10-Q 1 q302.txt Q3 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________________ FORM 10-Q (Mark One) _X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-26008 CLICKACTION INC. (Exact name of registrant as specified in its charter) Delaware 77-0195362 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2197 E. BAYSHORE ROAD PALO ALTO, CA 94303 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (650) 473-3600 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 ___ As of November 4, 2002, the registrant had 13,401,347 shares of common stock outstanding. CLICKACTION INC. FORM 10-Q For the Quarterly Period Ended September 30, 2002 Table of Contents Part I. Financial Information Page Item 1. Financial Statements a) Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 ---- 3 b) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001 ----------------------- 4 c) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 ------------------------------------------ 5 d) Notes to Condensed Consolidated Financial Statements ---------------------------------------- 7 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations --------- 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk -------------------------------------------------- 32 Item 4. Controls and Procedures ------------------------------- 32 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ---------------------- 33 Signatures ---------------------------------------------------------- 37 Page 2

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Page 5 Non-cash investing and financing activities: Sale of Elibrium division net liabilities for notes receivable $ ---- $ 1,500 Dividend paid with issuance of common stock 61 30 Supplemental cash flow information: Cash paid during the period for interest 20 9 Cash paid during the period for income tax 56 22 See accompanying notes to condensed consolidated financial statements. Page 6 CLICKACTION INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows of ClickAction Inc. include all material adjustments (consisting of normal recurring adjustments and adjustments relating to the sale of Elibrium) which are, in the opinion of management, necessary for their fair presentation. The interim results presented are not necessarily indicative of results for a full year. Certain reclassifications have been made for consistent presentation. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001. Revenue Recognition We derive our revenues primarily from the following sources: * Email Marketing Automation, or EMA, revenue which consists of: * Email usage services, including setup fees, * Data and list management services, and * Consulting services, * Software licenses, and * Name acquisition services. Email Marketing Automation Revenue We account for revenue related to EMA services as two separate components: email usage and setup fees. We provide email usage services under two plans: subscription plans and project plans. Under a subscription plan, email services are provided over a designated period, typically with a monthly maximum number of emails. Subscription plan revenues are recognized ratably over the contract period. Email services are also provided on a project basis and revenues for these services are recognized once the project has been completed. We provide data and list management services and recognize data and list management fees based on the number of email lists downloaded and delivered. We provide consulting services and we recognize consulting services fees as services are rendered. We recognize setup fees on a straight-line basis over the term of the service contract. Software License Revenue We allocate revenue on software arrangements involving multiple elements to each element based on the relative fair values of the elements as required by Statement of Position (SOP) 97-2, Software Revenue Recognition. Our determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to the price charged when the same element is sold separately. We have analyzed elements included in our multiple-element arrangements and determined that we have sufficient VSOE to allocate revenue to maintenance and basic support services and consultative services components of our perpetual license arrangements. For arrangements where VSOE has been established for all undelivered elements, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from maintenance and support services is recognized ratably over its respective term. For arrangements where VSOE has not been established for all undelivered elements, revenue is recognized from the date of delivery ratably over the remaining term of the agreement. Page 7 CLICKACTION INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Name Acquisition Services Revenue We recognize revenue for name acquisition services on a per name basis when the names are delivered to the client. We have sold name acquisition services on a stand-alone basis and thus have established evidence of fair value. The client may also have rights to receive credit for names acquired which become invalid over a specified period of time. In these circumstances, we record a reserve based on actual credits issued in the month following acquisition. We recognize revenue on all products and services when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed or determinable and (4) collection is reasonably assured or, for software licenses, collection is probable. We define each of the four criteria as follows: Persuasive evidence of an arrangement exists. It is our customary practice to have a written contract, which is signed by both our client and us. Delivery has occurred or services have been rendered. Delivery of email under the subscription plan is deemed to have occurred ratably over the term of the contract. Delivery of email on a project basis is deemed to have occurred when the project is completed. Delivery of setup services is deemed to have occurred ratably over the term of the contract. Delivery of data and list management services is deemed to have occurred when email lists are downloaded and delivered. Delivery of consulting services is deemed to have occurred when services are rendered and accepted by our clients. Delivery of licenses is deemed to have occurred when the license is delivered and accepted by our client. If undelivered products and services exist in an arrangement that are essential to the functionality of the delivered software, delivery is not considered to have occurred until these products or services are delivered. Delivery of acquired names is deemed to have occurred when they are delivered to and accepted by our clients. The fee is fixed or determinable. The fee is customarily fixed and determined in a contract before products and services are delivered. The fee is normally due 30 days from invoice date for our products and services. However, for software licenses, we may grant terms in excess of 30 days but not more than one year. Collection is reasonably assured or, for software licenses, collection is probable. Collectibility is assessed on a client-by-client basis at the time the arrangement is entered into. We typically sell to clients for which there is a history of successful collection. New clients are subject to a credit review process, through which we evaluate the clients' financial condition and their ability to pay. If we determine that collectibility is not reasonably assured or, for software licenses, collectibility is not probable based upon the credit review, revenue will be recognized on a cash-collected basis. Our initial judgment that collectibility is probable for any given client may change subsequent to the date the transaction is entered into due to deterioration in the client's ability to pay. In such situations, we would recognize bad debt expense to the extent that all or a portion of the outstanding fees may not be collected. Discontinued Operations On June 15, 2001, we completed the sale of substantially all of the assets and liabilities of our Elibrium division to a corporation owned and controlled by certain former members of our management team. The Elibrium division developed, marketed and manufactured a line of desktop application products consisting of small business productivity software and services. The original sales price for the Elibrium division was $3.0 million, of which $500,000 was paid on June 15, 2001, $274,000 on June 30, 2001 and $726,000 on September 15, 2001. On December 17, 2001, we agreed to set off $750,000 from the remaining $1.5 Page 8 CLICKACTION INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) million of scheduled payments of the purchase price from Elibrium. The setoffs were due to a dispute over certain accounts payable and accounts receivable items. Under the definitive settlement agreement, Elibrium agreed to pay $750,000 as the remaining balance of the purchase price, of which $500,000 was paid on December 20, 2001 and $250,000 was paid on March 1, 2002. Further, Elibrium agreed to end all disputes, to pay all of certain disputed liabilities and to release us of all known and unknown claims arising from the purchase of our Elibrium division. The sale of the Elibrium division has been reflected as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30 and is presented separately in the consolidated financial statements. Summary operating results of discontinued operations were as follows: Three Months Ended Nine Months Ended -------------------- ------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2002 2001 2002 2001 --------- ---------- --------- -------- Desktop applications revenues $ ---- $ ---- $ ---- $ (576) Cost of revenues ---- ---- ---- 4,732 --------- ---------- --------- -------- Gross loss ---- ---- ---- (5,308) Operating expenses ---- ---- ---- 7,826 --------- ---------- --------- -------- Loss from discontinued operations $ ---- $ ---- $ ---- $(13,134) ========= ========== ========= ========

Settlement of Claims We entered into a Release Agreement, effective as of March 29, 2002, with The Tail Wind Fund Ltd., or Tail Wind, the holder of all of our issued and outstanding Series A Preferred Stock, related to certain disputes that have arisen between us and Tail Wind. Under this agreement, each party released all claims against the other party. In consideration of this release, we issued Tail Wind 250,000 shares of our common stock and agreed to use our commercially reasonable best efforts to register these shares within 90 days after the date of the execution of the release agreement. The fair value of these shares was $310,000, of which $240,000 was charged to the statement of operations for the three months ended March 31, 2002 and $70,000 was charged to the statement of operations for the three months ended September 30, 2001. Per Share Computation Basic net loss per share is computed using the weighted average shares of common stock outstanding during each period presented. Diluted net loss per share is computed using the weighted average shares of common stock and potential dilutive shares of common stock from options and warrants using the treasury stock method. A total of 3,432,642 and 3,729,814 outstanding stock warrants and stock options with a weighted average exercise price of $0.35 and $1.15 for the three months ended September 30, 2002 and 2001, respectively and a total of 2,661,688 and 2,144,388 outstanding stock warrants and stock options with a weighted average exercise price of $0.69 and $3.32 for the nine months ended September 30, 2002 and 2001, respectively, were not included in the computation of diluted net loss per share because their effect would have been antidilutive. Page 9 CLICKACTION INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Recent Accounting Pronouncements In July 2001, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its present value and the related capitalized charge is depreciated over the useful life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do not believe the adoption of SFAS No. 143 will have a material effect on the results of our operations. In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion 30 will now be used to classify those gains and losses. This statement also amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This statement also makes technical corrections to existing pronouncements, which are not substantive but in some cases may change accounting practices. SFAS No. 