-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AkI8eeQwvqQLao2uizRsFqofa4CbTbLvDxQZ8SfQSWRr71pOOmL3aeqmBoovZ2dW zOeAamnX6Skobdg2zUgk7Q== 0000912282-03-000225.txt : 20030515 0000912282-03-000225.hdr.sgml : 20030515 20030515144851 ACCESSION NUMBER: 0000912282-03-000225 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APTIMUS INC CENTRAL INDEX KEY: 0001087277 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 911809146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27065 FILM NUMBER: 03703985 BUSINESS ADDRESS: STREET 1: 95 S JACKSON STREET 2: STE 300 CITY: SEATTLE STATE: WA ZIP: 98104 BUSINESS PHONE: 2064419100 MAIL ADDRESS: STREET 1: 95 SOUTH JACKSON STREET 2: STE 300 CITY: SEATTLE STATE: WA ZIP: 98104 FORMER COMPANY: FORMER CONFORMED NAME: FREESHOP COM INC DATE OF NAME CHANGE: 19990525 10-Q 1 aptimus10q_033103.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q

\|X\|	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 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 0-28968

APTIMUS, INC.
(Exact name of registrant as specified in its charter)

WASHINGTON
(State or other jurisdiction of incorporation)

91-1808146
(I.R.S. Employer Identification No.)

95 South Jackson Street, Suite 300
Seattle, Washington 98104
(Address of principal executive offices and zip code)

(206) 441-9100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The number of shares of the registrant’s Common Stock outstanding as of April 15, 2003 was 4,220,933.

APTIMUS, INC.

INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 2003

		Page No.
Part I—FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements	1
	Balance Sheets as of December 31, 2002 and March 31, 2003	1
	Statements of Operations for the three months Ended March 31, 2002 and 2003	2
	Condensed Statements of Cash Flows for the three months ended March 31, 2002 and 2003	3
	Notes to Condensed Consolidated Financial Statements	4
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	6
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	13
ITEM 4.	Controls and Procedures	13
PART II—OTHER INFORMATION
ITEM 1.	Legal Proceedings	13
ITEM 2.	Changes in Securities and Use of Proceeds	13
ITEM 3.	Defaults Upon Senior Securities	14
ITEM 4.	Submission of Matters to a Vote of Security Holders	14
ITEM 5.	Other Information	14
ITEM 6.	Exhibits and Reports On Form 8-K	14
SIGNATURE		16
CERTIFICATIONS		17

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APTIMUS, INC.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

	December 31, 2002		March 31, 2003

ASSETS
Cash and cash equivalents	$ 667		$ 459
Accounts receivable, net	530		502
Prepaid expenses and other assets	159		98
Short-term investments	51		-

Total current assets	1,407		1,059
Fixed assets, net	440		275
Intangible assets, net	24		33
Long-term investments	40		40
Deposits	30		30

	$ 1,941		$ 1,437

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$ 297		$ 383
Accrued and other liabilities	344		378
Current portion of capital lease obligations	68		47

Total liabilities	709		808

Commitments and contingent liabilities (note 7)

Shareholders' equity

Common stock, no par value; 100,000 shares authorized, 4,221 issued
and outstanding at December 31, 2002 and March 31, 2003
	60,282		60,282
Additional paid-in capital	2,506		2,506

Deferred stock compensation	(2	)	(1	)

Accumulated deficit	(61,554	)	(62,158	)

Total shareholders' equity	1,232		629

	$ 1,941		$ 1,437

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 March 31,
	2002		2003

Net revenues	$ 773		$ 911

Operating expenses
Sales and marketing	543		348
Connectivity and network costs	322		279
Partner fees	255		220
Research and development	150		133
General and administrative	468		349
Depreciation and amortization	363		125
Equity-based compensation	4		1
Loss (gain) on disposal of long-term assets	(23	)	58

Total operating expenses	2,082		1,513
Operating loss	(1,309	)	(602	)

