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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
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 000-27065
APTIMUS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1809146
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
95 South Jackson Street
Suite 300
Seattle, Washington 98104
(Address of principal executive offices)
Registrant's telephone number: (206) 441-9100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold on the OTCBB as of the last business day of the registrant's most
recently completed second fiscal quarter, which was June 30, 2003:
$1,142,973.75.
The number of shares of the registrant's Common Stock outstanding as of
February 13, 2004 was 5,217,683.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 8, 2004
are incorporated by reference into Part III.
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FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Forward-looking statements can often be identified by terminology such as
may, will, should, expect, plan, intend, expect, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Aptimus, Inc. ("Aptimus", "we", "us" or the "Company"), or
developments in the Company's industry, to differ materially from the
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements include, without limitation, fluctuation of the Company's operating
results, the ability to compete successfully, the ability of the Company to
maintain current client and distribution partner relationships and attract new
ones, the sufficiency of remaining cash and short-term investments to fund
ongoing operations and the ability to integrate acquired companies. For
additional factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements, please see the risks and
uncertainties described under "Business -- Risk Factors" in Part I of this
Annual Report. Certain of the forward-looking statements contained in this
Report are identified with cross-references to this section and/or to specific
risks identified under "Business -- Risk Factors."
PART I
Item 1: Business
Overview
Aptimus today is a powerful performance-based Internet advertising
network. For marketers, the Aptimus Network offers a high volume, high quality
platform to present their offers across a broad audience of website and e-mail
distribution channels. Marketers pay only for the results they achieve on a cost
per click, cost per lead, cost per acquisition, or cost per impression basis, as
well as combinations of those models. As a result, marketers can refine their
offers and payment models to achieve their exact objectives 100% of the time.
For website distribution partners, the Aptimus Network generates high revenues
per impression promoting compelling offers from quality brands in graphical
formats that complement the partners' sites and add value for their customers.
At the heart of the Aptimus Network is a proprietary, patent-pending technology
and direct marketing process called Dynamic Revenue Optimization(TM), which
automatically determines on a real-time basis the best marketer offers for
promotion on each distribution partner's website and in each e-mail sent. The
technology is designed to optimize results for Aptimus' marketer clients by
placing the right offers in front of the right customers, while maximizing
revenues for Aptimus' distribution partners. The Company's primary offer
presentation formats include cross-marketing promotions at the point of
registration, log-in or other transactional activities on websites, online
advertising programs, and permission based e-mail marketing campaigns. Aptimus'
current clients include many of the top 500 direct marketers, such as Procter &
Gamble, Gevalia Coffee, Hewlett Packard, IBM and Forbes. Aptimus distribution
partners include a broad cross-section of the Internet from CNET Networks to
eDiets. Aptimus has offices in San Francisco and Seattle, and is publicly traded
on the OTCBB under the symbol APTM.
Company History
Aptimus began in 1994 as the FreeShop division of Online Interactive, Inc.
This division was spun-off from Online Interactive, Inc. in 1997 as FreeShop
International, Inc., and later became FreeShop.com, Inc. FreeShop was an online
direct marketing website connecting marketers and consumers in an innovative new
approach made possible by the Internet. The concept was to leverage the unique
qualities of the Internet to change the direct marketing paradigm and allow
consumers to pick and choose the promotional offers they actually wanted from
direct marketers. This site-centric approach led to the Company's growth through
our initial public offering in 1999 and into 2000. The core of our business
model was the lead generation business, a decades-old two-step marketing process
where marketers offer a free trial, sample or information as a first step to
acquiring a new customer. By the year 2000, our lead generation business was
surrounded by advertising and sponsorship opportunities, which eventually grew
to 65% of our revenues in the second quarter of 2000.
During the year 2000, funding for Internet companies slowed and stock
prices generally declined. Lack of funding, combined with an increased focus
among Internet companies on profitability over revenue growth objectives,
resulted in reduced marketing spending by Internet companies, most notably in
the second half of 2000. This drop in spending had significant repercussions
throughout the industry and materially affected our advertising and sponsorship
businesses.
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While the Company faced major challenges in 2000 and our results suffered,
we maintained our aggressive posture and focused on what we know best - online
direct marketing. Toward that end, beginning in June 2000 we undertook an
evaluation of all aspects of how we do business. Through this effort, we made a
number of determinations and commitments that formed the basis of our strategy
going forward.
o We determined that revenue streams from advertising and sponsorship
opportunities were declining quickly and would not likely return to
their earlier levels for some time to come. Those revenue streams
were critical to making rapid growth via our site-centric approach
possible, given the high marketing and infrastructure costs of
growing a website audience.
o We determined that our lead generation core business remained
strong, direct marketing in general continued to prosper, and most
direct marketers recognized the importance of the Internet as a key
part of their distribution mix.
o We determined that all major sites throughout the industry would be
feeling the same impacts on advertising spending, and thus would be
seeking alternative revenue-generation opportunities such as
results-based pricing (where fees are paid on a per-lead or other
results basis).
o We determined that our direct marketing clients could be served even
better by our placement of their offers in relevant context through
other companies' websites and e-mail channels, without Aptimus
spending the significant resources required to continue to maintain
and grow our own website audiences.
As a result of these determinations, we made a shift to build a network
strategy beginning in the Summer of 2000, placing direct marketing clients'
offers in contextually relevant locations on partner websites throughout the
Internet. Consistent with this new strategy, in October 2000 we renamed our
company Aptimus, Inc., and christened our network the Aptimus Network.
From the summer of 2000 to the summer of 2001, we laid the foundation for
our new network business model, and also reevaluated and changed all aspects of
our company in the process. We exited the website business and terminated most
of the contracts that were tied to our website business. We also reduced our
staff from a high of 215 to 28 at the end of 2001 primarily through
restructuring plans implemented in February of 2001 and June of 2001. In
addition, in November 2001 we completed a major issuer tender offer, acquiring
9,230,228 shares of our outstanding common stock, or approximately 69.87% of our
outstanding shares as of November 15, 2001. The issuer tender offer was
completed in order to increase the upside potential for continuing shareholders
who believed in the future of online direct marketing and our Company while
simultaneously allowing shareholders who desired to exit the stock to do so at a
substantial premium to market prices at the time.
As of the summer of 2001, we were a fully transitioned company focused
exclusively on our network business opportunity, and poised for a turnaround in
our growth. During the third quarter of 2001, our first full quarter of network
focus, our network generated $140,000 in revenues. The momentum increased in the
fourth quarter, where we grew to $322,000 in network revenues. Since then, we
have continued to scale our business with annual revenues growing to $2.9
million in 2002 and increasing by sixty percent to $4.6 million for 2003.
With continued positive momentum, a strong technology foundation, and a
low fixed cost structure, we are on our way to realizing the power and growth
potential of our network model. We hope to build on the foundation of our recent
successes and develop Aptimus into an Internet survivor and category leader in
online performance-based marketing technologies and services.
Industry Background
Direct Marketing
Advertising expenditures can be broadly defined as either brand or direct
marketing. Brand advertising is intended to generate brand name awareness and
create a specific image for a particular company, product or service. Direct
marketing involves any communication to a consumer intended to generate a
specific response or action, generally a purchase of a product or service.
Traditional Direct Marketing
Traditional direct marketing media include direct mail, telemarketing,
newspaper, magazine, radio and television advertising. Although traditional
direct marketing is effective and widely used, it presents a number of
challenges for marketers and consumers alike. Traditional direct marketers
generally lack specific and timely information on a particular consumer's
immediate interests. As a result, marketers spend considerable resources on
communications most consumers don't want or need. Given the costs associated
with traditional direct marketing, which typically include printing, data
processing, postage, assembly, labor, telecommunications, and facilities, low
response rates make the process increasingly inefficient.
3
Online Direct Marketing
Online direct marketing media include banner advertisements,
interstitials, advertorials, text-links, pop-ups, targeted e-mail solicitations
and website sponsorships. Online direct marketing is more efficient than
traditional direct marketing because it requires lower production costs, and
provides easier and faster customer response features. In addition, online
direct marketing allows marketers to develop one-to-one relationships with
customers; collect instantaneous data and feedback on marketing campaigns; and
enables highly customized marketing campaigns.
Even with these advantages, direct marketers face challenges in realizing
the full potential of the Internet as a marketing medium. With millions of
websites, only a fraction of which have significant audiences, it is difficult
for marketers to decide where to spend their marketing budgets. Even leading
brand name marketers who build their own websites must find ways to attract a
sizeable audience. In addition, technological hurdles may impede conventional
direct marketers from successfully extending their activities to the Internet.
The Aptimus Solution
Aptimus believes it has developed the most powerful performance-based
advertising network on the Internet today. The Aptimus Network generates high
volumes of quality orders for leading marketers, by presenting their offers
across a network of website distribution partners from CNET Networks to eDiets.
At the same time, the Aptimus Network provides significant revenue benefits to
its website partners, generating higher revenues per impression for its key
formats than any other ad network, or even CPM based advertising programs.
Marketers pay only for the results they achieve on a cost per click, cost
per lead, cost per acquisition, or cost per impression basis, as well as
combinations of those models. As a result, marketers can refine their offers and
payment models to achieve their exact objectives 100% of the time.
The Aptimus Network is focused primarily on advertising placements at the
points of various transactional activities on websites where consumers are more
active and, thus, more likely to respond to offers from marketers. Key formats
include cross-marketing promotions at the point of registration, log-in,
download or other transactional activities on websites. The Aptimus Network also
includes other online advertising formats and e-mail marketing campaigns.
Dynamic Revenue Optimization(TM)
At the core of the Aptimus Network is a proprietary, patent-pending
technology and direct marketing approach called Dynamic Revenue Optimization
(DRO), which automatically determines on a real-time basis the best marketer
offers for promotion on each distribution partner's website and in each e-mail
sent. The technology is designed to optimize results for Aptimus' marketer
clients by placing the right offers in front of the right customers, while
maximizing revenues for Aptimus' distribution partners.
In simple terms, the Company's Dynamic Revenue Optimization system
measures every offer in every ad position on a revenue per impression basis.
Then, offers with greater revenues per impression for that position
automatically receive more exposure there, while lower performing offers receive
less exposure. The analytics are continuously updated to quickly identify the
performance of new offers and to adjust and improve the performance of every
placement.
Revenues per impression are determined based on response rate to each
offer in each position multiplied by the fee for that response, whether the
marketer is paying a fee per click, a fee per lead, or based on any other
measurable outcome. This approach is more flexible and powerful than other
response based systems that usually focus on one payment model exclusively, such
as the cost per click approach of paid search networks.
Because DRO depends on consumer response as a central factor, the system
automatically improves the targeting of each offer based on consumer behavior,
placing the right offers in front of the right customers at the right time.
Because DRO also depends on the price per result paid by each marketer, a
competitive environment is created that leads marketers to pay Aptimus the
highest fees possible for their desired results.
4
Benefits to Consumers
The Aptimus Network presents great offers from leading brands to
consumers, allowing consumers to easily select and respond to the offers that
are of greatest interest to them. Because the Aptimus Network prioritizes offers
in each location based on actual response behavior in that location, consumers
are more likely to find offers of unique interest and value to them since they
are likely to have interests in common with others who have come to the same
position, regardless of their demographic characteristics. In addition, the
Aptimus Network prioritizes the most popular offers which also tend to offer the
greatest value to consumers.
Benefits to Marketers
Aptimus benefits marketers by offering a powerful, cost effective way to
acquire new customers online. The Aptimus Network presents their offers across a
broad selection of website partners, and the Company's Dynamic Revenue
Optimization approach automatically determines where the best customers are for
each offer. Marketers pay Aptimus solely based on the results achieved for them,
on a cost per click, cost per lead, cost per order, or other payment model which
makes the most sense for them. Thus, marketers can test new marketing programs
with Aptimus with little to no risk, and the potential for high volume results
for the best performing offers.
Benefits to website partners
The Company believes that the Aptimus Network generates higher revenues
per impression for its website distribution partners than any other ad network
available today. Aptimus works closely with partners to identify key areas of
their websites that have the most profit potential, and then dynamically serves
targeted offers into those placements on an ongoing basis. Partners share in
results achieved, and Aptimus does all of the work to manage the placements,
advertiser sales, order taking, optimization, billing, etc.
Aptimus' preferred positions are different than the targeted positions of
other ad networks such as Google or aQuantive. And the Aptimus Network generates
higher revenues per impression than other networks while keeping consumers at
the partner's website, rather than clicking them away to the website of the
sponsoring advertiser.
Strategy
Our objective is to be the largest performance based advertising network
on the Internet. We intend to achieve this objective by the following key
strategies:
Grow website Distribution Partner Base
We intend to continue to grow our website distribution network as our
primary emphasis, now that we have a powerful platform and strong base of
leading clients. The Aptimus Network already generates high revenues per
impression. Our main emphasis is to increase those impressions. Our key target
distribution partners are large website properties with significant volumes of
transactional activities such as registrations, log-ins, downloads, auction
bids, and other activities. We are also seeking major brand distribution
partners in key interest categories to continue to attract more and new types of
major brand clients.
Expand Client Base
Aptimus provides major marketers with a cost-effective alternative to
traditional direct marketing and, as a result, the Company has a significant
opportunity to increase the number of direct marketing clients we serve. In
particular, we are seeing more national consumer brand companies seeking
Internet-based direct marketing vehicles, and we plan to initiate new
relationships and expand our existing relationships with these companies. We
continue to focus our sales staff to drive this client growth. We plan to
continue to expand and refine the services we offer to our clients, including
enhanced marketing programs, new methods of presenting offers, and expanded
data-gathering options. Finally, we also offer our services to advertising and
direct marketing agencies as a solution for their client companies to access
consumers on the Internet.
Increase Revenues Per Impression
Our Dynamic Revenue Optimization technology platform automatically maximizes
revenues through a patent-pending algorithmic approach. Over time, as we
continue to add new clients and offers, this system should automatically
increase our revenues based on the impressions we receive. In addition, clients
have a built-in incentive to improve their offers and the fees they pay to
Aptimus per response, as the revenue results per impression for their offer will
be a key factor in determining their exposure and, in turn, the volume of orders
they receive. Aptimus also offers marketers tools to dynamically test new offer
formats and versions, such as different graphics or text, to improve their own
response rate in the Aptimus Network. While the Aptimus Network already sets
revenue per impression records in many of its locations, there will always be an
opportunity to increase revenues per impression even further through continuous
testing and improvement.
5
Sales and Marketing
Client Base Development
We sell our solutions to marketer clients primarily through a sales and
marketing organization comprised of Aptimus employed sales staff based in San
Francisco. As part of our strategy to increase our client base, we will expand
our sales force and client account management teams on an as needed basis. In
addition, Aptimus works extensively with advertising agencies, which often act
as "offer aggregators" bringing multiple new clients and offers to Aptimus
simultaneously. Relationships with key advertising agencies have enabled Aptimus
to expand its base of clients and offers more rapidly, without having to expand
its internal sales team as quickly or as much as might otherwise be required.
Partner Base Development
Aptimus has a dedicated business development team who target and offer
websites the opportunity to participate in the Aptimus Network. Aptimus business
development staff and account managers work closely with our partner websites to
determine the most advantageous offer placements and presentation formats, often
monetizing previously untapped content and traffic. We continually and
dynamically analyze consumer response to offers presented on distribution
partner websites in order to optimize results. We also experiment with multiple
overall presentation formats and placements to maximize revenues for our
distribution partners.
Operations and Technology
We have implemented a broad array of offer presentation, dynamic
optimization, customer service, transaction processing and reporting systems
using both proprietary and licensed technologies. The Aptimus Network resides on
a proprietary platform that is flexible, reliable and scalable. It can support
millions of consumers and large numbers of marketer clients and website
distribution partners. Aptimus' proprietary network has been developed using
both data and process engineering approaches to ensure a comprehensive and
reliable architecture. Aptimus has filed a non-provisional patent application
with the US Patent and Trademark Office that covers our proprietary offer
rotation engine as a whole as well as its various unique component parts. The
Aptimus Network technology has been created with four foundation goals in mind:
Flexibility: The network is built entirely in Java, HTML, and XML,
and is intended to run across all platforms and networks.
Compatibility: To support the network, we have designed our offer
presentation formats to scale easily across partner websites with a
minimum of technical integration required.
Reliability: We have conducted millions of transactions across our
network of partner sites with a negligible failure rate. All our data
transfers are conducted according to industry-standard security protocols,
including Secure Sockets Layer (SSL).
Scalability: All of our technologies are designed for rapid,
complete deployment across a large number of distribution partners. We
leverage existing transactional implementations at our distribution
partner websites to speed the integration process.
The Aptimus Network technology has been designed to evolve with the
business and the Internet marketplace.
Competition
While we believe that our proprietary technology offers us a significant
advantage over any potential competition in our specific areas of focus, we
nonetheless face competition from other online advertising and direct marketing
networks for client advertising budgets. Given our results based approach and
the large budgets of most of our clients, many of our contracts are effectively
unlimited in scale such that our clients can and do work with Aptimus and
multiple other sources simultaneously for online marketing and customer
acquisition. Other online advertising networks and performance based marketing
providers that marketers might work with include ValueClick, Google,
MaxWorldwide, aQuantive, AskJeeves, FindWhat and Advertising.com, some of which
are also partners or clients of Aptimus.
Aptimus also competes indirectly for Internet advertising revenues in
general with large Web publishers and Web portals, such as America Online,
Microsoft Network, and Yahoo!, all of which would also be strong distribution
partners for the Aptimus Network.
