-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LDHvflmT7PzpIWp+KBpq+sTWguLMjIcX3fJUDUrNkE99cJddu2ijpSUS+GD57Z0G sBfWxfHDwANTa/UpJpJ9Sg== 0001019056-10-000974.txt : 20100802 0001019056-10-000974.hdr.sgml : 20100802 20100802161151 ACCESSION NUMBER: 0001019056-10-000974 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20100802 DATE AS OF CHANGE: 20100802 GROUP MEMBERS: JOHN H. LEWIS GROUP MEMBERS: OSMIUM CAPITAL II, LP GROUP MEMBERS: OSMIUM CAPITAL, LP GROUP MEMBERS: OSMIUM PARTNERS, LLC GROUP MEMBERS: OSMIUM SPARTAN, LP SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SPARK NETWORKS INC CENTRAL INDEX KEY: 0001314475 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 980200628 STATE OF INCORPORATION: X0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-81138 FILM NUMBER: 10984267 BUSINESS ADDRESS: STREET 1: 8383 WILSHIRE BOULEVARD STREET 2: SUITE 800 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 BUSINESS PHONE: 323-658-3000 MAIL ADDRESS: STREET 1: 8383 WILSHIRE BOULEVARD STREET 2: SUITE 800 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 FORMER COMPANY: FORMER CONFORMED NAME: SPARK NETWORKS PLC DATE OF NAME CHANGE: 20050114 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: Osmium Partners, LLC CENTRAL INDEX KEY: 0001316729 IRS NUMBER: 550793716 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 388 MARKET, SUITE 920 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 415.362.4484 MAIL ADDRESS: STREET 1: 388 MARKET, SUITE 920 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 SC 13D/A 1 spark_13da1.htm SCHEDULE 13D/A Unassociated Document
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 13D
 
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)

(Amendment No. 1)*

Spark Networks, Inc.
(Name of Issuer)
 
Common Stock, par value $0.001 per share
(Title of Class of Securities)
 
84651P100
(CUSIP Number)
 
Osmium Partners, LLC
388 Market Street, Suite 920
San Francisco, CA 94111
Attention: John H. Lewis
Telephone: (415) 362-4485
 
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
 
August 2, 2010
(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box x.

Note. Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes.)

 
Page 1 of 10 pages

 
 
CUSIP No.: 84651P100
 
1.
NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
   
 
John H. Lewis
   
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a) o
 
(b) x
   
3
SEC USE ONLY
   
4
SOURCE OF FUNDS
   
 
PF
   
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) o
   
6.
CITIZENSHIP OR PLACE OF ORGANIZATION
   
 
United States

NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON WITH
7
SOLE VOTING POWER - 19,100
   
8
SHARED VOTING POWER - 1,362,554
   
9
SOLE DISPOSITIVE POWER - 19,100
   
10
SHARED DISPOSITIVE POWER - 1,362,554
   

11
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
   
 
1,381,654
   
12
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES o
   
13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
   
 
6.7%
   
14
TYPE OF REPORTING PERSON
   
 
IN

 
Page 2 of 10 pages

 
 
CUSIP No.: 84651P100

1
NAME OF REPORTING PERSON
 
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
   
 
Osmium Partners, LLC
   
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a) o
 
(b) x
   
3
SEC USE ONLY
   
4
SOURCE OF FUNDS
   
 
AF
   
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) o
   
6
CITIZENSHIP OR PLACE OF ORGANIZATION
   
 
Delaware

NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON WITH
7
SOLE VOTING POWER - 0
   
8
SHARED VOTING POWER - 1,362,554
   
9
SOLE DISPOSITIVE POWER - 0
   
10
SHARED DISPOSITIVE POWER - 1,362,554
   

11
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
   
 
1,362,554
   
12
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES o
   
13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
   
 
6.6%
   
14
TYPE OF REPORTING PERSON
   
 
IA, OO
 
 
Page 3 of 10 pages

 
 
CUSIP No.: 84651P100

1
NAME OF REPORTING PERSON
 
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
   
 
Osmium Capital, LP
   
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a) o
 
(b) x
   
3
SEC USE ONLY
   
4
SOURCE OF FUNDS
   
 
WC
   
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) o
   
6
CITIZENSHIP OR PLACE OF ORGANIZATION
   
 
Delaware

NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON WITH
7
SOLE VOTING POWER - 0
   
