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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 000-51195
SPARK NETWORKS PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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ENGLAND AND WALES
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98-0200628 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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8383 Wilshire Boulevard, Suite 800, Beverly Hills, |
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California
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90211 |
(Address of principal executive offices)
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(Zip Code) |
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 836-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Ordinary Shares, par value £0.01 per share
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American Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).
Yes o No þ
As of June 30, 2005, the aggregate market value of the registrants ordinary shares held by
non-affiliates of the registrant was approximately $74,607,102 based on the closing sale price of
the ordinary shares in the form of Global Depositary Shares as reported on the Frankfurt Stock
Exchange. The registrants American Depositary Shares were approved for listing on the American
Stock Exchange in February 2006. Ordinary shares held by each officer and director and by each
person who owns 10% or more of the outstanding ordinary shares have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The registrant had 30,247,996 outstanding ordinary shares, par value £0.01 per share, as of
February 1, 2006.
No documents are incorporated herein by reference.
SPARK NETWORKS, PLC
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2005
Spark Networks and Spark Networks logos are trademarks and/or registered trademarks of Spark
Networks plc.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including the sections entitled 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 annual report on Form 10-K, 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
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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 Form 10-K,
regarding, among other things:
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our significant historical 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; |
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our ability to attract members, convert members into paying subscribers and retain our
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 equity securities; |
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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 annual report on Form 10-K 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
Form 10-K to conform these statements to actual results or to changes in our expectations.
You should read this annual report on Form 10-K, and the documents that we reference in this Form
10-K and have filed as exhibits 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.
ADDITIONAL INFORMATION
We are required to file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can read our SEC filings 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.
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PART I
ITEM 1. BUSINESS
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. In 2005, Spark Networks averaged approximately 3.3 million monthly unique
visitors to our Web sites in the United States, according to comScore Media Metrix, which ranked us
as the third largest provider of online personals services in the United States. 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 Note 12 to our Consolidated
Financial Statements included in this annual report. 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. 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 longer periods, ranging from three to
twelve months. Following their initial terms, subscriptions on our
Web sites renew automatically for
subsequent one-month periods until paying subscribers terminate them.
For the year ended December 31, 2005, we had approximately 220,000 average paying subscribers,
representing a decrease of 2.7% from 2004. Our JDate and AmericanSingles
segments had approximately 70,500 and 105,300 average paying subscribers for the year ended
December 31, 2005, an increase of 1% and a decrease of 20.5%, respectively, compared to 2004.
Our Industry
We believe that online personals fulfill significant needs for 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.
Our Competitive Strengths
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Strength of JDate Brand. We believe that
JDates strong brand recognition
in the Jewish community is a valuable asset. An analysis of comScore Media Metrix
data, for the twelve months ended December 31, 2005, reveals that JDate.com
experienced more average daily visitors and more page views than any other
religious online personals service, and that JDate.com is the most popular
religion-focused online personals service in the United States. 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 to drive a member to JDate as we are our other Web sites,
and as is typical of other 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 email, 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 those types of functionality drives return visits to our Web
sites and help us 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 focus offers us 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 representatives. These representatives help members with a
range of assistance, such as matters relating to completing
personal profiles and choosing photos for their profiles, and
answering questions about billing and technical issues. We believe that the
quality of our customer service increases member satisfaction which,
in turn, also increases the
number and percentage of members that become and remain paying subscribers. |
Our Online Personals Services
Our online personals services offer single adults
convenient and secure settings 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 also operate Web sites targeted at selected vertical affinity
markets. We currently offer Web sites in English 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. An analysis of
comScore Media Metrix data for the twelve months ended December 31, 2005, revealed
that JDate.com experienced more average daily visitors and more page views than any
other religious online personals service, and that JDate.com is the most popular
religion-focused online personals service in the United States. 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 $29.99. |
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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 |
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AsianSinglesConnection.com*
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Asian singles |
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BBWPersonalsPlus.com*
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Big beautiful women, big
handsome men and their admirers |
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BlackSinglesConnection.com*
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African American singles |
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CanadianPersonals.net*
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Canadian singles |
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CatholicMingle.com*
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Catholic singles |
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ChristianMingle.com*
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Christian singles |
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Web site
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Target Markets |
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CollegeLuv.com
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College singles |
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Cupid.co.il
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Jewish singles (Israel only) |
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Date.ca
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Canadian singles |
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DeafSinglesConnection.com*
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Deaf singles |
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GreekSinglesConnection.com*
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Greek singles |
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IndianMatrimonialNetwork.com*
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Indian singles |
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InterracialSingles.net*
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Interracial singles |
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ItalianSinglesConnection.com*
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Italian singles |
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JDate.co.il
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Jewish singles (Israel only) |
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JewishMingle.com*
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Jewish singles |
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LatinSinglesConnection.com*
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Hispanic/Latin singles |
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LDSMingle.com*
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Mormon singles |
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Date.co.uk
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UK singles |
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MilitarySinglesConnection.com*
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Military singles |
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PrimeSingles.net*
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Mature singles |
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SingleParentsMingle.com*
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Single parents |
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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 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 paying subscribers 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. 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, 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
connection. |
Travel
and Events. As a complement to our online services, we offer
travel opportunities and other
promotional events which allow individuals to meet in a more personal environment. Our
travel and event programs are typically trips, dinners or other mixer events designed to
facilitate social interaction. Less than 2% of our revenues for the year ended December 31,
2005 were generated from travel and events.
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Business Strategy
We intend to grow our subscription-based revenue by driving additional traffic to our Web sites,
through integrated and targeted marketing 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 and remain 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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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 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. |
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Increase Subscription Rates. We had approximately 220,000 average paying
subscribers for the year ended December 31, 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 communication
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 December
31, 2005, we employed 42 customer service representatives at our Beverly Hills, California
facility, 19 representatives in Provo, Utah and 13 customer service representatives at our facility
in Israel. Our team of customer service representatives helps
members with matters ranging from completing personal essays and
choosing photos for their profiles to answering questions about billing and technical issues.
Customer service representatives receive ongoing training in an effort to better personalize the experience
for visitors, members and
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paying subscribers that call in and to
capitalize on upselling opportunities. On
average, our customer service center receives approximately 1,700 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 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, represents 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 online marketing efforts,
we supplement our marketing by
employing a variety of offline marketing activities. These primarily
consist of print and outdoor advertising,
public relations, event sponsorship and promotional alliances. We believe that more targeted
marketing messages, 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. Specifically for
JDate, we increased offline marketing spending. Such marketing initiatives are targeted at
brand building and name recognition.
Technology
Our
software development team consisted of 20 employees as of December 31, 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 20 employees monitor
and 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, which we believe facilitates the addition of new Web sites and
features.
We recently completed a re-architecture of our primary system based on distributed Service Oriented
Architecture principles using the Microsoft.Net platform. This re-architecture included changes to
our server and network configurations, database schemas and deployment, web presentation
methodologies and introduced 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 are currently increasing redundant hardware and software systems
in order to better support our services.
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 and AmericanSingles are some of our trademarks, whether registered
or not, in the United States and several other countries. AmericanSingles and JDate are
registered trademarks in the United States. JDate is also a registered trademark in
the EU, Australia,
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Israel and Canada. Spark Networks
is a registered trademark 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.
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 December 31, 2005, we had 193 full-time employees. We are not subject to any collective
bargaining agreements and we believe that our relationship with our employees is good.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below together with all of the other
information included in this report 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 report 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 December 31, 2005, we had an
accumulated deficit of approximately $45.1 million. We had net loss of approximately $1.4 million
for the year ended December 31, 2005 and a loss of
$11.6 million for the 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
9
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.
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:
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the size and diversity of our member and paying subscriber bases; |
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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; |
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customer service and support efforts; |
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selling and marketing efforts; and |
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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
10
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 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:
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competition from pre-existing competitors with significantly stronger brand recognition
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our improper evaluations of the potential of such markets; |
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diversion of capital and other valuable resources away from our core business and other |
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opportunities that are potentially more profitable; and |
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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 2004 and
2005 we introduced a number of new Web sites and features, and we anticipate the introduction of
additional Web sites and features in 2006 and 2007. 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.
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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 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 December 31, 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 $1.9 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 December 31, 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 $6.1
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.
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
12
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
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 December 31, 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 $6.1
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.
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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, 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
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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.
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
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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 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
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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.
As a U.S. public company, we are subject to the reporting requirements of the Sarbanes-Oxley Act of
2002. 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 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 have been publicly reporting 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. |
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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.
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.
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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 (
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.
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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 |
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than we have; |
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our need to create and increase our brand recognition and improve our marketing efforts |
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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
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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.
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 years ended December 31, 2005, the monthly subscriber churn for (1) the JDate
segment was 25.9% (2) the AmericanSingles segment was 36.3% and (3) the Web sites in our Other
Businesses segment was 25.6%. 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.
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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 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
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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 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 resumed mediation
on February 23, 2006, but it did not result in a settlement.
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.
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
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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 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
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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
the registration of all of our issued and outstanding ordinary shares
in February 2006, there was 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 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 February 1, 2006, 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, 52.0% 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
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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% of 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 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 ( 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 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.
Most of our ordinary shares and ordinary shares issuable upon the exercise of our warrants and
options are eligible for sale, which results in dilution and may 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, the market price of our ADSs could fall. Our ordinary shares in
the form of GDSs trade on the Frankfurt Stock Exchange. We have registered on Form S-1 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. The
registration statement registers an aggregate of 33,263,996 ordinary shares and ordinary shares
underlying warrants or options. In addition, we have filed a registration statement under the
Securities Act of 1933, as amended, on Form S-8 covering all of the ordinary shares issuable upon
exercise of our outstanding options and options available for future grant under our share option
schemes. As of February 1, 2006, we had 4,655,201 ordinary shares underlying outstanding options
and 14,424,049 ordinary shares underlying options available for future grant. 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
27
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
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 are 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
our ordinary shares are listed for trading on the American Stock Exchange in the form of ADSs.
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.
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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. |
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.
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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 report 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 report who is not a resident of the United
States.
Currently, one of our directors, Martial Chaillet, named in this report 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 report 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; |
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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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not
Applicable.
ITEM 2. PROPERTIES
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, 2007. Our monthly base rent for
this facility is $53,850. We also currently lease office space in Provo, Utah; Cupertino,
California; San Francisco, 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.
ITEM 3. 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 Huebner
each seek to certify a nationwide
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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.
A mediation occurred in Adelman in 2004 that did not result in a settlement. A post-mediation
status conference was held on Friday, July 16, 2004. At that Status Conference, the court
suggested that the parties agree to a bifurcation of the liability issue. The purpose of the
bifurcation is to allow the Court to determine whether as a matter of law the California Dating
Services Act (CDS Act) applies to us. In this way, if the Court determines that the CDS Act is
inapplicable, all further expenses associated with discovery and class certification can be
avoided. The Court has permitted limited discovery including document requests and
interrogatories, the parties will each be permitted to take one deposition without further leave of
the Court, the parties will be allowed to designate expert witnesses, and the Court will conduct a
trial on the issue of the applicability of the CDS Act to our business in the spring of 2006.
Although some written discovery relating to the bifurcated trial has been completed, depositions
have not yet been taken. A second mediation occurred in Adelman on Friday, February 10, 2006, but
the mediation has not yet been completed. The mediation resumed on February 23,
2006, but did not result in a settlement. The bifurcated trial in Adelman is now set for May 15, 2006, the deposition cut-off date is
March 24, 2006, and the final briefing deadline is April 17, 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 that 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 period for filing an appeal from the Memorandum Opinion
in the Fertelmeyster Action has now expired, and as a result, the Fertelmeyster litigation is now
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 in a concurring
opinion concluded that our services were not covered under the New
York Dating Services Act.
A lawsuit was 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 Spark for the sale of a database owned by
Datingcity. Datingcity further alleges that Spark 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 by paying Datingcity $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
32
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 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 have 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 has 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 our shares 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 the Kristal/MatchPower Action 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 our favor and (ii) dismiss with prejudice the action they
have filed against us. A disagreement exists regarding the language to be included, and the scope
of, the General Release. A motion to enforce the settlement provided for in the Stipulation is set to be heard on March 22, 2006.
We anticipate that the Stipulation will be enforced according to its terms.
On March 10, 2005, Akonix Systems, Inc. (Akonix) filed with the American Arbitration Association
a demand for arbitration against us. Akonix, which provided software services to us pursuant to a
Project Contract and Amendment thereto (Akonix Contract), claims that we breached an obligation
under the Akonix Contract to issue to Akonix an option to purchase 50,000 shares of our common
stock at a strike price equal to the October 23, 2000 last trading price of such stock on the
Frankfurt Stock Exchange (the Stock Option). Although the Akonix Contract called for the Stock
Option to be delivered to Akonix by December 19, 2001, Akonix did not demand delivery of the Stock
Option until mid-2004.
Akonix claims damages in excess of $500,000, based on the difference between the strike price for
the Stock Option and the highest trading price of our stock in 2004. We contend that Akonix is not
entitled to pursue any claim based on the Stock Option because, among other things, (a) Akonix did
not timely demand issuance of the Stock Option, (b) Akonix did not tender to us payment of the
option price, and (c) the provision in the Akonix Contract for issuance of the Stock Option is
unenforceable, as no agreement was reached on the length of time within which Akonix was entitled
to exercise the Stock Option.