6
Seasonality
Aptimus is subject to seasonal fluctuations. Direct marketers generally
increase their customer acquisition efforts in the third quarter and early
fourth quarter more than at any other time of the year. Further, in the United
States Internet user traffic typically subsides during the summer months.
Expenditures by advertisers and direct marketers also tend to reflect overall
economic conditions as well as individual budgeting and buying patterns of
marketers.
Intellectual Property
We regard our copyrights, service marks, trademarks, pending patents,
trade secrets, proprietary technology and similar intellectual property as
critical to our success, and we rely on trademark, patent and copyright law,
trade secret protection and confidentiality and license agreements with our
employees, customers, independent contractors, partners and others to protect
our intellectual property rights. We have registrations or pending registrations
of the trademark "Aptimus" and "The Aptimus Network" in the United States,
Australia, Canada, China, the European Union, and New Zealand. We also have a
pending non-provisional patent application in the United States and under the
Patent Cooperation Treaty for protection in the PCT member states that covers
our proprietary offer rotation engine as a whole as well as its various unique
component parts.
We have registered a number of domain names, including aptimus.com among
others. Internet regulatory bodies regulate domain names. The regulation of
domain names in the United States and in foreign countries is subject to change
in the future. Regulatory bodies could establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for holding
domain names. The relationship between regulations governing domain names and
laws protecting trademarks and similar intellectual property rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring domain
names that infringe on or otherwise decrease the value of our trademarks and
other proprietary rights.
Aptimus may be required to obtain licenses from others to refine, develop,
market and deliver new services. We may be unable to obtain any such license on
commercially reasonable terms, if at all, or guarantee that rights granted by
any licenses will be valid and enforceable.
Financial Information About Geographic Areas
For the years ended December 31, 2003, 2002 and 2001 revenues attributable
to the United States have been $4.6 million, $2.8 million and $1.7 million, or
100%, 97%, and 93%, respectively. For the past three fiscal years all long-lived
assets of the Company have been located in the United States.
Employees
As of February 13, 2004, Aptimus had a total of 25 employees. The current
employee mix includes 13 in sales and marketing, 7 in technology and
development, and 5 in finance and administration. Unions represent none of our
employees. We consider relations with our employees to be good.
7
RISKS RELATED TO OUR BUSINESS
We have a limited operating history, which makes it difficult to predict our
future performance.
Our limited operating history makes predicting our future performance
difficult and does not provide investors with a meaningful basis for evaluating
an investment in our common stock. From our inception in June 1994 through June
1997, we existed as a division of Online Interactive, Inc. We began operations
as an independent company in June 1997. In the first half of 1998, we began
offering advertising opportunities on our websites and in our e-mail newsletters
in addition to our primary business of lead generation. As a result, our
performance from the end of the first quarter of 1998 through January 2001 was
not comparable to prior periods. In February 2001, we repositioned the Company
as a direct marketing infrastructure provider, focusing all our resources on
building our direct marketing network. As a consequence, our performance since
the repositioning is not comparable to periods prior to that time.
We will face risks encountered by early-stage companies in Internet-related
businesses and may be unsuccessful in addressing these risks.
We face risks frequently encountered by early-stage companies in new and
rapidly evolving markets, including the market for online direct marketing. We
may not succeed in addressing these risks, and our business strategy may not be
successful. These risks include uncertainties about our ability to:
o attract a larger number of consumers to our offer network;
o contract with new advertiser and agency clients and add new and
compelling content to our offer network;
o contract with new online distribution partners with access to large
volumes of online users;
o contract with third-party providers of systems upon which our
services may depend;
o collect receivables for services performed from existing advertiser
and agency clients;
o manage our evolving operations;
o adapt to potential decreases in online advertising rates;
o successfully introduce new products and services;
o continue to develop and upgrade our technology and minimize
technical difficulties and system downtime;
o create and maintain the loyalty of our customers, partners and
clients;
o maintain our current, and develop new, strategic relationships and
alliances; and
o attract, retain and motivate qualified personnel.
We have a history of losses and have not yet achieved profitability.
We have not achieved profitability as of December 2003. We incurred net
losses of $17.9 million, or more than 9.5 times the amount of our net revenues,
for the year ended December 31, 2001, $5.5 million, or more than 1.9 times the
amount of our net revenues, for the year ended December 31, 2002 and $1.5
million, or one-third the amount of our net revenues for the year ended December
31, 2003. As of December 31, 2003, our accumulated deficit was $63.1 million. We
have replaced an earlier strategy of increased expenditures to accelerate growth
with our current strategy of maintaining operating expenses and capital
expenditures to levels commensurate with actual growth. Even if we do achieve
profitability, we may be unable to sustain profitability on a quarterly or
annual basis in the future. It is possible that our net revenues will grow more
slowly than we anticipate or that operating expenses will exceed our
expectations.
8
We may need additional financing at some point n the future, without which we
may be required to restrict or discontinue our operations.
As of December 31, 2003, our business was not generating the cash
necessary to fund our long-term operations. We anticipate that our available
cash resources will be sufficient to meet our currently anticipated capital
expenditures and working capital requirements for at least the next two to three
years. In the event our cash from operations have not by that time grown to meet
or exceed our capital expenditure and working capital requirements, we may need
to raise additional funds to continue operation. In addition, we may need to
raise additional funds to develop or enhance our services or products, fund
expansion, respond to competitive pressures or acquire businesses or
technologies. Unanticipated expenses, poor financial results or unanticipated
opportunities that require 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 existing
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 the Company, or at all. 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 or
discontinue our operations.
Our quarterly operating results are uncertain and may fluctuate significantly,
which could negatively affect the value of our share price.
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate. For example, during the year ended
December 31, 2003, the percentage of annual net revenues attributable to the
first, second, third and fourth quarters were 19.9%, 20.5%, 30.8% and 28.8%,
respectively. Our operating results for a particular quarter or year may fall
below the expectations of securities analysts and investors. With the
significant shift in the business to an online direct marketing infrastructure
provider, operating results in the near term may fall below earlier established
expectations of securities analysts and investors. These lower operating results
may cause a decrease in our stock price.
Our limited operating history and new business model makes it difficult to
ascertain the effects of seasonality on our business. We believe, however, that
our revenues may be subject to seasonal fluctuations because advertisers
generally place fewer advertisements during the first and third calendar
quarters of each year. In addition, expenditures by advertisers tend to be
cyclical, reflecting overall economic conditions as well as budgeting and buying
patterns. A decline in the economic prospects of advertisers could alter current
or prospective advertisers' spending priorities, or the time periods in which
they determine their budgets, or increase the time it takes to close a sale with
our advertisers.
If we cannot secure sufficient promotional offers from our marketer clients, our
business will suffer.
If we are unsuccessful in acquiring and renewing a continuing array of
free, trial and promotional offers for our distribution network, our order
volumes will likely decrease. The attractiveness of our offer network to
consumers and distribution partners is based in part on our ability to provide a
broad variety of offers of interest to consumers. In addition, a number of other
websites give consumers access to similar offers. We face competition for free,
trial and promotional offers from these websites as well as a variety of other
online and traditional competitors. Without sufficient variety and quality of
offers, our promotional offer network will become less attractive to both
marketers and our distribution partners through whose sites the offers are
promoted, and our ability to generate revenues from marketer clients will be
adversely affected.
If we cannot maintain our licenses with data owners, our business may suffer.
We distribute promotional offers by means of e-mail to lists of names
owned by the Company or managed by the Company under license from third-party
list owners. While this business segment's contributions to total revenues have
shrunk on a percentage basis over the past several quarters, it remains a
material part of our business. We face competition from other providers of list
management services. If we are unsuccessful in maintaining our current license
agreements with data list owners, our e-mail-based order volumes will likely
decrease. As a consequence, our ability to generate revenues from the e-mail
segment of our business will be adversely affected.
The majority of our contracts have month-to-month terms, and the loss of a
significant number of these contracts in a short period of time could harm our
business.
During the year ended December 31, 2003, a significant number of our
contracts had month-to-month terms with automatic renewal unless terminated by
either party with 30 days notice. The loss of a significant number of these
contracts in any one period could result in a reduction in the size of our offer
network, cause an immediate and significant decline in our net revenues and
cause our business to suffer.
9
The loss of the services of any of our executive officers or key personnel would
likely cause our business to suffer.
Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Timothy C. Choate, our
President and Chief Executive Officer and other key employees, including our
technical and sales personnel. The loss of the services of any of these
individuals could harm our business. We may be unable to attract, motivate and
retain other key employees in the future. Competition for employees in our
industry has experienced a reduction in intensity. However, in the past we have
experienced difficulty in hiring qualified personnel. We do not have employment
agreements with any of our key personnel, nor do we have key-person insurance
for any of our employees.
Any future acquisitions present many risks and uncertainties generally
associated with acquisitions, including, without limitation:
o difficulties integrating operations, personnel, technologies,
products and information systems of acquired businesses;
o potential loss of key employees of acquired businesses;
o adverse effects on our results of operations from
acquisition-related charges and amortization of goodwill and
purchased technology;
o increased fixed costs, which could delay profitability;
o inability to maintain the key business relationships and the
reputations of acquired businesses;
o potential dilution to current shareholders from the issuance of
additional equity securities;
o inability to maintain our standards, controls, procedures and
policies;
o responsibility for liabilities of companies we acquire; and
o diversion of management's attention from other business concerns.
Broker-dealers may be discouraged from effecting transactions in our shares
because they are considered penny stocks and are subject to the penny stock
rules.
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of
1934, as amended, impose sales practice and disclosure requirements on NASD
broker-dealers who make a market in "a penny stock". A penny stock generally
includes any non-Nasdaq equity security that has a market price of less than
$5.00 per share. Our shares have been quoted on the OTCBB since March 7, 2003.
Prior to March 7, 2003, our shares were quoted on the Nasdaq SmallCap Market.
The price of our shares on such markets ranged from $0.38 to $2.25 during the
period from January 1, 2002 to March 14, 2003, and the closing price of our
shares on March 14, 2003 was $0.38. Purchases and sales of our shares are
generally facilitated by NASD broker-dealers who act as market makers for our
shares. The additional sales practice and disclosure requirements imposed upon
broker-dealers may discourage broker-dealers from effecting transactions in our
shares, which could severely limit the market liquidity of the shares and impede
the sale of our shares in the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock to
anyone other than an established customer or "accredited investor" (generally,
an individual with net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,000 together with his or her spouse) must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt.
In addition, the penny stock regulations require the broker-dealer to
deliver, prior to any transaction involving a penny stock, a disclosure schedule
prepared by the Securities and Exchange Commission relating to the penny stock
market, unless the broker-dealer or the transaction is otherwise exempt. A
broker-dealer is also required to disclose commissions payable to the
broker-dealer and the registered representative and current quotations for the
securities. Finally, a broker-dealer is required to send monthly statements
disclosing recent price information with respect to the penny stock held in a
customer's account and information with respect to the limited market in penny
stocks.
10
Since our stock price is volatile, we may become subject to securities
litigation that is expensive and could result in a diversion of resources.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile. Securities class action litigation has
often been brought against companies that experience volatility in the market
price of their securities. Litigation brought against us could result in
substantial costs to us in defending against the lawsuit and a diversion of
management's attention that could reduce the value of your investment.
Our directors and executive officers hold a substantial portion of our stock,
which could limit your ability to influence the outcome of key transactions,
including changes of control.
As of February 13, 2004, Mr. Choate beneficially owned approximately 27.9%
of our issued and outstanding common stock and our directors and executive
officers as a group beneficially owned approximately 28.1% of our issued and
outstanding common stock. As a result, the ability of our other stockholders to
influence matters requiring approval by our stockholders, including the election
of directors and the approval of mergers or similar transactions, could be
limited.
Our articles of incorporation, bylaws, change in control agreements and the
Washington Business Corporation Act contain anti-takeover provisions which could
discourage or prevent a takeover, even if an acquisition would be beneficial to
our shareholders.
Provisions of our amended and restated articles of incorporation, our
bylaws, change in control agreements we have entered into with certain of our
executive officers, and our Shareholder Rights Plan could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
shareholders. These provisions include:
o authorizing the issuance of "blank check" preferred stock that could
be issued by our board of directors, without shareholder approval,
to increase the number of outstanding shares or change the balance
of voting control and thwart a takeover attempt;
o prohibiting cumulative voting in the election of directors, which
would otherwise allow less than a majority of shareholders to elect
directors; and
o declaration of a dividend distribution of preferred share purchase
rights and adoption of a Rights Plan in March 2002, which would
discourage a change of control attempt without the approval of the
Board of Directors.
o acceleration of option vesting and payment of severance in the event
an executive loses his job as a consequence of the sale or merger of
the Company.
In addition, Chapter 23B.19 of the Washington Business Corporation Act and
the terms of our stock option plan may discourage, delay or prevent a change in
control which certain shareholders may favor.
If a significant number of our clients experience a decline in their financial
condition, the collectibility of our accounts receivable may suffer, materially
adversely affecting our financial results.
A decline in the financial condition of clients owing significant amounts
to us could cause us to write off the amounts owed by these entities as bad
debt, which could have a material adverse effect on our financial results.
An increase in the number of orders on our network may strain our systems or
those of our third-party service providers, and we are vulnerable to system
malfunctions.
Any serious or repeated problems with the performance of our network could
lead to the dissatisfaction of consumers, our marketer clients or our
distribution partners. The order volume on our network is expected to increase
over time as we seek to expand our client, consumer and distribution partner
base. The proprietary and third-party systems that support our network must be
able to accommodate an increased volume of traffic. Although we believe our
systems and those of our third-party hosting service providers can currently
accommodate well in excess of current order volumes, our network has, in the
past, experienced slow response times and other systems problems for a variety
of reasons, including failure of our third party Internet service providers,
hardware failures and failure of software applications. In these instances, our
network was typically unavailable or slow for approximately one and one-half to
two hours. Although these failures did not have a material adverse effect on our
business, we may experience similar problems in the future that could have a
material adverse effect on our business.
11
We face intense competition from marketing-focused companies for marketer
clients and may be unable to compete successfully.
We may be unable to compete successfully with current or future
competitors. We face intense competition from online advertising and direct
marketing companies like ValueClick, CoolSavings, Aquantive and MaxWorldwide.
Competition with smaller privately funded direct competitors also continues to
be a factor. We expect competition from online competitors to remain intense
because there are no substantial barriers to entry in our industry. Increased
competition could result in price reductions for online advertising space and
marketing services, reduced gross margins and loss of market share.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than Aptimus. These advantages may allow them to respond more quickly
and effectively to new or emerging technologies and changes in customer
requirements. These advantages may also allow them to engage in more extensive
research and development, undertake farther-reaching marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
employees, strategic partners and advertisers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective marketer
clients.
Online marketing is a rapidly developing industry, and new types of
products and services may emerge that are more attractive to consumers and
marketers than the types of services we offer. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share.
If our customers request products and services directly from our marketer
clients instead of requesting the product or service from us, our business could
suffer.
Our marketer clients, data licensors and/or distribution partners may
offer the same free, trial or promotional products or services on their own
websites or e-mail programs that we offer via our offer distribution network and
e-mail programs. Our customers may choose to request products or services
directly from our marketer clients, data licensors and/or distribution partners
instead of requesting the product or service through us, which would result in
lower net revenues to the Company from lead generation and cause our business to
suffer.
If third-party Internet service providers place limitations or restrictions on
commercial e-mail addressed to their subscribers, our business could suffer.
Our e-mail program distributes commercial e-mail to company-owned and
licensed lists of individual Internet users, some of whom are subscribers of
third-party Internet service providers or ISPs such as AOL, Yahoo! and MSN.
These ISPs have the ability to limit, restrict or otherwise filter the e-mails
delivered to their subscribers. Efforts by such ISPs to limit or restrict
third-party commercial e-mails such as ours, if successful, could result in
lower net revenues to the Company from lead generation and cause our business to
suffer.
We may need to incur litigation expenses in order to defend our intellectual
property rights, and might nevertheless be unable to adequately protect these
rights.
We may need to engage in costly litigation to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the intellectual property rights of others. We can give no assurance
that our efforts to prevent misappropriation or infringement of our intellectual
property will be successful. An adverse determination in any litigation of this
type could require us to make significant changes to the structure and operation
of our services and features or to license alternative technology from another
party. Implementation of any of these alternatives could be costly and
time-consuming and may not be successful. Any intellectual property litigation
would likely result in substantial costs and diversion of resources and
management attention.
Our success largely depends on our trademarks, including "Aptimus," and
internally developed technologies, including our patent pending opt-in serving
platform, which includes offer rotation and implementation, order collection,
order processing and lead delivery, that we seek to protect through a
combination of patent, trademark, copyright and trade secret laws. Protection of
our proprietary technology and trademarks is crucial as we attempt to build our
proprietary advantage, brand name and reputation. Despite actions we take to
protect our intellectual property rights, it may be possible for third parties
to copy or otherwise obtain and use our intellectual property without
authorization or to develop similar technology independently. In addition, legal
standards relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related businesses are uncertain and
still evolving. Although we are not currently engaged in any lawsuits for the
purpose of defending our intellectual property rights, we may need to engage in
such litigation in the future. Moreover, we may be unable to maintain the value
of our intellectual property rights in the future.
12
We could become involved in costly and time-consuming disputes regarding the
validity and enforceability of recently issued or pending patents.
