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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file Number: 0-27065
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APTIMUS, INC.
(Exact name of registrant as specified in its charter)
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WASHINGTON 91-1808146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
95 South Jackson Street, Suite 300, Seattle, Washington 98104
(Address of principal executive offices and zip code)
(206) 441-9100
(Registrant's telephone number, including area code)
----------------------------
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 |X| No |_|
The number of outstanding shares of common stock, no par value, of the
Registrant at October 31, 2002 was 4,083,944.
APTIMUS, INC.
INDEX TO THE FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Page
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of December 31, 2001 and September 30, 2002 .....1
Statements of Operations for the three and nine months ended
September 30, 2001 and 2002 .....................................2
Condensed Statements of Cash Flows for the nine months
ended September 30, 2001 and 2002 ...............................3
Notes to Financial Statements .....................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...............................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .......17
ITEM 4. CONTROLS AND PROCEDURES ..........................................17
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ........................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..............18
ITEM 5. OTHER INFORMATION ................................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................18
SIGNATURES ..................................................................21
CERTIFICATIONS ..............................................................22
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APTIMUS, INC.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
December 31, September 30,
2001 2002
------------ -------------
ASSETS
Cash and cash equivalents $ 3,651 $ 1,457
Accounts receivable, net 269 230
Prepaid expenses and other assets 219 125
Short-term investments 1,046 51
------------ -------------
Total current assets 5,185 1,863
Fixed assets, net 2,115 668
Intangible assets, net 33 19
Long-term investments 147 40
Deposits 30 30
------------ -------------
$ 7,510 2,620
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 204 $ 332
Accrued and other liabilities 421 324
Current portion of capital lease obligations 84 87
Current portion of notes payable 89 -
------------ -------------
Total current liabilities 798 743
------------ -------------
Capital lease obligations, net of current portion 68 2
------------ -------------
Total liabilities 866 745
Commitments and contingent liabilities (note 7) 60,173 60,211
Shareholders' equity
Common stock, no par value; 100,000 shares
authorized, 3,985 and 4,084 issued and
outstanding at December 31, 2001 and September 30,
2002, respectively
Additional paid-in capital 2,534 2,501
Deferred stock compensation (13)
(4)
Accumulated deficit (56,050) (60,833)
------------ -------------
Total shareholders' equity 6,644 1,875
------------ -------------
$ 7,510 $ 2,620
------------ -------------
The accompanying notes are an integral part of these financial statements.
1
APTIMUS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2002 2001 2002
-------------- -------------- -------------- --------------
Net revenues $ 188 $ 537 $ 1,495 $ 2,092
Operating expenses
Sales and marketing 113 537 5,729 1,676
Connectivity and network costs 376 340 1,451 1,079
Partner fees 77 184 172 754
Research and development 168 152 1,475 451
General and administrative 548 436 2,064 1,343
Depreciation and amortization 458 357 1,862 1,083
Equity-based compensation 224 2 278 9
Lease renegotiation costs and impairment
of leasehold improvements - 402 - 402
Restructuring costs - - 4,998 -
-------------- -------------- -------------- --------------
Total operating expenses 1,964 2,410 18,029 6,797
Operating loss (1,776) (1,873) (16,534) (4,705)
Interest expense 39 5 137 20
Other (income) expense 33 122 (490) 58
-------------- -------------- -------------- --------------
Net loss $ (1,848) $ (2,000) $ (16,181) $ (4,783)
-------------- -------------- -------------- --------------
Basic and diluted net loss per share $ (0.15) $ (0.49) $ (4.03) $ (1.19)
-------------- -------------- -------------- --------------
Weighted-average shares used in computing
basic and diluted net loss per share 12,563 4,067 13,703 4,025
-------------- -------------- -------------- --------------
The accompanying notes are an integral part of these financial statements.
2
APTIMUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2001 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (16,181) $ (4,783)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 1,861 1,084
Bad debt expense (252) (8)
Amortization of deferred compensation 277 9
(Gain) loss on disposal of assets 92 (7)
Impairment of fixed assets from lease renegotiation - 377
Write-off of shareholder notes receivable - 27
Restructuring costs 4,998 -
Cash paid for restructuring costs (1,858) (15)
Loss on long-term investments - 107
Amortization of discount on short-term investments (68) (4)
Changes in assets and liabilities, net of impact of
acquisitions:
Accounts receivable 2,317 47
Prepaid expenses and other assets 222 98
Accounts payable (2,154) 143
Accrued and other liabilities (625) (97)
------------ ------------
Net cash used in operating activities (11,371) (3,022)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (369) (29)
Proceeds from disposal of assets 81 32
Purchase of short-term investments (3,947) (1)
Sale of short-term investments 11,004 1,000
Proceeds from reduction in long-term investments 1 -
Net cash provided by investing activities 6,770 1,002
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases (139) (63)
Repayment of notes payable (1,821) (89)
Notes issued to shareholders - (27)
Repurchase of common stock (334) -
Issuance of common stock, net of issuance stocks 7 5
------------ ------------
Net cash used in financing activities (2,287) (174)
------------ ------------
Net decrease in cash and cash equivalents (6,888) (2,194)
Cash and cash equivalents at beginning of period 12,854 3,651
------------ ------------
Cash and cash equivalents at end of period $ 5,966 $ 1,457
------------ ------------
The accompanying notes are an integral part of these financial statements.
3
APTIMUS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in financial
statements, prepared in accordance with accounting principles generally accepted
in the United States America, have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC).
The unaudited financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K filed with the SEC on March 29, 2002. The
results of operations for the nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire year ending December 31, 2002.
Certain changes have been made to the description and presentation of the
Statement of Operations during the current year. Fees paid to network partners,
including email list owners have been reclassified in the statement of
operations as Partner fees. Such costs were included in the connectivity and
network costs line in prior periods. Prior period presentation has been changed
to conform to current period presentation. These changes to the description and
presentation of the Statement of Operations had no effect on net loss.
Additionally certain changes were made to the Statement of Cash Flows to conform
to the current year presentation. These reclassifications had no impact on
results of operations or cash flows for the period.
Our business has been operating at a loss and generating negative cash flows
from operations since inception. As of September 30, 2002, we had accumulated
losses of approximately $60.8 million. Even with anticipated growth in revenues,
we expect our losses and negative cash flows are likely to continue during the
fiscal year ending December 31, 2002.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. If the Company is unable to increase
revenues or contain operating expenses as planned it may not have sufficient
funds to satisfy its cash requirements. The Company may be forced to curtail
operations further, dispose of assets or seek additional funding. Such events
would materially and adversely affect the value of the Company's equity
securities. There can be no assurance that the Company will be able to
successfully complete the steps necessary to continue as a going concern.
2. REVENUE RECOGNITION
The Company currently derives revenue from providing lead generation activities
through a network of partners and e-mail mailings.
Revenue earned for lead generation through the Aptimus network is based on a fee
per lead and is recognized when the lead information is delivered to the client.
Revenue earned for e-mail mailings can be based on a fee per lead, a percentage
of revenue earned from the mailing, or a cost per thousand e-mails delivered.
Revenue from e-mail mailings delivered on a cost per thousand basis is
recognized when the e-mail is delivered. Revenues from e-mail mailings sent on a
fee per lead or a percentage of revenue earned from the mailing basis are
recognized when amounts are determinable, generally when the customer receives
the leads.
