapira on December 1, 2005 (incorporated by reference to
Exhibit 10.2 of the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission
on December 7, 2005). |
|
|
10 |
.17** |
|
|
|
Tax Indemnification Agreement entered into by the Registrant and
Alon Carmel on December 1, 2005 (incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission
on December 7, 2005). |
|
16 |
.1** |
|
|
|
Letter re: Change in Certifying Accountant (incorporated by
reference to exhibit 16.1 of MatchNet, Inc.s
registration statement on Form S-1 (file no. 333-117940)
filed with the Securities and Exchange Commission on
August 4, 2004) |
|
21 |
.1** |
|
|
|
List of subsidiaries |
|
23 |
.1 |
|
|
|
Consent of Ernst & Young |
|
23 |
.2 |
|
|
|
Consent of Tanner LC |
|
23 |
.3 |
|
|
|
Consent of Steptoe & Johnson (contained in
exhibit 5.1) |
|
24 |
.1** |
|
|
|
Power of attorney |