The Internet, including the market for e-commerce and online advertising,
direct marketing and promotion, is characterized by a rapidly evolving legal
landscape. A variety of patents relating to the market have been recently
issued. Other patent applications may be pending. We have a pending
non-provisional patent application before the United States Patent and Trademark
Office and have made appropriate filings with certain foreign regulatory bodies
preserving our patent rights in their jurisdictions, which we intend to
prosecute. It is possible that significant activity in this area may continue
and that litigation may arise due to the patent holder's and/or our efforts to
enforce applicable patent rights.
We may incur substantial expense and management attention may be diverted
if litigation occurs. Moreover, whether or not claims against us have merit, we
may be required to enter into license agreements or be subject to injunctive or
other equitable relief, either of which would result in unexpected expenses or
management distraction.
We may face litigation and liability for information displayed on our network or
delivered in an e-mail.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement and various other claims relating to the nature and
content of materials we publish on our offer distribution network or distribute
by e-mail. These types of claims have been brought, sometimes successfully,
against online services in the past. We could also face claims based on the
content that is accessible from our network through links to other websites. In
addition, we may be subject to litigation based on laws and regulations
concerning commercial e-mail. Any litigation arising from these claims would
likely result in substantial costs and diversion of resources and management
attention, and an unsuccessful defense to one or more such claims could result
in material damages and/or injunctive or other equitable relief. We have no
insurance coverage for these types of claims. Moreover, any claim that
successfully limited or entirely prevented our current commercial e-mail
activities would result in lower net revenues to the Company and cause a
material adverse effect on our business.
Security and privacy breaches could subject us to litigation and liability and
deter consumers from using our network.
We could be subject to litigation and liability if third parties penetrate
our network security or otherwise misappropriate our users' personal or credit
card information. This liability could include claims for unauthorized purchases
with credit card information, impersonation or other similar fraud claims. It
could also include claims for other misuses of personal information, such as for
unauthorized marketing purposes. In addition, the Federal Trade Commission and
other federal and state agencies have investigated various Internet companies in
connection with their use of personal information. We could be subject to
investigations and enforcement actions by these or other agencies. In addition,
we license on a very limited basis customer names and street addresses to third
parties. Although we provide an opportunity for our customers to remove their
names from our user list, we nevertheless may receive complaints from customers
for these license arrangements.
The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in general
or, specifically, from using the Internet to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Many marketers seek to offer their products and services on our distribution
network because they want to encourage people to use the Internet to purchase
their goods or services. Internet security concerns could frustrate these
efforts. Also, our relationships with consumers may be adversely affected if the
security measures we use to protect their personal information prove to be
ineffective. We cannot predict whether events or developments will result in a
compromise or breach of the technology we use to protect customers' personal
information. We have no insurance coverage for these types of claims.
Furthermore, our computer servers or those of our third-party service
providers, if any, may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. We may need to expend significant additional
capital and other resources to protect against a security breach or to alleviate
problems caused by any such breaches. We may be unable to prevent or remedy all
security breaches. If any of these breaches occur, we could lose marketing
clients, distribution partners and visitors to our distribution network.
13
RISKS RELATED TO OUR INDUSTRY
If the acceptance of online advertising and online direct marketing does not
increase, our business will suffer.
The demand for online marketing may not develop to a level sufficient to
support our continued operations or may develop more slowly than we expect. We
expect to derive almost all of our revenues from contracts with marketer clients
under which we provide online marketing services through our offer distribution
network and our commercial e-mail programs. The Internet has not existed long
enough as a marketing medium to demonstrate its effectiveness relative to
traditional marketing methods. Marketers that have historically relied on
traditional marketing methods may be reluctant or slow to adopt online
marketing. Many marketers have limited experience using the Internet as a
marketing medium. In addition, marketers that have invested substantial
resources in traditional methods of marketing may be reluctant to reallocate
these resources to online marketing. Those companies that have invested a
significant portion of their marketing budgets in online marketing may decide
after a time to return to more traditional methods if they find that online
marketing is a less effective method of promoting their products and services
than traditional marketing methods. Moreover, the Internet-based companies that
have adopted online marketing methods may themselves develop more slowly than
anticipated or not at all. This, in turn, may result in slower growth in demand
for the online direct marketing services of the type provided by the Company.
We do not know if accepted industry standards for measuring the
effectiveness of online marketing will develop. An absence of accepted standards
for measuring effectiveness could discourage companies from committing
significant resources to online marketing. There are a variety of pricing models
for marketing on the Internet. We cannot predict which, if any, will emerge as
the industry standard. Absence of such a standard makes it difficult to project
our future pricing and revenues.
If we are unable to adapt to rapid changes in the online marketing industry, our
business will suffer.
Online marketing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. We may incur substantial costs to modify our
services or infrastructure to adapt to these changes and to maintain and improve
the performance, features and reliability of our services. We may be unable to
successfully develop new services on a timely basis or achieve and maintain
market acceptance.
We face risks from potential government regulation and other legal uncertainties
relating to the Internet.
Laws and regulations that apply to Internet communications, commerce,
commercial e-mail and advertising are becoming more prevalent. The adoption of
such laws could create uncertainty in use of the Internet and reduce the demand
for our services, or impair our ability to provide our services to clients.
Congress has enacted legislation regarding children's privacy on the Internet.
In addition, the federal Assault of Non-Solicited Pornography and Marketing Act
of 2003 (the "CAN SPAM Act"), which regulates commercial e-mail practices n the
United States, was signed into law in December 2003. Additional laws and
regulations may be proposed or adopted with respect to the Internet covering
issues such as user privacy, freedom of expression, pricing, content and quality
of products and services, taxation, advertising, intellectual property rights
and information security. Passage of the CAN SPAM Act, which preempts state laws
regulating commercial e-mail, certainly has eliminated some uncertainty in
respect to our commercial e-mail practices caused by the various, often
conflicting state laws. However, it's too early to tell what effect, if any, the
Act will have on our business. The passage of legislation regarding user privacy
or direct marketing on the Internet may reduce demand for our services or limit
our ability to provide customer information to marketers. Furthermore, the
growth of electronic commerce may prompt calls for more stringent consumer
protection laws. For example, the European Union has adopted a directive
addressing data privacy that may result in limits on the collection and use of
consumer information. The adoption of consumer protection laws that apply to
online marketing could create uncertainty in Internet usage and reduce the
demand for our services, or impair our ability to provide those services to
clients.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to our business could reduce demand for our services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs.
Our services are available on the Internet in many states and foreign
countries, and these states or foreign countries may claim that we are required
to qualify to do business in their jurisdictions. Currently, we are qualified to
do business only in Washington and California. Our failure to qualify in other
jurisdictions if we were required to do so could subject us to taxes and
penalties and could restrict our ability to enforce contracts in those
jurisdictions.
14
Item 2: Properties
The Company currently occupies 9,677 square feet in a leased facility in
Seattle, Washington and 4,451 square feet in a leased facility in San Francisco,
California. The current lease in Seattle expires in May 2004, and the current
lease in San Francisco expires in December 2007. The Company is actively
considering alternatives in respect to its Seattle lease and anticipates
securing adequate lease space in the Seattle area on favorable terms for the
period commencing after the May 2004 expiration of its current lease. The leased
facilities are adequate for the Company's needs.
Item 3: Legal Proceedings
We are not engaged in any material litigation at this time.
Item 4: Submission of Matters to a Vote of Security Holders
None.
15
PART II
Item 5: Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock (the "Common Stock") was quoted on the Nasdaq
National Market under the symbol "FSHP" from our initial public offering on
September 27, 1999 through October 23, 2000. From October 24, 2000 through
September 30, 2002 the Common Stock was quoted on the Nasdaq National Market
under the symbol "APTM." From October 1, 2002 to March 6, 2003 the Common Stock
was quoted on the Nasdaq Small-Cap Market under the symbol "APTM." Since March
7, 2003, the Common Stock has been trading on the OTCBB under the symbol
"APTM.OB." Prior to September 27, 1999, there was no public market for our
common stock. The following table shows the high and low closing sale prices for
our common stock as reported on the Nasdaq National Market, the Nasdaq Small-Cap
Market and the OTCBB for the periods indicated:
High Low
-------- --------
Year Ended December 31, 2002
First quarter............................... $ 2.25 $ 0.50
Second quarter.............................. $ 2.00 $ 1.05
Third quarter............................... $ 1.45 $ 0.66
Fourth quarter.............................. $ 0.86 $ 0.48
Year Ended December 31, 2003
First quarter............................... $ 0.65 $ 0.28
Second quarter.............................. $ 0.60 $ 0.31
Third quarter............................... $ 1.10 $ 0.40
Fourth quarter.............................. $ 5.45 $ 0.60
As of February 13, 2004, there were approximately 164 holders of record of
the Common Stock and 5,217,683 shares of the Common Stock outstanding.
The Company has never paid cash dividends on the Common Stock and does not
intend to pay cash dividends on the Common Stock in the foreseeable future. The
Company's board of directors intends to retain any earnings to provide funds for
the operation and expansion of the Company's business.
Recent Sales of Unregistered Securities
In July 2003 the Company completed raising $305,000 pursuant to the terms
of a Convertible Promissory Note, which will pay interest of 6% per annum, but
can be converted to shares of common stock at the option of the holder at a
fixed price of $0.80 per share. The note has a 36-month term. Principal and
accrued interest is payable quarterly, commencing one year from the closing
date. In addition to the notes, the Company issued to the investors warrants to
purchase a total of 127,094 shares of common stock for $0.50 per share. The
warrants have a term of five years. The notes and warrants were issued only to
accredited investors in reliance upon the exemptions from registration provided
by Rule 506 of Regulation D and Section 4(2) under the Securities Act.
In December 2003, the Company completed a $2.75 million private placement
investment with accredited investors Apex Capital, LLC and Special Situations
Technology Funds. The Company sold the accredited investors 776,690 shares of
unregistered Aptimus, Inc. common stock at a price of $3.55 per share. The
shares were issued in reliance upon the exemptions from registration provided by
Rule 506 of Regulation D and Section 4(2) under the Securities Act.
16
Item 6: Selected Financial Data
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data are qualified in their entirety by
reference to, and you should read them in conjunction with, Aptimus' financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report.
Aptimus, Inc.
------------------------------------------------------------
Year ended December 31,
------------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
Statement of Operations Data:
Revenues ............................. $ 8,506 $ 16,873 $ 1,874 $ 2,915 $ 4,571
Operating expenses:
Sales and marketing ................ 15,042 29,571 6,185 1,971 1,288
Connectivity and network costs ..... 616 2,047 1,780 1,312 1,023
Partner fees ....................... -- -- 321 1,013 1,436
Research and development ........... 901 2,439 1,632 559 527
General and administrative ......... 1,343 3,055 2,423 1,687 1,319
Depreciation and amortization ...... 1,156 2,419 2,268 1,305 315
Equity-based compensation .......... 1,117 774 371 11 104
Lease renegotiation costs and
abandonment of leasehold
improvements ..................... -- -- -- 478 --
Loss (gain) on disposal of
long-term assets ................. (3) (3) 339 105 37
Restructuring costs ................ -- -- 4,998 -- --
-------- -------- -------- -------- --------
Total operating expenses ... 20,172 40,302 20,317 8,441 6,049
-------- -------- -------- -------- --------
Operating loss ..................... (11,666) (23,429) (18,443) (5,526) (1,478)
Interest expense ................... 40 114 155 24 41
Interest income .................... (815) (2,439) 720 46 8
-------- -------- -------- -------- --------
Net loss ........................... $(10,891) $(21,104) $(17,878) $ (5,504) $ (1,511)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (1.08) $ (1.36) $ (1.44) $ (1.35) $ (0.35)
======== ======== ======== ======== ========
Shares used to compute basic and
Diluted per share amounts .......... 10,043 15,567 12,400 4,073 4,333
======== ======== ======== ======== ========
As of December 31,
------------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents .......... $ 33,795 $ 12,854 $ 3,651 $ 667 $ 2,368
Working capital (deficiency) ....... 46,736 23,032 4,387 698 2,457
Total assets ....................... 55,816 35,532 7,510 1,941 3,975
Long-term obligations, less current
portion .......................... 40 944 68 -- 267
Total shareholders' equity ......... 50,911 29,868 6,644 1,232 2,712
17
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 objectives 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. To achieve these objectives,
we leverage our proprietary technology platform to dynamically present offers to
large volumes of transacting consumers at the point of transaction, when they
are most likely to respond, across a broad variety of websites. In our network
we focus our efforts around two primary offer presentation formats:
1. CoRegistration - 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, e-mail and site registrations or joins, and other
transactional actions occurring on the websites of our distribution
partners.
2. E-mail - We present relevant offers to consumers via opt-in e-mail
lists, including lists that we own, lists that we manage for others,
and third party lists.
During 2003, we derived our revenues primarily from lead generation
contracts related to the Aptimus network of sites and opt-in e-mail lists. We
receive lead generation revenues when we deliver customer information to a
marketer in connection with an offer presented via our network. Revenue from the
Aptimus Network started in the first quarter of 2001. In prior years we derived
our revenues from lead generation activities, banner advertising, site
sponsorships and newsletter sponsorships related to the FreeShop site, which was
sold in May of 2001. 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 impression or cost per click through. The services we deliver
are primarily sold under short-term agreements that are subject to cancellation.
We recognize revenues in the period in which we deliver the service, provided we
have no further performance obligation.
For the years ended December 31, 2001, 2002, and 2003 our ten largest
clients accounted for 40.2%, 44.6% and 61.7% of our net revenues, respectively.
One customer accounted for 10.3% of net revenues during the year ended December
31, 2001. No single client accounted for more than 10% of net revenues in the
year ended December 31, 2002. Proctor & Gamble and Advertising.com accounted for
13.6% and 10.1% of net revenues during the year ended December 31, 2003,
respectively.
Our business has been operating at a loss and generating negative cash
flows from operations since inception. As of December 31, 2003, we had an
accumulated deficit of approximately $63.1 million. With the reductions in
continuing operating expenses that have been made and growth in revenues, we
anticipate achieving positive earnings and cash flows during the year ending
December 31, 2004. However, there are still many challenges to achieving this
goal, including the availability of additional financing, and the achievement is
by no means assured. See "Risks Related to Our Business".
On March 7, 2003, our common stock was delisted from the Nasdaq SmallCap
Market due to our noncompliance with the continued listing standards for that
market. Since March 7, 2003, our common stock has been quoted on the OTCBB under
the symbol "APTM".
18
Results of Operations
The following table sets forth statement of operations data for the
periods indicated as a percentage of net revenues:
Year Ended December 31,
-------------------------------
2001 2002 2003
------- ------- -------
Net revenues ................................ 100.0% 100.0% 100.0%
Operating expenses:
Sales and marketing ....................... 330.0 67.7 28.2
Connectivity and network costs ............ 95.0 45.0 22.4
Partner fees .............................. 17.2 34.7 31.4
Research and development .................. 87.1 19.2 11.5
General and administrative ................ 129.3 57.9 28.9
Depreciation and amortization ............. 121.0 44.7 6.9
Equity-based compensation ................. 19.8 0.4 2.3
Lease renegotiation costs and abandonment
of Leasehold improvements ............... -- 16.4 --
Loss (gain) on disposal of long-term assets 18.1 3.6 0.8
Restructuring costs ....................... 266.7 -- --
------- ----- -----
Total operating expenses .......... 1,084.2 289.6 132.4
------- ----- -----
Operating loss .............................. (984.2) (189.6) (32.4)
Interest expense ............................ 8.2 0.8 0.9
Interest income ............................. 38.4 1.6 0.2
------- ----- -----
Net loss .................................... (954.0)% (188.8)% (33.1)%
======= ===== =====
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net revenues. We derive our revenues primarily from lead generation
contracts. Leads are obtained through promoting our clients' offers across our
Aptimus Network of website partners and opt-in email lists. Our net revenues
increased by $1.7 million, or 57%, to $4.6 million in the year ended December
31, 2003 from $2.9 million in the year ended December 31, 2002. The increase in
revenue is primarily due to expansion of our Aptimus Network, including the
addition of new website distribution partners thereby increasing our ad
impressions, and the expansion of our advertiser client base.
Sales and marketing. Sales and marketing expenses consisted primarily of
marketing and operational personnel costs, bad debts, and outside sales costs.
Sales and marketing expenses decreased by $683,000, or 35%, to $1.3 million in
2003 from $2.0 million in 2002. The decrease in sales and marketing expenses is
primarily a result of a $430,000 reduction in payroll costs and a $230,000
reduction in rent expense. The decrease in payroll costs is a result of a
decrease in the amount of high level management in the sales and marketing area.
The reduction in rent expense is a result of renegotiating the Seattle lease in
October of 2002 and the San Francisco lease in January 2003. Sales and marketing
payroll costs are expected increase in 2004 as a small number of new sales,
business development and account management personnel are expected to be hired
in 2004. Other than payroll related costs, sales and marketing expenses in 2004
are expected to be relatively consistent with amounts in 2003.
Connectivity and network costs. Connectivity and network costs consist of
expenses associated with the fees, maintenance and usage of our network as well
as e-mail delivery costs. Such costs include e-mail delivery costs, Internet
connection charges, hosting facility costs, banner ad serving fees and personnel
costs. Internet and network connectivity decreased by $289,000, or 22%, to $1.0
million in 2003 from $1.3 million in 2002. The decrease in connectivity and
network costs is primarily a result of an $182,000 decrease in connectivity
costs and an $114,000 decrease in e-mail delivery costs. These reductions were
offset by small increases in several other categories. Connectivity costs
decreased primarily as a result of terminating our offsite hosting contract with
EDS. E-mail delivery costs decreased as a result of using different e-mail
delivery vendors with lower costs for delivery. Internet and network
connectivity expenses are expected to increase slightly as we add additional
power supply backup to our network in 2004 compared to amounts in 2003. The EDS
contract was cancelled in July 2003, which resulted in five months of savings in
2003. Also January 2004 was the last month that an external provider was used
for delivery of e-mail. In 2003 e-mail delivery fees were approximately
$300,000. Although most of the e-mail delivery costs will be eliminated in 2004
there will be some increases in internal costs associated with this change.