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have a material effect on our financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The new statement will be effective for exit or disposal activities initiated after December 31, 2002, the adoption of which may affect the timing of expense recognition should we incur restructuring costs in the future. Segment and Geographic Information Our chief operating decision maker is considered to be our Chief Executive Officer (CEO). The CEO reviews financial information on a consolidated basis for purpose of making operating decisions and assessing financial performance. We have not separately reported segment information on a geographic basis, as international sales represent less than 1% of net revenue for the three months and nine months ended September 30, 2002 and 2001. Capital expenditures for long-lived assets are not reported to management by segment. Preferred Stock On March 30, 2001, we issued 3,500 shares of our Series A 4% Cumulative Convertible Preferred Stock for an aggregate purchase price of $3.5 million. The net proceeds from this private placement were $3.3 million. The Series A Preferred Stock accrues cumulative dividends at the rate of 4% per annum, payable semi-annually, in shares of our common stock or cash at our option or the holder's option if certain conditions are not satisfied. Prior to January 2, 2003, the Series A Preferred Stock is convertible into shares of our common stock at a conversion price of $4.08. Page 10 CLICKACTION INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Subject to certain conditions, any outstanding shares of Series A Preferred Stock will automatically convert into shares of our common stock on January 2, 2003 at a conversion price equal to the lesser of $4.08 or the reset price, which is the average closing bid prices of our common stock during the fourth quarter of 2002. The number of shares of our common stock issuable in connection with an automatic conversion of the Series A Preferred Stock is subject to two limitations related to the holder's percentage ownership of our outstanding shares of common stock after such automatic conversion. The first limitation is that the number of shares of our common stock issuable to a holder of Series A Preferred Stock in connection with an automatic conversion cannot, together with any other shares of our common stock beneficially owned by such holder prior to such conversion, exceed 9.99% of the total number of outstanding shares of our common stock immediately after such automatic conversion. Our obligation to issue any shares of common stock in excess of this 9.99% cap is suspended until such time as the issuance of such shares would not exceed the 9.99% cap. The second limitation is that the number of shares of our common stock issuable to a holder of Series A Preferred Stock in connection with an automatic conversion cannot, together with any other shares of our common stock issued to such holder upon conversion of Series A Preferred Stock or as dividends on the Series A Preferred Stock, exceed 19.9% of the total number of outstanding shares of our common stock as of March 30, 2001. In lieu of issuing any shares in excess of this 19.9% cap, we are required to pay to such holder in twelve equal monthly installments an amount equal to the number of shares in excess of the 19.9% cap multiplied by 107.5% of the closing bid price per share of our common stock on the day before the automatic conversion of the Series A Preferred Stock. Based on the bid price of our stock on October 16, 2002, this cash payment would be $2,879,531, payable in twelve monthly installments of approximately $239,961. Without additional financial resources, we will not be able to make such a payment. We may redeem any outstanding shares of the Series A Preferred Stock at any time upon 30 days prior notice. The redemption price consists of (a) a cash payment of the original purchase price plus accrued and unpaid dividends and any unpaid liquidated damages, and (b) warrants to purchase 50% of the shares of our common stock issuable upon conversion of any outstanding shares of the Series A Preferred Stock at a conversion price equal to the lower of $4.08 or the average closing bid price over the twenty-five trading days prior to the redemption date. We may be required to repurchase our Series A preferred stock if we do not regain compliance with the Nasdaq SmallCap Market's listing requirements by November 19, 2002. If required, the amount of this repurchase obligation would be $3.6 million and would be payable within three days of a written notice. Without additional financing, we will not be able to make such a payment. If we are liquidated or dissolved, the holders of the Series A Preferred Stock will be entitled to receive, out of our assets available for distribution to our stockholders, prior and in preference to the holders of our common stock, a liquidation preference equal to $1,000 per share plus all accrued and unpaid dividends. As of September 30, 2002, the liquidation preference was $3,060,333. In connection with our proposed merger with infoUSA Inc., Tail Wind, the holder of all our outstanding Series A Preferred Stock, has waived, until such merger closes, all of its rights as a holder of our Series A Preferred Stock other than the right to vote on the merger pursuant to the terms of a settlement agreement entered into on October 8, 2002 by us, infoUSA and Tail Wind. See "Subsequent Events - Merger with infoUSA" and Subsequent Events - Tail Wind Settlement Agreement" below. Restructuring Accrual We established an accrual for the restructuring costs in the quarter ended September 30, 2001. The accrual was established for severance costs in connection with the reduction in staffing levels and the Page 11 CLICKACTION INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) closure of our offices in San Francisco, CA, Los Angeles, CA and New York, NY. The following shows the changes in the accrual account: Balance as of Balance as of December 31, 2001 Payments September 30, 2002 ----------------- ------------ ------------------ Closure of offices $ 619,339 $ (443,264) $ 176,075 ================= ============ ================== Subsequent Events Merger with infoUSA On October 8, 2002, we entered into an agreement and plan of merger with infoUSA Inc. and Kapalua Acquisition Corp., a wholly-owned subsidiary of infoUSA, pursuant to which we would become a wholly-owned subsidiary of infoUSA. If the merger is completed, our common stockholders will receive an aggregate of up to $2.7 million in cash payable in up to two installments, subject to adjustment as provided in the merger agreement, and without interest, in exchange for all outstanding shares of our common stock. Based upon the 13,498,316 shares of common stock that we currently expect to be outstanding as of the effective time of the merger (which includes 6,968 shares of common stock that we expect to be issued upon exercise of outstanding options prior to the effective time of the merger), our common stockholders will receive up to $0.20 in cash per share, subject to adjustments which could decrease this per share cash amount to a minimum of $0.15, for each share of common stock owned by our common stockholders. On November 1, 2002, we filed a definitive proxy statement containing information about the merger with the Securities and Exchange Commission. The merger is subject to a number of conditions including the approval of our stockholders. We currently plan to hold a special meeting of our stockholders to approve the merger on December 3, 2002. If approved, we expect to complete the merger as soon as practicable following the special meeting. Tail Wind Settlement Agreement In connection with our proposed merger with infoUSA Inc., Tail Wind, the holder of all our outstanding Series A Preferred Stock, has waived, until such merger closes, all of its rights as a holder of our Series A Preferred Stock other than the right to vote on the merger pursuant to the terms of a settlement agreement entered into on October 8, 2002 by us, infoUSA and Tail Wind. Pursuant to the settlement agreement, Tail Wind will receive $1.4 million in cash in exchange for: * all of its shares of our Series A Preferred Stock outstanding on the effective date of the merger; * an outstanding warrant to purchase 135,750 shares of our common stock; and * any other rights it may have with respect to us. The settlement agreement also provides that Tail Wind will enter into a participation agreement with us pursuant to which Tail Wind would be entitled to receive payments equal to 8% of the net profits with respect to certain of our customers which are introduced to us by Gregory Slayton or Tail Wind. Page 12 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations You should read the following discussion of our consolidated financial condition and results of operations along with our condensed consolidated financial statements and the related notes. In addition to historical information contained herein, the following discussion contains words such as "intends," "believes," "anticipates," "plans," "expects" and similar expressions which are intended to identify forward- looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in these forward-looking statements. Factors that could cause or contribute to these differences include the factors discussed below under "Factors Which May Impact Future Operating Results." You should not place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as otherwise required by federal securities laws, we do not intend to update any of the forward-looking statements after the date of this Form 10-Q to conform them to actual results or to reflect new information or changed circumstances. Overview We are a leading provider of email marketing automation products and services. ClickAction Email Marketing Automation, or EMA, solution helps marketers design, deploy and manage personalized email campaigns. ClickAction EMA saves time, generates revenues and reduces costs by providing highly scalable outbound and inbound messaging, one-to-one publication, powerful rule-based segmentation, real-time tracking and detailed reporting, all integrated in a Web-based solution. Our email marketing products are permission-based, which means that our clients send emails to customers and potential customers who have provided their email addresses, have a business relationship or explicitly asked to receive information on specific subjects, brands, services or products. Our clients typically use our EMA solution to send content rich emails that inform these customers about new products, sales and promotions, specified items of interest and corporate events. On June 15, 2001, we completed the sale of substantially all of the assets and liabilities of our Elibrium division to a corporation owned and controlled by certain former members of our management team. The Elibrium division developed, marketed and manufactured a line of desktop application products consisting of small business productivity software and services. On October 8, 2002, we entered into an agreement and plan of merger with infoUSA Inc. and Kapalua Acquisition Corp., a wholly-owned subsidiary of infoUSA, pursuant to which we would become a wholly-owned subsidiary of infoUSA. If the merger is completed, our common stockholders will receive an aggregate of up to $2.7 million in cash payable in up to two installments, subject to adjustment as provided in the merger agreement, and without interest, in exchange for all outstanding shares of our common stock. Based upon the 13,498,316 shares of common stock that we currently expect to be outstanding as of the effective time of the merger (which includes 6,968 shares of common stock that we expect to be issued upon exercise of outstanding options prior to the effective time of the merger), our common stockholders will receive up to $0.20 in cash per share, subject to adjustments which could decrease this per share cash amount to a minimum of $0.15, for each share of common stock owned by our common stockholders. In connection with our proposed merger with infoUSA Inc., Tail Wind, the holder of all our outstanding Series A Preferred Stock, has waived, until such merger closes, all of its rights as a holder of our Series A Preferred Stock other than the right to vote on the merger pursuant to the terms of a settlement agreement entered into on October 8, 2002 by us, infoUSA and Tail Wind. Critical Accounting Policies and Estimates The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in Page 13 accordance with accounting principles generally accepted in the United States of America. You should read the following discussion along with our condensed consolidated financial statements and the related notes included in this Form 10-Q. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the relevant reporting period. We base our estimates and judgments, in part, on historical experience and on various other factors that we believe to be reasonable under the circumstances at the time we prepare our financial statements, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Factors that could cause or contribute to these differences include the factors discussed below under "Factors Which May Impact Future Operating Results." Our critical accounting policies are as follows: * Revenue recognition; * Valuation of accounts receivable; * Restructuring accrual; * Valuation of long-lived assets; and * Accounting for income taxes. Revenue recognition. We derive our revenues primarily from the following sources: * EMA Revenue, which consists of: * Email usage services, including setup fees, * Data and list management services, and * Consulting services, * Software licenses, and * Name acquisition services. Email Marketing Automation Revenue We account for revenue related to EMA services as two separate components: email usage and setup fees. We provide email usage services under two plans: subscription plans and project plans. Under a subscription plan, email services are provided over a designated period, typically with a monthly maximum of emails. Subscription plan revenues are recognized ratably over the contract period. Email services are also provided on a project basis and revenues for these services are recognized once the project has been completed. We provide data and list management services and recognize data and list management fees based on the number of email lists downloaded and delivered. We provide consulting services and we recognize consulting services fees as services are rendered. Software Licenses Revenue We allocate revenue on software arrangements involving multiple elements to each element based on the relative fair values of the elements as required by Statement of Position (SOP) 97-2, Software Revenue Recognition. Our determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to the price charged when the same element is sold separately. We have analyzed elements included in our multiple-element arrangements and determined that we have sufficient VSOE to allocate revenue to maintenance and basic support services and consultative services components of our perpetual license arrangements. For arrangements where VSOE has been established for all undelivered elements, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from maintenance and support Page 14 services is recognized ratably over its respective term. For arrangements where VSOE has not been established for all undelivered elements, revenue is recognized from the date of delivery ratably over the remaining term of the agreement. Name Acquisition Services Revenue We recognize revenue for name acquisition services on a per name basis when the names are delivered to the client. We have sold name acquisition services on a stand alone basis and thus have established evidence of fair value. The client may also have the rights to receive credit for names acquired which become invalid over a specified period of time. In these circumstances, we accrue a reserve based on actual credits issued in the month following acquisition. We recognize revenue on all products and services when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed or determinable and (4) collection is reasonably assured or, for software licenses, collection is probable. We define each of the four criteria as follows: Persuasive evidence of an arrangement exists. It is our customary practice to have a written contract, which is signed by both our client and us. Delivery has occurred or services have been rendered. Delivery of email under the subscription plan is deemed to have occurred ratably over the term of the contract. Delivery of email on a project basis is deemed to have occurred when the project is completed. Delivery of setup services is deemed to have occurred ratably over the term of the contract. Delivery of data and list management services is deemed to have occurred when email lists are downloaded and delivered. Delivery of consulting services is deemed to have occurred when services are rendered and accepted by our clients. Delivery of licenses is deemed to have occurred when the license is delivered and accepted by our client. If undelivered products and services exist in an arrangement that are essential to the functionality of the delivered software, delivery is not considered to have occurred until these products or services are delivered. Delivery of acquired names is deemed to have occurred when they are delivered to and accepted by our clients. The fee is fixed or determinable. The fee is customarily fixed and determined in a contract before products and services are delivered. The fee is normally due 30 days from invoice date for our products and services. However, for software licenses, we may grant terms in excess of 30 days but not more than one year. Collection is reasonably assured or, for software licenses, collection is probable. Collectibility is assessed on a client-by-client basis at the time the arrangement is entered into. We typically sell to clients for which there is a history of successful collection. New clients are subject to a credit review process, through which we evaluate the clients' financial condition and their ability to pay. If we determine that collectibility is not reasonably assured or, for software licenses, collectibility is not probable based upon the credit review, revenue will be recognized on a cash-collected basis. Our initial judgment that collectibility is probable for any given client may change subsequent to the date the transaction is entered into due to deterioration in the client's ability to pay. In such situations, we would recognize bad debt expense to the extent that all or a portion of the outstanding fees may not be collected. Valuation of accounts receivable. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. The amount of allowance is based upon the age of the account receivable as follows: 0 - 30 Days 31 - 60 Days 61 - 90 Days 91 and Above ----------- ------------ ------------ ------------ Allowance for doubtful accounts percentage 0% 2% 20% 50% Page 15 These percentages are based upon our historical experience. In addition, an allowance is made on a specific account basis if we determine that there is doubt regarding a specific client's ability to pay. If our clients encounter difficulties in meeting their payment obligations to us that differs from our historical loss experience, additional bad debt expense will need to be recognized above our estimates. Additionally, if the financial condition of specific clients deteriorates resulting in an impairment of their ability to make payments, we may make additional allowances thus increasing the bad debt expense. Restructuring accrual. We established an accrual for the restructuring costs in the quarter ended September 30, 2001. The accrual was established for severance costs in connection with the reduction in staffing levels and the closure of our offices in San Francisco, CA, Los Angeles, CA and New York, NY. The accrual was made under the assumption that we would not be able to sublease the office space in San Francisco and New York and that we would be able to terminate the office lease in Los Angeles for an estimated amount. The severance was paid out in 2001 and the office lease in Los Angeles was terminated February 8, 2002 for the estimated amount. The following shows the changes in the accrual account: Balance as of Balance as of December 31, 2001 Payments September 30, 2002 ----------------- ------------ ------------------ Closure of offices $ 619,339 $ (443,264) $ 176,075 ================= ============ ================== Valuation of long-lived assets. We review our long-lived assets, primarily property and equipment, for impairment whenever events or circumstances occur which indicate that we may be unable to recover the recorded value of the affected long-lived assets. Events or circumstances could occur in the future that may require us to recognize impairment of long-lived assets. Accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. To date, we have established a 100% valuation allowance against our deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize any deferred tax assets in the future, an adjustment to the deferred tax assets would increase income in the period such determination was made. Results of Continuing Operations Three Months Ended September 30, 2002 and 2001 ---------------------------------------------- Net revenues for the three months ended September 30, 2002 increased $191,000, or 8%, to $2.6 million, compared with net revenues of $2.4 million for the corresponding period in 2001. The increase was primarily due to higher name acquisition services revenue in the three months ended September 30, 2002. In the three months ended September 30, 2002, we continued to experience pricing pressure in the email marketing industry and reductions in email marketing expenditures by our existing and prospective clients caused primarily by an overall weak economy and intense competition for new business opportunities. Until the economy improves and companies begin to increase their marketing budgets, we expect these trends to continue and also expect that our competitors in the email marketing industry will continue to use lower prices as a means to generate revenue and improve their market share, which could adversely affect our financial results and may require us to revise our financial projections. For the three months ended September 30, 2002, one customer accounted for 48% of our net revenues. Gross profit for the three months ended September 30, 2002 decreased $106,000, or 5%, to $2.0 million, compared with gross profit of $2.1 million for the corresponding period in 2001. The decrease in gross profit was primarily due to increased costs paid to third party vendors associated with increased name acquisition services revenue. Gross profit as a percentage of net revenues for the three months ended September 30, 2002 was 78% compared to 89% for the corresponding period in 2001. Our gross profit Page 16 varies from period to period due primarily to costs paid to third parties in association with our name acquisition activities. Total operating expenses for the three months ended September 30, 2002 decreased $6.0 million, or 71%, to $2.4 million, compared with total operating expenses of $8.4 million for the corresponding period in 2001. The decrease in total operating expenses was due to decreased product development, marketing and selling expenses related to our EMA products and services, and general and administrative expenses to support our infrastructure needs. In addition, we recorded $4.0 million in restructuring and impairment charges in the three months ended September 30, 2001 that we did not have for the three months ended September 30, 2002. Product development expenses for the three months ended September 30, 2002 decreased $623,000, or 35%, to $1.2 million, compared with product development expenses of $1.8 million for the corresponding period in 2001. As a percentage of net revenues, product development expenses were 46% for the three months ended September 30, 2002, compared to 76% for the corresponding period in 2001. The decrease in product development expenses was primarily due to reduction in headcount and consultant costs. We expect the product development expenses to decrease as a percentage of net revenues during the remainder of 2002 as we continue to find ways to reduce costs and improve efficiency in product development and network operations. Sales and marketing expenses for the three months ended September 30, 2002 decreased $861,000, or 62%, to $525,000, compared with sales and marketing expenses of $1.4 million for the corresponding period in 2001. As a percentage of net revenues, sales and marketing expenses were 21% for the three months ended September 30, 2002, compared to 59% for the corresponding period in 2001. The decrease in sales and marketing expenses was primarily due to a more focused marketing program that reduced the need for certain promotions that occurred in the three months ended September 30, 2001. In addition, the headcount in sales and marketing was smaller in the three months ended September 30, 2002 compared to the corresponding period in 2001. We expect our sales and marketing expenses to remain flat or slightly lower as a percentage of net revenues during the remainder of 2002 as we continue to find ways to more effectively gain exposure and recognition among current and potential clients with our existing marketing initiatives and to refine our sales strategy that focuses our sales force on our target market. General and administrative expenses for the three months ended September 30, 2002 decreased $667,000, or 53%, to $590,000, compared with general and administrative expenses of $1.3 million for the corresponding period in 2001. This decrease was primarily a result of a decreased headcount and expenses related to rent, professional services and bad debt expense in the quarter ended September 30, 2002. As a percentage of net revenues, general and administrative expenses were 23% for the three months ended September 30, 2002 compared to 53% for the corresponding period in 2001. We expect our general and administrative expenses to decrease slightly as a percentage of net revenues for the remainder of 2002 as we continue to improve cost efficiencies in general and administrative areas. Merger and acquisition related expenses for the three months ended September 30, 2002 were $124,000, which primarily consisted of legal expenses related to the proposed merger with infoUSA. We expect our merger and acquisition related expenses to increase substantially for the remainder of 2002 as we incur additional expenses in connection with the proposed