In Akonix, the parties have recently had a status conference with the arbitrator, pursuant to which
the applicable deadlines for completing discovery and proceeding with the arbitration have been
continued indefinitely. In the status conference, the parties agreed in concept to mediating this
dispute. The mediation in Akonix occurred on January 31, 2006. At the mediation, we proposed to
settle the claims of Akonix for a payment of $75,000. On Thursday, February 16, 2006, Akonix
accepted our proposal. Settlement documents have been prepared and it is
anticipated that settlement documents will be executed, and a settlement payment will be made, in
the next thirty (30) days.
On September 16, 2005, Soheil Davood (Davood) filed a Complaint against Spark entitled Soheil
Davood vs. Spark Networks, plc, Los Angeles County Superior Court Case No. BC 339998, alleging
causes of action for (1) Breach of Express Warranty, (2) Breach of Implied Warranty, (3) Negligent
Misrepresentation, and (4) Negligent Infliction of Emotional Distress. Davood alleges (i) he
subscribed to JDate, a website operated by us; (ii) he
33
communicated with a female; (iii) she gave
him what he thought was her phone number; and (iv) when he called the number, it was a rejection
hotline recording causing him to be humiliated and suffer emotional distress. We believe we have
no liability for this claim, and Davoods counsel has indicated Davood will probably dismiss
Davoods action against Spark after Spark responds to a subpoena requesting information regarding
the female subscriber who embarrassed Davood.
We have an indefinite extension of
time within which to respond to the Complaint and have requested
that Davood and his counsel dismiss the Complaint with prejudice because we believe we have no
liability for this claim.
We have filed an action in the Los Angeles County Superior Court (JetPay) against JetPay Merchant
Services, LLC, Los Angeles Superior Court Civil Action No. BC346182. In the Complaint in JetPay,
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. After we filed the Complaint against JetPay, we discovered that JetPay had retained,
converted, and/or not distributed to us funds belonging to us in the aggregate amount of
approximately $331,000 not reflected in the Complaint filed by us against JetPay. We intend to
amend our Complaint to seek the recovery of all such funds. 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.
On February 21, 2006, JetPay filed a Notice of Removal of our state
court action against JetPay to the United States District Court for
the Central District of California (California Federal Court
Action). JetPay has filed an Answer to our Complaint and a Counterclaim in the California Federal Court Action in which JetPay asserts the claims previously raised by JetPay in its correspondence with us.
In addition, JetPay has filed a Complaint against us in the United States District Court for the
Northern District of Texas (Texas Federal Court Action) in which it asserts the same claims
it has alleged in its Counterclaim in the California Federal Court Action. JetPay has announced
its intention to file a Motion to Stay or dismiss the California Federal Court Action so that
its claims can be prosecuted in the Texas Federal Court Action, and when that motion is filed,
we will vigorously oppose it in order to prosecute our claims against JetPay in the California
Federal Court Action. For the reasons set forth in
our Complaint in JetPay among others, we
believe that we are not indebted to JetPay
in any amount whatsoever, we intend to vigorously defend any claim
filed by JetPay against us, whether in JetPay or otherwise,
and we are in the process of prosecuting JetPay for the
recovery of the damages set forth above suffered by the us as a result of the acts and
omissions of JetPay.
We intend to defend vigorously against each of the 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.
We have additional existing legal claims and may encounter future legal claims in the normal course
of business. In our opinion, the resolutions of the existing legal claims are not expected to have
a material impact on our financial position or results of operations. We believe we has accrued
appropriate amounts where necessary in connection with the above litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 14, 2005, we held our 2005 Annual General Meeting of Shareholders (the AGM). On
November 15, 2005, our registration statement on Form 10 became effective and our ordinary shares
became registered under Section 12 of the Securities Exchange Act of 1934, as amended. At the AGM,
our shareholders voted to:
|
(i) |
|
approve an amendment to our Articles of Association so that during such times
that our ordinary shares or securities representing such shares are admitted to
trading on the American Stock |
34
|
|
|
Exchange, Nasdaq National Market and/or Nasdaq Small Cap
Market, the quorum requirement at a general meeting will be one-third of our issued
and outstanding ordinary shares present in person or by proxy and entitled to vote; |
|
(ii) |
|
elect Michael Brown, Martial Chaillet, Laura Lauder and Scott Shleifer as
directors and to re-elect Joe Y. Shapira, David E. Siminoff and Benjamin Derhy as
directors; |
|
|
(iii) |
|
approve the reduction of our share premium account in connection with a
possible rescission offer by our company; |
|
|
(iv) |
|
adopt our companys accounts for the year ended December 31, 2004 and the
directors and auditors reports on such accounts; |
|
|
(v) |
|
approve the remuneration report for our directors remuneration for the year
ended December 31, 2004; and |
|
|
(vi) |
|
reappoint our auditors and to authorize our directors to fix the auditors
remuneration. |
Each of the foregoing resolutions were approved by a vote of 1,150,000 votes for and no votes
against, withheld, abstained or were broker non-votes.
35
PART II.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our ordinary shares in the form of ADSs were approved in February 2006 for trading on the
American Stock Exchange under the trading symbol LOV. As of the filing date of this report, an
established public trading market for our ADSs has not yet developed. Our ordinary shares in the
form of 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
|
|
Year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
11.85 |
|
|
$ |
14.68 |
|
|
|
4.20 |
|
|
$ |
5.39 |
|
Second Quarter
|
|
|
9.85 |
|
|
$ |
11.79 |
|
|
|
6.30 |
|
|
$ |
7.63 |
|
Third Quarter
|
|
|
8.00 |
|
|
$ |
9.62 |
|
|
|
2.85 |
|
|
$ |
3.49 |
|
Fourth Quarter
|
|
|
7.33 |
|
|
$ |
9.68 |
|
|
|
4.75 |
|
|
$ |
6.06 |
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
8.25 |
|
|
$ |
10.66 |
|
|
|
6.16 |
|
|
$ |
8.02 |
|
Second Quarter
|
|
|
8.00 |
|
|
$ |
10.37 |
|
|
|
5.26 |
|
|
$ |
6.47 |
|
Third Quarter
|
|
|
7.50 |
|
|
$ |
9.28 |
|
|
|
5.25 |
|
|
$ |
6.85 |
|
Fourth Quarter
|
|
|
6.29 |
|
|
$ |
7.50 |
|
|
|
4.45 |
|
|
$ |
5.22 |
|
We had 121 shareholders of record as of February 1, 2006. We had not declared or paid any cash
dividends on our common shares. We presently intend to retain our future earnings, if any, to fund
the development and growth of our business and, therefore, do not have plans to pay any cash
dividends in the near future. Our equity compensation plan information is provided as set forth in
Part III, Item 12 (Security Ownership Of Certain Beneficial Owners and Management and Related
Stockholder Matters) of this report.
Unregistered Sales of Equity Securities
During the year ended December 31, 2005, 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.
1. 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. From
January 1, 2005 to December 31, 2005, pursuant to the terms of the warrant agreement, ECA 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, issued a total of
226,536 ordinary shares pursuant to such exercises.
2. From January 1, 2005 to December 31, 2005, we have issued an aggregate of 8,000
ordinary shares for cash consideration of $10,325 upon the exercise of warrants issued in
connection with a 1998 private placement pursuant to Regulation S of the Securities Act.
36
3. 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.
4. 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.
5. 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 the ordinary shares underlying
outstanding options and ordinary shares reserved for issuance upon the exercise of options
available for grant under our share option schemes. From January 1, 2005 to November 17, 2005, we
issued an aggregate of 1,062,609 ordinary shares upon the exercise 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 $1.26 to
$6.16, and a weighted average exercise price of $2.48 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.
ITEM 6. SELECTED 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 for
each of the three years in the period ended December 31, 2005, and the selected consolidated
balance sheet data as of December 31, 2004 and 2003, are derived from the audited consolidated
financial statements of our company included elsewhere in this report. The consolidated statement
of operations data for the year ended December 31, 2001 and the selected consolidated balance sheet
data as of December 31, 2002 and 2001 are derived from the audited consolidated financial
statements of our company not included in this report. 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. 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.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,(1) |
|
(in thousands, except per share amounts) |
|
2005 |
|
|
2004(6) |
|
|
2003(6) |
|
|
2002 |
|
|
2001 |
|
Consolidated Statements of
Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
65,511 |
|
|
$ |
65,052 |
|
|
$ |
36,941 |
|
|
$ |
16,352 |
|
|
$ |
10,434 |
|
Direct marketing expenses |
|
|
24,411 |
|
|
|
31,240 |
|
|
|
18,395 |
|
|
|
5,396 |
|
|
|
2,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin |
|
|
41,100 |
|
|
|
33,812 |
|
|
|
18,546 |
|
|
|
10,956 |
|
|
|
8,390 |
|
Operating
expenses:* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing |
|
|
1,208 |
|
|
|
2,607 |
|
|
|
986 |
|
|
|
403 |
|
|
|
540 |
|
Customer service |
|
|
2,827 |
|
|
|
3,379 |
|
|
|
2,536 |
|
|
|
1,207 |
|
|
|
641 |
|
Technical operations |
|
|
7,546 |
|
|
|
7,184 |
|
|
|
4,481 |
|
|
|
1,587 |
|
|
|
1,772 |
|
Product development |
|
|
4,118 |
|
|
|
2,013 |
|
|
|
959 |
|
|
|
603 |
|
|
|
359 |
|
General and administrative |
|
|
25,074 |
|
|
|
29,253 |
(2) |
|
|
18,537 |
(2) |
|
|
7,996 |
|
|
|
5,496 |
|
Amortization of intangible assets other than goodwill |
|
|
1,085 |
|
|
|
860 |
|
|
|
555 |
|
|
|
524 |
|
|
|
2,137 |
|
Impairment of long-lived assets |
|
|
105 |
|
|
|
208 |
|
|
|
1,532 |
|
|
|
|
|
|
|
3,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
41,963 |
|
|
|
45,504 |
|
|
|
29,586 |
|
|
|
12,320 |
|
|
|
14,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) |
|
|
(863 |
) |
|
|
(11,692 |
) |
|
|
(11,040 |
) |
|
|
(1,364 |
) |
|
|
(6,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) and other expenses, net |
|
|
711 |
|
|
|
(66 |
) |
|
|
(188 |
) |
|
|
(840 |
) |
|
|
1,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before income taxes |
|
|
(1,574 |
) |
|
|
(11,626 |
) |
|
|
(10,852 |
) |
|
|
(524 |
) |
|
|
(8,179 |
) |
Provision for income taxes |
|
|
(136 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
(1,438 |
) |
|
|
(11,627 |
) |
|
|
(10,852 |
) |
|
|
(524 |
) |
|
|
(8,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic and diluted(3) |
|
|
(0.06 |
) |
|
|
(0.51 |
) |
|
|
(0.57 |
) |
|
|
(0.03 |
) |
|
|
(0.47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic and diluted (3) |
|
|
26,105 |
|
|
|
22,667 |
|
|
|
18,970 |
|
|
|
18,460 |
|
|
|
17,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,624 |
|
|
|
3,065 |
|
|
|
1,441 |
|
|
|
874 |
|
|
|
544 |
|
Additional Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average paying subscribers(4) |
|
|
220,000 |
|
|
|
226,100 |
|
|
|
125,800 |
|
|
|
58,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004(6) |
|
2003(6) |
|
2002 |
|
2001 |
* Operating expenses include share-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing |
|
|
24 |
|
|
|
156 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
Customer service |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical operations |
|
|
338 |
|
|
|
22 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
Product development |
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
2,063 |
|
|
|
1,526 |
|
|
|
1,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balace Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities |
|
|
17,292 |
|
|
|
7,423 |
|
|
|
5,815 |
|
|
|
7,755 |
|
|
|
7,569 |
|
Total assets |
|
|
48,620 |
|
|
|
27,359 |
|
|
|
16,969 |
|
|
|
17,461 |
|
|
|
16,352 |
|
Deferred revenue |
|
|
4,991 |
|
|
|
3,933 |
|
|
|
3,232 |
|
|
|
1,535 |
|
|
|
993 |
|
Capital lease obligations and notes payable |
|
|
10,830 |
|
|
|
1,873 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
23,437 |
|
|
|
16,872 |
|
|
|
11,659 |
|
|
|
3,998 |
|
|
|
3,238 |
|
Shares subject to rescission (5) |
|
|
6,089 |
|
|
|
3,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
(45,073 |
) |
|
|
(43,635 |
) |
|
|
(32,008 |
) |
|
|
(21,156 |
) |
|
|
(20,632 |
) |
Total shareholders equity |
|
|
19,094 |
|
|
|
6,668 |
|
|
|
5,310 |
|
|
|
13,463 |
|
|
|
13,114 |
|
38
|
|
|
(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 year ended
December 31, 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 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 December 31, 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 $6.1 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) |
|
For the purposes of this and all future filings, prior period classification of
share-based compensation was reclassified to conform to current period classification. |
39
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 to our
consolidated financial statements, 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.
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 report.