8
SHARED VOTING POWER - 282,428
   
9
SOLE DISPOSITIVE POWER - 0
   
10
SHARED DISPOSITIVE POWER - 282,428
   

11
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
   
 
282,428
   
12
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES o
   
13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
   
 
1.4%
   
14
TYPE OF REPORTING PERSON
   
 
PN
 
 
Page 4 of 10 pages

 
 
CUSIP No.: 84651P100

1
NAME OF REPORTING PERSON
 
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
   
 
Osmium Capital II, LP
   
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a) o
 
(b) x
   
3
SEC USE ONLY
   
4
SOURCE OF FUNDS
   
 
WC
   
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) o
   
6
CITIZENSHIP OR PLACE OF ORGANIZATION
   
 
Delaware

NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON WITH
7
SOLE VOTING POWER - 0
   
8
SHARED VOTING POWER - 850,741
   
9
SOLE DISPOSITIVE POWER - 0
   
10
SHARED DISPOSITIVE POWER - 850,741
   

11
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
   
 
850,741
   
12
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES o
   
13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
   
 
4.1%
   
14
TYPE OF REPORTING PERSON
   
 
PN
 
 
Page 5 of 10 pages

 
 
CUSIP No.: 84651P100

1
NAME OF REPORTING PERSON
 
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
   
 
Osmium Spartan, LP
   
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a) o
 
(b) x
   
3
SEC USE ONLY
   
4
SOURCE OF FUNDS
   
 
WC
   
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) o
   
6
CITIZENSHIP OR PLACE OF ORGANIZATION
   
 
Delaware

NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON WITH
7
SOLE VOTING POWER - 0
   
8
SHARED VOTING POWER - 129,657
   
9
SOLE DISPOSITIVE POWER - 0
   
10
SHARED DISPOSITIVE POWER - 129,657
   

11
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
   
 
129,657
   
12
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES o
   
13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
   
 
0.6%
   
14
TYPE OF REPORTING PERSON
   
 
PN

 
Page 6 of 10 pages

 

EXPLANATORY NOTE

This Amendment No. 1 to Schedule 13D (this “Amendment No. 1”) is being filed with respect to the beneficial ownership of common stock, par value $0.001 per share (the “Common Stock”), of Spark Networks, Inc., a Delaware corporation (the “Issuer”, the “Company” or “Spark”). This Amendment No. 1 supplements Items 4 and 7 and amends and restates in its entirety Item 5 of the Schedule 13D previously filed on March 9, 2010.

ITEM 4. Purpose of Transaction.

On August 2, 2010, Osmium Partners sent a letter to the Board of Directors of the Issuer, which, among other things, expressed Osmium Partners’ concern in two areas which it believes are affecting the Issuer’s public market valuation: (a) substantial conflicts of interest that have and will likely continue to lead to a flawed strategic review process by the Special Committee of the Board of Directors and (b) excessive management compensation that does not reflect the Issuer’s reported financial results or stock performance over the last several years. A copy of the letter from Osmium Partners is attached hereto as Exhibit 3.

ITEM 5. Interest in Securities of the Issuer.

(a)           The Reporting Persons beneficially own:

   
(i)
Fund I directly owns 282,428 shares of Common Stock representing 1.4% of all of the outstanding shares of Common Stock.
       
   
(ii)
Fund II directly owns 850,741 shares of Common Stock representing 4.1% of all of the outstanding shares of Common Stock.
       
   
(iii)
Fund III directly owns 129,657 shares of Common Stock representing 0.6% of all of the outstanding shares of Common Stock.
       
   
(iv)
Mr. Lewis directly owns 19,100 shares of Common Stock representing 0.09% of all of the outstanding shares of Common Stock.
       
   
(v)
Osmium Partners, as the general partner of each of the Funds and the investment manager of the Other Accounts, may be deemed to beneficially own the 1,362,554 shares of Common Stock held by them, representing 6.6% of all of the outstanding shares of Common Stock.
       
   
(vi)
Mr. Lewis may be deemed to be the beneficial owner of the shares of Common Stock beneficially owned by Osmium Partners.
       
   
(vii)
Collectively, the Reporting Persons beneficially own 1,381,654 shares of Common Stock representing 6.7% of all of the outstanding shares of Common Stock.
       
    Each Reporting Person disclaims beneficial ownership with respect to any shares of Common Stock other than the shares owned directly and of record by such Reporting Person.
       