merger with infoUSA. During the three months ended September 30, 2001, we decided to reposition our business and focus our resources on enhancing our ASP solutions to enterprise clients and to cease product development and product sales to the enterprise software market. As part of this repositioning, we closed our offices in San Francisco, Los Angeles, and New York and recorded a charge of $781,000 related to facilities closure for the three months ended September 30, 2001. Also as part of this repositioning, we made a significant reduction in staffing levels related to enterprise software development, and reduced staffing levels in other areas of the company as well to reduce operating expenses. A total of 57 positions were eliminated and a Page 17 charge of $204,000 related to severance costs was recorded for the three months ended September 30, 2001. As a result of our decision to exit the enterprise software market, capitalized software product development costs were determined to be impaired under the requirements of SFAS 121, Accounting for Impairment of Long-Lived Assets, and an impairment charge totaling $3.0 million was recorded in the three months ended September 30, 2001. Net interest income for the three months ended September 30, 2002 decreased $20,000, or 105%, to $1,000 in net interest expense, compared with net interest income of $19,000 for the corresponding period in 2001. The decrease was primarily due to lower average cash balances and the interest expense associated with our capital lease obligations. We recorded an adjustment in income tax expense of $6,000 for the three months ended September 30, 2002 to adjust for an over accrual of minimum state income taxes. We expect income tax expense to remain flat for the remainder of 2002 as we are able to utilize our net operating loss carryforward. We recorded $30,000 in preferred stock dividends for the three months ended September 30, 2002 in association with the preferred stock we issued in March 2001. This dividend is payable semi-annually on June 30 and December 31 of each year until the conversion of the preferred stock into common stock. As a result of the foregoing factors, we incurred a net loss applicable to common stockholders for the three months ended September 30, 2002 of $448,000, compared to a net loss applicable to common stockholders of $6.3 million for the corresponding period in 2001. Nine Months Ended September 30, 2002 and 2001 --------------------------------------------- Net revenues for the nine months ended September 30, 2002 decreased $5.7 million, or 44%, to $7.1 million, compared with net revenues of $12.8 million for the corresponding period in 2001. The decrease was primarily due to significantly lower software license revenue and decreased sales of our EMA products and services. In the nine months ended September 30, 2002, we experienced pricing pressure in the email marketing industry and reductions in email marketing expenditures by our existing and prospective clients caused primarily by an overall weak economy and intense competition for new business opportunities. Until the economy improves and companies begin to increase their marketing budgets, we expect these trends to continue and also expect that our competitors in the email marketing industry will continue to use lower prices as a means to generate revenue and improve their market share, which could adversely affect our financial results and may require us to revise our financial projections. For the nine months ended September 30, 2002, one customer accounted for 32% of our net revenues. Gross profit for the nine months ended September 30, 2002 decreased $6.2 million, or 51%, to $5.9 million, compared with gross profit of $12.1 million for the corresponding period in 2001. The decrease in gross profit was primarily due to the decrease in software license revenue and in sales related to our EMA products and services. In addition, the margin for our name acquisition services revenue for the nine months ended September 30, 2002 was significantly lower than our EMA revenue as we increased purchase of name profiles from third party vendors. Gross profit as a percentage of net revenues for the nine months ended September 30, 2002 was 83% compared to 95% for the corresponding period in 2001. Our gross profit varies from period to period due primarily to costs paid to third parties in association with our name acquisition activities. Total operating expenses for the nine months ended September 30, 2002 decreased $11.2 million, or 58%, to $8.1 million, compared with total operating expenses of $19.4 million for the corresponding period in 2001. The decrease in total operating expenses was primarily due to decreased product development and marketing and selling expenses related to our EMA products and services, and general and administrative expenses to support our infrastructure needs. In addition, we recorded $4.0 million Page 18 in restructuring and impairment charges in the nine months ended September 30, 2001 that we did not have for the nine months ended September 30, 2002. Product development expenses for the nine months ended September 30, 2002 decreased $1.7 million, or 32%, to $3.6 million, compared with product development expenses of $5.3 million for the corresponding period in 2001. As a percentage of net revenues, product development expenses were 50% for the nine months ended September 30, 2002, compared to 41% for the corresponding period in 2001. The decrease in product development expenses was primarily due to reduction in headcount and consultant costs. We expect the product development expenses to decrease as a percentage of net revenues during the remainder of 2002 as we continue to find ways to reduce costs and improve efficiency in product development and network operations. Sales and marketing expenses for the nine months ended September 30, 2002 decreased $3.7 million, or 62%, to $2.2 million, compared with sales and marketing expenses of $5.9 million for the corresponding period in 2001. As a percentage of net revenues, sales and marketing expenses were 31% for the nine months ended September 30, 2002, compared to 46% for the corresponding period in 2001. The decrease in sales and marketing expenses was primarily due to a more focused marketing program that reduced the need for certain promotions that occurred in the nine months ended September 30, 2001. In addition, the headcount in sales and marketing was smaller in the nine months ended September 30, 2002 compared to the corresponding period in 2001. We expect our sales and marketing expenses to remain flat or slightly lower as a percentage of net revenues during the remainder of 2002 as we continue to find ways to more effectively gain exposure and recognition among current and potential clients with our existing marketing initiatives and to refine our sales strategy that focuses our sales force on our target market. General and administrative expenses for the nine months ended September 30, 2002 decreased $2.1 million, or 52%, to $2.0 million, compared with general and administrative expenses of $4.1 million for the corresponding period in 2001. This decrease was primarily the result of a decreased headcount and expenses related to rent, professional services and bad debt expense in the nine months ended September 30, 2002. As a percentage of net revenues, general and administrative expenses were 28% for the nine months ended September 30, 2002 compared to 32% for the corresponding period in 2001. We expect our general and administrative expenses to decrease slightly as a percentage of net revenues for the remainder of 2002 as we continue to improve cost efficiencies in general and administrative areas. Merger and acquisition related expenses for the nine months ended September 30, 2002 were $124,000, which primarily consisted of legal expenses related to the proposed merger with infoUSA. In the nine months ended September 30, 2001, we recorded $94,000 in merger and acquisition related expenses, which primarily consisted of legal and accounting fees related to reviewing potential acquisition targets. We expect our merger and acquisition related expenses to increase substantially for the remainder of 2002 as we incur additional expenses in connection with the proposed merger with infoUSA. During the nine months ended September 30, 2001, we decided to reposition our business and focus our resources on enhancing our ASP solutions to enterprise clients and to cease product development and product sales to the enterprise software market. As part of this repositioning, we closed our offices in San Francisco, Los Angeles, and New York and recorded a charge of $781,000 related to facilities closure for the nine months ended September 30, 2001. Also as part of this repositioning, we made a significant reduction in staffing levels related to enterprise software development, and brought down staffing levels in other areas of the company as well to reduce operating expenses. A total of 57 positions were eliminated and a charge of $204,000 related to severance costs was recorded for the nine months ended September 30, 2001. As a result of our decision to exit the enterprise software market, capitalized software product development costs were determined to be impaired under the requirements of SFAS 121, Accounting for Impairment of Long-Lived Assets, and an impairment charge totaling $3.0 million was recorded in the nine months ended September 30, 2001. Page 19 Settlement of claims expenses were $240,000 for the nine months ended September 30, 2002. We entered into a Release Agreement, effective as of March 29, 2002, with The Tail Wind Fund Ltd., the holder of all of our issued and outstanding Series A Preferred Stock, related to certain disputes that have arisen between us and Tail Wind. Under this agreement, each party released all claims against the other party. In consideration of this release, we issued Tail Wind 250,000 shares of our common stock with a total value of $310,000. Because one of the claims released was the liquidated damages previously recognized in the quarter ended September 30, 2001 in the amount of $70,000, the settlement of claims expense was $240,000 for the three months ended March 31, 2002. Net interest income for the nine months ended September 30, 2002 decreased $89,000, or 110%, to $8,000 in net interest expense, compared with net interest income of $81,000 for the corresponding period in 2001. The decrease was primarily due to lower average cash balances and interest expense associated with our capital lease obligations. We recorded $11,000 in income tax expense for the nine months ended September 30, 2002 for minimum state income taxes. We recorded $91,000 in preferred stock dividends for the nine months ended September 30, 2002 in association with the preferred stock we issued in March 2001. This dividend is payable semi-annually on June 30 and December 31 of each year until the conversion of the preferred stock into common stock. As a result of the foregoing factors, we incurred a net loss applicable to common stockholders for the nine months ended September 30, 2002 of $2.3 million, compared to a net loss applicable to common stockholders of $17.0 million for the corresponding period in 2001. Liquidity and Capital Resources We have financed our operations primarily through funds from operations, equity financings and, to a lesser extent, equipment lease financing. As of September 30, 2002, our principal source of liquidity consisted of $1.9 million in cash, cash equivalents and restricted cash, of which $425,000 was restricted in a money market account used as collateral for a standby letter of credit issued in connection with a sale and leaseback transaction with a third party vendor. This letter of credit expires on December 31, 2002, at which time these funds would become unrestricted. Our operating activities used $273,000 of cash during the nine months ended September 30, 2002, primarily as a result of our net loss during this period, lease termination payments made to the landlord of our Los Angeles, California office and costs related to restructuring activities. Our operating activities used $9.6 million of cash during the nine months ended September 30, 2001, most of which was attributable to operating activities for our Elibrium division that we sold in June 2001. Our investing activities provided $167,000 of cash during the nine months ended September 30, 2002 which consisted of a payment from Elibrium, Inc. related to the sale of our former Elibrium division offset by equipment purchases. Our investing activities provided $641,000 for the nine months ended September 30, 2001 which primarily consisted of payments from Elibrium, Inc. related to the sale of our former Elibrium division and proceeds from the sale of property and equipment in connection with a sale and leaseback transaction we entered into with a third party vendor in June 2001. These were partially offset by equipment purchases and the write-off of capitalized software production costs related to discontinued enterprise