Interest expense	(8	)	(3	)

Interest income	20		1

Net loss	$(1,297	)	$ (604	)

Basic and diluted net loss per share	$(0.33	)	$(0.14	)

Weighted-average shares used in computing basic	3,987		4,221
and diluted net loss per share

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)

	Three Months Ended March 31,
	2002		2003

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(1,297	)	$(604	)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization	363		125
Bad debt expense	(10	)	15
Amortization of deferred compensation	4		1
(Gain) loss on disposal of long-term assets	(23	)	58
Cash paid for restructuring costs	(15	)	-
Amortization of discount on short-term investments	(4	)	-
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable	(155	)	13
Prepaid expenses and other assets	52		61
Accounts payable	32		86
Accrued and other liabilities	12		34

Net cash used in operating activities	(1,041	)	(211	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(13	)	(20	)
Proceeds from disposal of assets	14		8
Payments for intangible assets	-		(15	)
Purchase of short-term investments	(1	)	-
Sale of short-term investments	1,000		51

Net cash provided by investing activities	1,000		24

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases	(18	)	(21	)
Repayment of notes payable	(38	)	-
Issuance of common stock, net of issuance stocks	3		-

Net cash used in financing activities	(53	)	(21	)

Net decrease in cash and cash equivalents	(94	)	(208	)

Cash and cash equivalents at beginning of period	3,651		667

Cash and cash equivalents at end of period	$ 3,557		$ 459

The accompanying notes are an integral part of these financial statements.

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APTIMUS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States America, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

The unaudited financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2003. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for any subsequent quarter or the entire year ending December 31, 2003.

Certain changes have been made to the description and presentation of the Statement of Operations during the current year. Losses and gains on the disposal of long-term assets have been reclassified to their own line item that is included in the loss from operations. Such costs were included in the other (income) expense category in prior years. Interest income is the only other item that was included in this other income (expense) category. Interest income is now shown as a separate line item after the loss from operations subtotal. Prior period presentation has been changed to conform to current period presentation. These changes to the description and presentation of the Statement of Operations had no effect on net loss.

Our business has been operating at a loss and generating negative cash flows from operations since inception. As of March 31, 2003, we had accumulated losses of approximately $62.2 million. Even with anticipated growth in revenues, we expect our losses and negative cash flows are likely to continue during the quarter ending June 30, 2003.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. If the Company is unable to increase revenues or contain operating expenses as planned it may not have sufficient funds to satisfy its cash requirements. The Company may be forced to curtail operations further, dispose of assets or seek additional funding. Such events would materially and adversely affect the value of the Company’s equity securities. There can be no assurance that the Company will be able to successfully complete the steps necessary to continue as a going concern.

2. REVENUE RECOGNITION

The Company currently derives revenue from providing lead generation and customer acquisition programs through a network of website and email 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.

Revenues generated through network partners and opt-in email list owners are recorded on a gross basis in accordance with Emerging Issues Task Force consensus 99-19 (EITF 99-19). Fees paid to network partners and opt-in email list owners related to these revenues are shown as Partner fees on the Statement of Operations. Email based campaigns that are sent to Company owned lists do not have partner fees associated with them.

The Company has evaluated the guidance provided by EITF 99-19 as it relates to determining whether revenue should be recorded gross or net for the payments made to network partners and opt-in email list owners. The Company has determined the recording of revenues gross is appropriate based upon the following factors:

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•

Aptimus acts as a principal in these transactions;

•

Aptimus and its customer are the only companies identified in the signed contracts;

•

Aptimus is solely responsible to the client for fulfillment of the contract;

•

Aptimus determines how the offer will be presented across the network; and

•

Amounts earned are based on leads or emails delivered and are not based on amounts paid to partners.

In addition to the ongoing revenue related to the network and email mailings some revenue has been recognized through March 31, 2002 related to services performed on the FreeShop site. These revenues have been recognized when received, as collection was not reasonably assured at the time the services were performed. As of March 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 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 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. Revenue from list rental activities is recognized in the period the names are delivered by the list broker to the third party.