Revenues generated through network partners and opt-in email list owners are
recorded on a gross basis in accordance with Emerging Issues Task Force
consensus 99-19 (EITF 99-19). Fees paid to network partners and opt-in email
list owners related to these revenues are shown as Partner fees on the Statement
of Operations. Email based campaigns that are sent to Company owned lists do not
have partner fees associated with them.
4
The Company has evaluated the guidance provided by EITF 99-19 as it relates to
determining whether revenue should be recorded gross or net for the payments
made to network partners and opt-in email list owners. The Company has
determined the recording of revenues gross is appropriate based upon the
following factors:
o Aptimus acts as a principal in these transactions;
o Aptimus and its customer are the only companies identified in the signed
contracts;
o Aptimus is solely responsible to the client for fulfillment of the
contract;
o Aptimus determines how the offer will be presented across the network; and
o Amounts earned are based on leads or emails delivered and are not based on
amounts paid to partners.
In addition to the ongoing revenue related to the network and email mailings
some revenue has been recognized through March 31, 2002 related to services
performed on the FreeShop site. These revenues have been recognized when
received, as collection was not reasonably assured at the time the services were
performed. As of September 30, 2002 it is not expected that any additional
amounts will be received that have not been previously recognized as revenue.
Prior to May 15, 2001 the Company derived revenue from its online marketing
service activities, including lead generation, advertising, and list rental.
Advertising revenues consisted of email advertisements, banner advertisements,
and anchor positions. Newsletter sponsorship revenues are derived from a fixed
fee or a fee based on the circulation of the newsletter. Newsletter sponsorship
revenues are recognized in the period in which the newsletter is delivered.
Banner advertising and anchor positions can be based on impressions, fixed fees,
or click throughs. Fixed fee contracts are recognized ratably over the term of
the agreement, provided that no significant Company obligations remain. Revenue
from impressions or click through based contracts is recognized based on the
proportion of impressions or click throughs delivered, to the total number of
guaranteed impressions or click throughs provided for under the related
contracts.
List rental revenues are received from the rental of customer names to third
parties through the use of list brokers. Revenue from list rental activities is
recognized in the period the names are delivered by the list broker to the third
party.
3. NET LOSS PER SHARE
Basic net loss per share represents net loss available to common shareholders
divided by the weighted average number of shares outstanding during the period.
Diluted net loss per share represents net loss available to common shareholders
divided by the weighted average number of shares outstanding, including the
potentially dilutive impact of common stock options and warrants. Common stock
options and warrants are converted using the treasury stock method. The effects
of outstanding stock options and warrants are anti-dilutive and, are accordingly
excluded from the calculation of diluted loss per share.
The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss per share calculations for the
periods indicated and the common stock equivalent securities as of the end of
the period that are not included in the diluted net loss per share calculation
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Numerator:
Net loss $ (1,848) $ (2,000) $ (16,181) $ (4,783)
----------- ----------- ----------- -----------
5
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Denominator:
Weighted average shares used in
computing net loss per share 12,563 4,067 13,703 4,025
----------- ----------- ----------- -----------
Potentially dilutive securities consist
of the following:
Options to purchase common stock 1,074 1,262 1,074 1,262
Unvested restricted stock grants 238 - 238 -
166 16 166 16
Warrants to purchase common stock
----------- ----------- ----------- -----------
1,478 1,278 1,478 1,278
----------- ----------- ----------- -----------
4. NEW ACCOUNTING PRONOUNCEMENTS
We adopted SFAS No. 141 "Business Combinations", SFAS No. 142 "Goodwill and
Other Intangible Assets", SFAS No. 143 "Accounting for Asset Retirement
Obligations", and SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" in the quarter ended March 31, 2002. We adopted SFAS No. 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," and SFAS 146 "Accounting for Costs
Associated with Exit or Disposal Activities" in the quarter ended June 30,
2002.The adoption of these standards did not have a material impact on our
financial position, results of operations or cash flows.
5. FIXED ASSETS AND MODIFICATION OF OPERATING LEASE
During the three months ended September 30, 2002 we negotiated and reached
agreement with our Seattle landlord to substantially reduce the amount of space
we lease and the corresponding rental rate we pay for our Seattle offices. The
new arrangement accommodates our limited space requirements and reflects the
current market's lower rates. Under the terms of the new lease, beginning
October 1, 2002, Aptimus will pay significantly less rent for a significantly
reduced amount of office space. It will also no longer have the use of a
majority of the leasehold improvements made in Seattle. Lease renegotiation
costs and impairment of leasehold improvements of $402,000 has been recorded;
$377,000 related to the net book value of the leasehold improvements being
surrendered to the landlord and $25,000 related to a cash payment required under
the agreement to amend the lease Additionally, the Company will issue to the
landlord warrants to purchase 150,000 shares of common stock to the, which have
not been recorded as all of the terms necessary to value the warrants have not
been determined.
6. LONG-TERM INVESTMENTS
Long-term investments consist of a minority equity investment in a non-public
company, which is being accounted for on the cost basis. The value of the
investment is currently estimated to beapproximately $40,000. In the three
months ended September 30, 2002, a permanent reduction in value of $107,000 was
recorded to reduce the value to $40,000.
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company's office facilities are leased under operating leases that provide
for minimum rentals and require payment of property taxes and include escalation
clauses. In addition, the Company also leases certain equipment under agreements
treated for financial reporting purposes as capital leases.
Future minimum lease payments under the non-cancelable leases, including the
revised lease as discussed in Note 5 above, are as follows (in thousands).
6
Capital Operating
Year ending September 30, leases leases
2003............................................. 95 234
2004............................................. 2 56
Total minimum lease payments....................... 97 $ 290
Less: Amount representing interest................. (8)
Present value of capital lease obligations......... 89
Less: Current portion.............................. (87)
Capital lease obligations, net of current portion.. $ 2
The Company has also entered into an agreement with a service provider that
contains cancellation fees. The non-cancelable portion of this agreement calls
for payments totaling approximately $140,000 through January 31, 2003.
Cancellation fees do not apply if the Company elects to terminate the agreement
after January 31, 2003. Total payments under this agreement through the end of
the initial term would total $560,000 through February 2004.
Litigation
There is no material litigation pending against the Company. From time to time,
the Company is a party to litigation and claims incident to the ordinary course
of business. While the results of litigation and claims cannot be predicted with
certainty, we believe that the final outcome of such matters will not have a
material adverse effect on our business, financial condition, results of
operations or cash flows.
8. NOTES RECEIVABLE FROM SHAREHOLDERS
In May 2002, 23,600 shares of our common stock were purchased from a departing
executive officer, on a ratable basis, by four of the Company's executive
officers for total purchase consideration of $27,376. To facilitate this
transaction the Company loaned each of the four executive officers the $6,844
necessary to purchase their respective shares. The notes receivable bear
interest at the prime rate, are secured by the stock purchased with the loan
proceeds and are non-recourse. The terms of the notes receivable call for
repayment on the earlier of demand by the company or the self-initiated,
voluntary termination of employment by the executive officer. The terms also
call for the loan to be forgiven on the earlier of two years, the merger or sale
of the Company, the filing of a bankruptcy petition by or against the company or
election by the Company Board of Directors in its sole discretion. The notes
remain in full force and effect. However, due to the flexibility of the note
terms, the company felt the value of the notes should not be reflected on the
balance sheet. The value of these notes of $27,376 was expensed as compensation
expense in September 2002.