software. Our financing activities used $112,000 in cash during the nine months ended September 30, 2002 which primarily consisted of repayment of capital lease obligations. Our financing activities provided $3.6 Page 20 million in cash during the nine months ended September 30, 2001 which consisted of net proceeds of $3.3 million from sale of 3,500 shares of preferred stock and proceeds from exercise of stock options. The following tables list our contractual obligations and commercial commitments: Payments Due by Period ----------------------------------------------- Contractual Obligations Less Than 1 - 3 4 - 5 After (in thousands) Total 1 Year Years Years 5 Years ----------------------- -------- ----------- -------- ------- --------- Long-Term Lease $ 572 $ 338 $ 234 $ ---- $ ---- Capital Lease Obligations $ 161 $ 127 $ 34 $ ---- $ ---- Other Long-Term Obligations $ 216 $ 205 $ 11 $ ---- $ ---- -------- ----------- -------- ------- --------- Total Contractual Cash Obligations $ 949 $ 670 $ 279 $ ---- $ ---- ======== =========== ======== ======= ========= Amount of Commitment Expiration Per Period ----------------------------------------------- Other Commercial Total Commitments Amounts Less Than 1 - 3 4 - 5 After (in thousands) Committed 1 Year Years Years 5 Years ----------------------- --------- ----------- -------- ------- --------- Standby Letters of Credit $ 425 $ 425 $ ---- $ ---- $ ---- --------- ----------- -------- ------- --------- Total Commercial Commitments $ 425 $ 425 $ ---- $ ---- $ ---- ========= =========== ======== ======= ========= We continuously monitor our operations and the use of our cash. We have compiled cash projections for the year ending December 31, 2002 and for the six months ending June 30, 2003 using various estimates of revenue, operating expenses and other non-operating cash expenditures. These cash projections indicate sufficient cash resources will be available to fund our operations through June 30, 2003. However, the estimates of revenue, operating expenses and other non-operating cash expenditures used to develop our cash projections are based on estimates and judgments and our actual cash needs could differ significantly from the projections if: * demand for our services or our cash flow from operations varies from projections; * we are unable to collect our accounts receivable in the ordinary course of business; * we are unable to execute in accordance with our operating plan; or * the level of our operating expenses necessary to fund our operations varies from projections. In addition, our cash projections do not reflect certain events, which if they occur, may substantially impact our liquidity or our ability to continue operations. For example, if all or substantially all of our outstanding accounts receivable as of September 30, 2002 are not paid, we believe that our existing cash and cash equivalents and cash that may be generated from operations may not be sufficient to fund our operations at currently anticipated levels beyond June 30, 2003. Likewise, our cash projections do not reflect any repurchase of our Series A preferred stock which may be required if we do not regain compliance with the Nasdaq SmallCap Market's listing requirements by November 19, 2002. If required, the amount of this repurchase obligation would be $3.6 million and would be payable within three days of a written notice. Nor do these projections provide for the substantial cash payment we may be required to make to the holders of our Series A preferred stock upon its conversion on January 2, 2003 if the average closing bid price of our common stock during the fourth quarter of 2002 is less than $4.08 per share. For more information regarding these potential payments related to our Series A preferred stock, see "Factors Which May Impact Future Operating Results," below. We do not believe that we will have sufficient cash reserves to make either of these payments. Page 21 In connection with our proposed merger with infoUSA Inc., Tail Wind, the holder of all our outstanding Series A Preferred Stock, has waived, until such merger closes, all of its rights as a holder of our Series A Preferred Stock other than the right to vote on the merger pursuant to the terms of a settlement agreement entered into on October 8, 2002 by us, infoUSA and Tail Wind. See "Current Events - Merger with infoUSA" and "Recent Events - Tail Wind Settlement Agreement" below. If current cash, cash equivalents and cash that may be generated from operations are insufficient to satisfy our liquidity requirements, we will likely seek to sell additional equity or debt instruments. However, because of the low trading price of our common stock, we believe it is unlikely that we would be able to raise significant amounts of additional capital through the issuance of equity or debt securities. If this additional financing becomes necessary and is not available or we are not able to raise additional funds through the sale of assets, we may need to merge with another company, sell our business or discontinue operations. Recent Events Merger with infoUSA On October 8, 2002, we entered into an agreement and plan of merger with infoUSA Inc. and Kapalua Acquisition Corp., a wholly-owned subsidiary of infoUSA, pursuant to which we would become a wholly-owned subsidiary of infoUSA. If the merger is completed, our common stockholders will receive an aggregate of up to $2.7 million in cash payable in up to two installments, subject to adjustment as provided in the merger agreement, and without interest, in exchange for all outstanding shares of our common stock. Based upon the 13,498,316 shares of common stock that we currently expect to be outstanding as of the effective time of the merger (which includes 6,968 shares of common stock that we expect to be issued upon exercise of outstanding options prior to the effective time of the merger), our common stockholders will receive up to $0.20 in cash per share, subject to adjustments which could decrease this per share cash amount to a minimum of $0.15, for each share of common stock owned by our common stockholders. On November 1, 2002, we filed a definitive proxy statement containing information about the merger with the Securities and Exchange Commission. The merger is subject to a number of conditions including the approval of our stockholders. We currently plan to hold a special meeting of our stockholders to approve the merger on December 3, 2002. If approved, we expect to complete the merger as soon as practicable following the special meeting. Tail Wind Settlement Agreement In connection with our proposed merger with infoUSA Inc., Tail Wind, the holder of all our outstanding Series A Preferred Stock, has waived, until such merger closes, all of its rights as a holder of our Series A Preferred Stock other than the right to vote on the merger pursuant to the terms of a settlement agreement entered into on October 8, 2002 by us, infoUSA and Tail Wind. Pursuant to the settlement agreement, Tail Wind will receive $1.4 million in cash in exchange for: * all of its shares of our Series A Preferred Stock outstanding on the effective date of the merger; * an outstanding warrant to purchase 135,750 shares of our common stock; and * any other rights it may have with respect to us. The settlement agreement also provides that Tail Wind will enter into a participation agreement with us pursuant to which Tail Wind would be entitled to receive payments equal to 8% of the net profits with respect to certain of our customers which are introduced to us by Gregory Slayton or Tail Wind. Page 22 Factors Which May Impact Future Operating Results The following risk factors should be considered very carefully in addition to the other information contained in this Form 10-Q. The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently think are not material may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition, or results of operations could be materially adversely affected. Failure to complete the proposed merger with infoUSA could negatively impact our future business and operations and the market price of our common stock. If the proposed merger with infoUSA is not completed for any reason, we may be subject to a number of material risks, including the following: * we may be required to pay infoUSA a termination fee of $400,000, plus reimburse up to $500,000 of infoUSA's expenses; * the price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the merger will be completed; * our costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed, which could have an adverse effect on the price of our common stock; and * the diversion of our management's, attention from our day-to-day business and the unavoidable disruption to our employees and their relationships with customers during the period before consummation of the merger may make it difficult for us to regain our market position if the merger does not occur. In addition, our customers and suppliers may, in response to the announcement of the merger, delay or defer decisions concerning their business with us. Any delay or deferral in those decisions by our customers or suppliers could have a material adverse effect on us. Similarly, our current and prospective employees may experience uncertainty about their future roles with infoUSA until infoUSA's strategies with regard to our employees are announced or executed. This may adversely affect our ability to retain key management, sales, marketing and technical personnel. Further, if the merger is terminated and our board of directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner willing to acquire our company or to pay an equivalent or more attractive price than the price to be paid in the merger. In addition, while the merger agreement is in effect, subject to compliance with applicable securities laws and fulfillment of its fiduciary duties, we are prohibited from soliciting, initiating, encouraging or entering into extraordinary transactions, such as a merger, sale of assets or other business combination, with any party other than infoUSA. We may need to raise additional capital and our prospects for obtaining additional financing, if required, are uncertain and failure to obtain additional capital would force us to discontinue operations at current levels. We believe that our existing cash and cash equivalents and cash that may be generated from operations will not be sufficient to fund our operations at currently anticipated levels beyond June 30, 2003 or an even earlier date if: * demand for our services or our cash flow from operations varies from projections; Page 23 * we are unable to collect our accounts receivable in the ordinary course of business; * we are unable to execute in accordance with our operating plan; or * the level of our operating expenses necessary to fund our operations varies from projections. In such event, additional capital from equity or credit financings may be necessary in order to fund our operations at currently anticipated levels beyond June 30, 2003. It is unlikely that we will be able to raise additional capital on terms acceptable to us, or at all. In particular, unless the market price of our common stock increases dramatically, it is unlikely that we will be able to raise funds through a public offering of our common stock. If adequate funds are not available or are not available on acceptable terms, we would have to scale back our operations, which could significantly impair our ability to develop or enhance products or services and respond to competitive pressures, or we may be forced to cease our operations entirely. In addition, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage of ownership of our stockholders would be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. Our customers continue to experience business conditions that could adversely affect our business. A continued decrease in expenditures by advertisers or a continued downturn in the economy could cause our revenues to decline significantly in any given period. We derive, and expect to continue to derive for the foreseeable future, a large portion of our revenues from the email marketing automation products and services we provide to our customers for their marketing and advertising campaigns. Marketing and advertising expenditures by our customers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. The overall market for advertising, including email marketing products and services, has been characterized in recent quarters by decreased demand, lower prices, the reduction or cancellation of contracts, an increased risk of uncollectible receivables from advertisers and the reduction of marketing and advertising budgets. As a result of these reductions, email marketing spending as well as advertising spending across traditional media has decreased. Further reductions may occur. As a result, our revenues from email marketing automation products and services may decline significantly in any given period. We have incurred significant operating losses in the past and we may not achieve profitability. As of