3. STOCK COMPENSATION

At March 31, 2003, the Company has two stock-based employee compensation plans, which are more fully described in Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2003. 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. 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 three months ended March 31:

	2002		2003
Net loss, as reported	$(1,297	)	$(604	)
Add: Total stock-based employee compensation expense, included in the
determination of net income as reported, net of related tax effects	4		1
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects	(145	)	(42	)
Pro forma net loss	$(1,438	)	$(645	)

Earnings per share:
Basic - as reported	$(0.33	)	$(0.14	)
Basic - pro forma	$(0.36	)	$(0.15	)

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4. 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 the common stock equivalent securities as of the end of the period that are not included in the diluted net loss per share calculation (in thousands):

	Three Months Ended March 31,
	2002 (Unaudited)		2003 (Unaudited)
Numerator:
Net loss	$(1,297	)	$ (604	)
Denominator:
Weighted average shares used in computing net loss per	3,987		4,221
share
Potentially dilutive securities consist of the following:
Options to purchase common stock	1,648		1,785
Warrants to purchase common stock	16		-

	1,664		1,785

5. NEW ACCOUNTING PRONOUNCEMENTS

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends SFAS 123 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, it amends the disclosure requirements of Statement 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 reported results. The adoption of this standard has not resulted in an impact to results of operations or financial position of the Company as the Company continues to follow the intrinsic value method to account for stock-based employee compensation. The additional disclosure requirements of this Statement have been adopted.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this filing 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, and the sufficiency of remaining cash and short-term investments to fund ongoing operations. 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 Exhibit 99.1 to this report, which factors are hereby incorporated by reference in this report.

Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this filing. You should not place undue reliance on forward-looking statements.

OVERVIEW

We began our direct marketing business in 1994 as the FreeShop division of Online Interactive, Inc. In addition to operating the FreeShop division, Online Interactive was also engaged in the business of selling software over the Internet. In July 1997, Online Interactive transferred the FreeShop division to FreeShop International, Inc., a newly formed, wholly owned subsidiary, and spun off FreeShop International through a distribution to its shareholders. On February 19, 1999, FreeShop International changed its name to FreeShop.com, Inc. On October 16, 2000 FreeShop.com, Inc. changed its name to Aptimus, Inc.

Today, Aptimus’ mission is to provide the most powerful and effective ways to acquire new customers via the Internet. This is the same mission we had in 1994 when we launched our business. We continue to believe that the Internet is the most important new medium for customer acquisition 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. In our network we focus our efforts around two primary offer presentation formats:

Co-Registration – 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. geo-targeting), 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.

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.

We derive our revenues primarily from lead generation contracts related to the Aptimus network of sites and opt-in email lists. We receive lead generation revenues when we deliver customer information to a marketer in connection with an offer presented via our network. The services we deliver are primarily sold under short-term agreements that

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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 three months ended March 31, 2002 and 2003 our ten largest clients accounted for 58.1% and 62.5% of our net revenues, respectively. During the quarter ended March 31, 2002 MyPoints.com, Inc. accounted for 15.9% of our revenues. During the quarter ended March 31, 2003 Blue Dolphin, Inc. accounted for 14.7% of our revenues and Kraft Foods, Inc. through List Services, Inc. accounted for 13.6% of our revenues.

Our business has been operating at a loss and generating negative cash flows from operations since inception. As of December 31, 2002, we had an accumulated deficit of approximately $62.2 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, 2003. 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.

RESULTS OF OPERATIONS

Revenues

We currently derive our revenues primarily from network activities, which include both lead generation activities through a network of partners and e-mail mailings. Our revenues increased by $138,000, or 18%, to $911,000 in the quarter ended March 31, 2003 from $773,000 in the same quarter of 2002. Included in the prior year revenue amount is $78,000 related to the old FreeShop site. The majority of the increase results from implementation of the Aptimail program which uses dynamic revenue optimization technology. The Aptimail program was launched towards the end of June 2002.