9. RESTRUCTURING COSTS
On February 20, 2001, we announced our intention to reposition the Company as a
direct marketing infrastructure provider, focusing all of our resources on
building a direct marketing network. As part of this repositioning all
activities related to our consumer-direct Web sites, including FreeShop.com,
Desteo.com, and CatalogSite.com were discontinued. As a result of these
activities, we reduced staffing levels by 161 employees during the first quarter
of 2001. In June of 2001 the decision was made to modify the restructuring plan
by disposing of the technology acquired in the XMarkstheSpot acquisition, to
reduce staffing by an additional 26 employees and to dispose of additional
equipment and software no longer being used in operations.
Restructuring costs of $4,998,000 for the year ended December 31, 2001 were
recognized in accordance with the guidance of Emerging Issues Task Force 94-3.
The restructuring resulted in the following charges during 2001 (in thousands):
First Second Third Fourth
Types of Costs Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------- ---------- --------- ----------- ----------
Employee severance $ 1,462 $ 503 $ - $ - $ 1,965
Capitalized software costs 364 364
Disposal of fixed assets, Net 4 534 538
Impairment of intangible assets 976 1,155 2,131
----------- ---------- --------- ----------- ----------
$ 2,806 $ 2,192 $ - $ - $ 4,998
----------- ---------- --------- ----------- ----------
Balance of severance accrual at end of period $ 511 $ 204 $ 57 $ 15 $ 15
----------- ---------- --------- ----------- ----------
7
In addition to severance costs, the repositioning resulted in the disposal and
abandonment of capitalized software and fixed assets. In conjunction with the
disposal of these assets, the Company received approximately $51,000 of
proceeds, which is included in the restructuring costs. Additionally, during
2001 we recorded a restructuring charge related to the impairment of intangible
assets related to the repositioning activities. Intangible assets related to the
acquisitions of Commonsite, LLC and Travel Companions International, Inc. were
impaired in the first quarter of 2001 as they related to our consumer direct Web
site business for which a plan of exit was implemented in the first quarter of
2001. Intangible assets related to the business acquisition of XMarkstheSpot,
Inc. were impaired in the second quarter of 2001 as the majority of the acquired
workforce was terminated and the acquired technology was replaced. The remaining
severance accrual balance of $15,000 was paid during 2002.
At September 30, 2002 no assets that were to be disposed of as part of the 2001
restructuring plan remained on the balance sheet, we do not anticipate any
additional costs to be recorded as a result of the 2001 restructuring plan and
all planned expenditures under the 2001 restructuring plan have been completed.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report, including the following discussion of the financial condition
and results of operations of the Company contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934. In
some cases, you can identify forward-looking statements by our use of words such
as "may," "will," "should," "could," "expect," "plan," "intend," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue" or the negative or
other variations of these words, or other comparable words or phrases. The
Company's actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including, but not limited to, insufficient capital,
fluctuation of the Company's operating results, the ability to compete
successfully, and the ability of the Company to maintain current client and
distribution partner relationships and attract new ones, as well as those risks
described in connection with the forward looking statement and the factors
listed on Exhibit 99.1 to this report, which factors are hereby incorporated by
reference in this report.
Although we believe the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this filing. You should not place
undue reliance on forward-looking statements.
OVERVIEW
We began our direct marketing business in 1994 as the FreeShop division of
Online Interactive, Inc. In addition to operating the FreeShop division, Online
Interactive was also engaged in the business of selling software over the
Internet. In July 1997, Online Interactive transferred the FreeShop division to
FreeShop International, Inc., a newly formed, wholly owned subsidiary, and spun
off FreeShop International through a distribution to its shareholders. On
February 19, 1999, FreeShop International changed its name to FreeShop.com, Inc.
On October 16, 2000 FreeShop.com, Inc. changed its name to Aptimus, Inc.
Today, Aptimus' mission is to provide the most powerful and effective ways
to acquire new customers via the Internet. This is the same mission we had in
1994 when we launched our business. We continue to believe that the Internet is
the most important new medium for customer acquisition in recent history.
We are positioning ourselves to be the leading online direct response
network. Our focus is creating high volume performance-based customer
acquisition solutions for major consumer marketers. At the core of the Company's
approach is a proprietary and highly scalable offer-serving platform, which
includes patent-pending Dynamic Revenue Optimization (DRO) technology. DRO
automatically determines the performance of various marketing campaigns and
adjusts offer impressions to maximize results, thus placing the right offers in
front of the right customers and realizing the benefits of true one-to-one
direct marketing. Aptimus presents direct response offers from advertisers
across an expanding network of distribution partner web sites and email
channels. We focus our efforts around three primary offer presentation formats:
1. CoRegistration - This is our core focus, whereby we present relevant
offers to transacting consumers in a manner that allows them to
"opt-in" or choose the offers they wish to receive. By managing the
registration process, we can target offers "real time" based on the
site demographics, the data entered in the order process (e.g.
geotargeting), and/or the substance of the specific transaction.
Managed transactions include product purchases, email and site
registrations or joins, and other transactional actions occurring on
the web sites of our distribution partners.
2. Email - We present relevant offers to consumers via opt-in email
lists, including lists that we own, lists that we manage for others,
and third party lists.
3. Pop-Ups/Interstitials - We present relevant offers via advertising
screens that "pop up" or "pop under" when consumers take particular
actions such as visiting a specific web site or web page.
9
During the nine months ended September 30, 2002 we derived our revenues
primarily from lead generation contracts related to the Aptimus network,
including email deliveries. We receive lead generation revenues when we deliver
customer information to a marketer in connection with an offer distributed
through our network of partners, including email list partners. Approximately
28% of our revenue was derived from contracts where we receive advertising
revenues on a cost per thousand basis from delivery of advertisements to opt-in
email lists. Lead generation pricing is based on cost per lead and varies
depending on the type of offer. Generally, pricing of advertising is based on
cost per thousand impressions basis. We recognize revenues in the period in
which we deliver the service, provided we have no further performance
obligation. During the nine months ended September 30, 2001 we derived our
revenues primarily from online lead generation and advertising contracts related
to the FreeShop Web site and Club FreeShop email Newsletters. The services we
deliver are primarily sold under short-term agreements that are subject to
cancellation.
In the quarters ended September 30, 2001 and 2002 our ten largest clients
accounted for 85.0% and 59.5% of our revenues, respectively. During the quarter
ended September 30, 2001, Caribbean Tourism Organization accounted for 20.1% of
our revenues and Topica accounted for 18.0% of our revenues. No other client
accounted for more than 10% of our revenues in the quarter ended September 30,
2001. During the quarter ended September 30, 2002 Kraft Foods N.A. - Gevalia
Division accounted for 11.7% of our revenues and Blue Dolphin Group accounted
for 10.5% of our revenues. No other client accounted for more than 10% of our
revenues in the quarter ended September 30, 2002. In the nine months ended
September 30, 2001 and 2002 our ten largest clients accounted for 39.2% and
46.2% of our revenues, respectively. No single client accounted for more than
10% of revenues in the nine months ended September 30, 2001. During the nine
months ended September 30, 2002 MyPoints.com, Inc. accounted for 11.3% of our
revenues and Kraft Foods N.A. - Gevalia Division accounted for 10.3% of our
revenues. No other client accounted for more than 10% of our revenues in the
nine months ended September 30, 2002.