Partner fees. Partner fees expense consists of fees to distribution
partners participating in our network. Partner fees increased by $423,000, or
42%, to $1.4 million in 2003 from $1.0 million in 2002. This increase is
directly related to the increase in our revenue. Partner fees have increased at
a lower rate than network revenues as a result of e-mail based campaigns. E-mail
based campaigns that are sent to Company-owned lists do not have any partner
19
fees associated with them. Also the cost of delivering the e-mails and certain
third-party costs are generally deducted before calculating the fees due
partners for e-mail based campaigns not sent to Company-owned lists. Partner
fees are expected to increase in 2004 as a result of the addition of new website
distribution partners.
Research and development. Research and development expenses primarily
include personnel costs related to maintaining and enhancing the features,
content and functionality of our websites, network and related systems. Research
and development expenses decreased by $32,000, or 6%, to $527,000 in 2003 from
$559,000 in 2002. Research and development expenses in 2004 are expected to be
relatively consistent with amounts in 2003.
General and administrative. General and administrative expenses primarily
consist of management, financial and administrative personnel expenses and
professional service fees. General and administrative expenses decreased by
$368,000, or 22%, to $1.3 million in 2003 from $1.7 million in 2002. The
decrease in general and administrative expenses is primarily a result of a
$154,000 reduction in payroll costs and a $115,000 reduction in rent expense.
The decrease in payroll costs is a result of a decrease in the number of general
and administrative staff. The reduction in rent expense is a result of
renegotiating the Seattle lease in October of 2002 and the San Francisco lease
in January 2003. General and administrative expenses in 2004 are expected to be
relatively consistent with amounts in 2003.
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, acquired technology, work force in-place and goodwill from
acquisitions. Depreciation and amortization expenses decreased by $1.0 million,
or 76%, to $315,000 in 2003 from $1.3 million in 2002. The decrease in
depreciation is a result of fixed assets becoming fully depreciated.
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 increased by $93,000, or
846%, to $104,000 in 2003 from $11,000 in 2002. The increase in equity-based
compensation is a result of issuing a warrant to an outside investor relations
firm and to the issuance of an option with a zero strike price to Timothy C.
Choate as compensation for guaranteeing the Company's line-of-credit.
Loss (Gain) on Disposal of Long-Term Assets. Loss (gain) on disposal of
long-term assets consists of gains and losses on disposals of assets and
impairments on long-term investments. Loss on disposal of long-term assets
decreased by $68,000, or 65%, to $37,000 in 2003 from $105,000 in 2002. In the
prior year the majority of the loss related to the write down of a long-term
investment. In the current year the loss on disposal of assets relates to
disposal of many smaller fixed assets.
Lease renegotiation costs and impairment of leasehold improvements. We
renegotiated the lease 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 began paying significantly less rent for a
significantly reduced amount of office space. As part of the transition, Aptimus
lost the use of a majority of the leasehold improvements made in Seattle. Lease
renegotiation costs and impairment of leasehold improvements of $478,000 was
recorded in 2002; $377,000 relates to the net book value of the leasehold
improvements being surrendered to the landlord, $25,000 relates to a cash
payment and $76,000 relates to the issuance of 150,000 shares of our
unregistered common stock to the Seattle landlord as compensation for amending
the lease. In addition, in January 2003 we renegotiated our lease with the San
Francisco landlord to substantially reduce the rental rate we pay for our San
Francisco offices. No additional consideration was given to the landlord, nor
were any impairment charges incurred as a consequence of the amended rental
rate. No significant additional lease renegotiation costs or impairments of
leasehold improvements are expected in 2003 or 2004.
Interest expense. Interest expense in 2003 relates to capital equipment
leases, the line-of-credit, and the convertible notes payable. Interest expense
totaled $41,000 and $24,000 in the years ended December 31, 2003, and 2002,
respectively.
Interest Income. Interest income consists of interest income on cash and
cash equivalents and short-term investments. Interest income decreased by
$38,000, or 83%, to $8,000 in 2003 from $46,000 in 2002. Interest income has
decreased as the balance available for investment has decreased due to use of
cash for operations.
20
Income Taxes. No provision for federal income taxes has been recorded for
any of the periods presented due to our current loss position.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net revenues. Our net revenues increased by $1.0 million, or 56%, to $2.9
million in the year ended December 31, 2002 from $1.9 million in the year ended
December 31, 2001. The increase in revenues resulted from a $2.2 million
increase in revenues from our network and a $1.2 million decrease in the
discontinued FreeShop site related revenues.
Revenue related to our network increased due to an increase in
transactions taking place on the network. The quantity of transactions has
increased as a result of adding more partners and clients to the network and
sending more e-mails. The average number of e-mails sent per month in 2002
increased by 425% compared to the monthly average in 2001. The increase in
transaction volume was tempered by a concurrent decrease in the average fee per
lead of approximately 12%. Also, e-mail marketing was implemented as part of our
network model in the third quarter of 2001 and did not provide revenues for an
entire year in 2001. Revenue related to the FreeShop site decreased as a result
of discontinuation of our consumer-direct websites.
Sales and marketing. In the second half of 2001 and all of 2002 sales and
marketing expenses consisted primarily of marketing and operational personnel
costs, bad debts, and outside sales costs. In the first half of 2001 and all of
2000, sales and marketing expenses were primarily comprised of advertising
costs, marketing and operational personnel costs related to developing our brand
and generating visits to our websites, as well as personnel and other costs.
Sales and marketing expenses decreased by $4.2 million, or 68%, to $2.0 million
in 2002 from $6.2 million in 2001. The decrease in sales and marketing expenses
is primarily a result of a $1.6 million reduction in advertising and public
relations spending and $1.8 million in reduced payroll costs.
Connectivity and network costs. Connectivity and network costs consist of
expenses associated with the fees, maintenance and usage of our network as well
as e-mail delivery costs. Such costs include e-mail delivery costs, Internet
connection charges, hosting facility costs, banner ad serving fees and personnel
costs. Internet and network connectivity decreased by $468,000, or 26%, to $1.3
million in 2002 from $1.8 million in 2001. This decrease resulted from the
elimination of costs associated with the FreeShop site in May of 2001.
Partner fees. Partner fees expense consists of fees to distribution
partners participating in our network. Partner fees increased by $692,000, or
216%, to $1.0 million in 2002 from $321,000 in 2001. This increase resulted from
approximately a 350% increase in network related revenues. Partner fees have
increased at a lower rate than network revenues as a result of e-mail based
campaigns. E-mail based campaigns that are sent to Company-owned lists do not
have any partner fees associated with them. Also the cost of delivering the
e-mails and certain third-party costs are generally deducted before calculating
the fees due partners for e-mail based campaigns not sent to Company-owned
lists. With the implementation of the network model advertising expenses
included in sales and marketing were virtually eliminated.
Research and development. Research and development expenses primarily
include personnel costs related to maintaining and enhancing the features,
content and functionality of our websites, network and related systems. Research
and development expenses decreased by $1.1 million, or 66%, to $559,000 in 2002
from $1.6 million in 2001. Reductions in staff resulting from the restructuring
and cost cutting efforts have reduced labor expenses by approximately $480,000
and outside services by approximately $440,000 compared to the prior year.
General and administrative. General and administrative expenses primarily
consist of management, financial and administrative personnel expenses and
professional service fees. General and administrative expenses decreased by
$736,000, or 30%, to $1.7 million in 2002 from $2.4 million in 2001. The two
largest factors in the decrease in general and administrative expenses was a
decrease in Legal, accounting and other outside service fees of approximately
$260,000 and one time costs in 2001 of approximately $370,000. The one time
costs in 2001 resulted from termination of an operating agreement acquired as
part of the XmarksTheSpot acquisition, and costs incurred for investment banking
services related to potential strategic transactions.
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, acquired technology, work force in-place and goodwill from
acquisitions. Depreciation and amortization expenses decreased by $964,000, or
43%, to $1.3 million in 2002 from $2.3 million in 2001. The decrease in
depreciation is a result of assets disposed or written off in 2001 as part of
the restructuring, assets becoming fully depreciated during 2002 and abandonment
of some leasehold improvement costs in September 2002.
21
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 $360,000, or
97%, to $11,000 in 2002 from $371,000 in 2001. The decrease in equity-based
compensation is primarily a result of the recognition of $305,000 in
equity-based compensation for restricted stock grants in September 2001.
Lease renegotiation costs and impairment of leasehold improvements. We
renegotiated the lease with our Seattle landlord to substantially reduce the
amount of space we lease and the corresponding rental rate we pay for our
Seattle offices. As part of the transition, Aptimus lost the use of a majority
of the leasehold improvements made in Seattle. Lease renegotiation costs and
impairment of leasehold improvements of $478,000 was recorded in 2002; $377,000
relates to the net book value of the leasehold improvements being surrendered to
the landlord, $25,000 relates to a cash payment and $76,000 relates to the
issuance of 150,000 shares of our unregistered common stock to the Seattle
landlord as compensation for amending the lease.
Restructuring costs. Restructuring costs consist of costs associated with
repositioning the Company as a direct marketing infrastructure provider and the
discontinuance of our consumer-direct websites. The restructuring category was
new for 2001, as this was the first time we undertook a restructuring. There
were no restructuring costs recorded in 2002 as no further restructurings were
undertaken in 2002. Amounts accrued in 2001 were paid in January of 2002 as
expected and no additional amounts were incurred related to the 2001
restructuring.
Interest expense. Interest expense in 2002 relates to capital equipment
leases. Interest expense totaled $24,000 and $155,000 in the years ended
December 31, 2002, and 2001, respectively. Interest expense decreased as the
Imperial Bank note was paid off in August 2001 and the Fingerhut Companies note
was paid off in November 2001.
Other (income) expense, net. Other (income) expense, net, consists of
interest income, gains and losses on disposal of assets and impairments on
long-term investments. Other (income) expense, net, decreased by $440,000 to a
$59,000 expense in 2002 from a $381,000 gain in 2001. Interest income has
decreased as the balance available for investment has decreased due to use of
cash for operations and a decline in interest rates. In addition to the decrease
in interest income an impairment on long-term investments of $107,000 was
recorded during the year.
Income Taxes. No provision for federal income taxes has been recorded for
any of the periods presented due to our current loss position.
Liquidity and Capital Resources
Since we began operating as an independent company in June 1997, we have
financed our operations primarily through the issuance of equity securities.
Gross proceeds from the issuance of stock through December 31, 2003 totaled
$71.0 million. As of December 31, 2003, we had approximately $2.4 million in
cash, cash equivalents and short-term securities, providing working capital of
$2.5 million. No off balance sheet assets or liabilities existed at December 31,
2003.
Net cash used in operating activities was $1.2 million and $3.8 million in
the years ended December 31, 2003 and 2002, respectively. Cash used in operating
activities in the year ended December 31, 2003 resulted primarily from net
losses, a decrease in accrued liabilities, an increase in accounts receivable
and an increase in prepaid and other assets, which were partially offset by an
increase in accounts payable. Cash used in operating activities in the year
ended December 31, 2002 resulted primarily from net losses, a decrease in
accrued liabilities and an increase in accounts receivable, which were partially
offset by an increase in accounts payable and a decrease in prepaid expenses.
Net cash provided by (used in) investing activities was $(84,000) and $1.0
million in the years ended December 31, 2003 and 2002, respectively. In the year
ended December 31, 2003, $118,000 was used to acquire fixed assets, $35,000 was
used to acquire intangible assets, $51,000 was provided by the sale of
short-term investments and $18,000 was provided by the sale of fixed assets. In
addition to these cash transaction $203,000 of computer equipment was purchased
with capital leases during the year ended December 31, 2003. In the year ended
December 31, 2002, $29,000 was used to purchase computer equipment, software,
furniture, office equipment and to pay for leasehold improvements; $10,000 was
used to purchase an intangible asset; $43,000 was received from the sale of
computer equipment and furniture; and $1.0 million was received from the of sale
of short-term securities.
22
Net cash provided by (used in) financing activities was $3.0 million and
$(168,000) in the years ended December 31, 2003 and 2002, respectively. Net cash
provided by financing activities in 2003 was $2.8 million from the sale of stock
in a private placement and $305,000 from the issuance of convertible notes
payable. These sources of cash were offset by the repayment of $162,000 of lease
obligation in the year ended December 31, 2003. Net cash used in financing
activities in 2002 resulted from principle payments of $84,000 on capital leases
and $89,000 in principle payment on notes payable, which were offset by $5,000
in proceeds from stock option exercises.
We believe our current cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next two to three years. Thereafter, we may need to raise
additional capital to meet our long-term operating requirements. Subject to the
receipt of such additional financing, if required, on terms favorable to the
Company, we anticipate achieving positive earnings and cash flows in the near
future. However, there are still many challenges to achieving this goal and the
achievement is by no means assured. See "Risks Related to Our Business".
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
delisting from the Nasdaq SmallCap Market 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.
The following table summarizes the contractual obligations and commercial
commitments entered into by the Company, in thousands.
Capital Operating
Year ending December 31, leases leases
------------------------ -------- -------
2004.................................... $ 130 $ 86
2005.................................... -- 62
2006.................................... -- 63
2007.................................... -- 77
-------- -------
Total cash commitments.................... $ 130 $ 288
======== =======
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to the
financial statements included in Item 8 of this Annual Report. 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 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 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 e-mail 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 e-mail
list owners related to these revenues were $1.4 million and $1.0 million for the
years ended December 31, 2003 and 2002, respectively. These fees are shown as
Partner fees on the Statement of Operations. E-mail based campaigns that are
sent to Company owned lists do not have partner fees associated with them.
The Company has valuated the guidance provided by Emerging Issues Task
Force consensus 99-19 (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 e-mail list owners. The Company has determined the recording of revenues
gross is appropriate based upon the following factors:
23
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 e-mails 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 operating expenses 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
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires a
guarantor to include disclosure of certain obligations, and if applicable, at
the inception of the guarantee, recognize a liability for the fair value of
other certain obligations undertaken in issuing a guarantee. The recognition
requirement is effective for guarantees issued or modified after December 31,
2002 and did not have a material impact on the Company.
In November 2002, the EITF reached a consensus on EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF No. 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which the vendor
will perform multiple revenue-generating activities. EITF No. 00-21 became
effective for interim periods beginning after June 15, 2003. The effect of
adopting EITF 00-21 did not have a material impact on the Company's financial
position, cash flows or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on the reported results. The disclosure provisions of SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. The Company has adopted the disclosure provisions of SFAS No. 148.
24
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities."
Until this interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns. Certain provisions of FIN 46 were
deferred until the period ending after March 15, 2004. The adoption of FIN 46
did not have a material impact on the Company's financial position, cash flows
or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends
SFAS 133 for certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149: (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (2) clarifies when a derivative contains a financing component, (3)
amends the definition of an underlying to conform it to language used in FASB
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (4)
amends certain other existing pronouncements. This Statement is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition, most provisions of
SFAS 149 are to be applied prospectively. The adoption of SFAS 149 did not have
a material impact on the Company's financial position, cash flows or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The adoption of this standard has not resulted in an impact to results
of operations or financial position of the Company, as the Company has no
financial instruments that fall within the scope of this standard.
Item 7A: 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
December 31, 2003, however, the Company's cash equivalents and short-term
securities mature within three months. As of December 31, 2003, the Company
believes the reported amounts of cash equivalents, short-term securities and
capital lease obligations 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.
25
Item 8: Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Aptimus, Inc.
Financial Statements
Page
----
Reports of Independent Accountants................................. 27
Balance Sheet as of December 31, 2002 and 2003..................... 28
Statement of Operations for the years ended December 31, 2001,
2002 and 2003...................................................... 29
Statement of Shareholders' Equity for the years ended
December 31, 2001, 2002 and 2003................................. 30
Statement of Cash Flows for the years ended December 31, 2001,
2002 and 2003...................................................... 31
Notes to Financial Statements...................................... 32
26
Report of Independent Accountants
To the Board of Directors and Shareholders of Aptimus, Inc.
We have audited the accompanying balance sheets of Aptimus, Inc. at
December 31, 2003 and 2002, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America. Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aptimus, Inc., as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. In
addition in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) schedule 1.1 on page 54 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.
Moss Adams LLP
Seattle, Washington
January 21, 2004
27
APTIMUS, INC.
BALANCE SHEET
(in thousands)
ASSETS
December 31,
---------------------
2002 2003
-------- --------
Cash and cash equivalents ............................... $ 667 $ 2,368
Accounts receivable, net ................................ 530 919
Prepaid expenses and other assets ....................... 159 166
Short-term investments .................................. 51 --
-------- --------
Total current assets .......................... 1,407 3,453
Fixed assets, net of accumulated depreciation ........... 440 408
Intangible assets, net .................................. 24 30
Long-term investments ................................... 40 40
Deposits ................................................ 30 44
-------- --------
$ 1,941 $ 3,975
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ........................................ $ 297 $ 636
Accrued and other liabilities ........................... 344 259
Current portion of capital lease obligations ............ 68 101
-------- --------
Total current liabilities ..................... 709 996
Convertible notes payable, net of unamortized discount .. -- 267
-------- --------
Total liabilities ............................. 709 1,263
-------- --------
Commitments and contingent liabilities (note 9)
Shareholders' equity common stock, no par value; 100,000
shares authorized, 4,221 and 5,213 issued and
outstanding at December 31, 2002 and 2003, respectively 60,282 63,098
Additional paid-in capital .............................. 2,506 2,679
Deferred stock compensation ............................. (2) --
Accumulated deficit ..................................... (61,554) (63,065)
-------- --------
Total shareholders' equity .................... 1,232 2,712
-------- --------
$ 1,941 $ 3,975
======== ========
The accompanying notes are an integral part of these financial statements.