Sales and Marketing

Sales and marketing expenses consist primarily of marketing and operational personnel costs, bad debts, and outside sales costs. Sales and marketing expenses decreased by $195,000 to $348,000, or 38% of revenues, in the quarter ended March 31, 2003 from $543,000, or 70% of revenues, in the same quarter of 2002. The decrease in sales and marketing expenses is primarily a result of reduced labor costs resulting from reductions in workforce and reduced rent expense as a result of renegotiating existing leases to reduce both square footage leased and the lease rates. In addition to the decreases of approximately $126,000 and $69,000 in labor and rent, respectively, bad debt expense increased by approximately $25,000 from the comparable prior year period. Sales and marketing expense for the remaining quarters of 2003 is expected to be similar to the first quarter of 2003.

Connectivity and Network Costs

Connectivity and network costs consist of expenses associated with the maintenance and usage of our network as well as email delivery costs. Such costs include email delivery costs, Internet connection charges, hosting facility costs, banner ad serving fees and personnel costs. Connectivity and network costs decreased by $43,000 to $279,000, or 31% of revenues, in the quarter ended March 31, 2003 from $322,000, or 42% of revenues, in the same quarter of 2002. This decrease was primarily the result of decreases in rent expense resulting from the renegotiation of leases, decreases in connectivity resulting from scaling back the level of operations outsourced and decreases in email delivery costs as a result of switching delivery vendors. These three items contributed similar amounts to the decrease in connectivity and network costs. Connectivity and network costs for the remaining quarters of 2003 are expected to increase slightly compared to the first quarter of 2003.

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Partner fees

Partner fees consist of fees owed to network distribution partners and opt-in email list owners based on revenue generating activities created in conjunction with these partners. Partner fees decreased by $35,000 to $220,000, or 24% of revenues, in the quarter ended March 31, 2003 from $255,000, or 33% of revenues, in the same quarter of 2002. Partner fees have decreased on an absolute and a percentage of revenue basis as a result of the continued growth in email based marketing campaigns and as a result of purchases of some email lists. Email based campaigns that are sent to Company-owned lists do not have any partner fees associated with them. Also the cost of delivering the emails and certain third-party costs are generally deducted before calculating the fees due partners for email based campaigns not sent to Company-owned lists.

Research and Development

Research and development expenses primarily consist of personnel costs related to maintaining and enhancing the features, content and functionality of our Web sites, network and related systems. Research and development expenses decreased by $17,000 to $133,000, or 15% of revenues, in the quarter ended March 31, 2003 from $150,000, or 19% of revenues, in the same quarter of 2002. This decrease in research and development expense was primarily due to a decrease in rent expense as a result of renegotiation of the Company’s Seattle lease. Research and development expense for the remaining quarters of 2003 is expected to be similar to the first quarter of 2003.

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 $119,000 to $349,000, or 38% of revenues, in the quarter ended March 31, 2003 from $468,000, or 61% of revenues, in the same quarter of 2002. There are four significant items that compose the majority of the decrease in general and administrative expenses. Reduction in professional service fees, primarily legal fees, as a result of fewer issues requiring assistance from outside council in the current period, a decrease in labor related costs as a result of additional reductions in administrative staff, a decrease in rent expense resulting from renegotiation of the Company’s office leases and a reduction in business taxes resulting from the inclusion of an additional California tax liability in the first quarter of 2002. These four items contributed similar amounts to the decrease in general and administrative expense. General and administrative expense for the remaining quarters of 2003 is expected to be similar to the first quarter of 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 and purchased email lists. Depreciation and amortization expenses decreased by $238,000 to $125,000, or 14% of revenues, in the quarter ended March 31, 2003 compared to $363,000, or 47% of revenues, in the same quarter of 2002. The continued decrease in depreciation and amortization is a result of the many assets becoming fully depreciated and the disposal of additional assets during 2002, primarily leasehold improvements. Depreciation and amortization is expected to continue to decline over the remaining quarters of 2003.