Our business has been operating at a loss and generating negative cash
flows from operations since inception. As of September 30, 2002, we had
accumulated losses of approximately $60.8 million. Even with anticipated growth
in revenues, we expect our losses and negative cash flows are likely to continue
during the remainder of the fiscal year ending December 31, 2002. Our
accountants have noted that these conditions raise substantial doubt about our
ability to continue as a going concern, as emphasized in their report included
in our Annual Report on Form 10-K, filed March 29, 2002.
If the Company is unable to increase revenues or contain operating expenses
as planned it may not have sufficient funds to satisfy its cash requirements.
The Company may be forced to curtail operations further, dispose of assets or
seek additional funding. Such events would materially and adversely affect the
value of the Company's equity securities. There can be no assurance that the
Company will be able to successfully complete the steps necessary to continue as
a going concern.
Our common stock was quoted on the Nasdaq National Market following our
September 1999 initial public offering. By letter dated February 15, 2002, we
were advised by Nasdaq Listing Qualifications that we were then out of
compliance with the Nasdaq National Market rule that requires a National
Market-listed company to maintain a $5.0 million minimum market value for its
publicly held shares. As of May 16, 2002, the Company had not regained
compliance with this rule and, accordingly, Nasdaq notified the Company that its
securities would be delisted from the Nasdaq National Market, effective, May 28,
2002. By letter dated May 23, 2002, we appealed the staff determination to
delist the Company's securities from the National Market. The appeal had the
effect of staying the delisting pending a decision on the appeal by the hearings
panel. The Company presented its appeal of the delisting to the hearings panel
on July 12, 2002, requesting, in the alternative, that its securities remain
listed on the Nasdaq National Market, or that its application for listing on the
Nasdaq SmallCap Market be accepted and its securities listed on that Market as
promptly as practicable. By letter dated August 12, 2002, Nasdaq notified the
Company of the panel's decision to transfer the listing of the Company's
securities to the Nasdaq SmallCap Market, effective with the open of business on
Thursday, August 15, 2002. The panel conditioned the transfer on the fact that
if the Company's shares continued to close below the SmallCap Market's $1.00 per
share minimum bid price requirement for the thirty-trading day period ending
August 30 2002, the Company would be notified of such noncompliance and would
thereupon be granted a period of 180 calendar days within which to demonstrate
compliance with the $1.00 minimum bid as well as all other minimum listing
requirements. Aptimus did not achieve compliance with the $1.00 minimum bid
price requirement as of August 30, 2002. Accordingly, by letter date September
10, 2002, Nasdaq notified the Company that it had until March 3, 2003 to achieve
and maintain for a minimum of ten (10) consecutive trading days compliance with
all Nasdaq SmallCap Market minimum requirements for continued listing. We can
give no assurance that we will achieve compliance with these requirements within
the prescribed timeframe, or at all. As of September 30, 2002, our common stock
price was not in compliance with the $1.00 minimum bid price requirement for
continued listing on the Nasdaq SmallCap Market. Failure to meet all such
minimum listing requirements and maintain them for at least ten (10) consecutive
trading days will result in the immediate delisting of the Company's shares from
the Nasdaq SmallCap Market.
10
RESULTS OF OPERATIONS
Revenues
We currently derive our revenues primarily from network activities, which
include both lead generation activities through a network of partners and e-mail
mailings. In the prior year our revenues also included online lead generation
and advertising contracts related to the FreeShop, Catalogsite, and Desteo
websites. Our revenues increased by $349,000, or 186%, to $537,000 in the
quarter ended September 30, 2002 from $188,000 in the same quarter of 2001. For
the nine months ended September 30, 2002, net revenues have increased by
$597,000 or 40% to $2.1 million, from $1.5 million in the first nine months of
2001. During 2001 we refocused our efforts to a network lead generation model
from a site centric lead generation model. Revenue in the nine months ended
September 30, 2001 was primarily derived from the FreeShop site, which was
discontinued in the second quarter of 2001. This refocusing resulted in a
significant decline in revenues through the third quarter of 2001. Net revenue
increased from the fourth quarter of 2001 through the second quarter of 2002. In
the third quarter of 2002 revenues have declined from the second quarter. This
decline was primarily a result of:
1. A change in sales leadership, which included a two month period where
the company had no vice president of sales;
2. A change in sales approach toward focusing more energy around larger
clients with greater growth potential;
3. A decline in volume of cost per thousand based email advertising,
which is not our core business; and
4. A decrease in the amount of services performed for a key client, which
is a continuing client, due to changes in their approach.
The table below provides detail of the composition of our net revenue, in
thousands:
Three Months Ended
----------------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30,
2001 2001 2001 2001 2002 2002 2002
---------- ---------- ---------- --------- ---------- --------- ---------
Network revenue. $ 41 $ 127 $ 140 $ 322 $ 695 $ 782 $ 537
FreeShop site related revenue 885 254 48 57 78 - -
Total revenue $ 926 $ 381 $ 188 $ 379 $ 773 $ 782 $ 537
Sales and Marketing
Sales and marketing expenses consist primarily of marketing and operational
personnel costs, bad debts, and outside sales costs in 2002. During the
beginning of 2001, sales and marketing costs included significant amounts of
marketing and promotional costs related to developing our brands and generating
visits to our Web sites. Sales and marketing expenses increased by $424,000 to
$537,000, or 100% of revenues, in the quarter ended September 30, 2002 from
$113,000, or 60% of revenues, in the same quarter of 2001. For the nine months
ended September 30, 2002, sales and marketing expenses have decreased by $4.0
million to $1.7 million, or 80% of revenues, from $5.7 million, or 383% of
revenues, in the first nine months of 2001. The increase in sales and marketing
for the three months ended September 30, 2002 compared to the three months ended
September 30, 2001 is primarily a result of settlement of previously recorded
liabilities for $170,000 less than recorded and a $260,000 reduction in the
reserve for bad debts in 2001. When these two items are excluded from the 2001
quarter the current year expense for the quarter is comparable to the prior
year. On a year to date bases the decrease in sales and marketing expenses is
primarily related to reductions in advertising spending and payroll related
costs. These costs have decreased as a result of the repositioning of the
Company in February of 2001. For the nine months ended September 30, 2002,
reductions in spending for advertising accounted for 37% of the decrease and
reductions in payroll costs accounted for 43% of the decrease. Sales and
marketing expenses in the fourth quarter of 2002 are expected to decrease
slightly compared to the third quarter of 2002.
Connectivity and Network Costs
Connectivity and network costs consist of expenses associated with the
maintenance and usage of our network as well as email delivery costs. Such costs
include email delivery costs, Internet connection charges, hosting facility
costs, banner ad serving fees
11
and personnel costs. Connectivity and network costs decreased by $36,000 to
$340,000, or 63% of revenues, in the quarter ended September 30, 2002 from
$376,000, or 200% of revenues, in the same quarter of 2001. For the nine months
ended September 30, 2002, Internet and network connectivity expenses have
decreased by $372,000 to $1.1 million, or 52% of revenues, from $1.5 million, or
97% of revenues, in the first nine months of 2001. During the first quarter of
2001 costs were incurred to support both the network and the FreeShop site. The
decrease in connectivity and network costs is primarily related to reductions in
connectivity spending and payroll related costs and has been partially offset by
an increase in email delivery costs. For the nine months ended September 30,
2002 reductions in connectivity spending resulted in a 78% decrease, reductions
in payroll costs resulted in a 45% decrease and increases in email deliveries
accounted for a 35% increase. Connectivity and network costs in the fourth
quarter of 2002 are expected to decrease slightly compared to the third quarter
of 2002.