28
APTIMUS, INC.
STATEMENT OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
----------------------------------
2001 2002 2003
-------- -------- --------
Net revenues ................................. $ 1,874 $ 2,915 $ 4,571
Operating expenses:
Sales and marketing ........................ 6,185 1,971 1,288
Connectivity and network costs ............. 1,780 1,312 1,023
Partner fees ............................... 321 1,013 1,436
Research and development ................... 1,632 559 527
General and administrative ................. 2,423 1,687 1,319
Depreciation and amortization .............. 2,268 1,305 315
Equity-based compensation .................. 371 11 104
Lease renegotiation costs and abandonment of
leasehold improvements ................... -- 478 --
Loss (gain) on disposal of long-term assets .. 339 105 37
Restructuring costs ........................ 4,998 -- --
-------- -------- --------
Total operating expenses ........... 20,317 8,336 6,049
-------- -------- --------
Operating loss ............................... (18,443) (5,421) (1,478)
Interest expense ............................. 155 24 41
Interest income .............................. 720 46 8
-------- -------- --------
Net loss ..................................... $(17,878) $ (5,504) $ (1,511)
======== ======== ========
Basic and diluted net loss per share ......... $ (1.44) $ (1.35) $ (0.35)
======== ======== ========
Weighted average shares used in computing per
Share information .......................... 12,400 4,073 4,333
======== ======== ========
The accompanying notes are an integral part of these financial statements.
29
APTIMUS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
Common stock Additional Deferred Total
-------------------- paid-in stock Accumulated Shareholders'
Shares Amount capital Compensation Deficit equity
------- -------- ---------- ------------ ----------- -------------
Balances at December 31, 2000 ... 15,505 65,874 2,518 (352) (38,172) 29,868
Repurchase of common stock ...... (12,162) (5,637) 7 (5,630)
Exercise of stock options and
warrants ...................... 56 14 (14) --
Issuance of shares under
employee stock purchase program 7 3 3
Issuance of restricted shares
under 2001 Stock Plan ......... 635 304 304
Deferred compensation related
to forfeitures of stock options (281) 281 --
Amortization of deferred stock
Compensation .................. 58 58
Adjustments to common stock in
connection with a business
acquisition ................... (56) (81) (81)
Net loss ........................ (17,878) (17,878)
------- -------- -------- -------- -------- --------
Balance on December 31, 2001 .... 3,985 60,173 2,534 (13) (56,050) 6,644
Exercise of stock options and
warrants ...................... 86 34 (29) 5
Issuance of common stock in
connection with lease
renegotiation ................. 150 75 75
Compensation related to
issuance of stock options to
outside contractor ............ 1 1
Amortization of deferred stock
Compensation .................. 11 11
Net loss ........................ (5,504) (5,504)
------- -------- -------- -------- -------- --------
Balance on December 31, 2002 .... 4,221 $ 60,282 $ 2,506 $ (2) $(61,554) $ 1,232
Issuance of stock ............... 777 2,694 2,694
Exercise of stock options and
Warrants ...................... 221 129 129
Issuance of warrants and
options ....................... 166 166
Forfeiture of shares ............ (6) (7) 7 --
Amortization of deferred stock
Compensation .................. 2 2
Net loss ........................ (1,511) (1,511)
------- -------- -------- -------- -------- --------
Balance on December 31, 2003 .... 5,213 $ 63,098 $ 2,679 $ -- $(63,065) $ 2,712
======= ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
30
APTIMUS, INC.
STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31,
----------------------------------
2001 2002 2003
-------- -------- --------
Cash flows from operating activities
Net loss ................................................. $(17,878) $ (5,504) $ (1,511)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ....................... 2,268 1,305 315
Bad debt expense (recovery) ......................... (296) (2) 26
Amortization of deferred stock compensation ......... 371 11 103
Compensation on shares of common stock issued ....... -- 76 --
Abandonment of fixed assets from lease renegotiation -- 377 --
Restructuring costs ................................. 4,998 -- --
Cash paid for restructuring costs ................... (1,900) (15) --
Loss (gain) on disposal of property and equipment ... 74 (2) 37
Impairment of long-term investment .................. 197 107 --
Amortization of discount on short-term investments .. (84) (4) --
Amortization of discount on convertible notes payable -- -- 7
Changes in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable ............................... 2,267 (259) (415)
Prepaid expenses and other assets ................. 564 60 (17)
Accounts payable .................................. (2,384) 108 339
Accrued and other liabilities ..................... (739) (77) (85)
-------- -------- --------
Net cash used by operating activities ............. (12,542) (3,819) (1,201)
-------- -------- --------
Cash flows from investing activities
Purchase of property and equipment .................. (370) (29) (118)
Proceeds from disposal of fixed assets .............. 81 43 18
Purchase of intangible asset ........................ -- (10) (35)
Payment for business acquisitions ................... -- -- --
Purchase of short-term investments .................. (3,947) (1) --
Sale of short-term investments ...................... 14,997 1,000 51
(Purchase of) proceeds from long-term investments .. 1 -- --
-------- -------- --------
Net cash provided (used) by investing activities 10,762 1,003 (84)
-------- -------- --------
Cash flows from financing activities
Proceeds from note payable ........................ -- -- 305
Repayment of notes payable ........................ (2,375) (89) --
Principal payments under capital leases ........... (156) (84) (162)
Repurchase of common stock ........................ (4,899) -- --
Issuance of common stock, net of issuance costs ... 7 5 2,843
-------- -------- --------
Net cash provided (used) by financing activities (7,423) (168) 2,986
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ... (9,203) (2,984) 1,701
Cash and cash equivalents at beginning of period ....... 12,854 3,651 667
-------- -------- --------
Cash and cash equivalents at end of period ............. $ 3,651 $ 667 $ 2,368
======== ======== ========
The accompanying notes are an integral part of these financial statements.
31
APTIMUS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and business
Aptimus operates an online direct marketing network. Aptimus is primarily
an online marketing service that generates sales leads, creates product
awareness, and initiates consumer purchases through multiple online marketing
vehicles, including free and trial offers, banner advertising, e-mail newsletter
sponsorship, and others. Aptimus began as a division of Online Interactive, Inc.
(Online), a Washington corporation, incorporated in July 1994. On June 30, 1997,
Online Interactive contributed the FreeShop Division, including certain net
assets, to its wholly owned subsidiary, FreeShop International, Inc., a
Washington corporation incorporated on June 23, 1997, which then began operating
as a separate entity.
On February 19, 1999, FreeShop International, Inc. changed its name to
FreeShop.com, Inc. On October 16, 2000 FreeShop.com, Inc. changed its name to
Aptimus, Inc. (Aptimus or the Company).
2. Summary of significant accounting policies
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash, cash equivalents and short-term investments
The Company generally considers any highly liquid investments purchased
with an original or remaining maturity of three months or less at the date of
purchase to be cash equivalents.
The Company classifies, at the date of acquisition, its marketable
securities into categories in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 2002, short-term investments
consisted of a certificate of deposit with a maturity of less than one year.
Currently, the Company classifies all of its short-term investments as held to
maturity, which are reported at amortized cost, which approximated their fair
value at December 31, 2002. There are no short-term investments at December 31,
2003. Realized gains and losses and declines in value of securities judged to be
other than temporary are included in other income (expense), net.
The Company invests its cash and cash equivalents in deposits at a major
financial institution that may, at times, exceed federally insured limits.
Management believes that the risk of loss is minimal. To date, the Company has
not experienced any losses related to temporary cash investments.
Accounts receivable
The Company grants credit to its customers for substantially all of its
sales. 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. The Company has reserved for all outstanding balances past due greater
than ninety days as of December 31, 2003 and 2002.
Fixed assets
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.
The estimated useful lives are as follows:
32
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 the results of operations at the time of disposal. 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.
Intangible assets
Intangible assets are stated at cost less accumulated amortization and are
amortized using the straight-line method over their estimated useful lives. The
estimated useful lives are as follows:
E-mail names.................................. Two years
Aptimus trademark and logo.................... Three years
At December 31, 2002 and 2003, accumulated amortization of intangible
assets was $42,000 and $72,000, respectively.
Long-term investments
Long-term investments consist of minority equity investments in non-public
companies. These investments are being accounted for on the cost basis and will
be evaluated for impairment each quarter. During the years ended December 31,
2002 the Company recorded charges of approximately $107,000, related to the
impairment of these investments.
Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment and continues
to evaluate them as events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with these assets. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values. During 2001 impairment losses were recognized as part of the
restructuring charges. As discussed further in Note 5, the Company recorded
charges of $377,000 during 2002 related to the abandonment of leasehold
improvements. No impairment charges were recognized during 2003.
Fair value of financial instruments
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued liabilities and long-term debt approximate fair value because
of their short maturities.
Deferred revenues
Deferred revenues consist of advance billings and payments on marketing
contracts and are included in accrued and other liabilities in the accompanying
balance sheet.
Revenue recognition
The Company currently derives revenue from providing lead generation and
customer acquisition programs through a network of website and e-mail
distribution partners.
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.
33
In addition to lead generation revenues the Company earns revenue from
list rental activities. 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 net of related broker fees and is
recognized in the period the cash is received due to uncertainties surrounding
the actual amounts that will be received.
Revenues generated through network partners and opt-in e-mail 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 e-mail
list owners related to these revenues are shown as Partner fees on the Statement
of Operations. E-mail 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 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 e-mail 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 customers 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 e-mails delivered and are
not based on amounts paid to partners.
In addition to the ongoing revenue related to the network and e-mail
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 December 31, 2003 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.
Lead generation revenues consist of fees received, generally on a per
inquiry basis, for delivery of leads to clients. Revenue is recognized in the
period the leads are provided to the client.
Advertising revenues consist of e-mail newsletter sponsorships, banner
advertising, 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, which range from three
months to two years, 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. Prior to 2003 revenue from list
rental activities was recognized in the period the names were delivered by the
list broker to the third party.
Advertising costs
The Company expenses advertising costs as incurred. Total advertising
expense for the years ended December 31, 2001, 2002 and 2003 were $1,455,000,
$8,000 and $45,000, respectively.
Research and development costs
Research and development costs are expensed as incurred.
34
Website development costs
Costs incurred in developing the Company's websites are accounted for in
accordance with Emerging Issues Task Force Issues Summary 00-02, "Accounting for
website Development Costs." As such, the Company expenses all costs incurred
that relate to the planning and post implementation phases of development. Costs
incurred in the development phase are capitalized and recognized over the
website's estimated useful life if the website is expected to have a useful life
beyond one year. Costs capitalized are included in fixed assets and are
amortized over three years. Costs associated with repair or maintenance of
existing sites or the development of website content are expensed as incurred.
Income taxes
The Company accounts for income taxes under the asset and liability
method, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. If it is more
likely than not that some portion of a deferred tax asset will not be realized,
a valuation allowance is recorded.
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.
Basic and diluted net loss per share is equal for all periods presented because
the impact of common stock equivalents is antidilutive.
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 those common stock equivalent securities not included in
the diluted net loss per share calculation (in thousands):
Year ended December 31,
----------------------------------
2001 2002 2003
-------- -------- --------
Numerator:
Net loss ......................................... $(17,878) $ (5,504) $ (1,511)
======== ======== ========
Denominator:
Weighted average shares used in computing net loss
per share ..................................... 12,400 4,073 4,333
======== ======== ========
Potentially dilutive securities consist of the
following:
Options to purchase common stock ................. 1,236 1,394 1,522
Warrants to purchase common stock ................ 16 14 183
Convertible notes payable ........................ -- -- 381
-------- -------- --------
1,252 1,408 2,086
======== ======== ========
Concentrations of credit risk
Concentrations of credit risk with respect to accounts receivable exist
due to the large number of Internet based companies. This risk is mitigated due
to the wide variety of customers to which the Company provides services, as well
as the customer's dispersion across many different geographic areas. During the
year ended December 31, 2001 one customer accounted for 10.3% of net revenues.
During the year ended December 31, 2002, no single customer accounted for
greater than 10% of total net revenues. During the year ended December 31, 2003
two customers accounted for 13.6% and 10.1% of net revenues. As of December 31,
2002 two customers accounted for 18.2% and 11.6%, of outstanding accounts
receivable. As of December 31, 2003 two customers accounted for 34.4% and 17.2%,
of outstanding accounts receivable. The Company maintains an allowance for
doubtful accounts receivable based upon its historical experience and the
expected collectibility of all accounts receivable.
Stock compensation
At December 31, 2003, the Company has two stock-based employee
compensation plans, which are more fully described in Note 10. The Company
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
35
income. The following table illustrates the effect on net income and earning per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation for the years ended December 31:
2001 2002 2003
-------- -------- --------
Net loss, as reported........................................................ $(17,878) $ (5,504) $ (1,511)
Add: Total stock-based employee compensation expense, included in the
determination of net income as reported, net of related tax effects....... 59 11 104
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects.. (932) (373) (249)
-------- -------- --------
Pro forma net loss........................................................... $(18,751) $ (5,866) $ (1,656)
======== ======== ========
Earnings per share:
Basic - as reported....................................................... $ (1.44) $ (1.35) $ (.35)
======== ======== ========
Basic - pro forma......................................................... $ (1.51) $ (1.44) $ (.38)
======== ======== ========
For SFAS No. 123 pro forma disclosure, the fair value of each option is
estimated on the date of grant using the Black-Scholes option pricing model for
the years ended December 31, 2001, 2002 and 2003, with the following assumptions
used for grants to employees:
Year ended December 31,
-------------------------
2001 2002 2003
---- ---- ----
Weighted average risk free interest rate..... 4.42% 3.29% 2.53%
Weighted average expected life (in years).... 4.00 3.60 4.00
Volatility................................... 100% 100% 100%
Dividends.................................... None None None
Comprehensive income
To date, the Company has not had any transactions required to be reported
in comprehensive income other than its net loss.
Recent accounting pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 requires a guarantor to include
disclosure of certain obligations, and if applicable, at the inception of the
guarantee, recognize a liability for the fair value of other certain obligations
undertaken in issuing a guarantee. The recognition requirement is effective for
guarantees issued or modified after December 31, 2002 and did not have a
material impact on the Company.
In November 2002, the EITF reached a consensus on EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF No. 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which the vendor
will perform multiple revenue-generating activities. EITF No. 00-21 became
effective for interim periods beginning after June 15, 2003. The effect of
adopting EITF 00-21 did not have a material impact on the Company's financial
position, cash flows or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on the reported results. The disclosure provisions of SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. The Company has adopted the disclosure provisions of SFAS No. 148.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities."
Until this interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns. Certain provisions of FIN 46 were
deferred until the period ending after March 15, 2004. The adoption of FIN 46
did not have a material impact on the Company's financial position, cash flows
or results of operations.
36
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends
SFAS 133 for certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149: (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (2) clarifies when a derivative contains a financing component, (3)
amends the definition of an underlying to conform it to language used in FASB
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (4)
amends certain other existing pronouncements. This Statement is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition, most provisions of
SFAS 149 are to be applied prospectively. The adoption of SFAS 149 did not have
a material impact on the Company's financial position, cash flows or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The adoption of this standard has not resulted in an impact to results
of operations or financial position of the Company, as the Company has no
financial instruments that fall within the scope of this standard.
3. 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 websites, 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
------ ------ ------ ------ ------
Total ..................................... $2,806 $2,192 $ -- $ -- $4,998
====== ====== ------ ------ ======
Balance of severance accrual at end of period $ 511 $ 204 $ 57 $ 15 $ 15
====== ====== ====== ====== ======
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
website 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.
At December 31, 2003 no assets or liabilities 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.
4. Accounts receivable
Accounts receivable consist of the following (in thousands):
December 31,
---------------------
2002 2003
--------- ---------
Accounts receivable....................... $ 606 $ 980
Less: Allowance for doubtful accounts..... (76) (61)
--------- ---------
$ 530 $ 919
========= =========
37
5. Property and equipment
Property and equipment consist of the following (in thousands):
December 31,
-------------------
2002 2003
-------- --------
Computer hardware and software................... $ 3,150 $ 2,717
Office furniture and equipment................... 285 281
Leasehold improvements........................... 222 229
-------- --------
3,657 3,227
Less: Accumulated depreciation and amortization.. (3,217) (2,819)
-------- --------
$ 440 $ 408
======== ========
Property and equipment includes equipment under capital leases in the
amount of $68,000 and $203,000 at December 31, 2002 and 2003, respectively.
Accumulated amortization on this equipment was $67,000 and $26,000 at December
31, 2002 and 2003, respectively.
During the third quarter of 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 began paying significantly less rent for a reduced amount of
office space and surrendered a majority of the leasehold improvements made in
Seattle. Lease renegotiation costs and impairment of leasehold improvements of
$478,000 were recorded; $377,000 related to the net book value of the leasehold
improvements being surrendered to the landlord, $25,000 related to a cash
payment required under the agreement to amend the lease and $76,000 related to
150,000 shares of unregistered common stock issued to the landlord.