The pro forma combined statements of operation for the years ended December 31, 2005 gave effect to
the acquisition of MingleMatch, Inc. as if it had been completed on January 1, 2005. Our combined
financial statements include the results of operations of MingleMatch, Inc. from its acquisition
date May 19, 2005 to December 31, 2005. The MingleMatch column for the year ended December 31, 2005
includes MingleMatch activity for the period prior to its acquisition date from January 1, 2005 to
May 18, 2005. The 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, 2005 |
|
|
|
Spark |
|
|
Mingle |
|
|
Pro Forma |
|
|
Pro Forma |
|
|
|
Networks |
|
|
Match |
|
|
Adjustments |
|
|
Consolidated |
|
|
|
(in thousands, except per share amounts) |
|
Net revenues |
|
$ |
65,511 |
|
|
$ |
1,453 |
|
|
$ |
|
|
|
$ |
66,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct marketing expenses |
|
|
24,411 |
|
|
|
741 |
|
|
|
|
|
|
|
25,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin |
|
|
41,100 |
|
|
|
712 |
|
|
|
|
|
|
|
41,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing |
|
|
1,208 |
|
|
|
79 |
|
|
|
|
|
|
|
1,287 |
|
Customer service |
|
|
2,827 |
|
|
|
147 |
|
|
|
|
|
|
|
2,974 |
|
Technical operations |
|
|
7,546 |
|
|
|
350 |
|
|
|
|
|
|
|
7,896 |
|
Product development |
|
|
4,118 |
|
|
|
113 |
|
|
|
|
|
|
|
4,231 |
|
General and administrative (excluding
share-based compensation) |
|
|
25,074 |
|
|
|
986 |
|
|
|
|
|
|
|
26,060 |
|
Amortization of intangible assets
other than goodwill |
|
|
1,085 |
|
|
|
2 |
|
|
|
313 |
(1) |
|
|
1,400 |
|
Impairment of long lived assets |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
41,963 |
|
|
|
1,677 |
|
|
|
313 |
|
|
|
43,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(863 |
) |
|
|
(965 |
) |
|
|
(313 |
) |
|
|
(2,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) and other expenses, net |
|
|
711 |
|
|
|
(209 |
) |
|
|
|
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) |
|
|
(1,574 |
) |
|
|
(756 |
) |
|
|
(313 |
) |
|
|
(2,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(1,438 |
) |
|
$ |
(756 |
) |
|
$ |
(313 |
) |
|
$ |
(2,507 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per ordinary share
basic and diluted |
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares
outstanding basic and diluted |
|
|
26,105 |
|
|
|
|
|
|
|
|
|
|
|
26,105 |
|
|
|
|
(1) |
|
Represents amortization of intangible assets that would have occurred if the purchase had
happened on January 1, 2005. |
40
|
|
|
|
|
|
|
Stub Period Ended |
|
|
May 18, 2005 |
Domain Names |
|
$ |
|
297 |
|
Subscriber Discounts |
|
|
|
|
|
Developed Software |
|
|
|
16 |
|
|
|
|
Total Amortization |
|
|
|
313 |
|
|
|
|
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition.
|
|
|
|
|
|
|
At May 19, 2005 |
|
|
|
(In thousands) |
|
Current assets (including cash acquired
of $221) |
|
$ |
295 |
|
Property and equipment, net |
|
|
162 |
|
Goodwill |
|
|
9,742 |
|
Domain names and databases |
|
|
4,655 |
|
|
|
|
|
Total assets acquired |
|
|
14,854 |
|
Current liabilities |
|
|
41 |
|
Deferred tax liability |
|
|
1,823 |
|
|
|
|
|
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 $9,742,000 of acquired goodwill, $400,000 was assigned to assembled workforce and $1,823,000
was as a result of recording a deferred tax liability resulting from
differences between
tax and book bases as proscribed by SFAS 109.
ITEM 7. 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 audited consolidated financial statements and the related notes that are
included in this Report.
Some of the statements contained in this Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Report are forward-looking statements
that involve substantial risks and uncertainties. All statements other than historical facts
contained in this report, 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 and 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
41
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 report.
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 and in the form of ADSs
on the American 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 $65.5 million in 2005. For the year ended December
31, 2005, we had approximately 220,000 average paying subscribers, representing a decrease of 2.7%
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 monthly subscription fee of $34.95 and
AmericanSingles.com, which targets the U.S. mainstream online singles community, at a current
monthly subscription fee of $29.99. 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, 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. |
42
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 20 employees as of December 31, 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 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.
43
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.
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 Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived
Assets.
Valuation of Goodwill, Identified Intangibles and Other Long-lived Assets
We test goodwill and intangible assets for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets and test
property, plant and equipment for impairment in accordance with SFAS
No. 144. 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; |
44
|
|
|
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; |
|
|
|
|
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 2005, 2004 and 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 a 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 between a 20% to 50% ownership
interest. At December 31, 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 BusinessLegal 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
45
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.
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 to
be realized in our future tax returns. As of December 31, 2005 and 2004, we had a valuation
allowance that completely offset our net 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, 2005, we had net operating loss carry-forwards of approximately $54.4 million and
$50.4 million 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 $1.6 million and $500,000 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 share options and other
share-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 year ended December
31, 2005, is $2.7 million higher, than if we had continued to account for share-based compensation
under APB Opinion No. 25. Basic and diluted income per share for the year ended December 31, 2005
would have been $0.05, if we had not adopted Statement 123(R), compared to reported basic and
diluted loss per share of $(0.06).
At December 31, 2005, we had two share-based employee compensation plans, which are described more
fully in Note 10 to the consolidated financial statements
contained 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, Accounting for Stock-Based Compensation. Only share-based employee compensation
related to variable accounting (as discussed in Note 10 to the
consolidated financial statements) was recognized in
our 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, 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.
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.
46
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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December |
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
Net loss as reported |
|
$ |
(1,438 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: SFAS 123 (R) share based employee compensation
expense included in reported net income, net of related tax
effects |
|
|
2,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: share based employee compensation expense recorded
in the accompanying consolidated statements of operations
Pre-SFAS 123 (R) |
|
|
(30 |
) |
|
|
367 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total share based employee compensation expense
determined under fair value based method for all awards,
of related tax effects |
|
|
(5,460 |
) |
|
|
(3,452 |
) |
|
|
(3,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(4,211 |
) |
|
$ |
(14,712 |
) |
|
$ |
(14,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic & diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.57 |
) |
Pro forma basic & diluted |
|
$ |
(0.16 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.76 |
) |
Note that the above pro forma disclosures are provided for 2004 and 2003 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.
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 for those options granted prior to July 1,
2005, the following assumptions were used to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
Year Ended |
|
|
Ended June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Expected life in years |
|
|
4 |
|
|
|
4 |
|
Dividend per share |
|
|
|
|
|
|
|
|
Volatility |
|
|
76.2 |
% |
|
|
70.0 |
% |
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 necessary and we must calibrate actual forfeiture behavior to what has already been
recorded. For the six month period ending December 31, 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.
47
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 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.
We 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.
The following table describes our pro forma statement of consolidated operations and EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
2005 Spark |
|
|
2005 Share- |
|
|
Before Share- |
|
|
2004 Spark |
|
|
2004 Share- |
|
|
Before Share- |
|
|
|
Networks |
|
|
Based |
|
|
Based |
|
|
Networks |
|
|
Based |
|
|
Based |
|
|
|
Consolidated (1) |
|
|
Compensation (2) |
|
|
Compensation |
|
|
Consolidated (1)(4) |
|
|
Compensation (2)(4) |
|
|
Compensation |
|
Net revenues |
|
$ |
65,511 |
|
|
$ |
|
|
|
$ |
65,511 |
|
|
$ |
65,052 |
|
|
$ |
|
|
|
$ |
65,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct marketing expenses |
|
|
24,411 |
|
|
|
|
|
|
|
24,411 |
|
|
|
31,240 |
|
|
|
|
|
|
|
31,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin |
|
|
41,100 |
|
|
|
|
|
|
|
41,100 |
|
|
|
33,812 |
|
|
|
|
|
|
|
33,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing |
|
|
1,208 |
|
|
|
24 |
|
|
|
1,184 |
|
|
|
2,607 |
|
|
|
156 |
|
|
|
2,451 |
|
Customer service |
|
|
2,827 |
|
|
|
44 |
|
|
|
2,783 |
|
|
|
3,379 |
|
|
|
|
|
|
|
3,379 |
|
Technical operations |
|
|
7,546 |
|
|
|
338 |
|
|
|
7,208 |
|
|
|
7,184 |
|
|
|
22 |
|
|
|
7,162 |
|
Product development |
|
|
4,118 |
|
|
|
248 |
|
|
|
3,870 |
|
|
|
2,013 |
|
|
|
|
|
|
|
2,013 |
|
General and administrative |
|
|
25,074 |
|
|
|
2,063 |
|
|
|
23,011 |
|
|
|
29,253 |
|
|
|
1,526 |
|
|
|
27,727 |
|
Amortization of intangible assets other than goodwill |
|
|
1,085 |
|
|
|
|
|
|
|
1,085 |
|
|
|
860 |
|
|
|
|
|
|
|
860 |
|
Impairment of long lived assets |
|
|
105 |
|
|
|
|
|
|
|
105 |
|
|
|
208 |
|
|
|
|
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
41,963 |
|
|
|
2,717 |
|
|
|
39,246 |
|
|
|
45,504 |
|
|
|
1,704 |
|
|
|
43,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(863 |
) |
|
|
(2,717 |
) |
|
|
1,854 |
|
|
|
(11,692 |
) |
|
|
(1,704 |
) |
|
|
(9,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) and other expenses, net |
|
|
711 |
|
|
|
|
|
|
|
711 |
|
|
|
(66 |
) |
|
|
|
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income |
|
|
(1,574 |
) |
|
|
(2,717 |
) |
|
|
1,143 |
|
|
|
(11,626 |
) |
|
|
(1,704 |
) |
|
|
(9,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
(136 |
) |
|
|
|
|
|
|
(136 |
) |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,438 |
) |
|
$ |
(2,717 |
) |
|
$ |
1,279 |
|
|
$ |
(11,627 |
) |
|
$ |
(1,704 |
) |
|
$ |
(9,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
193 |
|
|
|
|
|
|
|
193 |
|
|
|
(32 |
) |
|
|
|
|
|
|
(32 |
) |
Income taxes |
|
|
(136 |
) |
|
|
|
|
|
|
(136 |
) |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Depreciation |
|
|
3,624 |
|
|
|
|
|
|
|
3,624 |
|
|
|
3,065 |
|
|
|
|
|
|
|
3,065 |
|
Amortization of intangible assets |
|
|
1,085 |
|
|
|
|
|
|
|
1,085 |
|
|
|
860 |
|
|
|
|
|
|
|
860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3) |
|
$ |
3,328 |
|
|
$ |
(2,717 |
) |
|
$ |
6,045 |
|
|
$ |
(7,733 |
) |
|
$ |
(1,704 |
) |
|
$ |
(6,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
second half of 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 a 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. |
48
|
|
|
(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. |
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 our other Web sites and businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
AmericanSingles |
|
$ |
29,217 |
|
|
$ |
35,224 |
|
|
$ |
19,253 |
|
JDate |
|
|
25,961 |
|
|
|
23,820 |
|
|
|
16,091 |
|
Other Businesses |
|
|
10,333 |
|
|
|
6,008 |
|
|
|
1,597 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
65,511 |
|
|
$ |
65,052 |
|
|
$ |
36,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Marketing |
|
|
|
|
|
|
|
|
|
|
|
|
AmericanSingles |
|
$ |
15,167 |
|
|
$ |
24,954 |
|
|
$ |
15,887 |
|
JDate |
|
|
2,885 |
|
|
|
1,740 |
|
|
|
739 |
|
Other Businesses |
|
|
6,359 |
|
|
|
4,546 |
|
|
|
1,769 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,411 |
|
|
$ |
31,240 |
|
|
$ |
18,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution |
|
|
|
|
|
|
|
|
|
|
|
|
AmericanSingles |
|
$ |
14,050 |
|
|
$ |
10,270 |
|
|
$ |
3,366 |
|
JDate |
|
|
23,076 |
|
|
|
22,080 |
|
|
|
15,352 |
|
Other Businesses |
|
|
3,974 |
|
|
|
1,462 |
|
|
|
(172 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,100 |
|
|
$ |
33,812 |
|
|
$ |
18,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses |
|
|
41,963 |
|
|
|
45,504 |
|
|
|
29,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) |
|
$ |
(863 |
) |
|
$ |
(11,692 |
) |
|
$ |
(11,040 |
) |
|
|
|
|
|
|
|
|
|
|
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 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 Costs: 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. |
49
|
|
|
Monthly Subscriber Churn: Monthly subscriber churn represents the ratio expressed as a
percentage of (a) the number of paying subscriber cancellations during the period divided by
the number of average paying subscribers during the period and (b) the number of months in
the period. |
Selected statistical information regarding our key operating metrics 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Average Paying Subscribers (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
AmericanSingles |
|
|
105.3 |
|
|
|
132.5 |
|
|
|
71.5 |
|
JDate |
|
|
70.5 |
|
|
|
69.8 |
|
|
|
50.7 |
|
Other Businesses |
|
|
44.2 |
|
|
|
23.8 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
220.0 |
|
|
|
226.1 |
|
|
|
125.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Monthly Net Revenue per Paying Subscriber: |
|
|
|
|
|
|
|
|
AmericanSingles |
|
$ |
23.12 |
|
|
$ |
22.16 |
|
|
$ |
22.43 |
|
JDate |
|
|
30.70 |
|
|
|
28.42 |
|
|
|
26.44 |
|
Other Businesses |
|
|
17.58 |
|
|
|
16.75 |
|
|
|
23.72 |
|
Total |
|
|
24.44 |
|
|
|
23.53 |
|
|
|
24.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Subscriber Acquisition Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
AmericanSingles |
|
$ |
35.16 |
|
|
$ |
43.29 |
|
|
$ |
45.70 |
|
JDate |
|
|
12.70 |
|
|
|
8.09 |
|
|
|
4.39 |
|
Other Businesses |
|
|
32.05 |
|
|
|
34.74 |
|
|
|
80.32 |
|
Total |
|
|
28.36 |
|
|
|
33.85 |
|
|
|
33.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Subscriber Churn: |
|
|
|
|
|
|
|
|
|
|
|
|
AmericanSingles |
|
|
36.3 |
% |
|
|
35.6 |
% |
|
|
32.1 |
% |
JDate |
|
|
25.9 |
% |
|
|
25.8 |
% |
|
|
22.4 |
% |
Other Businesses |
|
|
25.6 |
% |
|
|
26.8 |
% |
|
|
33.4 |
% |
Total |
|
|
30.8 |
% |
|
|
31.7 |
% |
|
|
28.2 |
% |
In 2003 and 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 year ended December 31, 2005, the decrease in average paying
subscribers for AmericanSingles as compared to the slight increase 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 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.
