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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
95 SOUTH JACKSON STREET
SUITE 300
SEATTLE, WASHINGTON 98104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 441-9100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of common stock, no par value, of the
registrant at October 31, 2001 was 13,191,602.
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APTIMUS, INC.
INDEX TO THE FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance sheets as of December 31, 2000 and September 30, 2001.......................... 1
Statements of Operations for the three and nine months ended
September 30, 2000 and 2001........................................................... 2
Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and 2001........................................................... 3
Notes to Financial Statements.......................................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 7
OPERATIONS.............................................................................
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.............................. 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................................... 12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................................ 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 12
ITEM 5. OTHER INFORMATION...................................................................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 12
SIGNATURES............................................................................................... 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APTIMUS, INC.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
December 31, September 30,
2000 2001
ASSETS
Cash and cash equivalents.................................... $ 12,584 $ 5,966
Accounts receivable, net..................................... 2,240 175
Prepaid expenses and other assets............................ 646 556
Short-term investments....................................... 12,012 5,023
---------- ----------
Total current assets................................ 27,752 11,720
Fixed assets, net............................................ 4,760 2,498
Intangible assets, net....................................... 2,643 38
Long-term investments........................................ 345 344
Deposits..................................................... 32 35
---------- ----------
$ 35,532 $ 14,635
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................. $ 2,573 $ 419
Accrued and other liabilities................................ 1,154 586
Current portion of capital lease obligations................. 193 81
Current portion of notes payable............................. 800 693
---------- ----------
Total current liabilities........................... 4,720 1,779
Capital lease obligations, net of current portion............ 144 88
Notes payable, net of current portion........................ 800 50
---------- ----------
Total liabilities............................................ 5,664 1,917
Shareholders' equity
Common stock, no par value; 100,000 shares authorized
15,505 and 13,192 issued and outstanding at
December 31, 2000 and September 30, 2001, respectively. 65,874 64,628
Additional paid-in capital................................ 2,518 2,530
Deferred stock compensation............................... (352) (87)
Accumulated deficit....................................... (38,172) (54,353)
---------- ----------
Total shareholders' equity.......................... 29,868 12,718
---------- ----------
$ 35,532 $ 14,635
========== ==========
The accompanying notes are an integral part of these financial statements.
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APTIMUS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
---------------------------------- --------------------------------
2000 2001 2000 2001
---------------- ---------------- ---------------- -------------
Net revenues......................................... $ 3,492 $ 188 $ 14,516 $ 1,495
Operating expenses
Sales and marketing............................... 7,333 113 23,355 5,729
Internet and network connectivity................. 635 453 1,480 1,623
Research and development.......................... 636 168 1,612 1,475
General and administrative........................ 640 548 2,339 2,064
Depreciation and amortization..................... 588 458 1,661 1,862
Equity-based compensation......................... 191 224 691 278
Restructuring costs............................... 4,998
-------- --------- -------- ----------
Total operating expenses.................... 10,023 1,964 31,138 18,029
-------- --------- -------- ----------
Operating loss....................................... (6,531) (1,776) (16,622) (16,534)
Interest expense..................................... 54 39 65 137
Other income, net.................................... (627) 33 (1,942) (490)
-------- --------- -------- ----------
Net loss............................................. $ (5,958) $ (1,848) $(14,745) $ (16,181)
======== ========= ======== ==========
Basic and diluted net loss per share................. $ (0.38) $ (0.15) $ (0.94) $ (1.18)
======== ======== ======== ==========
Weighted-average shares used in computing basic
and diluted net loss per share.................... 15,682 12,563 15,630 13,700
======== ========= ======== ==========
The accompanying notes are an integral part of these financial statements.