6. Line-of-credit
In July 2003 the Company obtained a line-of-credit with Comerica Bank for
up to $500,000, with a term of one year, which is renewable at the Company's
option, and is secured by the Company's assets. The line-of-credit bears
interest at prime plus three percent. Timothy C. Choate, the Company Chief
Executive Officer, personally guaranteed the line-of-credit. At December 31,
2003 there was no balance outstanding under the line-of-credit.
7. Accrued and other liabilities
Accrued and other liabilities consist of the following (in thousands):
December 31,
-------------------
2002 2003
------- -------
Accrued network partner fees................... $ 157 $ 27
Accrued commissions............................ 17 55
Deferred revenue............................... 12 37
Accrued vacation............................... 70 68
Other.......................................... 88 72
------- -------
$ 344 $ 259
======= =======
8. Convertible note payable
In July 2003 the Company borrowed $305,000 pursuant to the terms of a
Convertible Promissory Note, which will pay interest of 6% per annum, but can be
converted to shares of common stock at the option of the holder at a fixed price
of $0.80 per share. The note has a 36-month term. Principal and accrued interest
is payable quarterly, commencing one year from the closing date. In addition to
the notes, the Company has issued to the investors warrants to purchase a total
of 127,094 shares of common stock for $0.50 per share. The warrants have a term
of five years.
9. Related party transactions
During the year ended December 31, 2001, the Company repurchased all
shares of common stock held by Fingerhut (see Note 10).
38
In June 2001, certain assets of the Company's suspended Desteo operation
were sold to an entity controlled by relatives of the Company's CEO, Tim Choate.
Mr. Choate had no involvement in negotiating the terms of the sale. The sale,
which is in form substantially similar to the Company's earlier sale of certain
of its FreeShop-related assets to Altura International, Inc., was on an earn-out
basis in which the obligations of the purchaser are secured by the assets sold.
To date no amounts have been received under this agreement, as the purchasing
company has not earned any amounts from the site.
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. In June 2003 5,900 of the shares outstanding were
cancelled along with $6,844 of notes receivable as a result of one of the
executive officers leaving the Company.
In July 2003 Timothy C. Choate, the CEO, and Robert W. Wrubel, a director,
participated in the convertible note payable (Note 8) in the amount of $50,000
and $15,000, respectively. In connection with the convertible note Mr. Choate
and Mr. Wrubel received warrants for 20,835 and 6,250 shares of common stock,
respectively at an exercise price of $0.50 per share. These warrants have a
five-year term.
In August 2003 Timothy C. Choate was granted an option for 25,000 shares
of common stock at an exercise price of $0.00 per share in recognition for his
guaranteeing the Company's line-of-credit debt (Note 6).
39
10. Commitments and contingencies
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 are as
follows (in thousands).
Capital Operating
Year ending December 31, leases leases
------------------------ ------- ---------
2004............................................. $ 130 $ 86
2005............................................. -- 62
2006............................................. -- 63
2007............................................. -- 77
------- -------
Total minimum lease payments....................... 130 $ 288
======= =======
Less: Amount representing interest................. (29)
-------
Present value of capital lease obligations......... 101
Less: Current portion.............................. (101)
-------
Capital lease obligations, net of current portion.. $ --
=======
Rent expense for the years ended December 31, 2001, 2002 and 2003, was
$824,000, $648,000 and $206,000 respectively.
Litigation
The Company may be subject to various claims and pending or threatened
lawsuits in the normal course of business. Management believes that the outcome
of any such lawsuits would not have a materially adverse effect on the Company's
financial position, results of operations or cash flows.
Change in Control Agreement
In December 2002, the Board of Directors approved a Change in Control
Agreement. Under the terms of this agreement, key members of management are to
receive a severance package ranging between eight and twelve months salary in
the event of a change in control of the Company and termination of the employee.
Guarantees and Indemnifications
The following is a summary of our agreements that the Company has
determined are within the scope of Interpretation No. 45, or FIN 45, which are
separately grandfathered because the guarantees were in effect prior to December
31, 2002. Accordingly, the Company has no liabilities recorded for these
agreements as of December 31, 2003.
As permitted under Washington law and our by-laws and certificate of
incorporation, the Company has agreements whereby the Company indemnifies its
officers and directors for certain events or occurrences while the officer or
director is, or was serving, at the Company's request in such capacity. The term
of the indemnification period is the applicable statute of limitations for
indemnifiable claims. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has a directors' and officers' insurance policy
that may enable the Company to recover a portion of any future amounts paid.
Assuming the applicability of coverage and the willingness of the insurer to
assume coverage and subject to certain retention, loss limits and other policy
provisions, the Company believes the estimated fair value of this
indemnification obligation is not material. However, no assurances can be given
that the insurers will not attempt to dispute the validity, applicability or
amount of coverage, which attempts may result in expensive and time-consuming
litigation against the insurers.
The Company's standard advertising client and distribution partner
contracts include standard cross indemnification language that requires, among
other things, the Company to indemnify the client or partner, as the case may
be, for certain claims and damages asserted by third-parties that arise out of
the Company's breach of the contract. In the past, the Company has not been
subject to any claims for such losses and has thus not incurred any material
costs in defending or settling claims related to these indemnification
obligations. Accordingly, the Company believes the estimated fair value of these
obligations is not material.
40
Pursuant to these agreements, the Company may indemnify the other party
for certain losses suffered or incurred by the indemnified party in connection
with various types of third-party claims, which may include claims of
intellectual property infringement, breach of contract and intentional acts in
the performance of the contract. The term of these indemnification obligations
is generally limited to the term of the contract at issue. In addition, the
Company limits the maximum potential amount of future payments the Company could
be required to make under these indemnification obligations to the consideration
paid during a limited period of time under the applicable contract, but in some
infrequent cases the obligation may not be so limited. In addition, the
Company's standard policy is to disclaim most warranties, including any implied
or statutory warranties such as warranties of merchantability, fitness for a
particular purpose, quality and non-infringement, as well as any liability with
respect to incidental, indirect, consequential, special, exemplary, punitive or
similar damages. In some states, such disclaimers may not be enforceable. If
necessary, the Company would provide for the estimated cost of service
warranties based on specific warranty claims and claim history. The Company has
not been subject to any claims for such losses and has not incurred any costs in
defending or settling claims related to these indemnification obligations.
Accordingly, the Company believes the estimated fair value of these agreements
is not material.
11. Shareholders' equity
Preferred stock
Subject to the provisions of the articles of incorporation and limitations
prescribed by law, the board of directors has the authority to issue, without
further vote or action by the shareholders, up to 6,814,516 additional shares of
preferred stock in one or more series.
In March 2002, the Board of Directors of the Company declared a dividend
distribution of one preferred share purchase right (a "right") for each
outstanding share of Common Stock of the Company. The dividend is payable to the
stockholders of record on March 29, 2002. Each right entitles the registered
holder to purchase form the Company one one-thousandth of a share of Series C
Preferred Stock of the Company at a price of $15 per one one-thousandth of a
Preferred Share. In the event of an acquisition, except pursuant to a tender or
exchange offer which is for all outstanding Common Shares at a price and on
terms which a majority of certain members of the Board of Directors determines
to be adequate, each holder of a right will thereafter have the right to receive
upon exercise the number of Common Shares or of one one-thousandth of a share of
Preferred Shares having a value equal to two times the exercise price of the
right. There were no transactions during 2002 or 2003 related to the rights.
Common stock
In April 2001, the Company repurchased 2,720,000 shares of common stock
from Fingerhut in exchange for $250,000 in cash and a note payable for $838,000.
The note payable called for equal monthly payments, including interest at 9.5%,
for 18 months through October 2002. As part of the repurchase Fingerhut was also
issued a warrant for 150,000 shares with an exercise price of $2.50 per share,
subject to adjustment if future sales of common stock are sold for less than
$0.40 per share. The warrants were valued at $7,200 for which an expense was
recorded. In November 2001 the note payable to Fingerhut was paid-off early at a
$100,000 discount and the warrant was cancelled. The early extinguishment of the
note payable is shown as a reduction of the cost to repurchase the shares in the
common stock account in the accompanying financial statements.
In November 2001, we completed an issuer tender offer by purchasing
9,230,000 shares of our Common Stock for $0.48 per share in cash for an
aggregate purchase price of approximately $4,565,000, including associated
costs. We announced the tender offer on August 27, 2001 and commenced the tender
offer on October 10, 2001 by filing a Schedule TO-I. Following completion of the
tender offer approximately 3,985,000 shares of common stock remained
outstanding.
During the year ended December 31, 2001 the Company repurchased 212,000
shares for approximately $184,000, respectively, under a 10b-18 stock repurchase
plan approved by the Board of Directors and initiated in August 2000.
In October of 2002 150,000 shares of common stock were issued to the
Seattle landlord as compensation for renegotiation the Seattle lease.
Compensation of $76,000 was recorded related to this issuance of stock and is
included in the lease renegotiation costs and abandonment of leasehold
improvements line of the statement of operations.
In December 2003 776,690 shares of unregistered commons tock were issued
to investors at a price of $3.55 per share. Gross proceeds were $2.757 million
with costs of approximately $64,000, including $20,000 of compensation related
to the issuance of warrants.
41
Warrants
In April 2001, in connection with the redemption of common stock from
Fingerhut, the Company issued to Fingerhut a warrant for 150,000 shares with an
exercise price of $2.50 per share, subject to adjustment if future sales of
common stock are sold for less than $0.40 per share. This warrant was cancelled
in November 2001.
In July of 2003, in connection with the issuance of the $305,000
convertible note payable, the Company issued warrants for 127,095 shares of
common stock. The warrants are fully vested, have an exercise price of $0.50 per
share and a term of five years. Compensation related to the issuance of the
warrants in the amount of $46,000 was recorded as a discount and is being
amortized to interest expense over the life of the notes.
In October of 2003 the Company issued a warrant to purchase 50,000 shares
of common stock for services. The warrant is fully vested, has an exercise price
of $2.05 per share and a term of five years. Compensation related to the
issuance of this warrant in the amount of $78,000 was recorded and is include in
equity based compensation on the statement of operations.
In December of 2003 the Company issued a warrant to purchase 5,634 shares
of common stock related to the sale of 776,690 shares of common stock. The
warrant is fully vested, has an exercise price of $5.00 per share and a term of
five years. Compensation related to the issuance of this warrant in the amount
of $20,000 was recorded and is include as an offset to common stock in the
balance sheet.
In return for various services, the Company has issued warrants to
purchase shares of common stock. At December 31, 2003, warrants outstanding are
as follows:
Year of issue Shares Exercise price Year of expiration
------------- ------ -------------- ------------------
2003 127,095 $ 0.50 2008
2003 50,000 $ 2.05 2008
2003 5,634 $ 5.00 2008
Stock options
Effective June 30, 1997, the Company approved the 1997 Stock Option Plan
(the 1997 Plan) to provide for the granting of stock options to employees,
directors and consultants of the Company to acquire ownership in the Company and
provide them with incentives for their service. Under the terms of the 1997
Plan, 788,613 shares of common stock remain unissued and not subject to options
and have been reserved for issuance to plan participants.
Effective June 12, 2001 the shareholders approved the 2001 Stock Plan (the
2001 Plan) to provide for the granting of stock options and restricted stock to
employees, directors and consultants of the Company to provide them with
incentives for their service. Under the terms of the 2001 Plan, 915,998 shares
of common stock remain unissued and not subject to options and have been
reserved for issuance to plan participants.
The Plans are administered by the Board of Directors of the Company, which
determines the terms and conditions of the options or restricted stock shares
granted, including exercise price, number of shares granted and the vesting
period of such shares. The maximum term of options is ten years from the date of
grant. The options are generally granted at the estimated fair value of the
underlying stock, as determined by the Board of Directors, on the date of grant.
As of December 31, 2003, options to purchase 788,613 and 915,998 shares of
common stock were available for future grant under the 1997 Plan and the 2001
Plan, respectively. During 2001, 635,000 shares of restricted stock were issued
to the Board of Directors and certain members of senior management that by its
terms became fully vested as a result of the tender offer. For the years ended
December 31, 2001, 2002 and 2003, $304,000, $1,000 and zero, respectively, of
deferred compensation was recorded for options and restricted stock grants for
which the exercise price was lower than the fair market value at the date of
grant. The deferred compensation recognized is amortized over the vesting period
of the related options in accordance with Financial Accounting Standards Board
interpretation No. 28. During the year ended December 31, 2001 $281,000 of
unamortized deferred compensation was reversed due to forfeitures of options. No
such reversals were made in the years ended December 31, 2002 and 2003.
42
The following table presents option activity under the Plans (in
thousands, except prices):
Year ended December 31,
---------------------------------------------------------
2001 2002 2003
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Options outstanding at beginning of period 1,397 $6.12 1,235 $1.88 1,394 $1.02
Options granted .......................... 1,258 0.40 755 0.76 643 0.42
Options exercised ........................ 223 0.35 124 0.38 228 0.60
Options forfeited ........................ 1,197 5.56 472 3.04 287 6.92
----- ----- ----- ----- ----- -----
Options outstanding at end of period ..... 1,235 $1.88 1,394 $1.02 1,522 $1.02
===== ===== ===== ===== ===== =====
Weighted average fair value of options
granted during the period .............. $0.29 $0.48 $0.32
43
The following table summarizes information about stock options outstanding under
the Plans at December 31, 2003 (in thousands, except prices and remaining
contractual life):
Options outstanding Options exercisable
------------------------------------------------------------------- -----------------------------
Weighted average
remaining
contractual Weighted average Weighted average
Range of Number of life exercise Number of Exercise
exercise prices shares (in years) price Shares price
--------------- --------- ---------------- ---------------- --------- ----------------
$ 0.00 25 9.6 $ 0.00 25 $ 0.00
0.28--0.82 1,262 8.3 0.43 882 0.45
1.02--2.50 159 7.3 1.55 106 1.63
4.27--6.00 65 6.4 5.66 57 5.65
12.69--14.88 11 5.9 14.65 11 14.63
----- -----
1,522 8.2 $ 0.87 1,081 $ 0.97
===== =====
The weighted average fair values and weighted average exercise prices per
share at the date of grant for options granted under the plans were as follows:
Year ended December 31,
--------------------------------------------------
Average fair value Average exercise price
----------------------- -----------------------
2001 2002 2003 2001 2002 2003
----- ----- ----- ----- ----- -----
Options granted with exercise prices less than the
fair value of the stock on the date of grant ........ $ -- $ -- $0.58 $ -- $ -- $0.07
Options granted with exercise prices equal to the
fair value of the stock on the date of grant ........ $0.29 $0.48 $0.31 $0.40 $0.76 $0.44
Options granted with exercise prices greater than the
fair value of the stock on the date of grant ........ $ -- $0.10 $ -- $ -- $1.49 $ --
During the years ended December 31, 2001, 2002 and 2003, the Company
granted options to purchase zero, 6,000 and 35,000 shares of common stock,
respectively, to consultants and advisors.
The Company follows SFAS No. 123 in accounting for options and warrants
issued to non-employees. During the years ended December 31, 2002 and 2003, the
Company recognized $1,000 and $8,000, respectively, of expense in connection
with options issued to consultants and advisors. The Company did not issue any
options to non-employees during the year ended December 31, 2001. In determining
the fair value of the options and warrants granted or issued to non-employees on
the date of grant, the Company used the Black-Scholes option-pricing model with
the following assumptions:
Year ended December 31,
---------------------------------
2001 2002 2003
---- ---- ----
Weighted average risk free interest rate..... N/A 1.75% 2.53%
Weighted average expected life (in years).... N/A 1.00 4.00
Volatility................................... N/A 100% 100%
Dividends.................................... N/A none none
12. Equity based compensation
Equity based compensation by statement of operations classifications is as
follows:
Year ended December 31,
--------------------------
2001 2002 2003
------- ------- -------
Sales and marketing.......................... $ 25 $ 3 $ 1
Internet and network......................... 4 -- --
Research and development..................... 8 -- --
General and administrative................... 334 8 103
------- ------- -------
Total Equity-based compensation......... $ 371 $ 11 $ 104
======= ======= =======
13. Stock purchase plan
The Company's Board of Directors adopted the Employee Stock Purchase Plan
(the Purchase Plan) on April 17, 2000 under which two million shares have been
reserved for issuance. Under the Purchase Plan, eligible employees may purchase
common stock in an amount not to exceed 50% of the employees' cash compensation
or 1,800 shares per purchase period. The purchase price per share will be 85% of
the common stock fair value at the lower of certain plan-defined dates. Pursuant
to the Purchase Plan, 7,200 shares were purchased at a weighted average price of
$0.39 per share for the year ended December 31, 2001. No shares were purchased
under the Purchase Plan in the years ended December 31, 2002 and 2003.
44
14. Employee retirement plan
During 1999, the Company established the Aptimus 401(k) plan, a
tax-qualified savings and retirement plan intended to qualify under Section 401
of the Internal Revenue Code. All employees who satisfy the eligibility
requirements relating to minimum age and length of service are eligible to
participate in the plan and may enter the plan on the first day of any month
after they become eligible to participate. Participants may make pre-tax
contributions to the plan of up to 15% of their eligible earnings, subject to a
statutorily prescribed annual limit. The Company may make matching contributions
of up to 100% of the first 6% of the compensation elected for contribution to
the plan by an employee. Each participant is fully vested in his or her
contributions and the investment earnings thereon, but vesting in any matching
contributions by us takes place over a period of five years. The Company has
made no matching contributions to the plan as of December 31, 2003.