50
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Direct marketing |
|
|
37.3 |
|
|
|
47.7 |
|
|
|
49.8 |
|
|
|
|
|
|
|
|
|
|
|
Contribution margin |
|
|
62.7 |
|
|
|
51.6 |
|
|
|
50.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing |
|
|
1.8 |
|
|
|
4.0 |
|
|
|
2.7 |
|
Customer service |
|
|
4.3 |
|
|
|
5.2 |
|
|
|
6.9 |
|
Technical operations |
|
|
11.5 |
|
|
|
11.0 |
|
|
|
12.1 |
|
Product development |
|
|
6.3 |
|
|
|
3.1 |
|
|
|
2.6 |
|
General and administrative (excluding share-based compensation) |
|
|
38.3 |
|
|
|
44.7 |
|
|
|
50.2 |
|
Amortization of intangible assets other than goodwill |
|
|
1.7 |
|
|
|
1.3 |
|
|
|
1.5 |
|
Impairment of long lived assets |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
64.1 |
|
|
|
69.6 |
|
|
|
80.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(1.3 |
) |
|
|
(17.8 |
) |
|
|
(29.9 |
) |
Interest and other expenses, net |
|
|
1.1 |
|
|
|
(0.1 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
Loss income before income taxes |
|
|
(2.4 |
) |
|
|
(17.7 |
) |
|
|
(29.4 |
) |
Provision for income taxes |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(2.2 |
)% |
|
|
(17.7 |
)% |
|
|
(29.4 |
)% |
|
|
|
|
|
|
|
|
|
|
For the purposes of this and all future filings, prior period classification of share-based
compensation was reclassified to conform to current period classification.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Business Metrics
For the year ended December 31, 2005, average paying subscribers for the JDate segment increased
1.0% to 70,500, compared to 69,800 for the same period last year. For the year ended December 31,
2005, average paying subscribers for the AmericanSingles segment decreased 20.5% to 105,300
compared to 132,500 for the same period in 2004. For the year ended December 31, 2005, average
paying subscribers for Web sites in our Other Businesses segment increased 85.7% to 44,200,
compared to 23,800 for the same period in 2004. The increase in average paying subscribers for
JDate for the year ended December 31, 2005 is a result of increased marketing spending to acquire
new JDate members. 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 last three quarters
of 2005, we stabilized our marketing spending rate for AmericanSingles, and accordingly we expect
that the number of average paying subscribers for AmericanSingles will begin to stabilize as well.
The increase in average paying subscribers for our
51
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 year ended December 31, 2005, average monthly net revenue per paying subscriber for the
JDate segment increased 8% to $30.70 compared to $28.42 for the year ended December 31, 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 in 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 year ended December 31, 2005, average monthly net
revenue per paying subscriber for the AmericanSingles segment increased 4.3% to $23.12 from $22.16
for the year ended December 31, 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 in 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 year ended December
31, 2005, average monthly net revenue per paying subscriber for Web sites in our Other Businesses
segment increased 5.0% to $17.58, compared to $16.75 for the
year ended December 31, 2004. The increase was primarily due to the addition of MingleMatch during
the second quarter of 2005.
For the year ended December 31, 2005, direct subscriber acquisition cost for JDate increased 57.0%
to $12.70 compared to $8.09 for the same periods 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 year ended December 31, 2005, direct subscriber acquisition costs
for AmericanSingles decreased 18.8% to $35.16 compared to $43.29 for the same period in 2004 due to
a decrease in marketing expenditures associated with the AmericanSingles Web site as well as
increased efficiency of marketing spending. For the year ended December 31, 2005, direct
subscriber acquisition cost for the Web sites in our Other Businesses segment decreased 7.7% to
$32.05 compared to $34.74 for the same period in 2004. This decrease was primarily due to the
acquisition of MingleMatch which has a lower acquisition cost per subscriber than the other sites
included in this segment.
For the year ended December 31, 2005, monthly subscriber churn for JDate increased slightly to
25.9% compared to 25.8% for the same period in 2004. For the year ended December 31, 2005, monthly
subscriber churn for AmericanSingles increased to 36.3%, compared to 35.6% for the same period in
2004. For the year ended December 31, 2005, monthly subscriber churn for the Web sites in our
Other Businesses segment decreased to 25.6% compared to 26.8% for the same period in 2004. The
decrease in the churn at year end 2005 is due to the addition of MingleMatch.
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, 2005 and
2004, 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 9.2% to $26.0 million for the year ended December 31, 2005
compared to $23.8 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. Net revenues for AmericanSingles
decreased 17.1% to $29.2 million for the year ended December 31, 2005, compared to $35.2 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 71.7% to $10.3 million for the year ended December 31, 2005
52
compared to $6.0 million for the same period in 2004, largely driven by the purchase of MingleMatch, Inc. in the second quarter of
2005.
Direct Marketing Expenses
Direct marketing expenses for JDate increased 65.8% to $2.9 million for the year ended December 31,
2005 compared to $1.7 million in 2004. The increase in marketing spent was due to new marketing
initiatives for JDate. Direct marketing expenses for AmericanSingles decreased 39.2% to $15.2
million for the year ended December 31, 2005 compared to $25.0 million for the same period in 2004.
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 39.9% to $6.4 million for the year ended December 31, 2005 compared to $4.5
million for the same period in 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 in
early 2004. 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.
Operating Expenses
Operating expenses consist primarily of indirect marketing, customer service, technical operations,
product development and general and administrative expenses. Operating expenses decreased 7.8% to
$41.9 million for the year ended December 31, 2005 compared to $45.5 million in the same period in
2004. Stated as a percentage of net revenues, operating expenses decreased to 64.1% for the year
ended December 31, 2005 compared to 69.6% for the same period in 2004. 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 53.7% to $1.2 million for the year ended December 31, 2005 compared to $2.6
million for the same period in 2004. Stated as a percentage of net revenues, indirect marketing
expenses decreased to 1.8% for the year ended December 31, 2005 compared to 4.0% for the same
period in 2004. The decrease is due to a decrease in headcount in our marketing department, and
the termination of the Chief Marketing Officer in the fourth quarter of 2004 a position which has
not been replaced. 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 consist primarily of costs associated with our member
services center. Customer services expenses decreased 16.3% to $2.8 million for the year ended
December 31, 2005 compared to $3.4 million for the same period in 2004. Stated as a percentage of
net revenues, customer service expenses decreased to 4.3% for the year ended December 31, 2005
compared to 5.2% for the same period in 2004. The decrease is due to a decrease in headcount from
2004 to 2005 offset by share-based compensation as a result of the adoption of SFAS 123 (R) of
$44,000 for 2005. Duing 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 and in 2005, we worked to increase our efficiency in
handling our call volume, and therefore reduced our headcount accordingly. 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 consist primarily of the people and systems
necessary to support our network, Internet connectivity and other data and communication support.
Technical operations expenses increased 4.2% to $7.5 million for the year ended December 31, 2005
compared to $7.2 million in 2004. The increase is primarily due to 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 the adoption of SFAS 123 (R) of $316,000
53
for 2005.
As a percentage of net revenues, technical operations decreased to 11.5% for the year
ended December 31, 2005 compared to 11.0% in the same period last year. 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 consist primarily of costs incurred in the
development, creation and enhancement of our Web sites and services. Product development expenses
increased 105% to $4.1 million for the year ended December 31, 2005 compared to $2.0 million in
2004. As a percentage of net revenues, product development expenses increased to 6.3% for the year
ended December 31, 2005 compared to 3.1% 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 the
adoption of SFAS 123 (R) of $248,000 in 2005. 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. 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 14.2% to $25.1 million for the year
ended December 31, 2005 compared to $29.3 million for the same period in 2004. The decrease in
general and administrative expenses is due primarily to lower 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 of $537,000 in 2005 as a result of the
adoption of SFAS 123 (R). Stated as a percentage of net revenues, general and administrative
expenses decreased to 38.3% for the year ended December 31, 2005 compared to 44.7% in 2004. We
expect these general and administrative expenses 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 our 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.
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 26.2% to $1.1
million fort he year ended December 31, 2005 compared to $860,000 in 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 $711,000 for the year ended December 31, 2005
compared to a gain of $66,000 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. Net loss in 2005 was affected by compensation expense related to the adoption of SFAS
123(R) of $2.7 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
54
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. 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 our Israel affiliate, which was acquired at the beginning of
2004, and our Web sites in Israel, 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-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
55
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
$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 AmericanSingles 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.
56
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 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.
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.
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.
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.
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 decrease as a percentage of revenues
was primarily the result of economies of scale in supporting a larger member and subscriber base.
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.
57
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 report.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended ( 1 ) |
|
|
Mar 31, |
|
June 30, |
|
Sep 30, |
|
Dec 31, |
|
Mar 31, |
|
June 30, |
|
Sep 30, |
|
Dec 31, |
|
Mar 31, |
|
June 30, |
|
Sep 30, |
|
Dec 31, |
(in thousands except per share amounts) |
|
2003 (2) |
|
2003(2) |
|
2003(2) |
|
2003 |
|
2004 |
|
2004 |
|
2004 |
|
2004 |
|
2005 |
|
2005 |
|
2005 |
|
2005 |
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 |
|
|
$ |
16,586 |
|
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 |
|
|
|
6,059 |
|
|
|
|
Contribution margin |
|
|
3,460 |
|
|
|
3,743 |
|
|
|
5,837 |
|
|
|
5,506 |
|
|
|
8,511 |
|
|
|
6,487 |
|
|
|
8,390 |
|
|
|
10,424 |
|
|
|
11,298 |
|
|
|
9,413 |
|
|
|
9,862 |
|
|
|
10,527 |
|
Operating
expenses:* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
|
(61 |
) |
|
|
131 |
|
|
|
488 |
|
|
|
428 |
|
|
|
580 |
|
|
|
568 |
|
|
|
912 |
|
|
|
547 |
|
|
|
265 |
|
|
|
238 |
|
|
|
255 |
|
|
|
450 |
|
Customer service
|
|
|
563 |
|
|
|
458 |
|
|
|
736 |
|
|
|
779 |
|
|
|
975 |
|
|
|
903 |
|
|
|
723 |
|
|
|
778 |
|
|
|
577 |
|
|
|
560 |
|
|
|
650 |
|
|
|
1,040 |
|
Technical operations
|
|
|
819 |
|
|
|
994 |
|
|
|
1,024 |
|
|
|
1,644 |
|
|
|
1,634 |
|
|
|
2,085 |
|
|
|
1,482 |
|
|
|
1,983 |
|
|
|
1,402 |
|
|
|
1,548 |
|
|
|
1,898 |
|
|
|
2,698 |
|
Product development
|
|
|
168 |
|
|
|
229 |
|
|
|
82 |
|
|
|
480 |
|
|
|
340 |
|
|
|
531 |
|
|
|
505 |
|
|
|
637 |
|
|
|
830 |
|
|
|
1,060 |
|
|
|
1,059 |
|
|
|
1,169 |
|
|
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 |
|
|
|
5,061 |
|
Amortization of intangible
assets other than goodwill |
|
|
131 |
|
|
|
58 |
|
|
|
200 |
|
|
|
166 |
|
|
|
244 |
|
|
|
238 |
|
|
|
188 |
|
|
|
190 |
|
|
|
110 |
|
|
|
301 |
|
|
|
437 |
|
|
|
237 |
|
Impairment of long-lived
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
|
|
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 |
|
|
|
10,760 |
|
|
Income (loss) from
operations |
|
|
(643 |
) |
|
|
(755 |
) |
|
|
(2,718 |
) |
|
|
(6,924 |
) |
|
|
(3,016 |
) |
|
|
(4,065 |
) |
|
|
(2,998 |
) |
|
|
(1,613 |
) |
|
|
2,035 |
|
|
|
(699 |
) |
|
|
(1,966 |
) |
|
|
(233 |
) |
Interest (income) and other
expenses, net |
|
|
(53 |
) |
|
|
(57 |
) |
|
|
(22 |
) |
|
|
(56 |
) |
|
|
4 |
|
|
|
28 |
|
|
|
(46 |
) |
|
|
(52 |
) |
|
|
(24 |
) |
|
|
168 |
|
|
|
141 |
|
|
|
426 |
|
|
|
|
Income (loss) before
income taxes |
|
|
(590 |
) |
|
|
(698 |
) |
|
|
(2,696 |
) |
|
|
(6,868 |
) |
|
|
(3,020 |
) |
|
|
(4,093 |
) |
|
|
(2,952 |
) |
|
|
(1,561 |
) |
|
|
2,059 |
|
|
|
(867 |
) |
|
|
(2,107 |
) |
|
|
(659 |
) |
Income taxes
|
|
|
1 |
|
|
|
39 |
|
|
|
|
|
|
|
(40 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
(8 |
) |
|
|
56 |
|
|
|
(256 |
) |
|
|
|
Net income (loss)
|
|
$ |
(591 |
) |
|
$ |
(737 |
) |
|
$ |
(2,696 |
) |
|
$ |
(6,828 |
) |
|
$ |
(3,021 |
) |
|
$ |
(4,093 |
) |
|
$ |
(2,952 |
) |
|
$ |
(1,561 |
) |
|
$ |
1,987 |
|
|
$ |
(859 |
) |
|
$ |
(2,163 |
) |
|
$ |
(403 |
) |
|
|
|
|
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 |
) |
|
$ |
(0.01 |
) |
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 |
|
|
|
27,530 |
|
|
Weighted average shares
outstanding diluted(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$ |
287 |
|
|
$ |
333 |
|
|
$ |
405 |
|
|
$ |
416 |
|
|
$ |
579 |
|
|
$ |
790 |
|
|
$ |
839 |
|
|
$ |
857 |
|
|
$ |
848 |
|
|
$ |
919 |
|
|
$ |
942 |
|
|
$ |
913 |
|
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 |
|
|
|
224,200 |
|
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 |
|
|
$ |
24.66 |
|
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 |
% |
|
|
29.7 |
% |
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 |
|
|
$ |
27.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended |
|
|
|
Dec 31, |
|
|
Mar 31, |
|
|
June 30, |
|
|
Sep 30, |
|
|
Dec 31, |
|
|
Mar 31, |
|
|
June 30, |
|
|
Sep 30, |
|
|
Dec 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2004 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
|
|
* Operating expenses include share-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing
|
|
$ |
79 |
|
|
$ |
51 |
|
|
$ |
46 |
|
|
$ |
31 |
|
|
$ |
28 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10 |
|
|
$ |
14 |
|
Customer service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
22 |
|
Technical operations
|
|
|
140 |
|
|
|
290 |
|
|
|
111 |
|
|
|
(379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
170 |
|
Product development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
124 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,652 |
|
|
|
1,371 |
|
|
|
532 |
|
|
|
(891 |
) |
|
|
514 |
|
|
|
87 |
|
|
|
(115 |
) |
|
|
1,028 |
|
|
|
1,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain financial information for prior periods has been reclassified to conform
to the 2005 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. |
58
(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.