Partner fees
Partner fees consist of fees owed to network distribution partners and
opt-in email list owners based on revenue generating activities created in
conjunction with these partners. Partner fees increased by $107,000 to $184,000,
or 34% of network revenues, in the quarter ended September 30, 2002 from
$77,000, or 55% of network revenues, in the same quarter of 2001. For the nine
months ended September 30, 2002, partner fees have increased by $582,000 to
$754,000, or 37% of network revenues, from $172,000, or 56% of revenues, in the
first nine months of 2001. Network revenue is used instead of total revenues for
partner fees as this is considered a more meaningful statistic since partner
fees only relate to network revenues. These fees have increased on an absolute
basis as a result of the increases in network revenue. As a percentage of
network revenues such fees have decreased as a result of implementation of email
based campaigns in the third quarter of 2001. Email based campaigns that are
sent to Company-owned lists do not have any partner fees associated with them.
Also the cost of delivering the emails and certain third-party costs are
generally deducted before calculating the fees due partners for email based
campaigns not sent to Company-owned lists.
Research and Development
Research and development expenses primarily consist of personnel costs
related to maintaining and enhancing the features, content and functionality of
our Web sites, network and related systems. Research and development expenses
decreased by $16,000 to $152,000, or 28% of revenues, in the quarter ended
September 30, 2002 from $168,000, or 89% of revenues, in the same quarter of
2001. For the nine months ended September 30, 2002, research and development
expenses have decreased by $1.0 million to $451,000, or 22% of revenues, from
$1.5 million, or 99% of revenues, in the first nine months of 2001. The decrease
in research and development expense is primarily related to reductions in
payroll costs and contractor expenses resulting from repositioning the company
in early 2001. For the nine months ended September 30, 2002 reductions in staff
accounted for 48% of the decrease and reductions in contractor expenses
accounted for 43% of the decrease. Research and development expenses in the
fourth quarter of 2002 are expected to decrease slightly compared to the third
quarter of 2002.
General and Administrative
General and administrative expenses primarily consist of management,
financial and administrative personnel expenses and related costs and
professional service fees. General and administrative expenses decreased by
$112,000 to $436,000, or 81% of revenues, in the quarter ended September 30,
2002 from $548,000, or 292% of revenues, in the same quarter of 2001. For the
nine months ended September 30, 2002, general and administrative expenses have
decreased by $721,000 to $1.3 million, or 64% of revenues, from $2.1 million, or
138% of revenues, in the first nine months of 2001.
There are seven significant fluctuations that compose the majority of the
change in general and administrative expenses on a year-to-date basis. Reduction
in professional service fees, including both auditing and legal fees, as a
result of being a smaller company after the restructuring undertaken in 2001 and
the change in auditors during the fourth quarter of 2001. Audit and legal fees
decreased by $217,000, accounting for 30% of the decrease. One time costs
associated with a secondary stock offering and other investment banking services
account for $197,000 or 27% of the decrease. A one-time expense related to the
termination of a contract assumed with the purchase of XMarkstheSpot accounts
for $171,000 or 24% of the decrease. A decrease in the cost if insurance as a
result of being a smaller company after the restructuring undertaken in 2001
accounts for $98,000 or 14% of the decrease. A decrease in labor related costs
as a result of the 2001 restructuring accounts for $84,000 or 12% of the
decrease. Offsetting these decreases are two significant increases in general
and administrative operating expenses. The allocation of rent to general and
administrative expense increased by $112,000 as a result of an increase in the
proportion of general and administrative employees to total employees after the
2001 restructuring. The increase in rent expense offsets the decrease in general
and administrative expense by 16% of the
12
decrease. Local business taxes that are based on revenues were $77,000 higher in
the current year as a result of higher revenues and deductions taken for bad
debts expense in 2001. The increase in business taxes offsets the decrease in
general and administrative expense by 11% of the decrease. General and
administrative expenses in the fourth quarter of 2002 are expected to decrease
slightly compared to the third quarter of 2002.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation on leased
and owned computer equipment, software, office equipment and furniture and
amortization on intellectual property, non-compete agreements and goodwill from
acquisitions. Depreciation and amortization expenses decreased by $101,000 to
$357,000, or 67% of revenues, in the quarter ended September 30, 2002 compared
to $458,000, or 244% of revenues, in the same quarter of 2001. For the nine
months ended September 30, 2002, depreciation and amortization expenses have
decreased by $779,000 to $1.1 million, or 52% of revenues, compared to $1.9
million, or 125% of revenues, in the first nine months of 2001. The majority of
the decrease results from the impairment of goodwill and other acquired
intangibles as a result of the repositioning of the business in 2001.
Depreciation and amortization in the fourth quarter of 2002 is expected to
decrease compared to the third quarter of 2002 as a result of the impairment of
leasehold improvements resulting from renegotiation of the Seattle lease.
Equity-Based Compensation
Equity-based compensation expenses consist of amortization of unearned
compensation recognized in connection with stock options and stock grants
granted to employees and directors at prices below the fair market value of our
common stock. Unearned compensation is recorded based on the intrinsic value
when we issue stock options to employees and directors at an exercise price
below the estimated fair market value of our common stock at the date of grant.
Unearned compensation is also recorded based on the fair value of the options
granted as calculated using the Black-Scholes option pricing model when options
or warrants are issued to advisors and other service providers. Unearned
compensation is amortized over the vesting period of the option or warrant.
Equity-based compensation expenses decreased by $222,000 to $2,000, or less than
1% of revenues, in the quarter ended September 30, 2002 compared to $224,000, or
119% of revenues, in the same quarter of 2001. For the nine months ended
September 30, 2002, equity-based compensation expenses decreased by $269,000 to
$9,000, or less than 1% of revenues, compared to $278,000, or 19% of revenues,
in the first nine months of 2001. The decrease results primarily from the
recognition of approximately $217,000 in compensation in the prior year related
to restricted stock grants made on September 27, 2001. In addition to this the
forfeiture of options held by terminated employees and the continued decline in
the unearned compensation balance resulting from the continued amortization of
the balance continues to reduce equity-based compensation.
Lease renegotiation costs and impairment of leasehold improvements
During the three months ended September 30, 2002 we negotiated and reached
agreement with our Seattle landlord to substantially reduce the amount of space
we lease and the corresponding rental rate we pay for our Seattle offices. The
new arrangement accommodates our limited space requirements and reflects the
current market's lower rates. Under the terms of the new lease, beginning
October 1, 2002, Aptimus will pay significantly less rent for a significantly
reduced amount of office space. It will also no longer have the use of a
majority of the leasehold improvements made in Seattle. Lease renegotiation
costs and impairment of leasehold improvements of $402,000 has been recorded;
$377,000 related to the net book value of the leasehold improvements being
surrendered to the landlord and $25,000 related to a cash payment required under
the agreement to amend the lease Additionally, the Company anticipates issuing
to the landlord warrants to purchase 150,000 shares of the Company's common
stock, which have not been recorded as all of the terms necessary to value the
warrants have not been determined.