    The percentages set forth in this response are based on the 20,586,544 shares of Common Stock outstanding as of May 13, 2010, as reported by the Issuer in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010.

(b)           Osmium Partners and Mr. Lewis may be deemed to share with Fund I, Fund II, Fund III and the Other Accounts (and not with any third party) the power to vote or direct the vote of and to dispose or direct the disposition of the 282,428, 850,741, 129,657 and 99,728 shares of Common Stock reported herein, respectively. Mr. Lewis has sole power to vote or direct the vote of and to dispose or direct the disposition of the 19,100 shares of Common Stock held by him.

 
Page 7 of 10 pages

 
 
(c)           The following Reporting Persons engaged in the following transactions on the open market with respect to the Issuer’s Common Stock:

Osmium Capital, LP

Transaction
 
Number of
 
Price
 
Type of
Date
 
Shares
 
per Share
 
Transaction
6/8/2010
 
125
   
$
3.44
 
Purchase
6/21/2010
 
24
   
$
3.59
 
Purchase
6/22/2010
 
109
   
$
3.52
 
Purchase
7/2/2010
 
1,106
   
$
3.33
 
Purchase
7/6/2010
 
55
   
$
3.35
 
Purchase
7/12/2010
 
1,008
   
$
3.15
 
Purchase
7/13/2010
 
988
   
$
3.19
 
Purchase
7/22/2010
 
1,237
   
$
3.24
 
Purchase
7/23/2010
 
4,926
   
$
3.22
 
Purchase
7/26/2010
 
3,837
   
$
3.25
 
Purchase
7/27/2010
 
2,481
   
$
3.29
 
Purchase
7/28/2010
 
317
   
$
3.40
 
Purchase

Osmium Capital II, LP

Transaction
 
Number of
 
Price
 
Type of
Date
 
Shares
 
per Share
 
Transaction
6/8/2010
 
375
   
$
3.44
 
Purchase
6/16/2010
 
500
   
$
3.64
 
Purchase
6/21/2010
 
576
   
$
3.59
 
Purchase
6/22/2010
 
391
   
$
3.52
 
Purchase
6/24/2010
 
300
   
$
3.58
 
Purchase
7/2/2010
 
3,894
   
$
3.33
 
Purchase
7/6/2010
 
145
   
$
3.35
 
Purchase
7/12/2010
 
3,352
   
$
3.15
 
Purchase
7/13/2010
 
2,968
   
$
3.19
 
Purchase
7/22/2010
 
3,763
   
$
3.24
 
Purchase
7/23/2010
 
14,874
   
$
3.22
 
Purchase
7/26/2010
 
11,563
   
$
3.25
 
Purchase
7/27/2010
 
7,519
   
$
3.29
 
Purchase
7/28/2010
 
1,010
   
$
3.40
 
Purchase

Other Accounts
 
Transaction
 
Number of
 
Price
 
Type of
Date
 
Shares
 
per Share
 
Transaction
7/7/2010
 
2,000
   
$
3.25
 
Purchase
 
Other than the foregoing, no transactions in the Common Stock have been effected by the Reporting Persons in the last sixty (60) days.

(d)           Not applicable.

(e)           Not applicable.

ITEM 7. Material to be Filed as Exhibits.

 
Exhibit 3
 
Letter dated August 2, 2010 to Board of Directors of Issuer
 
 
Page 8 of 10 pages

 
 
SIGNATURE

After reasonable inquiry and to the best of its knowledge and belief, the undersigned each certifies that the information with respect to it set forth in this Statement is true, complete and correct.

Dated: August 2, 2010

 
John H. Lewis
 
 
Osmium Partners, LLC
 
 
Osmium Capital, LP
 
 
Osmium Capital II, LP
 
 
Osmium Spartan, LP
 
       
 
By:
/s/ John H. Lewis
 
 
John H. Lewis, for himself and as Managing Member of Osmium Partners, LLC, for itself and as General Partner of Osmium Capital, LP, Osmium Capital II, LP, and Osmium Spartan, LP
 
 
 
Page 9 of 10 pages

 
 
EXHIBIT INDEX

 
Exhibit 3
 
Letter dated August 2, 2010 to Board of Directors of Issuer

 
Page 10 of 10 pages

 
EX-3 2 ex_3.htm EXHIBIT 3 Unassociated Document
 
EXHIBIT 3

Osmium Partners Demands Action at Spark Networks to Maximize Shareholder Value

Dear Board Members,

Osmium Partners beneficially owns 6.7% of Spark Networks’ common stock. We are writing to express our concern in two areas that we believe are adversely affecting the Company’s public market valuation: a) substantial conflicts of interest that have and will likely continue to lead to a flawed strategic review process by the Special Committee of the Board of Directors and b) excessive management compensation that does not reflect Spark Networks’ reported financial results or stock performance over the last several years. We believe that these important issues mask the many positive attributes of Spark Networks’ business and act as impediments to shareholders realizing full value for their stock.