|
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 December 31, 2005, we had cash, cash equivalents and marketable securities of $17.3 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 $3.9 million for the year ended December 31, 2005 compared to
net cash used of $1.6 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. In addition, net loss was affected by higher
non-cash charges for depreciation and amortization as a result of the MingleMatch purchase as well
as SFAS 123(R) related charges. Operating cash flow in 2005 was negatively
impacted by a decrease in accounts payable.
59
Net cash used by investing activities was $259,000 for 2005 compared to net cash used of $11.2
million for 2004. The decrease in cash used was as a result of liquidating marketable securities
as well as a reduction in capital expenditures during 2005, partially offset by the purchase of
MingleMatch in 2005. During 2004, net cash used by investing activities included acquisition of
businesses, primarily PointMatch of $5.6 million, as well as capital expenditures for property and
equipment of $5.5 million, mainly for increased server and internet hosting equipment for our
growing Web sites. During 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 $1.4
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 is intended to make use of our existing hardware capacity.
Net cash
provided by financing activities was $9.1 million for 2005 compared to $15.0 million for
2004. In 2004, we completed a private placement of 600,000 ordinary shares which resulted in net
proceeds to the Company of $3.7 million, as well as the exercise of share options and warrants
which resulted in net proceeds of $11.5 million. Cash provided by financing activities in 2005 was
due almost entirely to the exercise of options and warrants offset by payments for notes payable
related to the MingleMatch acquisition.
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 $3.71, while the trading price of our
shares closed at $7.42 per share on December 31, 2005. As of December 31, 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 $1.9 million including statutory interest, of which
$1.7 million relates to the 200,000 shares held by our former Co-Chairman. As of December 31, 2005,
assuming every eligible optionee 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 31, 2005, the total number of options subject to a
rescission is 2,405,750 with a weighted average rescission offer repurchase price of $0.80 per
share, including statutory interest. As of December 31, 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 $551,000 including statutory interest.
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 had positive operating cash
flow in 2005 and anticipate continued positive cash flow from operations. 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 issuance of debt or equity.
As
discussed in Note 9 to our consolidated financial statements in this Report, in May 2005, the Company issued
five short term promissory notes in connection with the MingleMatch acquisition in the cumulative
face value amount of $10 million with a computed principal of $9.7 million after imputed interest
and discount of $253,000, computed at a 3.08% interest rate.
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 (paid); (ii) September 15, 2006 in the amount of $400,000; and (iii) September 15, 2007
in the amount of $900,000.
60
The following table describes our contractual commitments and obligations as of December 31, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
|
Total |
|
Operating leases |
|
$ |
414 |
|
|
$ |
202 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
616 |
|
Other commitments and obligations |
|
|
10,411 |
|
|
|
1,077 |
|
|
|
|
|
|
|
|
|
|
|
11,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
10,825 |
|
|
$ |
1,279 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had
other commitments and obligations consisting of notes payable for
acquisitions and legal settlements as well as, contracts with software
licensing, communications, computer hosting and marketing service providers. These amounts totaled
$10.4 million for less than one year and $1.1 million between one and three years. Contracts with
other service providers are for 30 day terms or less.
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.
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.
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.
61
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 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.
ITEM 7A. 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 relate primarily to our cash, cash
equivalents and marketable securities. We 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 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 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. Due to the
short-term nature of our investment portfolio, and our ability to liquidate this portfolio in short
order, we do not believe that a 10% increase in interest rates would have a material effect on the
fair market value of our investment portfolio.
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 2005, 2004 and 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to the Index to
Consolidated Financial Statements beginning at page F-1 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
As of December 31, 2005, our management, with the participation of our Chief Executive Officer, or
CEO, and Chief Financial Officer, or CFO, performed an evaluation of the effectiveness and the
operation of our disclosure
controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Based on that evaluation, the CEO and CFO concluded
that our disclosure controls and procedures were effective as of December 31, 2005.
62
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) Rule 13a-15 or 15d-15 under the Exchange
Act that occurred during the quarter ended December 31, 2005 that has materially affected, or is
reasonably likely to affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On
February 22, 2006, we amended our lease for our headquarters
located in Beverly Hills, California to extend the expiration date
for one year. The lease expires on July 31, 2007.
63
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 |
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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45 |
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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 August 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, who is expected to be employed by us until April
2005, 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. 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
64
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.
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.
65
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 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.
66
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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Companys officers, directors and persons who own
more than ten percent of a registered class of the Companys securities, to file with the
Securities Exchange Commission (the SEC) initial reports of ownership and reports of changes in
ownership of securities of the Company. Officers, directors and greater than ten percent
stockholders are required by the SECs regulations to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on the Companys review of the copies of such
reports furnished to the Company, management believes that all officers, directors and greater than
ten percent stockholders complied with the filing requirements of Section 16(a) for the fiscal year
ended December 31, 2005, except that Alon Carmel filed an untimely Form 3 after our securities
became registered under Section 12 of the Securities Exchange Act of 1934, as amended, in 2005.
Code of Business Conduct and Ethics
Our Board of Directors has adopted a Code of Business Conduct and Ethics, which applies to all
directors, officers and employees. The purpose of the Code is to promote honest and ethical
conduct. The Code is posted in the corporate governance section of the investor relations page of
our Web site located at www.spark.net, and is available in print, without charge, upon
written request to the Secretary at Spark Networks plc, 8383 Wilshire Boulevard, Suite 800, Beverly
Hills, California 90211. We intend to promptly post any amendments to or waivers of the Code on
our Web site.
ITEM 11. EXECUTIVE COMPENSATION
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
ended December 31, 2005, and whose annual salary and bonus during the fiscal years ended December
31, 2003, 2004 and 2005 exceeded $100,000 (the Named Executive Officers).
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Long-Term |
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Compensation |
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Annual Compensation |
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Securities |
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Other Annual |
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Underlying |
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All Other |
Name and Principal Position |
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Year |
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Salary |
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Bonus |
|
Compensation(3) |
|
Options |
|
Compensation(4) |
David E. Siminoff(1) |
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2005 |
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$ |
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 Officer |
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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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67
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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) |
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 |
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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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Officer |
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(1) |
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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) |
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Represents the amount of our annual matching contribution to each individuals 401(k) account. |
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(5) |
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Mr. Liberman has served as our General Counsel since October 2004 and Chief Operating Officer since September 2005. |
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(6) |
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Mr. Nelson became our Chief Technology Officer in October 2004. |
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(7) |
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Mr. Thompson became our Chief Financial Officer in October 2004. |
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.
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. These options were accelerated upon our listing on the American Stock Exchange in
February 2006. 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 served as the Executive Chairman of our Board of Directors at an annual salary of $350,000.
On December 31, 2005, Mr. Shapira resigned from an executive operating role with our company. On
January 27, 2006, we entered into a
68
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 continues 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 retained 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. This bonus was paid upon our listing on the American Stock Exchange in February 2006. 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 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.
These options were accelerated upon our listing on the American Stock Exchange in February 2006.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants |
|
Potential Realizable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at Assumed |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Rates of Stock |
|
|
Securities |
|
Percent of |
|
|
|
|
|
|
|
|
|
Price Appreciation |
|
|
Underlying |
|
Total Options |
|
Exercise or |
|
|
|
|
|
for Option Term(3) |
|
|
Options |
|
Granted to |
|
Base Price |
|
Expiration |
|
|
|
|
Name |
|
Granted |
|
Employees(1) |
|
Per Share(2) |
|
Date |
|
5% |
|
10% |
David E. Siminoff |
|
|
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Joe Y. Shapira |
|
|
250,000 |
|
|
|
18.1 |
|
|
|
9.12 |
|
|
|
03/01/12 |
|
|
|
928,189 |
|
|
|
2,163,075 |
|
Gregory R. Liberman |
|
|
35,000 |
|
|
|
2.5 |
|
|
|
7.72 |
|
|
|
02/03/12 |
|
|
|
109,999 |
|
|
|
256,343 |
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants |
|
Potential Realizable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at Assumed |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Rates of Stock |
|
|
Securities |
|
Percent of |
|
|
|
|
|
|
|
|
|
Price Appreciation |
|
|
Underlying |
|
Total Options |
|
Exercise or |
|
|
|
|
|
for Option Term(3) |
|
|
Options |
|
Granted to |
|
Base Price |
|
Expiration |
|
|
|
|
Name |
|
Granted |
|
Employees(1) |
|
Per Share(2) |
|
Date |
|
5% |
|
10% |
Gregory R. Liberman |
|
|
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. |
|
(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. |
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 |
|
|
|
|
|
|
|
|
|
|
38,751 |
|
|
|
211,249 |
|
|
|
37,013 |
|
|
|
111,038 |
|
Mark G. Thompson |
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
200,000 |
|
|
|
79,947 |
|
|
|
319,788 |
|
Philip C. Nelson |
|
|
|
|
|
|
|
|
|
|
62,500 |
|
|
|
187,500 |
|
|
|
99,934 |
|
|
|
299,801 |
|
|
|
|
(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. |
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2005 regarding compensation plans,
including individual compensation arrangements, under which equity securities of Spark Networks plc
are authorized for issuance.
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for future |
|
|
|
Number of Securities to be |
|
|
Weighted- average |
|
|
issuance under equity |
|
|
|
issued upon exercise of |
|
|
exercise price of |
|
|
compensation plans |
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
(excluding securities reflected |
|
Plan Category |
|
warrants and rights |
|
|
warrants and rights |
|
|
in column (a) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved
by security holders |
|
|
5,133,250 |
(1) |
|
$ |
5.32 |
|
|
|
14,386,500 |
(2) |
Equity compensation plans not
approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,133,250 |
|
|
|
|
|
|
|
14,386,500 |
|
|
|
|
(1) |
|
Represents share options outstanding under the 2004 Share Option Scheme and the 2000
Executive Share Option Scheme. |
|
(2) |
|
Represents share options available for future grants under the 2004 Share Option Scheme.
The 2000 Executive Share Option Scheme has been terminated and no future issuances of options
are available; however, all outstanding options granted under the plan continue in full force
and effect. |
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.
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 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.
71
As of
December 31, 2005, 2,613,500 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
December 31, 2005, 2,089,750 share options were outstanding under the 2000 Option Scheme at
prices ranging from $0.86 to $9.34 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, 2005, 2004 and 2003 were approximately $234,000,
$184,000, and $110,000, 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.
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.
72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the beneficial ownership of
our ordinary shares, as of February 1, 2006, for:
|
|
|
each person or entity who we know beneficially owns more than 5% of our ordinary shares; |
|
|
|
|
each Named Executive Officer and each director; 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
shares of ordinary shares outstanding, on an as-converted basis, used in calculating the percentage
for each listed shareholder includes ordinary shares underlying options or a warrant held by the
shareholder, all of which are being registered in this report, but excludes ordinary shares
underlying options or warrants held by any other person or entity. In addition, the number of each
shareholders ordinary shares underlying warrants and options that are exercisable within 60 days
of February 1, 2006 is set forth below. Percentage of beneficial ownership is based on 30,247,996
ordinary shares outstanding as of February 1, 2006. Unless otherwise indicated, the address of each
beneficial owner is c/o: Spark Networks plc, 8383 Wilshire Blvd., Suite 800, Beverly Hills,
California 90211.