15. Income taxes
A current provision for income taxes was not recorded for the years ended
December 31, 2001, 2002 and 2003 due to taxable losses incurred during such
periods. A valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income prior
to the expiration of net operating loss carry-forwards.
Deferred tax assets at December 31, 2002 and 2003 are as follows (in
thousands):
December 31,
------------------------
2002 2003
---------- ----------
Net operating loss carryforwards................. $ 20,565 $ 20,222
Nondeductible allowances and accruals............ 358 106
Expense related to stock options and warrants.... 77 108
---------- ----------
21,000 20,436
Less: Valuation allowance........................ (21,000) (20,436)
---------- ----------
$ -- $ --
========== ==========
At December 31, 2003, the Company had net operating loss carry forwards of
approximately $62.7 million for federal income tax reporting purposes. The net
operating losses will expire beginning in 2012 if not previously utilized.
Should certain changes in the Company's ownership occur, there could be a
limitation on the utilization of its net operating losses.
16. Supplemental cash flow information
The following items are supplemental information required for the
statement of cash flows (in thousands):
Year ended December 31,
-----------------------------
2001 2002 2003
------ ------ ------
Cash paid during the period for interest................ $ 154 $ 24 $ 24
====== ====== ======
Fixed assets acquired with capital leases............... $ 126 $ -- $ 203
====== ====== ======
Directors and Officers insurance premium financed....... $ 126 $ -- $ --
====== ====== ======
Repurchase of common stock with note payable............ $ 838 $ -- $ --
====== ====== ======
Common stock issued in connection with business
combination........................................... $ (81) $ -- $ --
====== ====== ======
45
17. Quarterly financial information (unaudited)
The following table sets forth the Company's unaudited quarterly financial
information for the years ending December 31, 2001, 2002, and 2003 (in
thousands, except per share data).
Three months ended
-------------------------------------------------------
3/31/01 6/30/01 9/30/01 12/31/01
---------- ---------- ---------- ---------
Net revenue.............................. $ 926 $ 381 $ 188 $ 379
Net loss................................. $ (8,858) $ (5,475) $ (1,848) $ (1,697)
========== ========== ========== =========
Basic and diluted net loss per share... $ (0.57) $ (0.42) $ (0.15) $ (0.20)
========== ========== ========== =========
Three months ended
-------------------------------------------------------
3/31/02 6/30/02 9/30/02 12/31/02
---------- ---------- ---------- ---------
Net revenue.............................. $ 773 $ 782 $ 537 $ 823
Net loss................................. $ (1,297) $ (1,486) $ (2,000) $ (721)
========== ========== ========== =========
Basic and diluted net loss per share... $ (0.33) $ (0.37) $ (0.49) $ (0.17)
========== ========== ========== =========
Three months ended
-------------------------------------------------------
3/31/03 6/30/03 9/30/03 12/31/03
---------- ---------- ---------- ---------
Net revenue.............................. $ 911 $ 938 $ 1,405 $ 1,317
Net loss................................. $ (604) $ (437) $ (273) $ (197)
========== ========== ========== =========
Basic and diluted net loss per share... $ (0.14) $ (0.10) $ (0.06) $ (0.04)
========== ========== ========== =========
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A: Controls And Procedures
(a) Evaluation of Disclosure Controls and Procedures
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-15(e) under the Exchange Act) as of December
31, 2003 (the "Evaluation Date"). 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.
46
PART III
Item 10: Directors and Executive Officers of the Registrant
The following table sets forth information, as of February 13, 2004, regarding
our directors, executive officers and key employees:
- --------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------
Timothy C. Choate 38 Chairman, Chief Executive Officer, President
- --------------------------------------------------------------------------------
John B. Balousek(1) 58 Director
- --------------------------------------------------------------------------------
Robert W. Wrubel(1) 43 Director
- --------------------------------------------------------------------------------
Eric Helgeland(1)(2) 46 Director
- --------------------------------------------------------------------------------
John A. Wade 41 Chief Financial Officer
- --------------------------------------------------------------------------------
David H. Davis 45 General Counsel/Secretary
- --------------------------------------------------------------------------------
(1) Member of the audit committee and compensation committee each of which is
independent as that term is used in Item 7(d)(3)(IV) of schedule 14A.
(2) Audit committee financial expert.
Timothy C. Choate has served as Chairman, President and Chief Executive
Officer since March 1998. Prior to March 1998, Mr. Choate served as a Vice
President of Micro Warehouse from July 1997 to March 1998. In 1994, Mr. Choate
co-founded Online Interactive, Inc., the former parent company of the Company,
and served as its Chairman, President and Chief Executive Officer until June
1997. Prior to 1994, Mr. Choate also served as President of Softdisk Publishing
LLC, a software publishing company, and the Senior Marketing Manager of Prodigy,
an Internet access and content provider. Mr. Choate currently serves as a
director of Digital River, Inc., a provider of eCommerce outsourcing solutions,
and Laplink, Inc., a software publishing company. Mr. Choate earned a Bachelor
of Science in economics, with a concentration in marketing and entrepreneurial
management, from the Wharton School of Business at the University of
Pennsylvania.
John B. Balousek has served as a director since February 1999. In 1998 Mr.
Balousek co-founded PhotoAlley.com, an online retailer of photographic
equipment, supplies and services. From 1979 to 1997, Mr. Balousek served in
various positions, including President and Chief Operating Officer and Director
of Foote, Cone & Belding Communications, Inc., a global advertising and
communications company. In 1996, Mr. Balousek served as Chairman and Chief
Executive Officer of True North Technologies, a digital and interactive service
of True North Communications, Foote, Cone & Belding's parent company. In
addition to Aptimus, Mr. Balousek currently serves as a director for Central
Garden and Pet. Co., a publicly-held manufacturer, marketer and distributor of
garden supplies and pet products; Interland Corp., a publicly-held Internet
hosting and business services company; EDB Holdings, Inc., a privately-held
holding company; and Master Replicas, a privately-held manufacturer, marketer
and distributor of authentic movie replicas. Mr. Balousek holds a Bachelor of
Arts degree in Journalism from Creighton University and a graduate degree from
Northwestern University.
Robert W. Wrubel has served as a director since November 2001. Mr. Wrubel
is currently the founder and Chairman of Whole Body, Inc., a start up company
that began operations in August 2002. From June 2001 to July 2002, Mr. Wrubel
was an Entrepreneur-in-residence at Highland Capital Partners, a venture capital
firm, where he identified new venture investments and developed start-up ideas
into viable business opportunities. Prior to that Mr. Wrubel was with Ask
Jeeves, Inc. from May 1998 to May 2001, where he served as Chief Executive
Officer, President and Vice President of Market Development. While at Ask
Jeeves, Mr. Wrubel grew the company from a 15-employee technology start-up to a
public software and services company of 425 employees. Mr. Wrubel built the Ask
Jeeves website into one of the top twenty most visited sites on the Internet and
developed its Business Solutions Group into a leading provider of customized
natural language services for major corporate clients, including Dell Computers,
Datek, Radio Shack, Ford Motor Co, Chrysler and British Telecommunications. From
1993 to 1998, Mr. Wrubel served in various positions, including Chief Operating
Officer and Vice President of Product Development for Knowledge Adventure, Inc.,
a leading educational software company. Prior to that, Mr. Wrubel worked as a
managing editor of Financial World Magazine and was the founding publisher and
editor of High Tech Tomorrow. Mr. Wrubel holds a Bachelor of Arts in History and
Economics from Yale University.
47
Eric Helgeland has served as a director since November 2002. Mr. Helgeland
currently serves as a project manager with Treasury Strategies, Inc., a position
he has held since 2000, where he provides marketing, business development and
M&A consulting services to a variety of public and private companies. From 1998
to 2000, Mr. Helgeland served as Vice President of Business Development for
Fingerhut, managing and directing new customer acquisition efforts and M&A
activities for the Federated Department Stores subsidiary. From 1995 to 1998,
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 began his career in managerial positions
with First Chicago, Household International and National Westminster Bank. Mr.
Helgeland holds a Bachelor of Arts degree in Economics from Northwestern
University.
David H. Davis has served as General Counsel and Corporate Secretary since
January 2000. He added the title of Vice President of Business Development in
2003. Prior to January 2000, Mr. Davis served as General Counsel and Corporate
Secretary for Ride, Inc. from August 1996 to December 1999 and for Egghead, Inc.
from September 1994 to August 1996. Prior to September 1994, Mr. Davis worked as
an attorney for the Seattle-based law firms of Lane Powell Spears Lubersky and
Stanislaw Ashbaugh. Mr. Davis holds a Bachelor of Arts degree in history from
Whitman College and a Juris Doctor degree from the University of Oregon School
of Law.
John A. Wade has been Chief Financial Officer since May 1998. Prior to
joining Aptimus, Mr. Wade served as the CFO and COO for Buzz Oates Enterprises,
a real estate development company, from November 1992 to May 1998. Prior to
November 1992, Mr. Wade also worked as the Controller for A&A Properties, Inc.,
an asset management corporation and as an auditor and taxation specialist at
McGladrey and Pullen, an international accounting firm. Mr. Wade serves as a
Board of Director for ITEX, a Barter exchange company. Mr. Wade holds a Bachelor
of Science degree in business administration with a concentration in accounting
from the San Diego State University School of Business.
Information with respect to the Company's Code of Conduct and Section
16(a) Beneficial Ownership Reporting Compliance may be found under the captions
"Code of Conduct" and "Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held June 8, 2004 (the "Proxy Statement"). Such information is incorporated
herein by reference
Item 11: Director and Executive Compensation
Director Compensation
Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board, but are reimbursed
for their reasonable expenses incurred in attending Board or Committee meetings.
The Company's 2001 Stock Plan, as amended (the "Stock Plan"), permits the
grant of restricted shares of our Common Stock and options for the purchase of
shares of our Common Stock to, among others, directors of the Company. In
accordance with the Stock Plan, the following four (4) grants were made to Tim
Choate in 2003: 8,750 shares in January 2003, 50,000 shares in March 2003, 5,367
shares in April 2003 and 25,000 shares in August 2003. In addition, directors
Robert W. Wrubel and Eric Helgeland each received a grant of 25,000 shares, and
director John D. Balousek received a grant of 75,000 shares, in March 2003.
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee is currently composed of Messrs.
Balousek, Wrubel and Helgeland. No member of the Compensation Committee is an
officer or employee of the Company. The Compensation Committee, however, did not
meet during the fiscal year ended December 31, 2003, and the Board performed the
duties otherwise performed by the Compensation Committee. Timothy C. Choate, the
Company's Chief Executive Officer and President, recused himself and did not
participate in the Board's discussions and voting in respect to option grants
made to Mr. Choate during the fiscal year, but otherwise participated in Board
discussions and voting in respect to all other option grants during the fiscal
year ended December 31, 2003.
48
No executive officer of the Company serves as a member of the Compensation
Committee of any entity that has one or more executive officers serving as a
member of the Company's Board. In addition, no interlocking relationship exists
between any member of the Company's Board and any member of the compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
Executive Compensation
The following table sets forth the compensation paid to the Company's
Chief Executive Officer and two most highly compensated executive officers for
the years ended December 31, 2001, 2002 and 2003.
Summary Compensation Table
Long-Term Compensation
Annual Compensation Securities Underlying
--------------------------------- ----------------- ----------------
Name and Principal Position Salary Bonus Options Restricted
Stock
- ------------------------------------- ----------------- ----------------------------------- ----------------
Timothy C. Choate 2003 $179,633 $0 89,117
President and Chief Executive Officer 2002 176,250 0 200,000
2001 150,000 0 100,000(1)
John A. Wade 2003 $147,467 $0 47,033
Vice President, Finance and Chief 2002 152,500 0
Financial Officer 2001 135,000 0 150,000 30,000(1)
David H. Davis 2003 $140,193 $0 45,717
Vice President, Business Development, 2002 136,790 0 12,500
Secretary and General Counsel 2001 138,125 0 125,000 30,000(1)
(1) Reflects a restricted stock grant under the Company's 2001 Stock Plan. The
restricted stock was sold in the Company's issuer tender offer that closed
in November 2001.
The following table sets forth certain information regarding stock option
grants to the Company's Chief Executive Officer and two most highly compensated
executive officers during the year ended December 31, 2003. The potential
realizable value is calculated based on the assumption that the Common Stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of its term. These numbers are calculated based on
SEC requirements and do not reflect the Company's projection or estimate of
future stock price growth. Potential realizable values are computed by:
o multiplying the number of shares of Common Stock subject to a given
option by the exercise price;
o assuming that the aggregate stock value derived from that
calculation compounds at the annual five percent (5%) or ten percent
(10%) rate shown in the table for the entire ten-year term of the
option; and
o subtracting from that result the aggregate option exercise price.
49
Option Grants in 2003
Individual Grants
-------------------------------------------------------------- Potential Realizable Value
% Of Total At Assumed Annual Rates Of
Number Of Options Stock Price Appreciation For
Securities Granted To Exercise Option Term
- ------------------ -------------- ---------------- ------------- ------------- ------------------------------
Underlying Employees In
Options Fiscal Year Price Expiration
Name Granted (1) (Per Share) Date 5% 10%
- ------------------ -------------- ---------------- ------------- ------------- ---------------- ------------
Timothy C. Choate 8,750(2) 1.4% 0.55(3) 01/06/13 3,027 7,670
Timothy C. Choate 50,000(4) 7.8% 0.28(5) 03/26/13 8,805 22,312
Timothy C. Choate 5,367(2) 0.8% 0.31(5) 04/01/13 1,046 2,652
Timothy C. Choate 25,000(2) 3.9% 0.00(6) 08/20/13 25,248 40,203
David H. Davis 6,710(2) 1.0% 0.55(3) 01/06/13 2,321 5,882
David H. Davis 35,000(4) 5.4% 0.28(5) 03/26/13 6,163 15,619
David H. Davis 4,007(2) 0.6% 0.31(5) 04/01/13 781 1,980
John A. Wade 7,500(2) 1.2% 0.55(3) 01/06/13 2,594 6,574
John A. Wade 35,000(4) 5.4% 0.28(5) 03/26/13 6,163 15,619
John A. Wade 4,533(2) 0.7% 0.31(5) 04/01/13 884 2,240
(1) During 2003, options to purchase stock and grants of restricted stock
collectively totaling 642,672 shares were issued to employees.
(2) Represents options vesting according to the following schedule: 100% at
issue
(3) The exercise price per share was equal to the fair market value of the
Common Stock on the date of grant as reported by the Nasdaq Small-Cap
Market.
(4) Represents options vesting according to the following schedule: three-year
term, quarterly vesting.
(5) The exercise price per share was equal to the fair market value of the
Common Stock on the date of grant as reported by the Nasdaq OTCBB.
(6) Option grant in recognition of Mr. Choate personally guaranteeing the
Company's line of credit debt.
Option Exercises and Fiscal Year End Values
The following table sets forth for our Chief Executive Officer and two
most highly compensated executive officers the number of shares acquired upon
exercise of stock options during the year ended December 31, 2003 and the number
of shares subject to exercisable and unexercisable stock options held at
December 31, 2003.
Aggregated Option Exercises in 2003
and Year-End Option Values
Number Of Securities
Underlying Unexercised Value Of Unexercised
Options At In-The-Money Options At December
December 31, 2003 31, 2003(1)
Shares ----------------------------- --------------------------------
Acquired On Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ----------- -------- ----------- ------------- ----------- -------------
Timothy C. Choate -- -- 236,167 54,950 $900,407 $214,324
David H Davis -- -- 176,214 37,003 566,508 132,431
John A. Wade 16,000 $67,657 212,148 9,885 704,673 27,537
(1) The value of unexercised in-the-money options at December 31, 2003 is
based on $4.25 per share, the closing price of the Common Stock at such
time, less the exercise price per share.
50
Employment Agreements
We do not have employment agreements with any of our employees, nor do we have
key-person insurance for any of our employees.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth the number of securities issuable under our
equity compensation plans and indicates whether or not the plan received
shareholder approval:
- ---------------------------------------------------------------------------------------------------------------------
Plan Category A B C
-------------------------------------------------------------------------------------
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
options, warrants and options, warrants and future issuance under
rights rights equity compensation plans
(excluding securities
reflected in Column A)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans 1,521,704 $0.87 3,668,975*
approved by security holders
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 0 -- 0
approved by security holders
- ---------------------------------------------------------------------------------------------------------------------
Total 1,521,704 $0.87 3,668,975
- ---------------------------------------------------------------------------------------------------------------------
*Includes 1,964,364 shares of common stock subject to the 2000 Employee Stock
Purchase Plan
Item 12: Security Ownership of Certain Beneficial Owners and Management and
related Stockholder Matters
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of its Common Stock as of February 13,
2004, by (i) each person known by the Company to be the beneficial owner of more
than five percent (5%) of the outstanding Common Stock, (ii) each director of
the Company, (iii) each of the Company's four most highly compensated executive
officers, and (iv) all directors and officers as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
51
Directors, Named Executive Officers Number of Shares % of Total Shares
and 5% Shareholders(1) Beneficially Owned(2) Owned(3)
- -------------------------------------------- --------------------- -----------------
Timothy C. Choate(4) 1,801,067 32.38%
John B. Balousek(5) 100,875 1.90%
Robert W. Wrubel(6) 90,625 1.71%
Eric Helgeland(7) 47,876 *
David H. Davis(8) 191,570 3.55%
John A. Wade(9) 225,198 4.14%
Harvey I. Houtkin(10) 354,000 6.78%
Austin W. Marxe & David M. Greenhouse(11) 542,290 10.39%
All directors and executive officers 2,457,211 39.59%
as a group (6 persons)(12)
* Represents beneficial ownership of less than one percent (1%) of the
Common Stock.