Given Great Hill Partners’ (“GHP”) influence on the Board’s actions and deliberations, the Board’s actions over time and the disturbing issues described below, we urge the Special Committee to 1) focus on selling the business for its full intrinsic value (which we believe is greater than $6 per share) or 2) announce its intention to remain public and enhance shareholder value through a comprehensive evaluation of management’s compensation relative to shareholder returns, revenue growth, and profitability. The Board should also renew its commitment to better capital management, including potential share repurchases and/or special dividends, and improved corporate governance.

The Special Committee is currently in the process of considering all strategic alternatives available to the Company, which was prompted by GHP’s unsolicited bid for the Company in March 2010. While we acknowledge that the Special Committee appropriately rejected GHP’s grossly inadequate and opportunistic bid, we remain convinced that independent directors will be unduly influenced by GHP to the detriment of the Company’s minority shareholders. We offer the following evidence to support this concern:

1.
On March 2, 2010, GHP, which currently holds a 48.7% voting stake in the Company, stated in a letter to the Board that “For the avoidance of doubt, please note that we have no interest in selling or otherwise disposing of any of our shares of common stock of the Company. In the event that any third party were to propose a competing transaction requiring a vote of the Company’s stockholders that the Company wished to pursue, we would oppose and vote against such competing transaction.” We believe the purpose of the above quotation from GHP is to dissuade any other third party from making a competing bid. Thus, our suggestion is that the Special Committee consider keeping the company public and realize value through the changes outl ined above.
   
2.
Additionally, GHP’s letter stated, “Following consummation of the proposed transaction, we expect that the Company will continue to operate its business as currently conducted. We do not anticipate seeking changes in the Company’s management as a result of the transaction.” Adam Berger, the CEO, and the management team have a duty of care and loyalty to the Company and all its shareholders. However, we are concerned about management’s long standing relationship with GHP and its vested interests in keeping their jobs and generous compensation packages. If another strategic acquirer were to purchase Spark, the management team would likely not be retained. < font style="DISPLAY: inline; TEXT-DECORATION: underline">As a result, we believe that the management team is confronted with a significant conflict of interest, and we are concerned that it may not pursue all possible transactions with equal vigor.
 
 
 

 
 
3.
Subsequent to the filing of our 13D in March, several investors have contacted us to relate concerns about the current sale process after their conversations with Mr. Berger. For example, one investor had a call with Mr. Berger where he mentioned a public statement made by the CEO of OK Cupid (a competitor) suggesting that $3.10 was a generous offer for Spark. This investor told us that it was the first time he had ever heard a CEO talk down the value of his own company – much less during a publicly announced strategic review and rejected bid. We believe comments such as this by Mr. Berger demonstrate our concern that he may fail to honor his duty of loyalty and care to all Spark shareholders and are symptomatic of the conflict of interest inherent in Mr. Berger’s relationship with GHP.
   
4.
On July 14, 2010, we spoke with EasyDate’s Chairman whose company just went public with the stated goal to fund acquisitions and international growth as they attempt to win more of a global market worth an estimated £1bn. Given that Piper Jaffray (“PJC”) has been running a process on behalf of the Special Committee for the past four months to consider all strategic alternatives including the sale of Spark, we were shocked to learn that EasyDate has never been contacted. By failing to contact a legitimate partner or acquirer, our fear is that PJC is not effectively canvassing or seeking strategic alternatives from all potential buyers/partners.

In a recent proxy fight with Vitacost (Nasdaq: VITC), GHP filed an investor presentation with the SEC on May 26, 2010, discussing “the opportunity cost of shareholder inaction”, which reflects that the peer market multiple for an internet vitamin retailer was 17.7x EBITDA, and that Vitacost was undervalued by 82% given a long list of poor corporate governance issues.