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APTIMUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
September 30,
2000 2001
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................................... $ (14,745) $ (16,181)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization........................................... 1,660 1,861
Bad debt expense........................................................ 1,247 (252)
Amortization of deferred compensation................................... 691 277
(Gain) loss on disposal of property and equipment....................... (4) 637
Impairment write-down of intangible assets and software................. 2,499
Amortization of discount on short-term investments...................... (98) (68)
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable................................................... (1,915) 2,317
Prepaid expenses and other assets..................................... (627) 222
Accounts payable...................................................... 902 (2,154)
Accrued and other liabilities......................................... 451 (568)
--------- ----------
Net cash used in operating activities................................. (12,438) (11,410)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................................... (2,717) (369)
Proceeds from disposal of property and equipment............................ 7 120
Purchase of short-term investments.......................................... (13,352) (3,947)
Sale of short-term investments.............................................. 14,000 11,004
Purchase of long-term investments........................................... (1)
Sale of long-term investments.............................................. 1
--------- ---------
Net cash provided by (used in) investing activities................... (2,063) 6,821
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases..................................... (92) (139)
Proceeds from notes payable................................................. 2,000
Repayment of notes payable.................................................. (200) (1,821)
Repurchase of common stock.................................................. (130) (334)
Issuance of common stock, net of issuance costs............................. 338 7
--------- ---------
Net cash provided by financing activities............................. 1,916 (2,287)
--------- ----------
Net increase in cash and cash equivalents..................................... (12,585) (6,888)
Cash and cash equivalents at beginning of period.............................. 33,795 12,854
--------- ---------
Cash and cash equivalents at end of period.................................... $ 21,210 $ 5,966
========= =========
The accompanying notes are an integral part of these financial statements.
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APTIMUS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements include all adjustments
that, in the opinion of management, are necessary to present fairly the
financial information set forth therein. Certain information and note
disclosures normally included in financial statements, prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC).
The unaudited financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K and the amendments thereto on form
10-K/A filed with the SEC on April 2, 2001, April 11, 2001 and April 24,
2001. The results of operations for the three and nine months ended
September 30, 2001 are not necessarily indicative of the results to be
expected for any subsequent quarter or the entire year ending December 31,
2001.
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
2. REVENUE RECOGNITION
The Company has several revenue sources 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 email 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 one year, are recognized
ratably over the term of the agreement, provided that no significant
Company obligations remain. Revenue from impressions or click through based
contracts is recognized based on the proportion of impressions or click
throughs delivered, to the total number of guaranteed impressions or click
throughs provided for under the related contracts.
List rental revenues are received from the rental of customer names to
third parties through the use of list brokers. Revenue from list rental
activities is recognized in the period the names are delivered by the list
broker to the third party.
Also included in net revenues are barter revenues generated from exchanging
lead generation and advertising services for advertising services. Such
transactions are recorded at the lower of the estimated fair value of the
advertisements received or delivered. Revenue from barter transactions is
recognized when advertising or lead generation is provided, and services
received are charged to expense when used. For the three months ended
September 30, 2000 and 2001 barter revenues were $593,000 and zero,
respectively. For the nine months ended September 30, 2000 and 2001 barter
revenues were $1,266,000 and zero, respectively.
The Company also had advertising and lead generation agreements that
provided for payment in equity securities of non-public companies. Revenue
was recognized under such agreements when sufficient contemporaneous
evidence existed concerning the value of the equity securities. For the
three months ended September 30, 2000 and 2001 no such revenues were
recorded. For the nine months ended September 30, 2000 and 2001 such
revenues were $344,000 and zero, respectively.