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Percentage |
Name of Beneficial Owner |
|
Shares |
|
of Shares |
5% stockholders: |
|
|
|
|
|
|
|
|
Great Hill
Investors, LLC (1) |
|
|
6,000,000 |
|
|
|
19.8 |
% |
Tiger Global Management, L.L.C.(2) |
|
|
4,631,085 |
|
|
|
15.3 |
|
Alon
Carmel (3) |
|
|
2,753,848 |
|
|
|
9.1 |
|
Capital
Research and Management Company (4) |
|
|
2,725,000 |
|
|
|
9.0 |
|
Criterion
Capital Management LLC (5) |
|
|
1,826,337 |
|
|
|
6.0 |
|
FM Fund
Management Limited (6) |
|
|
2,201,890 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
Named Executive Officers and Directors: |
|
|
|
|
|
|
|
|
David E.
Siminoff (7) |
|
|
2,124,500 |
|
|
|
6.7 |
|
Joe Y.
Shapira (8) |
|
|
3,012,639 |
|
|
|
9.9 |
|
Gregory R.
Liberman (9) |
|
|
262,500 |
|
|
|
* |
|
Mark
Thompson (10) |
|
|
250,000 |
|
|
|
* |
|
Philip
Nelson (11) |
|
|
250,000 |
|
|
|
* |
|
Scott
Shleifer (12) |
|
|
|
|
|
|
|
|
Michael
Brown (13) |
|
|
80,000 |
|
|
|
|
|
Benjamin
Derhy (14) |
|
|
80,000 |
|
|
|
* |
|
Laura
Lauder (15) |
|
|
180,000 |
|
|
|
* |
|
Martial
Chaillet (16) |
|
|
200,000 |
|
|
|
* |
|
All
directors and executives as a group (10 persons) (17) |
|
|
6,439,639 |
|
|
|
19.6 |
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
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. |
73
|
|
|
(2) |
|
Consists of 3,413,422 shares held by Tiger Global, L.P.; 1,141,593 shares held by Tiger
Global, Ltd.; and 76,070 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. |
|
(3) |
|
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. |
|
(4) |
|
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 2,725,000
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
2,010,800 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. |
|
(5) |
|
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. |
|
(6) |
|
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. |
|
(7) |
|
Includes 1,275,000 shares issuable upon exercise of share options, 337,500 shares of which
underlie options exercisable within 60 days of February 1, 2006. |
|
(8) |
|
Includes (i) 250,000 shares issuable upon exercise of share options,125,000 shares of which
underlie options exercisable within 60 days of February 1, 2006, (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 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. |
|
(9) |
|
Includes 250,000 ordinary shares issuable upon the exercise of options, which includes
104,376 shares issuable upon the exercise of options that are currently exercisable or
exercisable within 60 days of February 1, 2006. |
|
(10) |
|
Consists of 250,000 ordinary shares issuable upon the exercise of options, which includes
112,500 shares issuable upon exercise of options that are currently exercisable or
exercisable within 60 days of February 1, 2006. |
74
|
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(11) |
|
Consists of 250,000 ordinary shares issuable upon the exercise of options, which includes
128,125 shares issuable upon the exercise of options that are currently exercisable or
exercisable within 60 days of February 1, 2006. |
|
(12) |
|
Excludes 3,413,422 shares held by Tiger Global, L.P. and 76,070 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. |
|
(13) |
|
Represents shares issuable upon exercise of share options, 25,000 shares of which underlie
options exercisable within 60 days of February 1, 2006. |
|
(14) |
|
Represents shares issuable upon exercise of share options, 30,000 shares of which underlie
options exercisable within 60 days of February 1, 2006. |
|
(15) |
|
Consists of 100,000 held by Mrs. Lauders husband and 80,000 shares issuable to Mrs. Lauder
upon exercise of share options, 20,000 shares of which underlie options exercisable within 60
days of February 1, 2006. |
|
(16) |
|
Includes 80,000 shares issuable upon exercise of share options, 20,000 shares of which
underlie options exercisable within 60 days of February 1, 2006. |
|
(17) |
|
Shares beneficially owned by all executive officers and directors as a group include
options to purchase 2,595,000 shares, 902,501 shares of which are currently exercisable or
exercisable within 60 days of February 1, 2006. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 $335,000 to
Efficient Frontier in 2005 and $61,000 in 2004.
Yobon, Inc.
In 2004, the Company invested $250,000 in Yobon, Inc.,
a provider of Web toolbar technology. The Chief Technology Officer, Phil Nelson, is the Chairman of Yobon. In December 2005, the
company determined that the value of the Yobon investment would not be realized in full and
recorded an impairment charge in the amount of $105,000.
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 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,
75
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:
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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; |
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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 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 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
76
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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
During the fiscal years ended December 31, 2005 and 2004, we retained Ernst & Young LLP to
provide services as follows:
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Fees for the Year Ended December 31, |
|
Service |
|
2005 |
|
|
2004 |
|
Audit fees(1) |
|
$ |
569,047 |
|
|
$ |
1,130,977 |
|
Audit-related
fees(2) |
|
|
112,669 |
|
|
|
62,213 |
|
Tax
fees(3) |
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24,162 |
|
All other fees |
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Total audit and non-audit fees |
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$ |
681,716 |
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$ |
1,217,352 |
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(1) |
|
These are fees for professional services performed by Ernst & Young LLP for the audit of
our annual financial statements, review of our quarterly reports,
review of our Registration
Statement on Form S-1, and the issuance of opinions on our filings with the Companies House
which must be compliant with Generally Accepted Accounting Principles in the United Kingdom. |
|
(2) |
|
These are fees for assurance and related services performed
that are reasonably related to the performance of the audit or review
of the Companys financial statements.
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(3) |
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These are fees for professional services with respect to tax compliance
and/or tax consulting services. |
Pre-Approval Policy
In accordance with our Audit Committee Charter, the Audit Committee pre-approves all auditing
services and permitted non-audit services, if any, including tax services, to be performed for us
by our independent auditor, subject to the de minimis exceptions for non-audit services described
in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended, which are approved by
the Audit Committee prior to the completion of the audit. The scope of the pre-approval shall
include pre-approval of all fees and terms of engagement. The Audit Committee may form and
delegate authority to subcommittees consisting of one or more members when appropriate, including
the authority to grant pre-approvals of audit and permitted non-audit services, provided that
decisions of such subcommittee to grant pre-approvals shall be presented to the full Audit
Committee at its next scheduled meeting.
77
PART IV
Item 15. Exhibits, Financial Statement Schedules
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(a)(1) |
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All financial statements and schedules have been omitted because they are either not
applicable, not required or the information required has been disclosed in the Consolidated
Financial Statements and related Notes to Consolidated Financial Statements at page F-1, or
otherwise included in this Form 10-K. |
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Exhibit |
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Number |
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Description of Exhibit |
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3.1 |
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Memorandum of Association of Registrant dated
September 3, 1998 (incorporated by reference
to Exhibit 3.1 of the Registrants
Registration Statement on Form S-1 (File No.
333-123228) filed with the Securities and
Exchange Commission on March 10, 2005). |
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3.2 |
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Certificate Confirming Incorporation and
Change of Name dated January 31, 2005
(incorporated by reference to Exhibit 3.2 of
the Registrants Registration Statement on
Form S-1 (File No. 333-123228) filed with the
Securities and Exchange Commission on March
10, 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 (incorporated by
reference to Exhibit 4.1 of the Registrants
Registration Statement on Form S-1 (File No.
333-123228) filed with the Securities and
Exchange Commission on February 8, 2006). |
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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
(incorporated by reference to Exhibit 4.3 of
the Registrants Registration Statement on
Form S-1 (File No. 333-123228) filed with the
Securities and Exchange Commission on November
7, 2005). |
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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). |
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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). |
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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). |
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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). |
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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). |
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10.1 |
(e) |
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Fifth
Amendment to Lease, dated February 22, 2006.
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10.2 |
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2004 Share Option Scheme (incorporated by
reference to Exhibit 10.2 of the Registrants
Registration Statement on Form S-1 (File No.
333-123228) filed with the Securities and
Exchange Commission on March 10, 2005). |
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10.2 |
(a) |
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Form of Option Agreement for 2004 Share Option
Scheme (incorporated by reference to Exhibit
10.2(a) of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on November 14, 2005). |
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10.3 |
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2000 Executive Share Option Scheme
(incorporated by reference to Exhibit 10.3 of
the Registrants Registration Statement on
Form S-1 (File No. 333-123228) filed with the
Securities and Exchange Commission on March
10, 2005). |
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10.3 |
(a) |
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Form of Option Agreement for 2000 Executive
Share Option Scheme (incorporated by reference
to Exhibit 10.3(a) of the Registrants
Registration Statement on Form S-1 (File No.
333-123228) filed with the Securities and
Exchange Commission on November 14, 2005). |
78
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Exhibit |
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Number |
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Description of Exhibit |
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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). |
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10.4 |
(a) |
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First Amendment to Asset Purchase Agreement,
January 7, 2004, between the Registrant and
Point Match USA, Inc. (incorporated by
reference to Exhibit 10.4(a) of the
Registrants Registration Statement on Form
S-1 (File No. 333-123228) filed with the
Securities and Exchange Commission on
September 16, 2005). |
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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). |
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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). |
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10.6 |
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Executive Employment Agreement, dated August
12, 2004, between the Registrant and David
Siminoff (incorporated by reference to Exhibit
10.6 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on March 10, 2005). |
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10.7 |
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Executive Employment Agreement, dated October
4, 2004, between the Registrant and Mark
Thompson (incorporated by reference to Exhibit
10.7 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on March 10, 2005). |
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10.8 |
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Executive Employment Agreement, dated October
4, 2004, between the Registrant and Phillip
Nelson (incorporated by reference to Exhibit
10.8 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on March 10, 2005). |
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10.9 |
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Executive Employment Agreement, dated March 1,
2005, between the Registrant and Joe Y.
Shapira (incorporated by reference to Exhibit
10.9 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on March 10, 2005). |
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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). |
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10.10 |
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Form of Indemnification Agreement for Officers
and Directors (incorporated by reference to
Exhibit 10.10 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on November 7, 2005). |
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10.10 |
(a) |
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List of Parties executing Form of
Indemnification Agreement for Officers and
Directors (incorporated by reference to
Exhibit 10.10(a) of the Registrants
Registration Statement on Form S-1 (File No.
333-123228) filed with the Securities and
Exchange Commission on November 7, 2005). |
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10.11 |
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|
Deal Documents and Purchase Agreement for
investment in Yobon, Inc. dated October 19,
2004 (incorporated by reference to Exhibit
10.11 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on March 10, 2005). |
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10.12 |
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Warrant Agreement, dated December 30, 2004,
between the Registrant and Europlay Capital
Advisors LLC (incorporated by reference to
Exhibit 10.12 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on March 10, 2005). |
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10.13 |
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|
Executive Employment Agreement, dated August
31, 2005, between the Registrant and Gregory
R. Liberman (incorporated by reference to
Exhibit 10.13 of the Registrants Registration
Statement on Form S-1 (File No. 333-123228)
filed with the Securities and Exchange
Commission on September 16, 2005). |
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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.
(incorporated by reference to Exhibit 10.14 of
the Registrants Registration Statement on
Form S-1 (File No. 333-123228) filed with the
Securities and Exchange Commission on November
14, 2005). |
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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). |
79
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Exhibit |
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Number |
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Description of Exhibit |
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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). |
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10.17 |
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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). |
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10.18 |
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Deposit Agreement for Global Depositary Shares
(incorporated by reference to Exhibit 4.1 of
the Registrants Registration Statement on
Form 10 (File No. 000-51195) filed with the
Securities and Exchange Commission on November
7, 2005). |
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10.19 |
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Form of GDR (included in Exhibit 10.18 herein). |
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|
|
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 (incorporated by
reference to Exhibit 21.1 of the Registrants
Registration Statement on Form S-1 (File No.