The “Opportunity Cost” of Shareholder Inaction
 
Vitacost currently trades at a significant discount to its peers based on a Firm Value / CY2010E EBITDA trading multiple (8.9x vs. peer median multiple of 17.7x)
   
Assuming Vitacost were to trade at the median peer multiple of 17.7x, that would imply a share price of $17.47, which is 82.2% higher than the closing share price of $9.59 on May 24, 2010

($ in millions)
 
Company
 
Share Price
   
Market Capitalization
   
Firm Value
   
CY2009A-10E Rev Growth
   
CY2010E EBITDA
   
Firm Value / CY2010E EBITDA
 
Amazon
  $ 122.12     $ 54,425.4     $ 50,091.8       35.0 %   $ 2,598.0       19.3 x
Vistaprint
  $ 44.71     $ 1,955.5     $ 1,860.5       25.5 %   $ 156.6       11.9 x
Blue Nile
  $ 47.11     $ 683.3     $ 659.9       15.2 %   $ 32.4       20.4 x
Vitamin Shoppe
  $ 23.44     $ 632.4     $ 777.0       10.3 %   $ 79.1       9.8 x
Drugstore.com
  $ 3.16     $ 334.3     $ 318.4       16.3 %   $ 18.0       17.7 x
Median
          $ 683.3     $ 777.0       16.3 %   $ 79.1       17.7 x
Average
          $ 11,606.2     $ 10,741.5       20.5 %   $ 576.8       15.8 x
Vitacost
  $ 9.59     $ 263.6     $ 237.4       23.7 %   $ 26.6       8.9 x

       
   
Vitacost
 
CY’10E EBITDA
  $ 26.6  
Median Peer Multiple
    17.7 x
Implied Firm Value
  $ 471.2  
Less: Debt
  $ (9.6 )
Plus: Cash and ST investments
    44.3  
Plus: Option Strike Proceeds
    12.3  
Equity Value
  $ 518.2  
Total Fully Diluted Shares Out
    29.7  
Implied Share Price
  $ 17.47  
 Premium to current (%)
    82.2 %
 
Source: GHP / SEC filing.
 
 
 

 
 
We replicated this methodology below to show investors the “opportunity cost” to them created by Spark’s current management team and board failing to focus on shareholder value.
 
                              Firm Value/ LTM          
Company
  Share Price     Market Capitalization     Firm Value     EBITDAS     Revenue     EBITDAS Margin  
Ancestry.com
  $ 18.53     $ 787     $ 756       10.2 x     3.2 x     32 %
EasyDate Holdings
  £ 0.66     £ 49     £ 40       32.1 x     4.7 x     15 %
Health Grades
  $ 8.12     $ 242     $ 218       14.7 x     3.7 x     25 %
Travelzoo
  $ 15.68     $ 258     $ 226       11.8 x     2.2 x     18 %
Meetic
  21.80     497     456       10.9 x     2.9 x     27 %
Median
                            11.8 x     3.2 x     25 %
                                                 
Spark Networks
  $ 3.35     $ 70     $ 62       5.9 x     1.4 x     24 %

       
   
Spark
 
LTM Adjusted EBITDAS
  $ 10.4  
Median Peer Multiple
    11.8 x
Implied Firm Value
  $ 122.0  
Plus: Cash
  $ 6.8  
Plus: Real Estate Proceeds
  $ 1.6  
Equity Value
  $ 130.3  
Fully-Diluted Shares
    20.9  
Implied Share Price
  $ 6.24  
 Premium to Current
    86.2 %
 
Alternatively, the value of Spark could be determined from the perspective of a strategic acquirer.  Given Spark’s bloated cost structure, high management compensation and public company costs, as well as potential marketing budget synergies, we believe a strategic acquirer could realize large synergies with relative ease.
 
   
Spark
 
Reported EBITDA
  $ 10.4  
Plus: Public Company Costs
  $ 1.0  
Plus: Management Team Costs
  $ 3.5  
Plus: Excess Headcount Costs
  $ 3.1  
Adjusted EBITDA
  $ 18.0  
Multiple
    8.0 x
Implied Firm Value
  $ 143.7  
Plus: Cash
  $ 6.8  
Plus: Real Estate Proceeds
  $ 1.6  
Equity Value
  $ 152.0  
Fully-Diluted Shares
    20.9  
Implied Share Price
  $ 7.28  
     Premium to Current
    117.2 %

 
Source: Capital IQ and Company Press Releases. Most current EasyDate financials as of 12/31/09. Spark Networks revenue per employee is $280K vs. per group of $590K. For the analysis above, we assumed $440K in revenue per employee.