3. NET LOSS PER SHARE
Basic net loss per share amounts are computed by dividing the net loss by
the weighted average number of shares of common stock outstanding during
the period. Diluted net loss per share represents the net loss divided by
the weighted-average number of shares outstanding, including the
potentially dilutive impact of common stock options, warrants, and
restricted shares, which vest
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over time. Basic and diluted net loss per share are 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:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
---------------------------------- ------------------------
(UNAUDITED) (UNAUDITED)
2000 2001 2000 2001
---------------- ---------------- ---------------- --------------
Numerator:
Net loss....................................... $ (5,958) $ (1,849) $(14,745) $ (16,182)
========== ========= ========= =========
Denominator:
Weighted average shares used in computing
Net loss per share........................... 15,682 12,567 15,630 13,700
========== ========= ========= =========
Potentially dilutive securities excluded from per
share calculations consist of the following:
Options to purchase common stock............. 1,546 1,074 1,546 1,074
Unvested restricted stock grants............. 238 238
Warrants to purchase common stock............ 16 166 16 166
--------- --------- -------- ---------
1,562 1,478 1,562 1,478
========= ========== ========= ==========
4. NEW ACCOUNTING PRONOUNCEMENTS
We adopted SFAS No. 133 "Accounting for Derivatives and Hedging Activities"
in the quarter ended March 31, 2001. The adoption of this standard did not
have a material impact on our financial position, results of operations or
cash flows.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets," which revises accounting and reporting standards for acquired
goodwill and other intangible assets. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. We do not expect the adoption of
this statement to have a significant impact on our results of operations,
financial position or cash flows.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 143, "Accounting for Asset Retirement
Obligations," which establishes accounting and reporting standards for
liabilities related to retirement of assets. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. We do not expect the adoption
of this statement to have a significant impact on our results of
operations, financial position or cash flows.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which revises accounting and
reporting standards for the impairment and disposal of long-lived assets.
SFAS 144 is effective for fiscal years beginning after December 15, 2001.
We do not expect the adoption of this statement to have a significant
impact on our results of operations, financial position or cash flows.
5. RESTRUCTURING COSTS
On February 20, 2001 we announced our intention to reposition the Company
as a direct marketing infrastructure provider, focusing all of our
resources on building a direct marketing network. As part of this
repositioning all activities related to our consumer-direct Web sites,
including FreeShop.com, Desteo.com, and CatalogSite.com were discontinued.
Also as part of this repositioning a significant reduction in staffing
levels and a reduction in other expenses related to the consumer-direct Web
sites were made over the first six months of 2001. In the quarter ended
March 31, 2001 a staffing reduction plan was adopted that included a
reduction of 161 employees. This plan resulted in the recognition of $1.5
million in severance costs in the quarter ended March 31, 2001. In the
quarter ended June 30, 2001 additional staffing reduction plans were
adopted that resulted in a reduction of 26 employees. As of September 30,
2001 approximately $57,000 of severance costs were unpaid and included in
current liabilities. Severance costs were recognized in accordance with the
guidance of Emerging Issues Task Force 94-3. In addition to severance
costs, the repositioning and technology restructuring resulted in
impairment charges and losses of $364,000, $2,131,000 and $538,000 for
capitalized software, intangible assets and fixed assets, respectively, for
the nine months ended September 30, 2001. No impairment charges or losses
were recorded for the three months ended September 30, 2001. Intangible
assets impaired related to the acquisitions of Commonsite, LLC, Travel
Companions International, Inc., and XmarksTheSpot, Inc.
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6. RESTRICTED STOCK GRANTS
Effective June 12, 2001, the shareholders approved the 2001 Stock Plan (the
Stock Plan) to provide for the granting of stock to employees and directors
of the Company to provide them with incentives for their service. Under the
terms of the Stock Plan, 2,400,000 shares of common stock have been
reserved for issuance to Stock Plan participants. The Stock Plan is
administered by the Board of Directors of the Company, which determines the
terms and condition of the grants, including number of shares granted and
the vesting period of such shares.
On September 27, 2001, 635,000 shares of our common stock were granted to
members of the board of directors and officers. On the date of grant the
stock grants were 62.5% vested with the remaining shares vesting quarterly
over the next three quarters. Deferred compensation of $285,750 was
recorded based on the fair market value of the stock on the date of grant.
The deferred compensation recognized will be amortized over the vesting
period of the related stock grants in accordance with Financial Accounting
Standards Board interpretation No. 28. In the event of a change in control,
including the initiation of a tender offer for more than 50% of the then
issued and outstanding shares of common stock of the Company, the stock
grants become 100% vested.
7. SUBSEQUENT EVENTS
On August 23, 2001, the Board of Directors unanimously approved an issuer
tender offer to purchase, for a price of $0.48 per share in cash, up to
10,750,000 shares of our Common Stock (the Tender Offer). We announced the
Tender Offer on August 27, 2001, and commenced the Tender Offer on October
10, 2001 by filing a Schedule TO-I. The Tender Offer is currently scheduled
to expire at 5 p.m. Eastern Standard Time, Thursday, November 15, 2001. We
intend to purchase all shares properly tendered and not properly withdrawn,
up to the 10,750,000 limit, for $0.48 per share. See PART II - ITEM 5 for
additional information.
