Apollo Group Gives Free Ride to Top Executives at Aptimus

On August 8, Aptimus Inc. (APTM-$6.25), which derives its sales principally from response-based advertising contracts, announced a definitive agreement to be acquired by for-profit education provider Apollo Group (APOL-$53.82) for about $41.3 million, or $6.25 per share, in cash.

This offer price, however, is a far cry from its five-year high of $27.00 per share, the closing price on February 7, 2005.

Blessed is the man who expects nothing, for he shall never be disappointed. — English poet Alexander Pope [1688 – 1744]

Investors fled the stock long-ago, for the online advertising network has suffered recurring operating losses from continuing operations for six consecutive quarters, due in part to a decline in revenue per thousand page impressions (RPM—the revenue earned on those consumers who respond to advertiser offers presented on the publisher websites divided by impressions and multiplied times one thousand).

Average RPM, was $35.12 during the three months ended June 30, 2007, decreasing 41% from the $59.24 average in the comparable period of 2006. The lower RPM levels year-over-year were primarily due to a shift toward a broader set of placement types that were less responsive than historic registration placement locations. Management said, too, the slide in RPM was due in part to the Company’s continuous quality improvement efforts which could lead to lower offer response rates balanced by higher quality (which allegedly leads to higher lead prices over time).

Management’s objective in expanding placement formats and Ad products for advertisers did lead to higher combined placement page impressions: 113.9 million for the three months ended June 30, 2007, compared to 53.78 million for the prior year period. But, as previously mentioned, this marketing strategy failed to translate into greater RPM.

The mountain is high
The valley is low
and you confused on which way to go
so i'm from here
to give you a hand
and lead you into the promise lands

The timing of the deal could not have come at a better time—for management. Recent regulatory filings disclose that the acquisition serves to advance the pecuniary needs of directors and Named Executive Officers of the money-losing Ad network, offsetting now worthless past option grants (out-of-the money) with significant new cash awards.

come on and take a free ride(free ride)
come on and sit here by my side
come on and take a fr-ee ri-de

This deal exemplifies the most egregious traits associated with rewarding prior poor performance. For example, certain of Aptimus executive officers have entered into employment agreements with Apollo which provide for significant increases in base salary, performance bonus, integration bonus, retention bonus, closing bonus, Apollo option grants, and other specified payments and benefits.

all over the country
i've seen it the sa-me
nobody's winning
at this kind of game
we gotta do better
it's time to begin
you know all the answers
are stored from within so,

How many different ways can one earn a bonus?

[chorus]
come on and take a free ride (free ride)
come on and sit here by my side
come on and take a fr-ee ri-de

Robert W. Wrubel, who joined Aptimus in June 2005 and became CEO of the Company in August 2006, failed in his efforts to right the ship. Nonetheless, he has entered into an employment offer letter with Apollo that rewards him with him with the job as the online educator’s new CEO, with a 35 percent base salary increase to $275,000 (per annum)!

• Messer. Wrubel is also entitled to receive integration, retention, and stay cash bonuses of $103,125, $103,125, and $100,00, respectively. Can anyone tell us what is the material difference between a ‘retention’ and a ‘stay’ bonus?
• If the merger is completed by October 1, 2007, Wrubel is entitled to receive a one-time ‘cash closing’ bonus of $42,188, too.
• Mr. Wrubel will be granted options to purchase 75,000 shares of Apollo Class A common stock, subject to one-fourth of the shares vesting on each of the first through fourth anniversaries of the completion of the merger.

Feeding at the trough, too, is Aptimus founder and Chairman Timothy C. Choate. On August 7, 2007, Mr. Choate entered into a two-year consulting agreement with Apollo, which will pay him a fixed retainer in the amount of $25,000 per quarter.

• In addition, Mr. Choate will receive a severance payment equal to $200,000 (equal to his fiscal 2006 base salary), payment of health insurance continuation coverage premiums equal to an amount of $13,924, and an incentive payment of $37,500.
• Upon the completion of the merger, Mr. Choate, who beneficially owns 1.65 million shares, or 25.3% of the outstanding common stock of Aptimus, will also be able to accelerate the vesting of approximately 291,150 additional shares (option strike prices ranging from $0.00 - $1.02 per share).

Directors of the Company did not receive cash compensation for their services as directors or members of committees of the Board, but were paid with stock appreciation rights and/or stock options (most of which granted at a range of exercise prices less than $6.95 per underlying share). No matter-- upon the completion of the merger, each of outside directors of Aptimus are entitled to cash payments of $75,000 (with the lead director, Mr. Eric Helgeland, receiving $175,000).

[chorus]
come on and take a free ride (free ride)
come on and sit here by my side
come on and take a fr-ee ri-de ~ Jefferson Airplane [Free Ride lyrics]

Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.