September 30, 2002, we had an accumulated deficit of $30.6 million. We recorded a net loss of $418,000 from continuing operations for the three months ended September 30, 2002. We may not achieve profitability in the future. We have historically relied to a significant extent on the revenues and cash flow generated from the sale of desktop software products by our Elibrium division to fund the development and expansion of our email marketing strategy. As a result of the sale of our Elibrium division on June 15, 2001, our ability to achieve profitability in the future will depend primarily upon our ability to continue development of new email marketing products and services, enhance our infrastructure and expand our customer base and brand awareness. To achieve these goals, we may need to increase spending on product development, sales and marketing and technology. To the extent that our email marketing revenues do not significantly increase as a result of this increased spending, we may not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase our profitability on a quarterly or annual basis in the future. Our common stock may be delisted, and if it is delisted the market liquidity of our common stock would be adversely affected and the market price of our common stock could significantly decrease. On May 16, 2002, we received a notice from Nasdaq stating that we failed to satisfy the $4 million minimum net tangible assets continued listing requirement for the Nasdaq National Market. Our net tangible assets as of March 31, 2002 were approximately $3.3 million. On May 22, 2002, we Page 24 applied to have our common stock listed on the Nasdaq SmallCap Market. We currently meet all continued listing requirements for the Nasdaq SmallCap Market with the exception of maintaining a minimum bid price of $1.00. On June 3, 2002, we were notified by Nasdaq that our application for listing on the Nasdaq SmallCap Market had been approved. As a result, we have until November 19, 2002 to regain compliance with the minimum bid price requirement or our common stock may be delisted from the Nasdaq SmallCap Market. We have requested an extension of this date from the Nasdaq SmallCap Market pending the closing of the merger. In light of the current market price of our common stock, it is unlikely that we will be able to maintain a minimum bid price by November 19, 2002. Even if we regain compliance with the minimum bid price requirement, Nasdaq has other requirements that a company must also meet in order to remain listed on the Nasdaq SmallCap Market. If at any time before November 19, 2002, the closing bid price of our common stock is at least $1.00 for 10 consecutive trading days, Nasdaq will determine if we then comply with Nasdaq's continued listing requirements for the Nasdaq SmallCap Market. If we are unable to demonstrate compliance with the continued listing requirements on or before November 19, 2002, Nasdaq will provide us with written notification that our common stock will be delisted. At that time, we may appeal the Nasdaq staff's decision to a Nasdaq Listing Qualifications Panel. If we fail to regain compliance with the standards necessary to be quoted on the Nasdaq SmallCap Market, and our common stock is delisted, trading in our common stock would be conducted on the OTC Bulletin Board or in the over-the-counter market in what is commonly referred to as the "pink sheets." Such alternatives are generally considered to be less efficient markets, an investor would find it more difficult to dispose of, or to obtain accurate quotations as to, the market price of our common stock. If such were to occur, our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result. If our common stock is delisted from trading, the market price of our common stock may decline further, possibly to zero, and it may have a material adverse effect on the ability of our stockholders to sell their shares. The delisting of our common stock would also make it more difficult for us to raise additional financing. If specified events occur, we may be required to repurchase the outstanding shares of our Series A Preferred Stock at a premium price per share. In accordance with the terms of the documents relating to the issuance of our Series A Preferred Stock (and assuming the merger does not close) we are required to repurchase the outstanding shares of Series A Preferred Stock under specified circumstances, including, among others: * our common stock is no longer listed or included for quotation on the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange or the American Stock Exchange or the trading of our common stock is suspended or halted for more than one trading day; * our failure to deliver shares of our common stock within 15 trading days after a written request to convert shares of our Series A Preferred Stock or to exercise all or a portion of the related warrant; * after the registration statement covering the shares issuable upon conversion of the Series A Preferred Stock, related warrant and other related securities, sales cannot be made under such registration statement for any reason, including by reason of a stop order or our failure to update the registration statement; or * we merge with, sell all or substantially all of our assets to or enter into any other business combination transaction with a private company or we become a private company. In the event that any of such circumstances occur, each holder of shares of our Series A Preferred Stock has the option to compel us to repurchase any or all of such holder's then outstanding shares of Series A Preferred Stock at a premium. The price per share payable by us for any repurchased shares of Series A Preferred Stock is generally equal to the greater of 120% of the original purchase price per share plus any Page 25 accrued but unpaid dividends or the market price for our common stock on such date. If we are required to repurchase a significant number of shares of our Series A Preferred Stock under such circumstances, our liquidity and capital could be materially and adversely affected and we may not be able to implement our growth strategy. We would be required to issue a substantial number of additional shares upon conversion of our Series A Preferred Stock and, under certain circumstances, make substantial cash payments to holders of our Series A Preferred Stock if the merger is not completed and the average closing bid price of our common stock during the fourth quarter of 2002 does not exceed $4.08 per share. On March 30, 2001, we issued 3,500 shares of our Series A 4% Cumulative Convertible Preferred Stock for an aggregate purchase price of $3.5 million. Subject to certain conditions (and assuming the proposed merger with infoUSA is not completed), any outstanding shares of Series A Preferred Stock on January 2, 2003 will automatically convert into shares of our common stock at a conversion price equal to the lesser of $4.08 or the reset price, which is the average closing bid price of our common stock during the fourth quarter of 2002. The closing bid price of our common stock on October 16, 2002 was $0.16. If the average closing bid price of our common stock during the fourth quarter of 2002 does not exceed $4.08 per share, we would be required to issue a substantial number of additional shares of our common stock upon the automatic conversion of any outstanding shares of Series A Preferred Stock. We will not receive any consideration for the issuance of these additional shares of our common stock. In addition, the issuance of these additional shares of our common stock would result in substantial dilution to our common stockholders. The settlement agreement that we have entered into with The Tail Wind Fund has the effect of terminating these conversion rights as long as the merger is completed. The number of shares of our common stock issuable in connection with an automatic conversion of the Series A Preferred Stock is subject to two limitations related to the holder's percentage ownership of our outstanding shares of common stock after such automatic conversion. The first limitation is that the number of shares of our common stock issuable to a holder of Series A Preferred Stock in connection with an automatic conversion cannot, together with any other shares of our common stock beneficially owned by such holder prior to such conversion, exceed 9.99% of the total number of outstanding shares of our common stock immediately after such automatic conversion. Our obligation to issue any shares of common stock in excess of this 9.99% cap is suspended until such time as the issuance of such shares would not exceed the 9.99% cap. The second limitation is that the number of shares of our common stock issuable to a holder of Series A Preferred Stock in connection with an automatic conversion cannot, together with any other shares of our common stock beneficially owned by such holder prior to such conversion, exceed 19.9% of the total number of outstanding shares of our common stock as of March 30, 2001. In lieu of issuing any shares in excess of this 19.9% cap, we are required to pay on conversion to such holder an amount equal to the number of shares in excess of the 19.9% cap multiplied by 107.5% of the closing bid price per share of our common stock on the day before the automatic conversion of the Series A Preferred Stock. This payment is due in twelve equal monthly installments. The following table illustrates the number of shares of our common stock immediately issuable upon an automatic conversion of the Series A Preferred Stock assuming that the average closing bid price of our common stock during the fourth quarter of 2002 has remained at $0.16 per share, the closing bid price on October 16, 2002, or if it has decreased by 25%, 50% or 75% from $0.16 per share. This table also illustrates the number of shares of our common stock that cannot be issued in connection with an automatic conversion of the Series A Preferred Stock until such time as the issuance of such shares would not cause the holder of such shares to be in violation of the 9.99% ownership cap described above. Finally, this table illustrates the aggregate cash payment we would be required to pay in connection with an automatic conversion of the Series A Preferred Stock for shares of common stock in excess of the 19.9% ownership cap described above. The calculations in the following table assume that: * all shares of Series A Preferred Stock are still held by a single stockholder, Page 26 * there has been no change in the number of outstanding shares of our common stock , and * there are 3,000 shares of Series A Preferred Stock outstanding immediately prior to the automatic conversion of such shares into common stock. Assumed Number of Cash Payment Average Shares of Required in Closing Bid Common Stock Number of Lieu of Price during Immediately Shares of Issuance of the 4th Issuable Common Stock Shares in Quarter of Upon In Excess of Excess of 2002 Conversion 9.99% Cap 19.9% Cap ------------ ------------ ------------ ------------ $0.16 930,795 1,077,748 $ 2,879,531 0.12 930,795 1,077,748 $ 2,965,898 0.08 930,795 1,077,748 $ 3,052,265 0.04 930,795 1,077,748 $ 3,183,633 Our quarterly operating results are subject to significant fluctuations due to many factors, any of which could adversely affect our stock price. We have experienced, and may continue to experience, significant fluctuations in our quarterly operating results due to a variety of factors, many of which are outside our control. These factors include: * changes in pricing policies by us and our competitors; * the rate of growth of the use of the Internet as a medium for consumer and business communications and transactions, and the size and rate of growth of the market for email marketing products and services; * the timing and number of product enhancements and new product and services introductions by us and our competitors; * the timing and number of email marketing campaigns conducted by our customers; * the timing and delivery of strategic alliance arrangements; * our ability to upgrade and expand our infrastructure; * technical difficulties or system downtime affecting use of our email marketing products or services; * the seasonal nature of our email marketing automation business; * changes in the level of our operating expenses to support our growth; and * domestic and international regulation of email marketing, including privacy legislation. Due to these factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and should not be relied upon as an indication of our future performance. In addition, a significant portion of our operating expenses, particularly labor costs and rent, are relatively fixed, and planned expenditures are based, in part, on expectations with regard to future sales. As a result, we will likely be unable, or may elect not to, reduce spending quickly enough to offset any unexpected revenue shortfall. In the event of a revenue shortfall or unanticipated expenses in any given quarter, our operating Page 27 results may be below the expectations of