In addition to the lack of a full and fair sale process, we believe that Spark’s corporate financial performance has been poor for several years. Under this management’s leadership, net income plummeted from $9.0mn in 2007, to $4.8mn in 2008, and then to a loss of $6.4mn in 2009. This is hardly the performance one would expect or desire from leaders holding one of the best online dating brands in the industry.

Further, we estimate that Spark’s top 5 executives (the Company has not disclosed the compensation of its CIO/CLC since 2007) make approximately $3.5mn a year in total compensation and have collected approximately $12.3mn over the last 3.5 years. Over the same period, revenue declined from $65.2mn to $45.4mn, and enterprise value fell by approximately 70%. In 2009, the top 5 executives’ total compensation equated to 8% of sales and 35% of Adjusted EBITDA. Based on our research, calculating total compensation for only the top three executives, we believe the Spark Board has compensated management in the 92nd percentile of their peer group1 for delivering 39th percentile returns on a one year basis. On a longer term basis, under Mr. Berger’s leadership since taking over the business in 2007, the stock price has fallen 46%.
 

1 US equities with under $100mn in market cap.
 
 

 
 
It would appear that this management team is grossly overpaid for dramatic underperformance. At a minimum, we urge the Board to better align executive compensation with corporate performance and shareholder value creation.

As we explained in our letter dated March 9, 2010, we believe the future of online dating and Spark’s valuable brands are attractive.  On July 28, 2010, the CEO of Match.com, a subsidiary of InterActiveCorp (Nasdaq: IACI), stated, “The fundamentals of the business are going really well.  There are also always strategic possibilities.”  JDate and the core strategic brands are growing, generating significant amounts of cash relative to the market cap.  Therefore, we believe there is no need to sell the Company at this time for anything less than $6.00 per share. Publicly traded dating companies receive multiples of 11-32x Adjusted EBITDA versus our estimate of 5.9x for Spark operating at less than optimal efficiency. The Company has a strong balance sheet (10%+ of net cash to market cap), an untapped $25mn line of credit, and strong consistent cash flows. In fact, actions from both the Board and CEO suggest that they also believe the stock is deeply undervalued:

 
1.
In December 2005/June 2006, GHP purchased its 44% ownership stake at an average cost basis of $5.22.
     
 
2.
From 2007 through 2008, Spark repurchased 34% of the Company for $45mn with an average cost of $4.20 per share.
     
 
3.
In June 2008, Mr. Berger purchased 70,500 shares at $4.15 per share in the open market.

In conclusion, if a sufficient price for Spark cannot be achieved for all Spark shareholders, the Company should remain public and the Board should address the operating and compensation issues raised in this letter. Additionally, the Board should consider capital management actions such as paying out 100% of Free Cash Flow or conducting a Dutch Tender for 10-15% of the Company’s shares.

We welcome a dialogue with the members of the Special Committee to discuss our concerns regarding the Company and the performance of its management team. However, for the avoidance of doubt, we intend to pursue all avenues available to us to ensure that shareholder value is maximized and minority shareholder rights are protected.

Sincerely,

John H. Lewis
Managing Partner
Osmium Partners

DISCLAIMER

Certain factual and statistical (both historical and projected) industry and market data and other information contained herein was obtained by Osmium Partners from independent, third-party sources that it deems to be reliable. However, Osmium Partners has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained herein reflect the belief of Osmium Partners, which belief may be based in whole or in part on such data and other information. Osmium Partners recognizes that there may be confidential or otherwise non-public information in the possession of the companies discussed in this letter that could lead these companies or others to disagree with Osmium Partners’ conclusions.
 
 
 

 
 
The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Osmium Partners concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. Osmium Partners disclaims any obli gation to update this letter.

Funds and separately managed accounts managed by Osmium Partners own Spark Networks common stock. Osmium Partners manages funds that are in the business of actively trading - buying and selling - securities and other financial instruments. Osmium Partners in the future may change its investment position in Spark Networks and possibly increase, decrease, dispose of, or change the form of its investment for any or no reason.

This letter should not be considered a recommendation to buy, sell, or hold any investment. In addition, this letter is neither an offer to purchase nor a solicitation of an offer to sell any securities of Spark Networks or any of the other companies mentioned in this letter.
 
 
 

 
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