In October 2001 the commencement of the Tender Offer triggered the
accelerated vesting of the stock grants made on September 27, 2001. This
will result in the recognition of the $68,000 of deferred compensation and
the recognition of an additional $19,000 of equity-based compensation in
the fourth quarter of 2001.
In November 2001 the remaining balance of $572,000 on the note payable to
Fingerhut was paid-off at a substantial discount. See PART II - ITEM 5 for
additional information.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company contains forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. The Company's actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, but not limited to, those
described in connection with the forward looking statement and the factors
listed on Exhibit 99.1 to this report, which factors are hereby incorporated by
reference in this report.
In some cases, you can identify forward-looking statements by our use of
words such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although we believe the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this filing. You should not place
undue reliance on forward-looking statements.
OVERVIEW
We began our direct marketing business in 1994 as the FreeShop division of
Online Interactive, Inc. In addition to operating the FreeShop division, Online
Interactive was also engaged in the business of selling software over the
Internet. In July 1997, Micro Warehouse, Inc., a catalog retailer and direct
marketer of computers, software and related products, purchased all of the stock
of Online Interactive from its shareholders. Before the purchase was completed,
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 web sites. We focus our
efforts around three primary offer presentation formats:
1. CoRegistration - This is our core focus, whereby we present relevant
offers to transacting consumers in a manner that allows them to
"opt-in" or choose the offers they wish to receive. By managing the
registration process, we can target offers "real time" based on the
site demographics, the data entered in the order process (e.g.
geotargeting), and/or the substance of the specific transaction.
Managed transactions include product purchases, email and site
registrations or joins, and other transactional actions occurring on
the web sites of our distribution partners.
2. Pop-Ups/Interstitials - We present relevant offers via advertising
screens that "pop up" or "pop under" when consumers take particular
actions such as visiting a specific web site or web page.
3. Email - We present relevant offers to consumers via opt-in email
lists, including lists that we own, lists that we manage for others,
and third party lists.
During the nine months ended September 30, 2001, we derived our revenues
primarily from online lead generation and advertising contracts related to the
FreeShop Web site and Club FreeShop email Newsletters. Starting in June 2001 we
derived our revenues primarily from network lead generation contracts and we
expect to derive our revenues primarily from network lead generation contracts
in the future. We receive lead generation revenues when we deliver customer
information to a marketer in connection with
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an offer on our Web site or in our network. We received advertising revenues
from sales of banner advertising, site sponsorships and newsletter sponsorships.
We also derived a small portion of our lead generation revenues from the rental
of customer names and street addresses to third parties. 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. In the second half of 2000, we saw a shift away from these traditional
advertising models towards a cost per action model where advertisers pay based
on actual orders or registrations received. 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.
In the quarters ended September 30, 2000 and 2001, our ten largest clients
accounted for 59.1% and 85.0% of our revenues, respectively. During the quarter
ended September 30, 2000 no client accounted for more than 10% of our revenues.
During the quarter ended September 30, 2001, Caribbean Tourism Organization was
our largest client, accounting for 20.1% of our revenues and Topica, Inc. was
our second largest client, accounting for 18.0% of our revenues. Caribbean
Tourism Organization completed fulfillment of their 2001 brochures in July 2001
and are not currently active in the network. No other client accounted for more
than 10% of our revenues in the quarter ended September 30, 2001. In the nine
months ended September 30, 2000 and 2001, our ten largest clients accounted for
30.1% and 39.2% of our revenues, respectively. No single client accounted for
more than 10% of our revenues in the nine months ended September 30, 2000 and
2001.
Our business has been operating at a loss and generating negative cash
flows from operations since inception. As of September 30, 2001, we had
accumulated losses of approximately $54.4 million. In February 2001, the
decision was made to discontinue activities related to our consumer-direct Web
sites and to focus the resources of the Company towards the network strategy.