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 $3,000 to $1,000, or less than 1% of revenues, in the quarter ended March 31, 2003 compared to $4,000, or less than 1% of revenues, in the same quarter of 2002. The decrease results from the continued decline in the

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unearned compensation balance resulting from amortization of the balance. Equity based compensation for the remaining quarters of 2003 is expected to be less than the first quarter of 2003.

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 totaled $58,000, or 6% of revenue, in the quarter ended March 31, 2003. This loss was a result of the abandonment of certain customer relationship management software purchased in 2000. The net book value of this asset at the time of abandonment was approximately $66,000. This was offset by $8,000 received from the sale of other assets. In the comparable period of the prior year there was a $23,000 gain from disposal of long-term assets. This gain resulted from the sale of various small assets no longer needed as a result of the decrease in the number of employees.

Interest Expense

Interest expense in the current year results from capital equipment leases. In the prior year interest expense also resulted from notes payable used to finance the Company’s D&O insurance premiums. Interest expense totaled $3,000 in the quarter ended March 31, 2003 and $8,000 in the same quarter of 2002. The decrease in interest expense is a result of the D&O premiums not being financed in the current year and lower principle balances than in the prior year.

Interest Income

Interest income results from earnings on the Company’s available cash reserves. Interest income totaled $1,000 in the quarter ended March 31, 2003 and $20,000 in the same quarter of 2002. The decrease in interest income is primarily a result of lower cash balances available for investment.

Income Taxes

No provision for federal income taxes has been recorded for any of the periods presented due to the Company’s current loss position.

LIQUIDITY AND CAPITAL RESOURCES

Since we began operating as an independent company in July 1997, we have financed our operations primarily through the issuance of equity securities. Gross proceeds from the issuance of stock through March 31, 2003 totaled $65.7 million, including $21.5 million raised from Fingerhut Companies. As of March 31, 2003, we had approximately $459,000 in cash and cash equivalents, providing working capital of $251,000. No off-balance sheet assets or liabilities existed at March 31, 2003.

Net cash used in operating activities was $211,000 and $1.0 million in the three months ended March 31, 2003 and 2002, respectively. Cash used in operating activities in the three months ended March 31, 2003 resulted primarily from $604,000 of net loss. Net cash outflows from operations were decreased by $199,000 of non-cash expenses, a $13,000 decrease in accounts receivable, a $61,000 decrease in prepaid expenses and other assets a $86,000 increase in accounts payable and a $34,000 increase in accrued and other liabilities. Cash used in operating activities in the three months ended March 31, 2002 resulted primarily from $1.3 million of net losses. The net operating loss was increased by $15,000 of restructuring costs paid in the quarter and a $155,000 increase in accounts receivable. These decreases in operating cash flows were offset by $330,000 of non-cash expenses, a $52,000 increase in prepaid and other assets, a $32,000 decrease in accounts payable and a $12,000 decrease in other accrued liabilities.

Net cash provided by investing activities was $24,000 and $1.0 million in the three months ended March 31, 2003 and 2002, respectively. In the three months ended March 31, 2003, $51,000 was received from the maturity of a certificate of deposit. In addition to the maturity of the certificate of deposit, $8,000 was received from the sale of long-term assets and $35,000 was used for the purchase of additional equipment and intangible assets. In the three months ended March 31, 2002, $1.0 million was received from the maturity of commercial paper purchased in 2001. In addition to

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the maturity of commercial paper $14,000 was received from the disposal of fixed assets that was offset by $13,000 of equipment purchases.

Net cash used in financing activities was $21,000 and $53,000 in the three months ended March 31, 2003 and 2002, respectively. In the three months ended March 31, 2003, net cash used in financing activities resulted from $21,000 in principal payments made on capital leases. In the three months ended March 31, 2002, net cash used in financing activities resulted from $56,000 in principal payments made on a note payable and on capital leases offset by $3,000 in receipts for the Company’s common stock resulting from the exercise of stock options.