Restructuring costs
Restructuring costs consist of severance costs and losses on fixed and
intangible assets disposed or abandoned as a result of restructuring activities.
On February 20, 2001, the Company announced its intention to reposition itself
as a direct marketing infrastructure provider, focusing all its resources on
building its direct marketing network. As part of this repositioning, activities
related to our consumer-direct Web sites, including FreeShop.com, Desteo.com,
and CatalogSite.com were discontinued. Severance costs were approximately
$503,000 and $2.0 million in the quarter and nine months ended September 30,
2001, respectively. In addition to severance costs, the repositioning resulted
in the disposal and abandonment $953,000 of capitalized software and fixed
assets. In conjunction with the disposal of these assets, the Company received
approximately $51,000 of proceeds, which is included
13
as an offset in the restructuring costs. Additionally, during 2001 we recorded a
restructuring charge related to the impairment of intangible assets related to
the repositioning activities. Approximately $1.0 million of intangible assets
related to the acquisitions of Commonsite, LLC and Travel Companions
International, Inc. were impaired in the first quarter of 2001 as they related
to our consumer direct Web site business for which a plan of exit was
implemented in the first quarter of 2001. Approximately $1.2 million of
intangible assets related to the business acquisition of XMarkstheSpot, Inc.
were impaired in the second quarter of 2001 as the majority of the acquired
workforce was terminated and the acquired technology was replaced. The final
payments related to the 2001 restructuring were made in January 2002. Amounts
paid as part of the restructuring were the same as amounts accrued in the first
and second quarter of 2001. We do not expect to incur additional restructuring
costs in the near term.
Interest Expense
Interest expense in the current year results from capital equipment leases.
In the prior year interest expense also resulted from notes payable to Comerica
Bank, f/k/a Imperial Bank and Fingerhut Companies. Interest expense totaled
$5,000 in the quarter ended September 30, 2002 and $39,000 in the same quarter
of 2001. Interest expense totals $20,000 and $137,000 in the nine months ended
September 20, 2002 and 2001, respectively. The decrease in interest expense is a
result of the Comerica Bank note and Fingerhut Companies notes payable being
paid off in August 2001 and November 2001, respectively. Interest expense is
expected to continue to decrease as remaining amounts owed are paid down.
Other (Income) Expense
Other (income) expense consists of interest income, gains and losses on
disposals of assets and impairments on long-term investments. Other (income)
expense, increased by $89,000 to $122,000, or 23% of revenues, in the quarter
ended September 30, 2002 compared to $33,000, or 18% of revenues, in the same
quarter of 2001. For the nine months ended September 30, 2002, other (income)
expense has increased by $548,000 to an expense of $58,000, or 3% of revenues,
compared to income of $490,000, or 33% of revenues, in the first nine months of
2001. The increase is due to lower cash balances and to a $107,000 impairment
charge taken on a long-term investment in the third quarter of 2002. Lower cash
balances resulted from the use of cash in operations and the Company's issuer
tender offer in the fourth quarter of 2001.
Income Taxes
No provision for federal income taxes has been recorded for any of the
periods presented due to the Company's current loss position.
LIQUIDITY AND CAPITAL RESOURCES
Since we began operating as an independent company in July 1997, we have
financed our operations primarily through the issuance of equity securities.
Gross proceeds from the issuance of stock through September 30, 2002 totaled
$65.7 million, including $21.5 million raised from Fingerhut Companies. As of
September 30, 2002, we had approximately $1.5 million in cash, cash equivalents
and short-term securities, providing working capital of $1.1 million. No
off-balance sheet assets or liabilities existed at September 30, 2002.
Net cash used in operating activities was $3.0 million and $11.4 million in
the nine months ended September 30, 2002 and 2001, respectively. Cash used in
operating activities in the nine months ended September 30, 2002 resulted
primarily from $4.8 million of net loss. Net cash outflows from operations were
increased by $15,000 of restructuring costs paid in the period, $4,000 in
amortization of discount on short-term investments, and a $97,000 decrease in
accrued and other liabilities. Net cash outflows were offset by $1.6 million of
non-cash expenses, a $47,000 decrease in accounts receivable, a $98,000 decrease
in prepaid expenses and other assets and a $143,000 increase in accounts
payable. Cash used in operating activities in the nine months ended September
30, 2001 resulted primarily from $16.2 million of net losses. Net cash outflows
from operations were increased by $1.9 million of restructuring costs paid in
the nine-month period, $68,000 in amortization of discount on short-term
investments, a $2.2 million decrease in accounts payable and a $625,000 decrease
in accrued liabilities. Net cash outflows were offset by $7.0 million of
non-cash expenses, a $2.3 million decrease in accounts receivable and a $222,000
decrease in prepaid expenses and other assets.
Net cash provided by investing activities was $1.0 million and $6.7 million
in the nine months ended September 30, 2002 and 2001, respectively. In the nine
months ended September 30, 2002, $1.0 million was received from the maturity of
commercial paper
14
purchased in 2001. In addition to the maturity of commercial paper, $32,000 was
received from the disposal of fixed assets, $29,000 was used for the purchase of
additional equipment and $1,000 was reinvested in a certificate of deposit. In
the nine months ended September 30, 2001, $11.0 million was received from the
maturity of commercial paper purchased in 2000, $3.9 million was used for the
purchase of commercial paper, $369,000 was used to purchase equipment and
furniture, $81,000 was received from the disposal of fixed assets and $1,000 was
returned from a long-term investment.
Net cash used in financing activities was $174,000 and $2.3 million in the
nine months ended September 30, 2002 and 2001, respectively. In the nine months
ended September 30, 2002, net cash used in financing activities resulted from
$89,000 in principal payments made on a note payable, $63,000 in principle
payments on capital leases and $27,000 in issuance of notes to shareholders,
which were expenses in the three months ended September 30, 2002. These uses of
cash were offset by $5,000 received for the issuance of common stock resulting
from the exercise of stock options. In the nine months ended September 30, 2001,
net cash used in financing activities resulted from $1.8 million in principal
payments made on notes payable, $139,000 in principle payments on capital leases
and $334,000 used to repurchase the Company's common stock. These uses of cash
were offset by $7,000 received for the issuance of common stock resulting from
the exercise of stock options.
We believe our current cash and cash equivalents will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures for the
next four to six months. Thereafter, we may need to raise additional capital to
meet our long-term operating requirements. Although cost reduction measures were
implemented in the second quarter of 2001 and in the third quarter of 2002 and
revenues for the nine months ended November 30, 2002 have increased from the
comparable period in 2001there is no assurance these trends can be maintained.
Cash commitments under non-cancelable agreements over the next two years
consist of payments for rent, connectivity and capital leases. Such commitments
total $170,000 for the remainder of 2002, $223,000 during the year ended
December 31, 2003 and $35,000 through May of 2004. No cash commitments currently
extend beyond May of 2004.