This decision has resulted in a decrease in revenues in the first three quarters
of 2001. This decision has also resulted in a decrease in our continuing
operating expenses beginning in the second quarter of 2001. Even with a decrease
in continuing operating expenses and growth in revenues our losses and negative
cash flows are likely to continue for the foreseeable future. Also as a result
of this decision, we believe period-to-period comparison of our operating
results is not meaningful due to the significant differences between prior and
current activities, and the results for any period should not be relied upon as
an indication of future performance.
RESULTS OF OPERATIONS
Revenues
We derive our revenues primarily from online lead generation and
advertising contracts. Our revenues decreased by $3.3 million, or 95%, to
$188,000 in the quarter ended September 30, 2001 compared to $3.5 million in the
same quarter of 2000. On a year to date basis, net revenues have decreased by
$13.0 million or 90% to $1.5 million, compared to $14.5 million in the first
nine months of 2000. This decline in revenue resulted from a general decline in
the Internet advertising industry and a shift in focus to the network lead
generation model, including discontinuation of our consumer-direct Web sites.
Sales and Marketing
Sales and marketing expenses consist primarily of marketing and promotional
costs related to developing our brands and generating visits to our Web sites,
as well as personnel and other costs. Sales and marketing expenses decreased by
$7.2 million to $113,000, or 60% of revenues, in the quarter ended September 30,
2001 compared to $7.3 million, or 210% of revenues, in the same quarter of 2000.
On a year to date basis, sales and marketing expenses have decreased by $17.6
million to $5.7 million, or 383% of revenues, compared to $23.4 million, or 161%
of revenues, in the first nine months of 2000. The decrease in sales and
marketing expenses is a result of reduced advertising spending and reduced
payroll costs. Additionally, the decrease in the quarter ended September 30,
2001 compared to the quarter ended September 30, 2000 also resulted from the
settlement of previously recorded liabilities for $170,000 less than recorded
and a $260,000 reduction in the reserve for bad debts. On a year to date basis,
reductions in advertising spending account for approximately 69% of the decrease
and reductions in payroll costs account for approximately 19% of the decrease.
As a result of the decrease in revenue sales and marketing expense has increased
as a percentage of revenue even though the total sales and marketing expense has
decreased.
Internet and Network Connectivity
Internet and network connectivity consists of expenses associated with the
maintenance and usage of our Web sites and email delivery costs. Such costs
include Internet connection charges, hosting facility costs, banner ad serving
fees, network partner fees, and personnel costs. Internet and network
connectivity expenses decreased by $182,000 to $453,000, or 241% of revenues, in
the quarter ended September 30, 2001 compared to $635,000, or 18% of revenues,
in the same quarter of 2000. On a year to date basis, Internet
8
and network connectivity expenses have increased by $143,000 to $1.6 million, or
109% of revenues, compared to $1.5 million, or 10% of revenues, in the first
nine months of 2000. This increase resulted from costs incurred to support both
the network and consumer direct business models during the first two quarters of
2001. As a result of the decrease in revenue Internet and network connectivity
expense has increased as a percentage of revenue.
Research and Development
Research and development expenses primarily include personnel costs related
to maintaining and enhancing the features, content and functionality of our Web
site and related systems. Research and development expenses decreased by
$468,000 to $168,000, or 89% of revenues, in the quarter ended September 30,
2001 compared to $636,000, or 18% of revenues, in the same quarter of 2000. On a
year to date basis, research and development expenses have decreased by $137,000
to $1.5 million, or 99% of revenues, compared to $1.6 million, or 11% of
revenues, in the first nine months of 2000. The decrease in research and
development expenses in the quarter ended September 30, 2001 compared to the
quarter ended September 30, 2000 is a result of reductions in staff as a result
of the restructuring and cost cutting efforts. The reductions in the second and
third quarter of 2001 have been partially offset by increased consulting costs
during the first quarter of 2001. These consulting costs were incurred to
integrate and improve the network technology platform during the first three
months of 2001. As a result of the decrease in revenue research and development
expense has increased as a percentage of revenue even though the total research
and development expense has decreased.