securities analysts or investors. If this occurs, the market price of our common stock may decline significantly. If email marketing automation is not widely accepted or if use of the Internet by consumers does not continue to grow, there will be a decreased demand for our email marketing products and services and our business will suffer as a result. The market for email marketing automation products and services is new and rapidly evolving. If email marketing automation does not gain widespread acceptance as a means of marketing to, and communicating with, consumers, our business will suffer. Businesses that have relied upon traditional means of attracting new customers and maintaining customer relationships may not accept, or may be slow in accepting, our EMA products and services because: * they have already invested substantial resources in other more traditional methods of marketing and communicating; * they have allocated a limited portion of their marketing budgets to email marketing; * they may find email marketing to be less effective for promoting their products and services; * their customers may have concerns about security and privacy on the Internet or confuse our permission-based emails with unsolicited emails; or * the effectiveness of email marketing may diminish significantly if the volume of direct marketing email results in a negative reaction from consumers. Our success also depends on the growth and acceptance of the Internet as a medium for executing transactions. If consumers do not continue to purchase products online, then the market for our email marketing solution may disappear. If that happens, or if the number of business- to-consumer electronic commerce transactions grows more slowly than we anticipate, our business would suffer. The development of software to block email advertising may harm our ability to sell our services and to get compensated for services we perform. The success of our email marketing businesses depends on our ability to successfully deliver emails or marketing campaigns over the Internet. Software programs exist that limit or prevent advertising from being delivered to a user's computer. Widespread adoption of this software by Web users would significantly undermine the commercial viability of email advertising and marketing. The failure to deliver email messages or marketing campaigns for our clients in an effective and consistent manner may cause our clients to discontinue their use of our email campaign services. In addition, because we provide our clients with a 100% service guarantee, if our clients are not completely satisfied with our service we may be required to refund the delivery fees paid by dissatisfied clients or resend an email marketing campaign at our own expense. We are at risk of potential stock price volatility. Many factors outside our control may cause the market price of our common stock to fluctuate, including: * quarterly fluctuations in our revenues or results of operations, * general conditions in the computer hardware, software and Internet industries, * announcements of new products and services by us or by or competitors, Page 28 * announcements of alliance or partnership by us or by our competitors, * potential litigation, * volatility in the stock markets, particularly with respect to Internet stocks, and decreases in the availability of capital for Internet-related businesses, and * changes in financial estimates by securities analysts. The trading price of our common stock has been volatile and we have experienced significant declines in the market price of our common stock. In the past, many companies have been subject to securities class action litigation following significant declines in the market price of their securities. If we were sued in a securities class action, it could result in substantial costs and a diversion of management's attention and resources and could cause the market price of our common stock to decline further. Our success depends on our timely development of new products and services. We believe that our future success depends in large part upon our ability to keep pace with competitive offerings, to adapt to new operating systems, hardware platforms, media, and industry standards, and to provide additional functionality by enhancing our existing products and services and introducing new products and services on a timely basis. If we are unable to develop such products or services in a timely manner due to resource constraints or technological or other reasons, this inability could have a material adverse effect on our business. Intense competition could impair our ability to grow and achieve profitability. The market for email marketing products and services is intensely competitive and rapidly evolving. Our competitors are continuing to engage in significant price competition for email marketing services. We expect competition to increase significantly in the future because of the attention the Internet has received as a means of advertising and direct marketing and because there are relatively low barriers to entry in our market. We compete directly with publicly traded email service providers as well as numerous private companies. We compete with the information technology departments of current and prospective clients who use in-house email systems to manage and deliver email marketing campaigns. We also compete with companies providing software and services for outsourced solutions such as email distribution, list management, reporting and bounce processing, email consulting and campaign analysis. Many of our current and potential competitors have longer operating histories, greater name recognition, larger customer bases, more diversified lines of products and services and significantly greater resources than we have. These competitors may be able to devote significant resources to sales and marketing, adopt more aggressive pricing policies and deliver superior solutions. If we are not able to compete effectively with our current or future competitors, our business would be harmed. We may not be able to hire and retain key personnel necessary to support our business. We depend on the continued services of our key technical, sales and senior management personnel, particularly our President and Chief Executive Officer, George Grant, and our Senior Vice President of Technology, Kentyn Reynolds. Any officer or employee can terminate his or her relationship with us at any time, and we do not maintain key man insurance policies for either Mr. Grant or Mr. Reynolds. The future growth of our business will depend on our ability to attract, retain and motivate qualified, highly-skilled employees, particularly persons with marketing, Internet and information technology experience. There is competition for these employees with technical, management, marketing, sales, product development and other specialized skills in our industry. We may not be able to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. We have from time to time in Page 29 the past experienced, and expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Our current products and services may become obsolete and unmarketable if we are not able to respond adequately to rapidly changing technology and customer demands. Our industry is characterized by rapid changes in technology and customer demands. As a result, our current products and services may quickly become obsolete and unmarketable. We believe that our future success depends in large part upon our ability to keep pace with competitive offerings and customer requirements, to adapt to new operating systems, hardware platforms, media and industry standards, and to provide additional functionality by enhancing our existing products and services and introducing new products and services on a timely and cost-effective basis. We may be unable to do this due to resource constraints or technological or other reasons. Any failure or delay in adapting to technological advances or emerging industry standards or developing, introducing or marketing new products and services could cause us to lose clients or fail to gain new clients. If this happens, our business could suffer and our stock price could decline. Unplanned system interruptions and capacity constraints could disrupt our business and damage our reputation. We must offer reliable, secure and continuous service to attract and retain clients and persuade them to increase their reliance on our email marketing products and services. As the volume of emails generated by our clients increases, we must continuously upgrade and enhance our technical infrastructure to accommodate the increased demands placed on our systems. Our operations also depend in part on our ability to protect our systems against physical damage from fire, earthquakes, power loss, telecommunications failures, computer viruses, unauthorized user access or hacker attacks, physical break-ins and similar events. Any interruption or decrease in response time of our email marketing services could damage our reputation, reduce customer satisfaction and decrease usage of our services. If our system security is breached, our business and reputation could suffer. A fundamental requirement for online communications and transactions is the secure transmission of confidential information over public networks. Third parties may attempt to breach our security or that of our customers. Any breach in our online security could result in liability to our customers, damage to our reputation and harm to our business. Our servers are vulnerable to computer viruses or software programs that disable or impair computers, physical or electronic break-ins and similar disruptions, which could lead to loss of data. We may need to spend significant resources to license technologies to protect against security breaches or to address problems caused by a security breach. Increasing governmental regulation of electronic commerce and legal uncertainties could decrease demand for our email marketing service or increase our cost of doing business. We are subject not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to privacy and electronic commerce. Although there are currently few of these laws and regulations, state, federal and foreign governments may adopt more of these laws and regulations. The adoption of new laws or the adaptation of existing laws to the Internet may decrease the growth in the use of the Internet, which could in turn decrease the demand for our services, increase our cost of doing business or otherwise harm our business. Federal, state, local and foreign governments are considering a number of legislative and regulatory proposals relating to Internet commerce. As a result, a number of laws or regulations may be adopted regarding: * the ability to or manner of distributing email advertisements; * the pricing and taxation of goods and services offered over the Internet; Page 30 * intellectual property ownership; and * the characteristics and quality of products and services offered over the Internet. It is also uncertain as to how existing laws may be applied to the Internet in areas such as property ownership, copyright, trademark and trade secrets. The recent growth of Internet commerce has been attributed by some to the lack of sales and value-added taxes on interstate sales of goods and services over the Internet. Numerous state and local authorities have expressed a desire to impose such taxes on sales to consumers and businesses in their jurisdictions. Recently, Congress extended until November 1, 2003, the Internet Tax Freedom Act of 1998 which had prevented the imposition of such taxes through October 2001. If this extension of the federal moratorium on state and local taxes on Internet sales is not renewed when it expires on November 1, 2003, sales of goods and services over the Internet could be subject to multiple overlapping tax schemes, which could substantially hinder the growth of Internet commerce, including the use of our email marketing solution. The Internet generates privacy concerns which could result in market perceptions or legislation which could harm our business, result in reduced sales of our services, or both. We gather and maintain data related to consumers' buying behavior. Recently, lawsuits have been brought alleging, among other things, that at least one company, which combines information from online and other sources regarding users, has improperly collected and used information concerning Internet users in violation of federal electronics privacy statutes and other privacy laws. The United States Federal Trade Commission has launched an informal inquiry to determine whether that company has engaged in unfair or deceptive practices in collecting and maintaining information concerning Internet users. While we believe the "opt-in" nature of the user profiles that we create do not raise these issues, we may be sued or investigated regarding our practices. Any similar legal actions, whether against us or others, could limit our ability to sell our email marketing services or otherwise