333-123228) filed with the Securities and
Exchange Commission on December 14, 2005). |
|
|
|
|
|
|
23.1 |
|
|
Consent of Ernst & Young. |
|
|
|
|
|
|
23.2 |
|
|
Consent of Tanner LC. |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer
pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer
pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1** |
|
|
Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
** |
|
This exhibit shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general
incorporation language in any filings. |
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Beverly Hills, State of California,
on March 10, 2006.
|
|
|
|
|
|
Spark Networks plc
|
|
|
/s/ David E. Siminoff
|
|
|
David E. Siminoff |
|
|
Chief Executive Officer and President |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
|
|
Name |
|
Position |
|
Date |
|
|
|
|
|
|
|
|
|
/s/ David E. Siminoff |
|
|
|
|
|
|
|
|
|
|
|
David E. Siminoff
|
|
Chief Executive
Officer and
President (Principal
Executive Officer)
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
/s/ Mark Thompson |
|
|
|
|
|
|
|
|
|
|
|
Mark Thompson
|
|
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
/s/ Joe Y. Shapira |
|
|
|
|
|
|
|
|
|
|
|
Joe Y. Shapira
|
|
Chairman of the Board
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Brown
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Martial Chaillet |
|
|
|
|
|
|
|
|
|
|
|
Martial Chaillet
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
/s/ Benjamin Derhy |
|
|
|
|
|
|
|
|
|
|
|
Benjamin Derhy
|
|
Director
|
|
March 10, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laura Lauder
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Scott Shleifer |
|
|
|
|
|
|
|
|
|
|
|
Scott Shleifer
|
|
Director
|
|
March 10, 2006 |
81
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
Spark Networks plc (formerly known as MatchNet plc) |
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-8 |
|
|
|
|
|
|
MingleMatch, Inc. |
|
|
|
|
|
|
|
F-33 |
|
|
|
|
F-34 |
|
|
|
|
F-35 |
|
|
|
|
F-36 |
|
|
|
|
F-37 |
|
|
|
|
F-38 |
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Spark Networks plc
We have audited the accompanying consolidated balance sheets of Spark Networks plc as of December
31, 2005 and 2004, and the related consolidated statements of operations, shareholders equity, and
cash flows for each of the three years in the period ended December 31, 2005. 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 the 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 at December 31, 2005 and 2004,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 2005 the Company changed its method of
accounting for stock based compensation.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 15, 2006
F-2
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,096 |
|
|
$ |
4,265 |
|
Marketable securities |
|
|
196 |
|
|
|
3,158 |
|
Restricted cash |
|
|
1,085 |
|
|
|
1,330 |
|
Accounts receivable, net of allowance of $13 |
|
|
932 |
|
|
|
641 |
|
Advances to employees |
|
|
1 |
|
|
|
20 |
|
Prepaid expenses and other |
|
|
1,492 |
|
|
|
879 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
20,802 |
|
|
|
10,293 |
|
Property and equipment, net |
|
|
4,453 |
|
|
|
6,467 |
|
Goodwill, net |
|
|
17,344 |
|
|
|
7,955 |
|
Intangible assets, net |
|
|
4,627 |
|
|
|
1,069 |
|
Investment in noncontrolled affiliate |
|
|
1,099 |
|
|
|
1,167 |
|
Deposits and other assets |
|
|
295 |
|
|
|
408 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
48,620 |
|
|
$ |
27,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,267 |
|
|
$ |
3,014 |
|
Accrued liabilities |
|
|
3,632 |
|
|
|
8,052 |
|
Deferred revenue |
|
|
4,991 |
|
|
|
3,933 |
|
Notes payable current portion |
|
|
9,930 |
|
|
|
400 |
|
Current portion of obligations under capital leases |
|
|
|
|
|
|
173 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
20,820 |
|
|
|
15,572 |
|
Deferred tax liability |
|
|
1,717 |
|
|
|
|
|
Notes payable long term |
|
|
900 |
|
|
|
1,300 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
23,437 |
|
|
|
16,872 |
|
Shares subject to rescission |
|
|
6,089 |
|
|
|
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 30,241,496 shares as of December 31, 2005, 24,587,351 shares as of December 31, 2004 at a stated value of: |
|
|
487 |
|
|
|
401 |
|
Additional paid-in-capital |
|
|
64,064 |
|
|
|
50,423 |
|
Deferred share-based compensation |
|
|
|
|
|
|
(305 |
) |
Accumulated other comprehensive income (loss) |
|
|
(302 |
) |
|
|
(13 |
) |
Notes receivable from employees |
|
|
(82 |
) |
|
|
(203 |
) |
Accumulated deficit |
|
|
(45,073 |
) |
|
|
(43,635 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
19,094 |
|
|
|
6,668 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
48,620 |
|
|
$ |
27,359 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net revenues |
|
$ |
65,511 |
|
|
$ |
65,052 |
|
|
$ |
36,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct marketing expenses |
|
|
24,411 |
|
|
|
31,240 |
|
|
|
18,395 |
|
|
|
|
|
|
|
|
|
|
|
Contribution margin |
|
|
41,100 |
|
|
|
33,812 |
|
|
|
18,546 |
|
Operating expenses1: |
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing |
|
|
1,208 |
|
|
|
2,607 |
|
|
|
986 |
|
Customer service |
|
|
2,827 |
|
|
|
3,379 |
|
|
|
2,536 |
|
Technical operations |
|
|
7,546 |
|
|
|
7,184 |
|
|
|
4,481 |
|
Product development |
|
|
4,118 |
|
|
|
2,013 |
|
|
|
959 |
|
General and administrative |
|
|
25,074 |
|
|
|
29,253 |
|
|
|
18,537 |
|
Amortization of intangible assets other than goodwill |
|
|
1,085 |
|
|
|
860 |
|
|
|
555 |
|
Impairment of long-lived assets |
|
|
105 |
|
|
|
208 |
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
41,963 |
|
|
|
45,504 |
|
|
|
29,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(863 |
) |
|
|
(11,692 |
) |
|
|
(11,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) and other expenses, net |
|
|
711 |
|
|
|
(66 |
) |
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(1,574 |
) |
|
|
(11,626 |
) |
|
|
(10,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
(136 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,438 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding basic and diluted |
|
|
26,105 |
|
|
|
22,667 |
|
|
|
18,970 |
|
|
|
|
1. |
|
Operating expenses include share-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect marketing |
|
$ |
24 |
|
|
$ |
156 |
|
|
$ |
79 |
|
Customer service |
|
|
44 |
|
|
|
|
|
|
|
|
|
Technical operations |
|
|
338 |
|
|
|
22 |
|
|
|
140 |
|
Product development |
|
|
248 |
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
2,063 |
|
|
|
1,526 |
|
|
|
1,652 |
|
See accompanying notes.
F-4
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Compre- |
|
|
Notes |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Share |
|
|
hensive |
|
|
Receivable |
|
|
Accumu- |
|
|
Share- |
|
|
|
Ordinary Shares |
|
|
Paid-in |
|
|
Compen- |
|
|
Income |
|
|
from |
|
|
lated |
|
|
holders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
sation |
|
|
(Loss) |
|
|
Employees |
|
|
Deficit |
|
|
Equity |
|
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-based 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 options and
warrants |
|
|
5,304 |
|
|
|
79 |
|
|
|
|
|
|
|
8,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,435 |
|
Issuance of ordinary
shares for acquisition |
|
|
150 |
|
|
|
3 |
|
|
|
|
|
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,079 |
|
Issuance of ordinary
shares for settlement |
|
|
200 |
|
|
|
4 |
|
|
|
|
|
|
|
1,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,801 |
|
Unrealized
gain on
marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(403 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,412 |
|
|
|
|
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,717 |
|
Loans to employees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
121 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,438 |
) |
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2005 |
|
|
30,241 |
|
|
$ |
487 |
|
|
|
|
|
|
$ |
64,064 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(302 |
) |
|
|
|
|
|
$ |
(82 |
) |
|
$ |
(45,073 |
) |
|
$ |
19,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,438 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,852 |
) |
Adjustments to reconcile net loss to cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,709 |
|
|
|
3,925 |
|
|
|
1,996 |
|
Impairment of notes receivable and long-lived assets |
|
|
226 |
|
|
|
208 |
|
|
|
1,532 |
|
Share-based compensation |
|
|
2,717 |
|
|
|
1,704 |
|
|
|
1,871 |
|
Shares issued for legal settlement |
|
|
97 |
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
Imputed interest on notes payable |
|
|
181 |
|
|
|
|
|
|
|
|
|
(Gain) loss from sale of marketable securities |
|
|
107 |
|
|
|
(3 |
) |
|
|
|
|
Loss from investment in noncontrolled affiliate |
|
|
68 |
|
|
|
|
|
|
|
|
|
Notes payable issued for legal settlement |
|
|
|
|
|
|
1,700 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(291 |
) |
|
|
(231 |
) |
|
|
(318 |
) |
Advances to employees |
|
|
19 |
|
|
|
45 |
|
|
|
1,497 |
|
Restricted cash |
|
|
245 |
|
|
|
(1,330 |
) |
|
|
|
|
Prepaid expenses and other assets |
|
|
22 |
|
|
|
146 |
|
|
|
(297 |
) |
Accounts payable and accrued liabilities |
|
|
(3,668 |
) |
|
|
3,126 |
|
|
|
5,477 |
|
Deferred revenue |
|
|
1,058 |
|
|
|
701 |
|
|
|
1,697 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
3,946 |
|
|
|
(1,636 |
) |
|
|
2,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of marketable securities |
|
|
2,967 |
|
|
|
3,553 |
|
|
|
5,422 |
|
Purchases of marketable securities |
|
|
|
|
|
|
(3,000 |
) |
|
|
(2,033 |
) |
Purchases of property and equipment |
|
|
(1,448 |
) |
|
|
(5,467 |
) |
|
|
(2,733 |
) |
Purchases of businesses and intangible assets |
|
|
|
|
|
|
(5,077 |
) |
|
|
(151 |
) |
Purchase of noncontrolled affiliate |
|
|
|
|
|
|
(1,167 |
) |
|
|
|
|
Cash paid in acquisition of business, net of cash acquired |
|
|
(1,778 |
) |
|
|
|
|
|
|
|
|
Deposit for acquisition of business |
|
|
|
|
|
|
|
|
|
|
(2,046 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(259 |
) |
|
|
(11,158 |
) |
|
|
(1,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares |
|
|
10,705 |
|
|
|
15,156 |
|
|
|
1,071 |
|
Principal payments of capital lease obligations |
|
|
(173 |
) |
|
|
(314 |
) |
|
|
(176 |
) |
Notes payable |
|
|
(388 |
) |
|
|
|
|
|
|
|
|
Loans and advances to employees |
|
|
|
|
|
|
182 |
|
|
|
(385 |
) |
Payment on notes payable for acquisition |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
9,144 |
|
|
|
15,024 |
|
|
|
510 |
|
|
|
|
|
|
|
|
|
|
|
F-6
SPARK NETWORKS PLC
(formerly known as MatchNet plc)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net increase (decrease) in cash |
|
|
12,831 |
|
|
|
2,230 |
|
|
|
1,572 |
|
Cash and cash equivalents at beginning of year |
|
|
4,265 |
|
|
|
2,035 |
|
|
|
463 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
17,096 |
|
|
$ |
4,265 |
|
|
$ |
2,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash (received) paid for interest |
|
$ |
42 |
|
|
$ |
41 |
|
|
$ |
75 |
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information of non-cash investing and
financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment capital lease financing |
|
|
|
|
|
|
|
|
|
$ |
662 |
|
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-7
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. The Company has American depositary receipts
which are traded on the American Stock Exchange and global depositary receipts which 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.
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).
Reclassification
Certain prior year financial information has been reclassified to conform with current year
classifications.
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.
F-8
The Company derives a small amount of revenues (less than 2% in 2005, 2004, and 2003) 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 web site. Barter transactions are valued based on amounts
realized in similar cash transactions occurring within six months prior to the date of the barter
transaction. Revenue and the related marketing expenses, had these been cash arrangements,
totaled $21,000, $93,000, and $66,000 for the years ended December 31, 2005, 2004, and 2003
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, 2005, 2004, and 2003
the Company incurred advertising costs amounting to approximately $23.3 million, $29.1 million, and
$18.1 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
Statement of Financial Accounting Standard (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, 2004 and 2003, realized gains and recorded losses were insignificant. In 2005, the
Company sold securities in the amount of $3.0 million and recognized a loss of $107,000 and
reclassified specifically identifiable losses from unrecognized gains and losses of $112,000.
As of December 31, 2005, investment in marketable securities consists of government debt securities
with maturities between five to ten years. The fair value of the available for sale securities
approximates their carrying value (amortized cost). Unrealized gains and losses were immaterial.
Restricted Cash
The credit card processors the Company uses regularly withhold deposits and maintain balances which
we record as restricted cash. As of December 31, 2005 and 2004, the Company had $1.1 million and
$1.3 million in restricted cash, respectively.
Accounts Receivable
Accounts receivable is primarily composed of credit card payments for membership fees pending
collection from the credit card processors. The Company records a reserve based on historical
charge back levels experienced over the preceding three-month period. The allowance for doubtful
accounts as of December 31, 2005 and 2004 was approximately $13,000 and $13,000, respectively.
The chargeback reserve as of December 31, 2005 and 2004 was approximately $117,000 and $66,000,
respectively. Amounts charged to expense for 2005 and 2004 were
approximately $51,000 and $72,000, respectively.
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.
F-9
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 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.
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. The following table summarizes capitalized software development costs for the
years ended December 31, 2005, 2004 and 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Capitalized |
|
$ |
350 |
|
|
$ |
658 |
|
|
$ |
825 |
|
Expensed |
|
$ |
595 |
|
|
$ |
693 |
|
|
$ |
602 |
|
Unamortized Balance |
|
$ |
800 |
|
|
$ |
1,045 |
|
|
$ |
1,080 |
|
In 2004,
the Company recorded an impairment for capitalized software development costs of approximately $208,000.
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.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired
resulting from business acquisitions. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets, which no longer requires the periodic amortization of goodwill. As
of December 31, 2005 and 2004, the Company had unamortized goodwill of approximately $17.3 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
F-10
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 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 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.
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.
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 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.
F-11
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
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 year ended
December 31, 2005, is $2.7 million lower, than if it had continued to account for share-based
compensation under APB Opinion No. 25. Basic and diluted income per share for the year ended
December 31, 2005 would have been $0.05, if the Company had not adopted Statement 123(R), compared
to reported basic and diluted loss per share of $(0.06).