General and Administrative
General and administrative expenses primarily consist of management,
financial and administrative personnel expenses and related costs and
professional service fees. General and administrative expenses decreased by
$92,000 to $548,000, or 292% of revenues, in the quarter ended September 30,
2001 compared to $640,000, or 18% of revenues, in the same quarter of 2000. On a
year to date basis, general and administrative expenses have decreased by
$275,000 to $2.1 million, or 138% of revenues, compared to $2.3 million, or 16%
of revenues, in the first nine months of 2000. For the quarter and nine months
ended September 30, 2001 the decrease in general and administrative expenses is
primarily a result of the decrease in revenue based business taxes. As a result
of the decrease in revenue general and administrative expense has increased as a
percentage of revenue even though the total general and administrative expense
has decreased.
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 $130,000 to $458,000, or 244% of revenues, in
the quarter ended September 30, 2001 compared to $588,000, or 17% of revenues,
in the same quarter of 2000. On a year to date basis, depreciation and
amortization expenses have increased by $201,000 to $1.9 million, or 125% of
revenues, compared to $1.7 million, or 11% of revenues, in the first nine months
of 2000. The decrease in the quarter ended September 30, 2001 compared to the
quarter ended September 30, 2000 is primarily a result the impairment of
intangible assets in the first two quarters of 2001. The increase on a year to
date basis is a result of approximately $2.1 million in equipment, software,
furniture and leasehold improvements acquired from July 2000 through December
2000, which have been included for a full year during 2001. As a result of the
decrease in revenue depreciation and amortization expense has increased as a
percentage of revenue.
Equity-Based Compensation
Equity-based compensation expenses consist of amortization of unearned
compensation recognized in connection with stock options, stock grants, and
recognition of expenses when our principal shareholders sell our stock to
employees and directors at a price below the then estimated 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 option
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 $33,000 to $224,000, or 119% of
revenues, in the quarter ended September 30, 2001 compared to $191,000, or 6% of
revenues, in the same quarter of 2000. The increase in the quarter ended
September 30, 2001 compared to the quarter ended September 30, 2000 is a result
of recognition of approximately $217,000 in compensation related to restricted
stock grants made on September 27, 2001. On a year to date basis, equity-based
compensation expenses decreased by $275,000 to $278,000, or 19% of revenues,
compared to $691,000, or 5% of revenues, in the first nine months of 2000. The
decrease on a year to date basis resulted from the forfeiture of
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options held by terminated employees and the continued decline in the unearned
compensation balance resulting from the use of an accelerated amortization
method.
Restructuring costs
Restructuring costs consist of severance costs and losses on fixed and
intangible assets disposed or abandoned as a result of restructuring activities.
On February 20, 2001, we announced our intention to reposition the Company as a
direct marketing infrastructure provider, focusing all of our resources on
building a direct marketing network. As part of this repositioning all
activities related to our consumer-direct Web sites, including FreeShop.com,
Desteo.com, and CatalogSite.com were discontinued. Also as part of this
repositioning a significant reduction in staffing levels and a reduction in
other expenses related to the consumer-direct Web sites were made over the first
six months of 2001. In the quarter ended March 31, 2001, a staffing reduction
plan was adopted that included a reduction of 161 employees. This plan resulted
in the recognition of $1.5 million in severance costs in the quarter ended March
31, 2001. In the quarter ended June 30, 2001, additional staffing reduction
plans were adopted that resulted in a reduction of 26 employees. As of September
30, 2001, approximately $57,000 of severance costs remained unpaid and are
included in current liabilities. In addition to severance costs, the
repositioning and technology restructuring resulted in impairment charges and
losses of $364,000, $2,131,000 and $538,000 for capitalized software, intangible
assets and fixed assets, respectively, for the nine months ended September 30,
2001. Intangible assets impaired related to the acquisitions of Commonsite, LLC,
Travel Companions International, Inc., and XmarksTheSpot, Inc.