We believe our current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next three to six months. 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.

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 and the going concern contingency contained in our audit report may make raising additional capital more difficult. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of business opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited, and we might need to significantly restrict our operations.

The following table summarizes the contractual obligations and commercial commitments entered into by the Company.

	Payments Due by Period
Contractual Obligations	Total	2003	2004
Capital lease obligations	47	47	-
Operating leases	161	115	46
Other long-term obligations	385	315	70
Total Contractual Cash Obligations	$593	$477	$116

The operating agreement included in other long-term obligations above can be terminated with no penalties.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 2 to the financial statements included in Item 8 of the Annual Report on Form 10-K, filed with the SEC on March 31, 2003. We believe our most critical accounting policies include revenue recognition, allowance for doubtful accounts and fixed assets.

The Company currently derives revenue from providing lead generation activities through a network of partners and e-mail mailings. Revenue earned for lead generation though the Aptimus network is based on a fee per lead and is recognized when the lead information is delivered to the client. Revenue earned for e-mail mailings can be based on a fee per lead, a percentage of revenue earned from the mailing, or a cost per thousand e-mails sent. Revenue from e-mail mailings sent on a cost per thousand basis is recognized when the e-mail is delivered. Revenue from e-mail mailings sent on a fee per lead or a percentage of revenue earned from the mailing basis is recognized when amounts are determinable, generally when the customer receives the leads.

-11-

Revenues generated through network partners and opt-in email list owners are recorded on a gross basis in accordance with Emerging Issues Task Force consensus 99-17 (EITF 99-19). Fees paid to network partners and opt-in email list owners related to these revenues were $220,000 and $255,000 for the three months ended March 31, 2003 and 2002, respectively. These fees are shown as Partner fees on the Statement of Operations. Email based campaigns that are sent to Company owned lists do not have partner fees associated with them.

The company has evaluated the guidance provided by Emerging Issues Task Force consensus 99-17 (EITF 99-19) as it relates to determining whether revenue should be recorded gross or net of the payments made to network partners and opt-in email list owners. The Company has determined the recording of revenues gross is appropriate based upon the following factors:

•

Aptimus acts as a principal in these transactions;

•

Aptimus and its customer are the only companies identified in the signed contracts;

•

Aptimus is solely responsible to the client for fulfillment of the contract;

•

Aptimus determines how the offer will be presented across the network; and

•

Amounts earned are based on leads or emails delivered and are not based on amounts paid to partners.

The estimate of allowance for doubtful accounts is comprised of two parts, a specific account analysis and a general reserve. Accounts where specific information indicates a potential loss may exist are reviewed and a specific reserve against amounts due is recorded. As additional information becomes available such specific account reserves are updated. Additionally, a general reserve is applied to the aging categories based on historical collection and write-off experience. As trends in historical collection and write-offs change, the percentages applied against the aging categories are updated.

Property and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are amortized on a straight-line method over their estimated useful lives or the term of the related lease, whichever is shorter. Equipment under capital leases, which all contain bargain purchase options, is recorded at the present value of minimum lease payments and is amortized using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives are as follows:


Office furniture and equipment		Five years
Computer hardware and software		Three years
Leasehold improvements		Three to Five years

The cost of normal maintenance and repairs are charged to expense as incurred and expenditures for major improvements are capitalized. Gains or losses on the disposition of assets in the normal course of business are reflected in 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.

-12-

RECENT ACCOUNTING PRONOUNCEMENTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

All of the Company’s cash equivalents 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 March 31, 2003, however, the Company’s cash equivalents mature within one month. As of March 31, 2003, the Company believes the reported amounts of cash equivalents 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.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act as of a date (the “Evaluation Date”) within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us required to be included in our periodic SEC filings and Form 8-K reports.