(1) Unless otherwise indicated, the address of each beneficial owner is that
of the Company.
(2) Beneficial ownership is determined in accordance with the rules of the
SEC, based on factors including voting and investment power with respect
to shares. Common Stock subject to options currently exercisable, or
exercisable within 60 days after February 13, 2004, are deemed outstanding
for computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage ownership for
any other person.
(3) Based upon an aggregate of 5,217,683 shares of the Company's Common Stock
issued and outstanding as of February 13, 2004.
(4) Represents 1,154,865 shares held by Mr. Choate directly, 301,000 shares
held by trusts established for Mr. Choate's children, and 345,202 shares
that Mr. Choate has a right to acquire pursuant to options exercisable
within 60 days of February 13, 2004.
(5) Represents 100,875 shares that Mr. Balousek has a right to acquire
pursuant to options exercisable within 60 days of February 13, 2004.
(6) Represents 90,625 shares that Mr. Wrubel has a right to acquire pursuant
to options exercisable within 60 days of February 13, 2004.
(7) Represents 1,001 shares held by Mr. Helgeland directly and 46,875 shares
that Mr. Helgeland has a right to acquire pursuant to options exercisable
within 60 days of February 13, 2004.
(8) Represents 5,900 shares held by Mr. Davis directly and 185,670 shares that
Mr. Davis has a right to acquire pursuant to options exercisable within 60
days of February 13, 2004.
(9) Represents 5,900 shares held by Mr. Wade directly and 219,298 shares that
Mr. Wade has a right to acquire pursuant to options exercisable within 60
days of February 13, 2004.
(10) Mr. Houtkin is a passive investor in the Company. His address is: 160
Summit Avenue, Montvale, NJ 07645.
(11) Messrs. Marx and Greenhouse are passive investors in the Company. They
share sole voting and investment power over 88,800 shares of common stock
owned by Special Situations Technology Fund, L.P. and 453,490 shares of
common stock owned by Special Situations Technology Fund II, L.P. Their
address is: 153 E. 53rd Street, 55th Floor, New York, NY 10022.
(12) Represents 1,468,666 shares held by all the current directors and
executive officers and 988,545 shares current directors and executive
officers have a right to acquire pursuant to options exercisable within 60
days of February 13, 2004.
52
Item 13: Certain Relationships and Related Transactions
The Company has entered into indemnification agreements with each of its
directors and certain of its officers containing provisions that may require it,
among other things, to indemnify its directors and such officers against
liabilities that may arise by reason of their status or service as directors and
such officers, other than liabilities arising from willful misconduct of a
culpable nature, and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
In addition, the Company has entered into Change in Control Agreements
with certain of its officers that may require it to pay severance and accelerate
vesting of any unvested option grants in the event the officer's employment is
terminated as a consequence of a change of control of the Company, which is
defined as the sale of substantially all of the Company's assets, the
third-party acquisition of in excess of 50% of the Company's voting securities,
a reduction in force mandated as a prior condition to the sale or merger of the
Company, or the voluntary or involuntary winding up and liquidation of the
Company.
Item 14: Principle Accountant Fees and Services
Audit Fees: The aggregate fee billed by Moss Adams for professional services
rendered for the audit of the Company's financial statements for the fiscal year
ended December 31, 2003, and for review of the financial statements included in
each of the Company's Form 10-Q filings is $76,633.
Financial Information Systems Designs and Implementation Fees: Moss
Adams did not bill for any professional services for financial information
systems design or implementation as described in Paragraph (c)(4)(ii) of Rule
2-01 of Regulation S-X for the fiscal year ended December 31, 2003.
All Other Fees: Aggregate fees billed for all other services rendered by Moss
Adams, other than the services covered in the two previous paragraphs, for the
fiscal year ended December 31, 2003 are $12,054.
53
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)1. Financial Statements
The following financial statements of the registrant and the Report of
Independent Accountants thereon are included herewith in Item 8 above.
Page
----
Reports of Independent Accountants................................. 27
Balance Sheet as of December 31, 2002 and 2003..................... 28
Statement of Operations for the years ended December 31, 2001,
2002 and 2003...................................................... 29
Statement of Shareholders' Equity for the years ended
December 31, 2001, 2002 and 2003................................. 30
Statement of Cash Flows for the years ended December 31, 2001,
2002 and 2003...................................................... 31
Notes to Financial Statements...................................... 32
(a)2. Financial Statement Schedules
Schedule No. Description
------------ -----------
1.1 Valuation and Qualifying Accounts and Reserves 2001, 2002
and 2003
Valuation and Qualifying Accounts and Reserves 2001, 2002 and 2003
Balance at Charges to Charges to Balance at
beginning costs and other end of
of period expenses accounts Deductions period
---------- ---------- ---------- ---------- ----------
Year ended December 31, 2001
Allowance for doubtful accounts 1,801,059 (296,481) -- 1,436,578 68,000
Tax valuation allowance ....... 13,765,815 -- 4,468,418 -- 18,234,233
Year ended December 31, 2002
Allowance for doubtful accounts 68,000 (2,361) -- (10,361) 76,000
Tax valuation allowance ....... 18,234,233 -- 2,765,767 -- 21,000,000
Year ended December 31, 2003
Allowance for doubtful accounts 76,000 26,395 -- (41,395) 61,000
Tax valuation allowance ....... 21,000,000 -- 521,000 -- 21,521,000
(b) Reports on Form 8-K
July 24, 2003 - Results of Operations and Financial Condition
October 23, 2003 - Results of Operations and Financial Condition
December 5, 2003 - Press Release announcing Aptimus, Inc.'s completion of a
$2.75 private placement investment with Apex Capital,LLC and Special Situations
Technology Funds.
(c) Exhibits:
Exhibit
Number Description
------- -----------
3.1* Second Amended and Restated Articles of Incorporation of
registrant.
3.1.1^^ Articles of Amendment filed September 16, 2000.
3.1.2+ Articles of Amendment filed March 29, 2002.
3.2* Amended and Restated Bylaws of registrant.
4.1* Specimen Stock Certificate.
4.2* Form of Common Stock Warrant.
54
Exhibit
Number Description
------- -----------
4.3^^^ Rights Agreement dated as of March 12, 2002 between
registrant and Mellon Investor Services LLC, as rights
agent.
10.1*@@ Form of Indemnification Agreement between the registrant
and each of its directors.
10.2. *@@ 1997 Stock Option Plan, as amended.
10.3. *@@ Form of Stock Option Agreement.
10.4* Investor Subscription Agreement, dated December 10, 1998,
between registrant and Fingerhut Companies, Inc.
10.5* Warrant Agreement, dated December 10, 1998, between
registrant and Fingerhut Companies, Inc.
10.6* Stockholders Agreement, dated December 10, 1998, among
registrant, Timothy C. Choate, John P. Ballantine and
Fingerhut Companies, Inc.
10.7* Asset Purchase Agreement, dated May 5, 1999, among
registrant, Travel Companions International, Inc., Jeff
Mohr and Janet Mohr.
10.8* Asset Purchase Agreement, dated May 6, 1999, among
registrant, Commonsite LLC and Alan Bennett.
10.9* Registration Rights Agreement, dated May 6, 1999, between
registrant and Commonsite LLC.
10.10* Loan and Security Agreement, dated September 18, 1998,
between registrant and Imperial Bank.
10.11* Lease Agreement, dated September 23, 1997 and amended as
of February 16, 1999, between registrant and Merrill Place
LLC.
10.11.1* Second Amendment to Lease, dated November 30, 1999,
between registrant and Merrill Place LLC.
10.12* Promotion Agreement, dated May 18, 1998 and amended as of
June 30, 1998 and September 30, 1998, between registrant
and CNET, Inc.
10.13@* Linkshare Network Membership Agreement, dated September
23, 1998, between registrant and Linkshare Corporation.
10.14* Letter Agreement dated June 18, 1999 between registrant
and Fingerhut.
10.15* Escrow Agreement dated June 18, 1999 between registrant
and Fingerhut.
10.16* Common Stock Purchase Warrant dated January 26, 1998 in
favor of Karrie Lee.
10.17* Warrant to Purchase Stock dated September 18, 1998 in
favor of Imperial Bank.
10.18* Common Stock Purchase Warrant dated January 23, 1998 in
favor of Hallco Leasing Corporation.
10.19* Common Stock Purchase Warrant dated December 4, 1997 in
favor of Hallco Leasing Corporation.
10.20* Common Stock Purchase Warrant dated January 26, 1998 in
favor of Employco, Inc.
10.21@* Marketing Agreement with NewSub Services, Inc. effective
as of June 1, 1999.
10.22@* 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** Asset Purchase Agreement, dated November 22, 2000, among
Aptimus, Inc. and XMarkstheSpot, Inc.
10.24*** Stock Redemption Agreement, dated as of April 16, 2001, by
and between registrant and Fingerhut Companies. Inc.
10.25^@@ Aptimus, Inc. 2001 Stock Plan.
10.25.1^^@@ Form of Stock Option Agreement.
10.25.2^^@@ Form of Restricted Stock Agreement (for grants).
10.25.3^^@@ Form of Restricted Stock Agreement (for rights to
purchase).
10.26^^ Letter Agreement, dated November 13, 2001, by and between
registrant and Fingerhut Companies, Inc.
10.27@@ Change in Control Agreement, dated as of December 6, 2002,
by and between registrant and Timothy C. Choate
10.28@@ Form of Change in Control Agreement, dated as of December
6, 2002, by and between registrant and each of certain
executive managers of registrant
10.29# Lease Agreement, dated October 1, 2002, between registrant
and Merrill Place LLC.
10.30## Form of Convertible Note Purchase Agreement, dated as of
July 1, 2003, by and between the Company and certain
investors.
55
Exhibit
Number Description
------- -----------
10.31## Form of Convertible Secured Promissory Note, dated July
2003, executed by and between the Company and payable to
the order of certain investors.
10.32## Form of Common Stock Warrant, dated July 2003, by and
between the Company and certain investors.
10.32## Form of Security Agreement, dated as of July 1, 2003, by
and between the Company and certain investors.
10.33## Form of Registration Rights Agreement, dated as of July 1,
2003, by and between the Company and certain investors.
10.35 Stock Purchase Agreement, dated as of December 4, 2003, by
and between the Company and certain investors.
16.1# Letter dated December 12, 2001 from PricewaterhouseCoopers
LLP to the Securities and Exchange Commission.
23.2 Consent of Moss Adams LLP, independent accountants.
31.1 Rule 13a-14(a) Certification of the Chief Executive
Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial
Officer
32.1 Section 1350 Certification of the Chief Executive Officer
32.2 Section 1350 Certification of the Chief Financial Officer
- ----------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-81151).
** Incorporated by reference to the Company's Annual Report on Form 10-K,
dated April 2, 2001.
*** Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 16, 2001.
^ Incorporated by reference to the Company's Proxy Statement on Schedule
14A, dated May 17, 2001.
^^ Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated November 14, 2001.
^^^ Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 12, 2002.
# Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 10, 2001.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated May 15, 2002.
@ Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
@@ Management compensation plan or agreement.
# Incorporated by reference to the Company's Annual Report on Form 10-K,
dated March 28, 2003
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated November 14, 2003
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Aptimus, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 18, 2004 APTIMUS, INC.
By: /s/ TIMOTHY C. CHOATE
------------------------------
Timothy C. Choate,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ TIMOTHY C. CHOATE Chairman of the Board, March 17, 2004
- ---------------------------- President, Chief Executive
Timothy C. Choate Officer and Director
/s/ JOHN A. WADE Vice President, Finance March 17, 2004
- ---------------------------- Chief Financial Officer and
John A. Wade Chief Accounting Officer
/s/ JOHN B. BALOUSEK Director March 17, 2004
- ----------------------------
John B. Balousek
/s/ ERIC HELGELAND Director March 17, 2004
- ----------------------------
Eric Helgeland
/s/ROBERT W. WRUBEL Director March 17, 2004
- ----------------------------
Robert W. Wrubel
57
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1* Second Amended and Restated Articles of Incorporation of
registrant.
3.1.1^^ Articles of Amendment filed September 16, 2000.
3.1.2+ Articles of Amendment filed March 29, 2002.
3.2* Amended and Restated Bylaws of registrant.
4.1* Specimen Stock Certificate.
4.2* Form of Common Stock Warrant.
4.3^^^ Rights Agreement dated as of March 12, 2002 between
registrant and Mellon Investor Services LLC, as rights
agent.
10.1*@@ Form of Indemnification Agreement between the registrant
and each of its directors.
10.2. *@@ 1997 Stock Option Plan, as amended.
10.3. *@@ Form of Stock Option Agreement.
10.4* Investor Subscription Agreement, dated December 10, 1998,
between registrant and Fingerhut Companies, Inc.
10.5* Warrant Agreement, dated December 10, 1998, between
registrant and Fingerhut Companies, Inc.
10.6* Stockholders Agreement, dated December 10, 1998, among
registrant, Timothy C. Choate, John P. Ballantine and
Fingerhut Companies, Inc.
10.7* Asset Purchase Agreement, dated May 5, 1999, among
registrant, Travel Companions International, Inc., Jeff
Mohr and Janet Mohr.
10.8* Asset Purchase Agreement, dated May 6, 1999, among
registrant, Commonsite LLC and Alan Bennett.
10.9* Registration Rights Agreement, dated May 6, 1999, between
registrant and Commonsite LLC.
10.10* Loan and Security Agreement, dated September 18, 1998,
between registrant and Imperial Bank.
10.11* Lease Agreement, dated September 23, 1997 and amended as
of February 16, 1999, between registrant and Merrill Place
LLC.
10.11.1* Second Amendment to Lease, dated November 30, 1999,
between registrant and Merrill Place LLC.
10.12* Promotion Agreement, dated May 18, 1998 and amended as of
June 30, 1998 and September 30, 1998, between registrant
and CNET, Inc.
10.13@* Linkshare Network Membership Agreement, dated September
23, 1998, between registrant and Linkshare Corporation.
10.14* Letter Agreement dated June 18, 1999 between registrant
and Fingerhut.
10.15* Escrow Agreement dated June 18, 1999 between registrant
and Fingerhut.
10.16* Common Stock Purchase Warrant dated January 26, 1998 in
favor of Karrie Lee.
10.17* Warrant to Purchase Stock dated September 18, 1998 in
favor of Imperial Bank.
10.18* Common Stock Purchase Warrant dated January 23, 1998 in
favor of Hallco Leasing Corporation.
10.19* Common Stock Purchase Warrant dated December 4, 1997 in
favor of Hallco Leasing Corporation.
10.20* Common Stock Purchase Warrant dated January 26, 1998 in
favor of Employco, Inc.
10.21@* Marketing Agreement with NewSub Services, Inc. effective
as of June 1, 1999.
10.22@* 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** Asset Purchase Agreement, dated November 22, 2000, among
Aptimus, Inc. and XMarkstheSpot, Inc.
10.24*** Stock Redemption Agreement, dated as of April 16, 2001, by
and between registrant and Fingerhut Companies. Inc.
10.25^@@ Aptimus, Inc. 2001 Stock Plan.
58
10.25.1^^@@ Form of Stock Option Agreement.
10.25.2^^@@ Form of Restricted Stock Agreement (for grants).
10.25.3^^@@ Form of Restricted Stock Agreement (for rights to
purchase).
10.26^^ Letter Agreement, dated November 13, 2001, by and between
registrant and Fingerhut Companies, Inc.
10.27@@ Change in Control Agreement, dated as of December 6, 2002,
by and between registrant and Timothy C. Choate
10.28@@ Form of Change in Control Agreement, dated as of December
6, 2002, by and between registrant and each of certain
executive managers of registrant
10.29# Lease Agreement, dated October 1, 2002, between registrant
and Merrill Place LLC.
10.30## Form of Convertible Note Purchase Agreement, dated as of
July 1, 2003, by and between the Company and certain
investors.
10.31## Form of Convertible Secured Promissory Note, dated July
2003, executed by and between the Company and payable to
the order of certain investors.
10.32## Form of Common Stock Warrant, dated July 2003, by and
between the Company and certain investors.
10.32## Form of Security Agreement, dated as of July 1, 2003, by
and between the Company and certain investors.
10.33## Form of Registration Rights Agreement, dated as of July 1,
2003, by and between the Company and certain investors.
10.35 Stock Purchase Agreement, dated as of December 4, 2003, by
and between the Company and certain investors.
16.1# Letter dated December 12, 2001 from PricewaterhouseCoopers
LLP to the Securities and Exchange Commission.
23.1 Consent of Moss Adams LLP, independent accountants.
31.1 Rule 13a-14(a) Certification of the Chief Executive
Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial
Officer
32.1 Section 1350 Certification of the Chief Executive Officer
32.2 Section 1350 Certification of the Chief Financial Officer
- ----------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-81151).
** Incorporated by reference to the Company's Annual Report on Form 10-K,
dated April 2, 2001.
*** Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 16, 2001.
^ Incorporated by reference to the Company's Proxy Statement on Schedule
14A, dated May 17, 2001.
^^ Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated November 14, 2001.
^^^ Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 12, 2002.
# Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 10, 2001.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated May 15, 2002.
@ Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
@@ Management compensation plan or agreement.
# Incorporated by reference to the Company's Annual Report on Form 10-K,
dated March 28, 2003
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated November 14, 2003
59