Interest Expense
Interest expense primarily relates to capital equipment leases and notes
payable to Imperial Bank and Fingerhut Companies. Interest expense totaled
$39,000 in the quarter ended September 30, 2001 and $54,000 in the same quarter
of 2000. On a year to date basis, interest expense totaled $137,000 and $65,000
in the first nine months of 2001, and 2000, respectively. Interest expense has
increased as neither the Imperial nor Fingerhut Companies notes existed during
the first six months of 2000. Interest expense is expected to decrease in the
next quarter as a result of the payoff of the Imperial note payable in August
and the payoff of the Fingerhut note payable in November.
Other Income, Net
Other (income) expense, net consists primarily of interest income. Other
(income) expense, net decreased by $660,000 to an expense of $33,000, or 18% of
revenues, in the quarter ended September 30, 2001 compared to an income of
$627,000, or 18% of revenues, in the same quarter of 2000. On a year to date
basis other income, net has decreased by $1.5 million to $490,000, or 33% of
revenues, compared to $1.9 million, or 13% of revenues, in the first nine months
of 2000. The decrease is due to lower cash balances resulting from the use of
cash in operations. Also, the loss in the third quarter of 2001 is a result of
disposition of assets no longer needed to maintain the company's infrastructure.
Income Taxes
No provision for federal income taxes has been recorded for any of the
periods presented due to the Company's current loss position.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the issuance of equity
securities. Gross proceeds from the issuance of stock through September 30, 2001
totaled approximately $65.7 million, including $21.5 million raised from
Fingerhut Companies, Inc. and $41.1 million raised in our initial public
offering. As of September 30, 2001, we had approximately $11.0 million in cash
and cash equivalents and short-term investments and working capital of $10.4
million.
Net cash used in operating activities was $11.4 million and $12.4 million
in the nine months ended September 30, 2001 and 2000, respectively. Cash used in
operating activities for each period resulted primarily from net losses.
Net cash provided by (used in) investing activities was $6.8 million and
($2.1) million in the nine months ended September 30, 2001 and 2000,
respectively. In the nine months ended September 30, 2001, $7.0 was received
from the maturity of commercial paper purchased in the prior year, approximately
$369,000 was used to acquire equipment, internally developed software and
leasehold improvements and approximately $120,000 was received from the disposal
of fixed assets. In the nine months ended September 30,
10
2000, $14.0 million was received from the maturity of commercial paper purchased
in 1999, $13.4 million was used to purchase short-term investments in the
current year and approximately $2.7 million was used to purchase equipment,
software, leasehold improvements and furniture.
Net cash provided by (used in) financing activities was ($2.3 million) and
$1.9 million in the nine months ended September 30, 2001 and 2000, respectively.
In the nine months ended September 30, 2001, $1.8 million was used to repay
notes payable, $139,000 was used for principal payments under capital leases and
$334,000 was used to repurchase common stock. In the nine months ended September
30, 2000, net cash provided by financing activities resulted primarily from
proceeds of a $2.0 million note with Imperial Bank, the proceeds of which have
been used by the Company to purchase equipment, software, furniture and
leasehold improvements.
Assuming we purchase the maximum of 10,750,000 shares of our common stock
in the Tender Offer for an aggregate price of $5.16 million and taking account
of the recent payoff of the Fingerhut note payable we believe our current cash,
cash equivalents and short-term investments will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next six to nine months. Thereafter, we may need to raise additional capital
to meet our long-term operating requirements.
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
notification of possible delisting of the Company's securities received from the
Nasdaq National Market on June 20, 2001 and the going concern contingency
contained in our fiscal 2000 audit report may make raising additional capital
more difficult. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of business
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited, and we might need to
significantly restrict our operations.