seriously harm our business. Privacy concerns may cause consumers who use the Internet to decide not to opt-in to receive emails. Even the perception of security and privacy concerns, whether or not valid, may indirectly inhibit market acceptance of our email marketing services. In addition, legislative or regulatory requirements may heighten these concerns if businesses must notify users that the data captured after visiting Web sites may be used to direct product promotions and advertising to that user. For example, the European Union recently enacted its own privacy regulations that may result in limits on the collection and use of some user information. The United States and other countries may adopt similar legislation or regulatory requirements. If privacy legislation is enacted or consumer privacy concerns are not adequately addressed, our ability to conduct our business could be harmed. We may be exposed to liability for information displayed on our customers' Web sites or within their marketing partners' Web sites or email messages. Our email marketing services often require us to provide a connection to the Web sites of our customers and their marketing partners, so we may be perceived as being associated with the content of these Web sites. We do not and cannot screen all of the content generated by our customers and their marketing partners. As a result, we may face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the materials displayed on our customers' sites and on their marketing partners' sites and email messages. For example, if one of our customers is sued for posting information on its Web site that is alleged to be defamatory, we may also be named as a defendant in that legal action based solely on our limited association with that customer's Web site. As a result, we could be involved in legal proceedings and disputes that are costly to resolve. We may also suffer a loss of customers or damage to our reputation based on this information or resulting from our involvement in these legal proceedings. Furthermore, some foreign governments have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States. Page 31 Our limited protection of our intellectual property and proprietary rights may adversely affect our business. We rely primarily on a combination of trademark, copyright and trade secret laws, employee and third-party nondisclosure agreements and other methods to protect our proprietary rights. We do not have any patents or any patent applications to protect our proprietary rights. The protective measures we have taken to protect our proprietary rights may not be adequate to prevent unauthorized use of our proprietary technology and other intellectual property rights. We are dependent on licensed third-party technologies and we may need to license additional technologies to succeed in our business. We are highly dependent on technologies we license from third parties to enable us to send email through the Internet and to offer a variety of database management and targeted marketing capabilities. The email marketing industry is rapidly evolving, and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms, or at all. The failure to license these technologies could adversely affect our ability to offer competitive email marketing products and services. Item 3. Quantitative and Qualitative Disclosures About Market Risk We currently provide our services to clients primarily in the United States. As a result, it is unlikely that our financial results would be directly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All of our sales are currently denominated in United States dollars. Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. Given the short-term nature of these investments, we believe we are not subject to significant interest rate risk with respect to these investments. We currently have no interest bearing debt outstanding and we do not plan to use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal and meet liquidity needs while at the same time maximizing the income we receive from our investments without significantly increasing risk. Most of the securities that we have invested in are not subject to significant market risk due to their short-term maturity. We maintain our portfolio of cash equivalents and short-term investments in a variety of investments, including U.S. Treasuries, U.S. Government Agencies and money market funds. Item 4. Controls and Procedures Our Chief Executive Officer and our Senior Vice President, Finance have reviewed, within 90 days of this filing, the disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) that ensure that information relating to the company required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported in a timely and proper manner. Based upon this review, we believe that there are adequate controls and procedures in place to ensure that information relating to the company that is required to be disclosed by us in the reports that we file or submit under the Exchange Act is properly disclosed as required by the Exchange Act and related regulations. There have been no significant changes in the controls or other factors that could significantly affect the controls since the evaluation was performed. Page 32 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Incorporated by Reference Numbe Exhibit Description Form Date Number -------- -------------------------------- ------- ----------- -------- 2.1 Agreement and Plan of Merger and 8-K 8/19/99 2.1 Reorganization, dated as of July 2, 1999, among MySoftware Company, MyMarket Acquisition Corp., MarketHome, and the shareholders of MarketHome 2.2 Asset Purchase Agreement effective 8-K 6/15/01 2.1 as of June 12, 2001 between ClickAction Inc. and Elibrium, Inc. 2.3 Agreement and Plan of Merger dated 8-K 10/11/02 2.1 as of October 8, 2002, among ClickAction Inc., Kapalua Acquisition Corp. and infoUSA Inc. 2.4 Form of Voting Agreement among 8-K 10/11/02 2.2 Kentyn Reynolds, George Grant, Albert Liong, Andrew L. Caso, Gregory Slayton, Emerick M. Woods, Dave Mans, Edwin R. Niehaus, Byron Reese, Barton S. Foster, infoUSA Inc. and ClickAction 2.5 Voting Agreement among The Tail 8-K 10/11/02 2.3 Wind Fund Ltd, infoUSA Inc. and ClickAction Inc. 2.6 Settlement Agreement dated as of 8-K 10/11/02 2.4 October 8, 2002 between ClickAction Inc. and The Tail Wind Fund Ltd. 3.1 Certificate of Incorporation S-1 6/20/95 3.3 3.2 Bylaws S-1 6/20/95 3.4 3.3 Certificate of Ownership and 8-K 9/21/99 3.1 Merger, merging ClickAction Inc., a wholly owned subsidiary of MySoftware Company, with and into MySoftware Company, as filed on September 14, 1999 3.4 Certificate of Designation of S-3 6/15/98 3.4 Series A Junior Participating Preferred Stock (included as Exhibit A to Exhibit 4.2) Page 33 EXHIBITS INDEX (Continued) Exhibit Incorporated by Reference Numbe Exhibit Description Form Date Number -------- -------------------------------- ------- ----------- -------- 3.5 Certificate of Amendment of 10-K 12/31/01 N/A Certificate of Incorporation, as filed on May 23, 2000 3.6 Certificate of Designations of 8-K 3/30/01 4.4 the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series A 4% Cumulative Convertible Preferred Stock for ClickAction Inc., as filed with the Delaware Secretary of State on March 30, 2001 4.1 Specimen Common Stock Certificate 8-K 9/21/99 4.1 4.2 Rights Agreement dated as of June S-3 6/15/98 4.2 10, 1998 4.3 Purchase Agreement dated as of 8-K 3/30/01 4.1 March 30, 2001 between ClickAction Inc. and The Tail Wind Fund, Ltd. 4.4 Registration Rights Agreement, 8-K 3/30/01 4.2 dated as of March 30, 2001, between ClickAction Inc. and The Tail Wind Fund, Ltd. 4.5 Warrant, dated as of March 30, 8-K 3/30/01 4.3 2001, issued by ClickAction Inc. to the Tail Wind Fund, Ltd. 4.6 Form of Amendment No. 1 to Rights 8-K 10/11/02 4.1 Agreement between ClickAction Inc. and FleetBoston Financial Corporation, formerly BankBoston, N.A., as rights agent 10.1 Form of Indemnity Agreement for S-1 6/15/98 10.1 officers and directors 10.2 Form of Indemnity Agreement for S-1 6/20/95 10.2 officers and directors 10.3 Amended and Restated 1995 Equity S-1 4/11/01 99.1 Incentive Plan 10.4 1995 Non-Employee Directors' S-1 6/20/95 10.6 Stock Option Plan Page 34 EXHIBITS INDEX (Continued) Exhibit Incorporated by Reference Numbe Exhibit Description Form Date Number -------- -------------------------------- ------- ----------- -------- 10.5 Lease Agreement by and between S-1 6/20/95 10.8 ClickAction and 2197 E. Bayshore Road Partnership dated February 25, 1993, as amended (the "Palo Alto Lease") 10.6 First Amendment to Palo Alto 10-K 12/31/95 10.16 Lease dated June 30, 1995 10.7 Second Amendment to Palo Alto 10-K 12/31/01 N/A Lease 10.8 Third Amendment to Palo Alto 10-KSB 12/31/96 N/A Lease, effective January 27, 1997 10.9 Fourth Amendment to Palo Alto 10-K 12/31/01 N/A Lease, effective December 7, 1999 10.10 Fifth Amendment to Palo Alto 10-K 12/31/01 N/A Lease, effective May 17, 2000 10.11 Sixth Amendment to Palo Alto 10-K 12/31/01 N/A Lease, effective November 26, 2001 10.12 Seventh Amendment to Palo Alto 10-K 12/31/01 N/A Lease, effective December 12, 2001 10.13 Amended and Restated 1998 Non- S-8 4/11/01 99.2 Officer Stock Option Plan 10.14 1999 Employee Stock Purchase Plan Def 14A 4/17/00 N/A 10.15 2001 Equity Incentive Plan Def 14A 4/17/01 N/A 10.16 MarketHome Equity Incentive Plan S-8 8/16/99 99.4 10.17 Master Lease Agreement and Letter 10-K 12/31/01 N/A of Credit Agreement each dated June 21, 2001 by and between ClickAction Inc. and Sun Microsystems Finance 10.18 Definitive Settlement Agreement 10-K 12/31/01 N/A dated December 20, 2001 by and between ClickAction and Elibrium, Inc. 10.19 Private Label License Agreement 8-K 6/15/01 2.2 effective June 15, 2001 between ClickAction Inc. and Elibrium, Inc. Page 35 EXHIBITS INDEX (Continued) Exhibit Incorporated by Reference Numbe Exhibit Description Form Date Number -------- -------------------------------- ------- ----------- -------- 10.20 Amended and Restated Severance 10-K 12/31/01 N/A Agreement and Release between ClickAction Inc. and Gregory Slayton 21.0 Subsidiaries of ClickAction Inc. 10-K 12/31/01 N/A 23.1 Consent of KPMG LLP 10-K 12/31/01 N/A 99.1 Certificate of the Chief N/A N/A N/A Executive Officer of ClickAction Inc. as required by Section 906 of the Sarbanes-Oxley Act of 2002* 99.2 Certificate of the Chief Financial N/A N/A N/A Officer of ClickAction Inc. as required by Section 906 of the Sarbanes-Oxley Act of 2002* * Filed herewith (b) Report on Form 8K A current report on Form 8-K under Item 5 announcing the Agreement and Plan of Merger with infoUSA was filed with SEC on October 11, 2002. Page 36 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. ClickAction Inc. Date: November 13, 2002 By: /s/ Albert P. Liong --------------------------------- Albert P. Liong Senior Vice President, Finance Page 37 Certifications I, George Grant, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ClickAction 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 officer 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 officer 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. November 13, 2002 /s/ George Grant -------------------------------------- George Grant President and Chief Executive Officer Page 38 Certifications I, Albert P. Liong, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ClickAction 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 officer 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 officer 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. November 13, 2002 /s/ Albert P. Liong ------------------------------------ Albert P. Liong Senior Vice President, Finance Page 39 Exhibit 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Quarterly Report of ClickAction Inc. on Form 10-Q for the three months ended September 30, 2002, I, George Grant, Chief Executive Officer of ClickAction Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. such Quarterly Report on Form 10-Q for the three months ended September 30, 2002 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 such Quarterly Report on Form 10-Q for the three months ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of ClickAction Inc. November 13, 2002 /S/ George Grant ------------------------------------- George Grant President and Chief Executive Officer (Principal Executive Officer) Page 40 Exhibit 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Quarterly Report of ClickAction Inc. on Form 10-Q for the three months ended September 30, 2002, I, Albert Liong, Senior Vice President of Finance of ClickAction Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. such Quarterly Report on Form 10-Q for the three months ended September 30, 2002 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 such Quarterly Report on Form 10-Q for the three months ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of ClickAction Inc. November 13, 2002 /S/ Albert P. Liong ------------------------------------ Albert P. Liong Senior Vice President, Finance (Principal Financial Officer) Page 41

CLICKACTION INC 10-Q