Our cash requirements depend on several factors, including the level of
expenditures on advertising and brand awareness, the rate of market acceptance
of our services and the extent to which we use cash for acquisitions and
strategic investments. Unanticipated expenses, poor financial results or
unanticipated opportunities requiring financial commitments could give rise to
earlier financing requirements. If we raise additional funds through the
issuance of equity or convertible debt securities, the percentage ownership of
our shareholders would be reduced, and these securities might have rights,
preferences or privileges senior to those of our common stock. Additional
financing may not be available on terms favorable to us, or at all. The possible
delisting from the Nasdaq SmallCap Market and the going concern contingency
contained in our audit report may make raising additional capital more
difficult. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of business
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited, and we might need to
significantly restrict our operations. Our accountants have noted that these
conditions raise substantial doubt about our ability to continue as a going
concern, as emphasized in their report included in our Annual Report on Form
10-K, filed March 29, 2002.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the
financial statements included in Item 8 of the Annual Report on Form 10-K, filed
with the SEC on March 29, 2002. We believe our most critical accounting policies
include revenue recognition, allowance for doubtful accounts and fixed assets.
The Company currently derives revenue from providing lead generation
activities through a network of partners and e-mail mailings. Revenue earned for
lead generation though the Aptimus network is based on a fee per lead and is
recognized when the lead information is delivered to the client. Revenue earned
for e-mail mailings can be based on a fee per lead, a percentage of revenue
earned from the mailing, or a cost per thousand e-mails sent. Revenue from
e-mail mailings sent on a cost per thousand basis is recognized when the e-mail
is delivered. Revenue from e-mail mailings sent on a fee per lead or a
percentage of revenue earned from the mailing basis is recognized when amounts
are determinable, generally when the customer receives the leads.
Revenues generated through network partners and opt-in email list owners
are recorded on a gross basis in accordance with Emerging Issues Task Force
consensus 99-17 (EITF 99-19). Fees paid to network partners and opt-in email
list owners related to these revenues were $754,000 and $172,000 for the nine
months ended September 30, 2002 and 2001, respectively. These fees are shown as
15
Partner fees on the Statement of Operations. Email based campaigns that are sent
to Company owned lists do not have partner fees associated with them.
The company has evaluated the guidance provided by Emerging Issues Task
Force consensus 99-17 (EITF 99-19) as it relates to determining whether revenue
should be recorded gross or net of the payments made to network partners and
opt-in email list owners. The Company has determined the recording of revenues
gross is appropriate based upon the following factors:
o Aptimus acts as a principal in these transactions;
o Aptimus and its customer are the only companies identified in the
signed contracts;
o Aptimus is solely responsible to the client for fulfillment of the
contract;
o Aptimus determines how the offer will be presented across the network;
and
o Amounts earned are based on leads or emails delivered and are not
based on amounts paid to partners.
The estimate of allowance for doubtful accounts is comprised of two parts,
a specific account analysis and a general reserve. Accounts where specific
information indicates a potential loss may exist are reviewed and a specific
reserve against amounts due is recorded. As additional information becomes
available such specific account reserves are updated. Additionally, a general
reserve is applied to the aging categories based on historical collection and
write-off experience. As trends in historical collection and write-offs change,
the percentages applied against the aging categories are updated.
Property and equipment are stated at cost less accumulated depreciation and
are depreciated using the straight-line method over their estimated useful
lives. Leasehold improvements are amortized on a straight-line method over their
estimated useful lives or the term of the related lease, whichever is shorter.
Equipment under capital leases, which all contain bargain purchase options, is
recorded at the present value of minimum lease payments and is amortized using
the straight-line method over the estimated useful lives of the related assets.
The estimated useful lives are as follows:
Office furniture and equipment Five years
Computer hardware and software Three years
Leasehold improvements Three to Five years
The cost of normal maintenance and repairs are charged to expense as
incurred and expenditures for major improvements are capitalized. Gains or
losses on the disposition of assets in the normal course of business are
reflected in other income, net as part of the results of operations at the time
of disposal.
Changes in circumstances such as technological advances or changes to the
Company's business model can result in the actual useful lives differing from
the Company's estimates. In the event the Company determines that the useful
life of a capital asset should be shortened the Company would depreciate the net
book value in excess of the estimated salvage value, over its remaining useful
life thereby increasing depreciation expense. Long-lived assets, including fixed
assets and intangible assets other than goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. A review for impairment involves developing an
estimate of undiscounted cash flow and comparing this estimate to the carrying
value of the asset. The estimate of cash flow is based on, among other things,
certain assumptions about expected future operating performance. The Company's
estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to our
business model or changes in our operating performance.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted SFAS No. 141 "Business Combinations", SFAS No. 142 "Goodwill and
Other Intangible Assets", SFAS No. 143 "Accounting for Asset Retirement
Obligations", and SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" in the quarter ended March 31, 2002. We adopted SFAS No. 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," and SFAS 146 "Accounting for Costs
Associated with Exit or
16
Disposal Activities" in the quarter ended June 30, 2002.The adoption of these
standards did not have a material impact on our financial position, results of
operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of the Company's cash equivalents, short-term securities and capital
lease obligations are at fixed interest rates and therefore the fair value of
these instruments is affected by changes in market interest rates. As of
September 30, 2002, however, the Company's cash equivalents and short-term
securities mature within three months. As of September 30, 2002, the Company
believes the reported amounts of cash equivalents, short-term securities,
capital lease obligations and notes payable to be reasonable approximations of
their fair values. As a result, the Company believes that the market risk and
interest risk arising from its holding of financial instruments is minimal.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us required to be included in our periodic SEC filings and Form 8-K
reports.
(b) Changes in Internal Controls
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against the
Company. From time to time, the Company is a party to litigation and claims
incident to the ordinary course of business. While the results of litigation and
claims cannot be predicted with certainty, we believe that the final outcome of
such matters will not have a material adverse effect on our business, financial
condition, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities
None.
(b) Sales of Unregistered Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
(a) Nasdaq Listing Status
As noted elsewhere in this report, the Company received notice from Nasdaq
Listing Qualifications that its securities were non-compliant with the
$5,000,000 minimum value of publicly held shares requirement for continued
listing on the Nasdaq National Market and would thus be delisted from that
Market. The Company appealed that decision, which among other things had the
effect of staying the delisting pending the outcome of the appeal. On its
appeal, which was presented to the Hearings Panel on July 12, 2002, the Company
asked, in the alternative, that its securities remain listed on the Nasdaq
National Market, or that they be accepted for listing on the Nasdaq SmallCap
Market. By letter dated August 12, 2002, the Company was notified by Nasdaq that
its securities would be transferred to the Nasdaq SmallCap Market, effective
with the open of business, August 15, 2002. The panel conditioned the transfer
on the fact that if the Company's shares continued to close below the SmallCap
Market's $1.00 per share minimum bid price requirement for the thirty-trading
day period ending August 30 2002, the Company would be notified of such
noncompliance and would thereupon be granted a period of 180 calendar days
within which to demonstrate compliance with the $1.00 minimum bid as well as all
other minimum listing requirements. Aptimus did not achieve compliance with the
$1.00 minimum bid price requirement as of August 30, 2002. Accordingly, by
letter date September 10, 2002, Nasdaq notified the Company that it had until
March 3, 2003 to achieve and maintain for a minimum of ten (10) consecutive
trading days compliance with all Nasdaq SmallCap Market minimum requirements for
continued listing. We can give no assurance that we will achieve compliance with
these requirements within the prescribed timeframe, or at all. As of September
30, 2002, our common stock price was not in compliance with the $1.00 minimum
bid price requirement for continued listing on the Nasdaq SmallCap Market.