At December 31, 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
F-12
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in thousands except per share amounts) |
|
2005 |
|
2004 |
|
2003 |
Net loss as reported |
|
$ |
(1,438 |
) |
|
$ |
(11,627 |
) |
|
$ |
(10,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: SFAS 123 (R) share based employee compensation
expense included in reported net income, net of related tax
effects |
|
|
2,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: share
based employee compensation expense (benefit) recorded in
the accompanying consolidated statements of operations Pre-
SFAS 123 (R) |
|
|
(30 |
) |
|
|
367 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total share based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects |
|
|
(5,460 |
) |
|
|
(3,452 |
) |
|
|
(3,645 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(4,211 |
) |
|
$ |
(14,712 |
) |
|
$ |
(14,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic & diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.57 |
) |
Pro forma basic & diluted |
|
$ |
(0.16 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.76 |
) |
Note that the above pro forma disclosures are provided for 2004 and 2003 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 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 for those options granted prior to July 1,
2005, the following assumptions were used to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended June |
|
Year Ended |
|
|
30, |
|
December 31, |
|
|
2005 |
|
2004 |
Expected life in years |
|
|
4 |
|
|
|
4 |
|
Dividend per share |
|
|
|
|
|
|
|
|
Volatility |
|
|
76.2 |
% |
|
|
70.0 |
% |
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 six month period ending December 31, 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.
F-13
Prospective compensation expense was calculated using a binomial 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 as prescribed by SFAS 123(R).
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 years ended December 31, 2005, 2004
and 2003 because it would have been anti-dilutive. Had the Companys net income been
positive for the year ended December 31, 2005, 2004 and 2003, the weighted average shares
outstanding for the diluted earnings per share calculation would have been approximately 26.7
million, 26.9 million and 26.4 million, respectively, using the treasury stock method for 2004 and
2003, and the treasury stock method as adjusted under SFAS 123 (R) for 2005.
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:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
(in thousands) |
|
|
2005 |
|
2004 |
Net (loss) |
|
$ |
(1,438 |
) |
$ |
(11,627 |
) |
Changes in unrealized gains/losses in
available for sale securities |
|
|
114 |
|
|
(73 |
) |
Foreign currency translation adjustment |
|
|
(403 |
) |
|
100 |
|
|
|
|
|
|
|
Total comprehensive (loss) |
|
$ |
(1,727 |
) |
$ |
(11,600 |
) |
|
|
|
|
|
|
Accumulated other comprehensive income (loss) consists of the following (in thousands):
F-14
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Loss (gain) on marketable securities |
|
|
1 |
|
|
|
(113 |
) |
Foreign currency translation adjustment |
|
|
(303 |
) |
|
|
100 |
|
|
|
|
|
|
|
|
Total comprehensive (loss) |
|
$ |
(302 |
) |
|
$ |
(13 |
) |
|
|
|
|
|
|
|
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.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) 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).
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2005 |
|
2004 |
|
|
(in thousands, except per share amounts) |
(Loss) Per Common Share-Basic |
|
|
|
|
|
|
|
|
Net (loss) applicable to common shares |
|
$ |
(1,438 |
) |
|
$ |
(11,627 |
) |
Weighted average shares outstanding-basic |
|
|
26,105 |
|
|
|
22,667 |
|
Basic Earning Per Share |
|
|
(0.06 |
) |
|
|
(0.51 |
) |
|
|
|
|
|
|
|
Diluted earnings per common share is not applicable in a loss position
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.
The Company estimates the amount of chargebacks that will occur in future periods to offset current
revenue. The Companys revenue is collected through online credit card transactions. As such, the
Company is subject to revenue reversals or chargebacks by consumers generally up to 90 days
subsequent to the original sale date. The Company accrues chargebacks based on historical trends
relative to sales levels by website. Fines are levied by the major credit card companies should
acceptable chargeback levels be exceeded. The Company estimates fines based on discussions with
the merchant processing companies combined with standard fine schedules provided by the major
credit card companies.
F-15
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. The Company does not believe adoption of SFAS 154 will have a material
effect on its financial position, cash flows or results of operations.
2. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income before income taxes: |
|
(amounts in thousands) |
|
U.S. |
|
$ |
(2,162 |
) |
|
$ |
(11,626 |
) |
|
$ |
(10,852 |
) |
Foreign |
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,574 |
) |
|
$ |
(11,626 |
) |
|
$ |
(10,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income tax expense/(benefit): |
|
(amounts in thousands) |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
61 |
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
11 |
|
|
|
1 |
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(416 |
) |
|
|
(3,660 |
) |
|
|
(3,170 |
) |
State |
|
|
(82 |
) |
|
|
(1,323 |
) |
|
|
(658 |
) |
Foreign |
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(331 |
) |
|
|
(4,983 |
) |
|
|
(3,828 |
) |
|
|
|
|
|
|
|
|
|
|
Valuation Allowance |
|
|
123 |
|
|
|
4,983 |
|
|
|
3,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(136 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
Reconciliation of Effective Income Tax Rate: |
|
2005 |
|
2004 |
|
2003 |
Provision on earnings at federal statutory rate |
|
|
(35.0 |
) |
|
|
(35.0 |
) |
|
|
(35.0 |
) |
State tax provision, net of federal benefit |
|
|
(2.9 |
) |
|
|
(7.6 |
) |
|
|
(6.0 |
) |
Nondeductible
IPO and other expenses |
|
|
24.0 |
|
|
|
|
|
|
|
|
|
Foreign tax rate differential |
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
7.8 |
|
|
|
43.9 |
|
|
|
41.0 |
|
Other |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
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 to reconcile to its
reported income tax rate.
The Companys effective tax rate was also impacted by income taxes incurred in foreign and state
jurisdictions. With respect to the income of its foreign subsidiary, the Company takes the
position that the earnings of the foreign subsidiary are permanently invested in that jurisdiction.
As a result, no additional income taxes have been provided on the possible repatriation of these
earnings to the parent company. The Company has not calculated the amount of the deferred tax
liability that would result from such repatriation as such determination is not practicable.
The components of the deferred income tax asset/(liability) for the periods presented are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
|
(amounts in thousands) |
Deferred income tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward |
|
$ |
18,850 |
|
|
$ |
18,131 |
|
|
$ |
7,810 |
|
Depreciation and amortization |
|
|
2,348 |
|
|
|
2,274 |
|
|
|
1,388 |
|
Compensation accruals |
|
|
1,476 |
|
|
|
1,574 |
|
|
|
994 |
|
Accruals and reserves |
|
|
1,491 |
|
|
|
878 |
|
|
|
750 |
|
State taxes |
|
|
(1,600 |
) |
|
|
(1,555 |
) |
|
|
(613 |
) |
Gain/(Loss) on disposal of assets |
|
|
(73 |
) |
|
|
(129 |
) |
|
|
(607 |
) |
Excess capital loss over capital gain |
|
|
605 |
|
|
|
605 |
|
|
|
605 |
|
Credits |
|
|
204 |
|
|
|
204 |
|
|
|
|
|
Other |
|
|
171 |
|
|
|
93 |
|
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
Total before valuation allowance |
|
|
23,472 |
|
|
|
22,075 |
|
|
|
10,828 |
|
Less: Valuation allowance |
|
|
(23,369 |
) |
|
|
(22,075 |
) |
|
|
(10,828 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred income tax asset |
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (liabilities) |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
(215 |
) |
|
|
|
|
|
|
|
|
Amortization |
|
|
(1,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liability |
|
|
(1,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax |
|
$ |
(1,614 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Due to 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.
At December 31, 2005, the Company has gross net operating loss carry-forwards for income tax
purposes of approximately $54.4 million and $50.4 million available to reduce future federal and
state taxable income, respectively, which expire beginning in the years 2018 through 2024 for
federal purposes and in 2006 through 2014 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 $1.6 million and $500,000 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. In conjunction with the adoption
of SFAS 123(R), the net operating losses created by the exercise of stock options after the date of adoption have been
excluded from deferred tax assets.
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 our strategy of creating affinity-focused
online personals that provide experiences for our members. The Company expects that the 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
F-17
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.
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):
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2005 |
|
2004 |
|
|
(amounts in thousands, except per share data) |
Net revenues |
|
$ |
66,964 |
|
|
$ |
67,556 |
|
Net (loss) |
|
$ |
(2,507 |
) |
|
$ |
(13,267 |
) |
Net (loss) per share-basic and diluted |
|
$ |
(0.10 |
) |
|
$ |
(0.58 |
) |
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.
|
|
|
|
|
|
|
At May 19, 2005 |
|
|
(in thousands) |
Current assets (including cash acquired of $221) |
|
$ |
295 |
|
Property and equipment, net |
|
|
162 |
|
Goodwill |
|
|
9,742 |
|
Domain names and databases |
|
|
4,655 |
|
|
|
|
|
|
Total assets acquired |
|
|
14,854 |
|
Current liabilities |
|
|
41 |
|
Deferred tax liability |
|
|
1,823 |
|
|
|
|
|
|
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.
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. 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.
F-18
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 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 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 December 31, 2005. This amount is considered Goodwill and is recorded on the
balance sheet within the investment in non-controlled affiliates account. The Company has
recorded its share of Duplos loss in the amount of $67,400 in
2005.
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. 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 a reduction of shareholders
equity. As of December 31, 2005, and 2004, the Company had notes receivable from employees of
approximately $82,000 and $203,000, respectively. As of December 31, 2005, and 2004, the Company
had advances receivable from employees of approximately $1,000 and $20,000, respectively.
5. Property and Equipment
Property and equipment consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2004 |
|
Computer equipment |
|
$ |
4,836 |
|
|
$ |
4,228 |
|
Computer software |
|
|
8,372 |
|
|
|
7,475 |
|
Furniture, fixtures, and equipment |
|
|
628 |
|
|
|
593 |
|
Leasehold improvements |
|
|
449 |
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
14,285 |
|
|
|
12,686 |
|
Less: Accumulated depreciation |
|
|
(9,832 |
) |
|
|
(6,219 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,453 |
|
|
$ |
6,467 |
|
|
|
|
|
|
|
|
F-19
Depreciation
expense including that for equipment under capital leases for the years ended
December 31, 2005, 2004, and 2003, was $3.6 million, $3.1 million and $1.4 million, respectively,
and is calculated on the straight-line basis over three years.
Computer equipment as of December 31, 2005 and 2004 includes $662,000 of assets purchased under
capital leases.
6. Goodwill and Other Intangible Assets
The
Company follows SFAS No. 142, Goodwill and Other
Intangible Assets in accounting for goodwill whereby it 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 $17.3 million as of
December 31, 2005 and $8.0 million as of December 31, 2004 is mainly related to the purchase of
MingleMatch, Inc. in May 2005 and the Point Match 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, 2005 |
|
|
As of December 31, 2004 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Member databases |
|
$ |
4,610 |
|
|
$ |
2,593 |
|
|
$ |
2,277 |
|
|
$ |
1,913 |
|
Subscriber databases |
|
|
370 |
|
|
|
370 |
|
|
|
|
|
|
|
|
|
Purchased technologies |
|
|
962 |
|
|
|
782 |
|
|
|
757 |
|
|
|
757 |
|
Domain names |
|
|
2,429 |
|
|
|
|
|
|
|
705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,371 |
|
|
$ |
3,745 |
|
|
$ |
3,739 |
|
|
$ |
2,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense for finite-lived intangible assets for the years ended December 31, 2005, 2004
and 2003 was $1.1 million, $860,000 and $555,000, respectively. Amortization expense is expected to
be $952,000 for the year ending December 31, 2006, and $845,000, $343,000 and $57,000 for 2007,
2008 and 2009 respectively.
7. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(amounts in thousands) |
|
Advertising |
|
$ |
1,592 |
|
|
$ |
3,356 |
|
Loss contingencies |
|
|
601 |
|
|
|
2,280 |
|
Software & service agreement |
|
|
|
|
|
|
920 |
|
Other accrued liabilities |
|
|
1,439 |
|
|
|
1,496 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,632 |
|
|
$ |
8,052 |
|
|
|
|
|
|
|
|
Included in loss contingencies in 2004 is an accrual for $1.7 million related to the value of
shares that were 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.
F-20
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.
The Companys total payments under capital lease obligations were approximately $173,000 and
$314,000 for the years ended December 31, 2005 and 2004, respectively.
9. Notes Payable
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 in
the event of an initial public offering prior to the due date of the note. The notes were paid or
become due as follows:
|
|
|
|
|
Paid on October 31, 2005 |
|
$ |
1,000,000 |
|
Paid on January 10, 2006 |
|
$ |
2,000,000 |
|
Due on March 31, 2006 |
|
$ |
3,000,000 |
|
Due on May 31, 2006 |
|
$ |
2,650,000 |
|
Due on May 31, 2006 |
|
$ |
1,350,000 |
|
|
|
|
|
|
|
|
$ |
10,000,000 |
|
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.
In
November 2005, the Company entered into a financing agreement for a
directors and officers insurance policy in the amount of $591,000.
10. Shareholders Equity
Shares Issued for Settlement
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.
Shares Issued for Purchase of MingleMatch, Inc.
On May 19, 2005, the Company issued 150,000 shares with a value of approximately $1.1 million at
time of issuance, as part of the purchase of MingleMatch, Inc.
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.
F-21
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 2005, 320,000 warrants
were exercised. As of December 31, 2005, 430,000 warrants, which expire in 2007 are vested and
outstanding.
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 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 Dire