(b) Changes in Internal Controls

There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of the date hereof, there is no material litigation pending against the Company. From time to time, the Company is a party to litigation and claims incident to the ordinary course of business. While the results of litigation and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) Changes in Securities

None.

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(b) Sales of Unregistered Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are filed as part of this report:

Exhibit Number		Description

3.1*		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.

-14-

Exhibit Number		Description


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

-15-

Exhibit Number		Description



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.

99.1		Private Securities Litigation Reform Act of 1995 Safe Harbor and Forward- Looking Statements Risk Factors

99.2		Sarbanes Oxley Section 906 Certification of CEO

99.3		Sarbanes Oxley Section 906 Certification of CFO

_________________


*		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 Annual Report on Form 10-K, dated March 28, 2003.
+		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

(b) Reports on Form 8-K

None.

-16-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

APTIMUS, INC.

Date: May 14, 2003

/s/ John A. Wade
Name: John A. Wade
Title: Chief Financial Officer,
authorized officer and principal financial officer

-17-

CERTIFICATIONS

I, Timothy C. Choate, Chief Executive Officer of Aptimus, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Aptimus, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

/s/ Timothy C. Choate
Timothy C. Choate
Chief Executive Officer

-18-

I, John A. Wade, Chief Financial Officer of Aptimus, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Aptimus, Inc.;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 14, 2003

/s/ John A. Wade
John A. Wade
Chief Financial Officer

-19-

EX-99.1 3 ex99_1.htm

EXHIBIT 99.1

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 —
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

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 Web sites and in our email 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 result, our subsequent performance has not been and will not be comparable to prior periods. Moreover, the current economic downturn in the Internet business, specifically, and the overall economy, generally, has caused many online and traditional advertisers to drastically cut back or eliminate their advertising and marketing budgets and, in some cases, cease business operations altogether. Further erosion of this revenue source may adversely affect our operating results.

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:

•

attract a larger number of consumers to our direct marketing network;

•

contract with new marketing clients and add new and compelling content to our offer network;

•

contract with new online distribution partners with access to large volumes of online users;

•

contract with third-party providers of systems upon which our services may depend;

•

collect receivables for services performed from existing marketing clients;

•

manage our evolving operations;

•

adapt to potential decreases in online advertising rates;

•

successfully introduce new products and services;

•

continue to develop and upgrade our technology and to minimize technical difficulties and system downtime;

•

create and maintain the loyalty of our customers, partners and clients;

•

maintain our current, and develop new, strategic relationships and alliances; and

•

attract, retain and motivate qualified personnel.

We have a history of losses, expect future losses and may never achieve profitability.

We have not achieved profitability and are likely to continue to incur substantial losses through 2003. We incurred net losses of $21.1 million, or 1.2 times the amount of net revenues for the year ended December 31, 2000, $17.9 million, or more than 9.5 times the amount of our net revenues, for the year ended December 31, 2001, and $5.5 million, or more than 1.9 times the amount of our net revenues, for the year ended December 31, 2002. As of March 31, 2003, our accumulated deficit was $62.2 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. In February 2001 the decision was made to discontinue activities related to our consumer-direct Web sites. Although this decision has resulted in a decrease in continuing operating expenses after the first quarter of 2001, we still must significantly increase net revenues to achieve profitability. 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. Our accountants have noted that these conditions raise substantial doubt about our ability to continue as a going concern, as emphasized in their report included in this annual report.

We may need additional financing in the near future, without which we may be required to restrict or discontinue our operations.

Our business does not currently generate the cash necessary to fund our 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 three to six months. Thereafter, we may need to raise additional funds to continue operation, 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, 2002, the percentage of annual net revenues attributable to the first, second, third and fourth quarters were 26.5%, 26.8%, 18.4% and 28.3%, 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 Web sites give consumers access to similar offers. We face competition for free, trial and promotional offers from these Web sites 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 will suffer.