Failure to meet all such minimum listing requirements and maintain them for at
least ten (10) consecutive trading days will result in the immediate delisting
of the Company's shares from the Nasdaq SmallCap Market.
b. Changes in Board Composition
On October 30, 2002, Eric Helgeland was appointed to a vacant seat on the
company's Board of Directors. He was also appointed to serve on the company's
audit committee. Mr. Helgeland brings to Aptimus over two decades of strategy
development, new business creation, and marketing experience in the arena of
eCommerce, banking, and payments. Mr. Helgeland is currently a consultant with
Treasury Strategies, Inc., where he provides marketing, business development,
and M&A consulting services to a variety of public and private companies. Prior
to Treasury Strategies, Mr. Helgeland served as Vice President, Marketing and
Business Development, for Fingerhut Corporation, where he was responsible for
managing and directing new customer acquisition efforts and M&A activities for
the Federated Department Stores subsidiary. Prior to Fingerhut, Mr. Helgeland
served as President and CEO of Intersect, Inc. and later, Tactician Consulting,
companies engaged in marketing and distribution planning and software
development. Mr. Helgeland started his career in banking, holding various
managerial positions with First Chicago, Household International and National
Westminster Bank after graduating from Northwestern University with a BA in
economics.
On November 4, 2002, Richard Gallagher resigned from his position as a
Director of the Company. Earlier this year, Mr. Gallagher accepted a position as
President and CEO of Chartered Benefits, a privately held company engaged in
developing membership marketing programs principally for financial institutions.
Mr. Gallagher made the decision to leave our Board of Directors after concluding
that his duties in his new executive role were consuming all of his available
time and attention, leaving little time for other pursuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
Exhibit
Number Description
------ -----------
3.1(1) Second Amended and Restated Articles of Incorporation of
registrant.
3.1.1(5) Articles of Amendment filed September 16, 2000.
3.1.2(9) Articles of Amendment filed March 29, 2002.
3.2(5) Amended and Restated Bylaws of registrant.
4.1(5) Specimen Stock Certificate.
4.2(5) Form of Common Stock Warrant.
18
Exhibit
Number Description
------ -----------
4.3(6) Rights Agreement dated as of March 12, 2002 between
registrant and Mellon Investor Services LLC, as rights
agent.
10.1(1)(8) Form of Indemnification Agreement between the registrant and
each of its directors.
10.2(1)(8) 1997 Stock Option Plan, as amended.
10.3(1)(8) Form of Stock Option Agreement.
10.4(1) Investor Subscription Agreement, dated December 10, 1998,
between registrant and Fingerhut Companies, Inc.
10.5(1) Warrant Agreement, dated December 10, 1998, between
registrant and Fingerhut Companies, Inc.
10.6(1) Stockholders Agreement, dated December 10, 1998, among
registrant, Timothy C. Choate, John P. Ballantine and
Fingerhut Companies, Inc.
10.7(1) Asset Purchase Agreement, dated May 5, 1999, among
registrant, Travel Companions International, Inc., Jeff Mohr
and Janet Mohr.
10.8(1) Asset Purchase Agreement, dated May 6, 1999, among
registrant, Commonsite LLC and Alan Bennett.
10.9(1) Registration Rights Agreement, dated May 6, 1999, between
registrant and Commonsite LLC.
10.10(1) Loan and Security Agreement, dated September 18, 1998,
between registrant and Imperial Bank.
10.11(1) Lease Agreement, dated September 23, 1997 and amended as of
February 16, 1999, between registrant and Merrill Place LLC.
10.11.1(1) Second Amendment to Lease, dated November 30, 1999, between
registrant and Merrill Place LLC.
10.12(1) Promotion Agreement, dated May 18, 1998 and amended as of
June 30, 1998 and September 30, 1998, between registrant and
CNET, Inc.
10.13(1)(7) Linkshare Network Membership Agreement, dated September 23,
1998, between registrant and Linkshare Corporation.
10.14(1) Letter Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.15(1) Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.16(1) Common Stock Purchase Warrant dated January 26, 1998 in
favor of Karrie Lee.
10.17(5) Warrant to Purchase Stock dated September 18, 1998 in favor
of Imperial Bank.
10.18(5) Common Stock Purchase Warrant dated January 23, 1998 in
favor of Hallco Leasing Corporation.
10.19(5) Common Stock Purchase Warrant dated December 4, 1997 in
favor of Hallco Leasing Corporation.
10.20(5) Common Stock Purchase Warrant dated January 26, 1998 in
favor of Employco, Inc.
10.21(5)(7) Marketing Agreement with NewSub Services, Inc. effective as
of June 1, 1999.
10.22(5)(7) Marketing Agreement with eNews.com, Inc. dated December 8,
1999. (Incorporated by reference Exhibit 10.1 to the
Company's Report on Form 8-K filed January 12, 2000).
10.23(2) Asset Purchase Agreement, dated November 22, 2000, among
Aptimus, Inc. and XMarkstheSpot, Inc.
10.24(3) Stock Redemption Agreement, dated as of April 6, 2001, by
and between registrant and Fingerhut Companies. Inc.
10.25(4)(8) Aptimus, Inc. 2001 Stock Plan.
10.25.1(5) Form of Stock Option Agreement.
10.25.2(5) Form of Restricted Stock Agreement (for grants).
10.25.3(5) Form of Restricted Stock Agreement (for rights to purchase).
10.26(5) Letter Agreement, dated November 13, 2001, by and between
registrant and Fingerhut Companies, Inc.
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
and Forward- Looking Statements Risk Factors
- ---------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (No. 333-81151).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K,
dated April 2, 2001.
(3) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 16, 2001.
(4) Incorporated by reference to the Company's Proxy Statement on Schedule
14A, dated May 17, 2001.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, dated November 14, 2001.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 12, 2002.
19
(7) Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(8) Management compensation plan or agreement.
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, dated May 15, 2002.
(b) Reports on Form 8-K
The Company furnished a Form 8-K on August 14, 2002, attaching the
certifications of the Company's Chief Executive Officer and Chief Financial
Officer made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 in
connection with the Company's Quarterly Report on Form 10-Q, dated August 14,
2002. The information in a Form 8-K furnished pursuant to Item 9 shall not be
deemed to be filed under the Securities Exchange Act of 1934, as amended.
20
SIGNATURES
Pursuant to the requirements 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.
APTIMUS, INC.
Date: November 8, 2002 /s/ John A. Wade
------------------------------------------
Name: John A. Wade
Title: Chief Financial Officer,
authorized officer and principal
financial officer
21
CERTIFICATIONS
I, Timothy C. Choate, Chief Executive Officer of Aptimus, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aptimus, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Timothy C. Choate
--------------------------------
Timothy C. Choate
Chief Executive Officer
I, John A. Wade, Chief Financial Officer of Aptimus, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aptimus, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ John A. Wade
- -------------------------------
John A. Wade
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Aptimus, Inc. (the "Company") on Form
10-Q for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Timothy C. Choate,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Timothy C. Choate
----------------------------------
Timothy C. Choate
Chief Executive Officer
November 8, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Aptimus, Inc. (the "Company") on Form
10-Q for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, John A. Wade, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ John A. Wade
- -----------------------------
John A. Wade
Chief Financial Officer
November 8, 2002