Recent Accounting Pronouncements
We adopted SFAS No. 133 "Accounting for Derivatives and Hedging Activities"
in the quarter ended March 31, 2001. The adoption of this standard did not have
a material impact on our financial position, results of operations or cash
flows.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets," which revises accounting and reporting standards for acquired goodwill
and other intangible assets. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. We do not expect the adoption of this statement to have
a significant impact on our results of operations, financial position or cash
flows.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 143, "Accounting for Asset Retirement
Obligations," which establishes accounting and reporting standards for
liabilities related to retirement of assets. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. We do not expect the adoption of this
statement to have a significant impact on our results of operations, financial
position or cash flows.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which revises accounting and reporting standards
for the impairment and disposal of long-lived assets. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. We do not expect the adoption of
this statement to have a significant impact on our results of operations,
financial position or cash flows.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Substantially all of the our cash equivalents, short-term securities and
capital lease obligations are at fixed interest rates and, therefore, the fair
value of these instruments is affected by changes in market interest rates. As
of September 30, 2001, however, all of our cash equivalents and short-term
securities mature within five months. As of September 30, 2001, we believe the
reported amounts of cash equivalents, short-term securities and capital lease
obligations to be reasonable approximations of their fair values. As a result,
we believe the market risk arising from our holding of financial instruments is
minimal.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against us.
From time to time, we are a party to litigation and claims incident to the
ordinary course of business. While the results of litigation and claims cannot
be predicted with certainty, we believe that the final outcome of such matters
will not have a material adverse effect on our business, financial condition,
results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities
There were no changes in the Company's securities during the three months
ended September 30, 2001.
(b) Sales of Unregistered Securities
On September 27, 2001, we granted an aggregate of 635,000 shares of Common
Stock to our directors and officers in reliance on the exemptions from
registration under the Securities Act of 1933, as amended, provided by
Regulation D and Section 4(2), on the basis that these shares were granted to
our directors and officers for compensatory purposes and not in a public
offering. The grants were 62.5% vested on the date of grant. The remaining 37.5%
vested on October 10, 2001 upon the commendement of the Tender Offer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER EVENTS
(a) Issuer Tender Offer. On August 23, 2001, the Board of Directors
unanimously approved an issuer tender offer to purchase, for a price of $0.48
per share in cash, up to 10,750,000 shares of our Common Stock. The Tender Offer
was announced on August 27, 2001 and commenced on October 10, 2001 under the
terms and conditions set forth in the Offer to Purchase and related Letter of
Transmittal, each of which are attached as exhibits to the Schedule TO-I, dated
and filed October 10, 2001, as amended by that certain Amendment No. 1 to
Schedule TO-I, dated and filed October 31, 2001. The Tender Offer is currently
scheduled to expire at 5 p.m. Eastern Standard Time, Thursday, November 15,
2001, unless extended. We intend to purchase all shares properly tendered and
not properly withdrawn for $0.48 per share, subject to the terms and conditions
of the Tender Offer.
(b) Fingerhut Stock Redemption. By Letter Agreement, dated November 13,
2001, we agreed to immediately prepay without penalty, and Fingerhut Companies,
Inc. ("Fingerhut") agreed to accept, in full and final payment and satisfaction
of the remaining principal balance and accrued interest due and owing as of
November 16, 2001 under the Stock Redemption Agreement and Promissory Note, each
dated April 16, 2001, by and between the company and Fingerhut, the discounted
sum of $471,140.90. The sum paid represents a 20% discount off the principal
balance owing under the Stock Redemption Agreement and Promissory Note as of
November 16, 2001. As part of the Letter Agreement, Fingerhut also agreed to
release all of its rights and interests under the related Warrant to Purchase
Common Stock for 150,000 shares, which by the terms of the Letter Agreement has
been terminated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
3.1* Second Amended and Restated Articles of Incorporation of registrant.
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3.2 Articles of Amendment filed September 16, 2000
3.3* Amended and Restated Bylaws of registrant.
4.1* Specimen Stock Certificate.
4.2* Form of Common Stock Warrant.
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 April 16, 2001, by and
between Aptimus, Inc. and Fingerhut Companies, Inc.
10.25**** 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
Aptimus, Inc. and Fingerhut Companies, Inc.
99.1 Private Securities Litigation Reform Act of 1995 Safe
Harbor and Forward-Looking Statements Risk Factors
- ----------
* 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 annual report on Form 8-K, dated
April 23, 2001.
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****Incorporated by reference to the Company's proxy statement on Schedule 14A,
filed May 17, 2001
+ Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
(b) Reports on Form 8-K:
None.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APTIMUS, INC.
Date: November 14, 2001 By: /s/ JOHN A. WADE
Name: John A. Wade
Title: Chief Financial Officer