We distribute promotional offers by means of email to lists of names owned by the Company or managed by the Company under license from third-party list owners. Growth in this segment of our business accounts for an increasing portion of our revenues. 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 email-based order volumes will likely decrease. As a consequence, our ability to generate revenues from the email 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 quarter ended March 31, 2003, nearly 100% 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.

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 Chairman, President and Chief Executive Officer, Chris Redlitz our Senior Vice President of Sales and Business Development 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:

•

difficulties integrating operations, personnel, technologies, products and information systems of acquired businesses;

•

potential loss of key employees of acquired businesses;

•

adverse effects on our results of operations from acquisition-related charges and amortization of goodwill and purchased technology;

•

increased fixed costs, which could delay profitability;

•

inability to maintain the key business relationships and the reputations of acquired businesses;

•

potential dilution to current shareholders from the issuance of additional equity securities;

•

inability to maintain our standards, controls, procedures and policies;

•

responsibility for liabilities of companies we acquire; and

•

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 $0.28 to $0.65 during the period from January 1, 2002 to April 15, 2003, and the closing price of our shares on April 15, 2003 was $0.37. 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.

Since our stock price is volatile, we may become subject to securities litigation that is expensive and could result in a diversionof 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 April 15, 2003, Mr. Choate beneficially owned approximately 34.5% of our issued and outstanding common stock and our directors and executive officers as a group beneficially owned approximately 35.1% 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-takeoverprovisions 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 and bylaws [and change in control agreements we have entered into with certain of our executive officers] 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:

•

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;

•

prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of shareholders to elect directors; and

•

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.

•

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 you 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.

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, Engage, Avenue A 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 Web sites or email programs that we offer via our offer distribution network and email 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 email addressed to their subscribers, our business could suffer.

Our email program distributes commercial email 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 emails delivered to their subscribers. Efforts by such ISPs to limit or restrict third-party commercial emails 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.

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 provisional patent application, which we intend to further develop and 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 email.

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 email. 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 Web sites. In addition, we may be subject to litigation based on laws and regulations concerning commercial email. 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 email 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 rent customer names and street addresses to third parties. Although we provide an opportunity for our customers to remove their names from our rental list, we nevertheless may receive complaints from customers for these rentals.

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 hosting service providers 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.

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 email 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 or no 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 email 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, several states have passed laws restricting certain forms of commercial email, and similar legislation is pending in a number of other states. 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, delivery of commercial email, intellectual property rights and information security. 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.

EX-99.2 4 ex99_2.htm

EXHIBIT 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Aptimus, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy C. Choate, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 14, 2003

/s/ Timothy C. Choate
Timothy C. Choate
Chief Executive Officer

EX-99.3 5 ex99_3.htm

EXHIBIT 99.3

CERTIFICATION PURSUANT TO

18 U.S.C. ss. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Aptimus, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. Wade, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 14, 2003

/s/ John A. Wade
John A. Wade
Chief Financial Officer

-----END PRIVACY-ENHANCED MESSAGE-----

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

OR

APTIMUS, INC. INDEX TO THE FORM 10-Q For the quarterly period ended March 31, 2003

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APTIMUS, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

2. REVENUE RECOGNITION

3. STOCK COMPENSATION

4. NET LOSS PER SHARE

5. NEW ACCOUNTING PRONOUNCEMENTS

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

RESULTS OF OPERATIONS

Revenues

Sales and Marketing

Connectivity and Network Costs

Partner fees

Research and Development

General and Administrative

Depreciation and Amortization

Equity-Based Compensation

Loss (gain) on disposal of long-term assets

Interest Expense

Interest Income

Income Taxes

LIQUIDITY AND CAPITAL RESOURCES

CRITICAL ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

(b) Changes in Internal Controls

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

CERTIFICATIONS

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

RISKS RELATED TO OUR BUSINESS

RISKS RELATED TO OUR INDUSTRY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

APTIMUS, INC.

INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 2003

APTIMUS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 —
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS