<PAGE>
As filed with the Securities and Exchange Commission on January 14, 2000
Registration No. 333-90873
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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APROPOS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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Illinois 7372 36-3644751
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
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One Tower Lane, 28th Floor
Oakbrook Terrace, Illinois 60181
(630) 472-9600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Kevin G. Kerns
Chief Executive Officer and President
Apropos Technology, Inc.
One Tower Lane, 28th Floor
Oakbrook Terrace, Illinois 60181
(630) 472-9600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
John P. Tamisiea Daniel G. Kelly, Jr.
McDermott, Will & Emery Davis Polk & Wardwell
227 W. Monroe Street 450 Lexington Avenue
Chicago, IL 60606 New York, NY 10017
(312) 372-2000 (212) 450-4000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Securities and Exchange Commission acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 14, 2000
PROSPECTUS
Shares
APROPOS TECHNOLOGY, INC.
[LOGO]
Common Shares
This is an initial public offering of common shares by Apropos Technology,
Inc. Apropos is selling common shares. The estimated initial public offering
price is between $ and $ per share.
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We have applied for listing of our common shares on the Nasdaq National
Market under the symbol APRS.
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<TABLE>
<CAPTION>
Per Share Total
---------- ------
<S> <C> <C>
Initial public offering price................................ $ $
Underwriting discounts and commissions....................... $ $
Proceeds to Apropos, before expenses......................... $ $
</TABLE>
Apropos and one of our shareholders have granted the underwriters an option
for a period of 30 days to purchase up to additional common shares. We will
not receive any proceeds from the sale of shares by the selling shareholder.
--------
Investing in our common shares involves a high degree of risk.
See "Risk Factors" beginning on page 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
CHASE H&Q SG COWEN
U.S. BANCORP PIPER JAFFRAY
, 2000
<PAGE>
[Flap 1]
[(Inside Front Cover)]
[Graphic depiction of our customer interaction management solution.]
Apropos provides interaction management solutions to transform your voice
call center into a multimedia contact center.
[Flap 2 and 3]
[Graphic depiction of the components of the Apropos solution.]
The Apropos Solution Provides:
Valuable Information on your customers. . .
Valuable Information on your agents. . .
Key business metrics and trends to improve the overall performance of your
business and manage customer relationships.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 4
Forward-Looking Statements................................................ 13
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 28
Management................................................................ 42
Principal and Selling Shareholders........................................ 51
Certain Transactions...................................................... 53
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 56
U.S. Federal Tax Considerations for Non-U.S. Holders...................... 58
Underwriting.............................................................. 62
Legal Matters............................................................. 64
Experts................................................................... 64
Where You Can Find More Information....................................... 64
Index to Consolidated Financial Statements................................ F-1
</TABLE>
"Apropos" is an unregistered trademark of Apropos. This prospectus also
includes references to registered service marks and trademarks of other
entities.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common shares. You should read the entire
prospectus carefully, including "Risk Factors" on page 4 and our consolidated
financial statements and notes to those consolidated financial statements on
page F-1, before making an investment decision.
Apropos
We develop, market and support a comprehensive solution for managing real-
time customer interactions across voice and Internet-based communications
media, including e-mail and web collaboration. Our solution provides total
interaction management capabilities that seamlessly enable the on-line customer
to communicate with the contact center. The Apropos solution offers on-line
customers the flexibility to interact with businesses over the Internet through
e-mail or web collaboration, as well as voice communications to assist in
completing a sales or service transaction.
Our solution enables clients to prioritize, route and respond to customer
interactions across multiple communications media based on a single set of
business rules. Our clients can establish business rules to manage customer
interactions based on their business value or service level. For example,
clients can, on a real-time basis, (1) route specific types of customer
interactions to an agent based on that agent's particular skills and (2) adjust
the number of interactions and agents assigned to a queue to ensure maximum
responsiveness to the customer. Clients can also monitor the status of each
interaction and the performance of each contact center agent. Our solution
provides comprehensive real-time and historical reporting on each customer
interaction and on the contact center resources necessary to manage those
interactions.
Our strategy is to become the leading provider of customer interaction
management solutions for multimedia contact centers. The key elements of our
strategy are to:
. expand our leading technology position;
. enhance our product offering;
. increase our distribution capabilities;
. further develop our strategic partnerships;
. build market and brand awareness;
. expand penetration into major international markets; and
. pursue a software business model.
We have a diverse base of over 140 clients that utilize our solution for a
variety of applications, such as sales, customer service and support, help desk
and field service. Our significant clients include Chase Manhattan Corporation,
Amazon.com, Inc., Carlson Companies, Inc., Freightliner Corp., Pfizer, Inc.,
Remedy Corporation and 3Com Corporation. See "Business--Clients" on page 35 for
more information regarding these clients.
Our principal executive offices are located at One Tower Lane, 28th Floor,
Oakbrook Terrace, Illinois 60181, and our telephone number at that address is
(630) 472-9600. We maintain a web site at www.apropos.com. Information
contained on our web site does not constitute part of this prospectus.
1
<PAGE>
The Offering
<TABLE>
<S> <C>
Common shares offered by Apropos. shares
Common shares to be outstanding
after this offering............. shares
Use of proceeds.................. For repayment of debt, research and
development, expansion of our sales channels,
increased marketing programs, capital
expenditures and working capital and other
general corporate purposes. See "Use of
Proceeds" on page 14 for more information
regarding our use of the proceeds from this
offering.
Proposed Nasdaq National Market APRS
symbol..........................
</TABLE>
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The share amounts in this table are based on shares outstanding as of
September 30, 1999. This table excludes:
. 4,600,000 common shares reserved for issuance under our 1999 omnibus
incentive plan, of which 3,307,867 shares are subject to outstanding
options at a weighted average exercise price of $0.348 per share;
. 1,000,000 common shares reserved for issuance under our 1999 employee
stock purchase plan;
. 151,812 shares subject to outstanding options granted between September
30, 1999 and December 2, 1999, at a weighted average exercise price of
$2.53 per share;
. 106,274 common shares issuable upon exercise of outstanding warrants at
an exercise price of $3.97 per share; and
. 262,500 common shares issuable upon exercise of outstanding warrants
granted between September 30, 1999 and November 5, 1999 at an exercise
price of $5.34 per share.
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Unless otherwise noted, the information in this prospectus:
. assumes that the underwriters' over-allotment option will not be
exercised;
. reflects a seven-for-four stock split of our common shares occurring
immediately prior to the closing of this offering; and
. gives effect to the conversion, at the closing of this offering, of all
(1) 1,242,858 outstanding Series A convertible preferred shares into
2,175,001 common shares, (2) 1,599,888 outstanding Series B convertible
preferred shares into 2,799,804 common shares and (3) 1,152,737
outstanding Series C convertible preferred shares into 2,017,289 common
shares.
2
<PAGE>
Summary Consolidated Financial Information
The table below sets forth summary financial data for the periods indicated.
The data has been derived from (1) the audited consolidated financial
statements of Apropos for the three years ended December 31, 1998 included
elsewhere in this prospectus, (2) the audited consolidated financial statements
of Apropos for the nine-month period ended September 30, 1999 included
elsewhere in this prospectus and (3) the unaudited consolidated financial
statements of Apropos for the nine-month period ended September 30, 1998
included elsewhere in this prospectus. It is important that you read this
information together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 18 and our consolidated financial
statements and notes to those consolidated financial statements on page F-1.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended September
December 31, 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenue................... $ 2,006 $ 4,093 $ 9,142 $ 6,401 $12,400
Loss from operations............ (1,221) (3,708) (5,044) (3,400) (5,441)
Net loss........................ $(1,200) $(3,567) $(4,822) $(3,226) $(5,608)
Net loss per share--basic and
diluted........................ $ (0.42) $ (1.22) $ (1.64) $ (1.10) $ (1.88)
Shares used in calculation of
basic and diluted loss per
share.......................... 2,868 2,923 2,947 2,942 2,987
</TABLE>
The pro forma balance sheet data summarized below gives effect to (1) the
conversion of all of our outstanding convertible preferred shares into our
common shares at the closing of this offering and (2) the consummation of a
$5.0 million secured bridge loan in November 1999. See "Certain Transactions"
on page 53 and "Underwriting" on page 62 for more information regarding this
loan.
The pro forma as adjusted balance sheet data summarized below reflects the
sale of common shares in this offering and the application of $8.0
million of the estimated net proceeds from this offering to repay a portion of
our outstanding indebtedness.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
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(in thousands)
<S> <C> <C> <C>
Consolidated Selected Balance Sheet Data:
Cash and cash equivalents.................... $ 401 $ 5,401
Working capital (deficit).................... (536) (536)
Total assets................................. 11,010 16,010
Short-term debt.............................. 4,783 9,783
Long-term debt............................... 292 292
Convertible preferred shares................. 16,079 --
Total shareholders' equity (deficit)......... (15,379) 700
</TABLE>
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and all other
information contained in this prospectus before making an investment decision.
If any of the following risks, as well as other risks and uncertainties that
are not yet identified or that we currently think are immaterial, actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. In that event, the trading price of our
shares could decline, and you may lose part or all of your investment.
Risks Related to Our Business
Our limited operating history makes evaluating our business difficult.
Our limited operating history makes it difficult to forecast our future
operating results. We commenced operations in January 1989 but did not begin
shipping our principal product and generating revenue from our product until
March 1995. Therefore, we have only a limited operating history upon which you
may evaluate our business. You must consider the numerous risks and
uncertainties an early stage company like ours faces in a rapidly changing
software and technology industry. These risks include our inability to:
. increase awareness of our brand and continue to build client loyalty;
. maintain our current, and develop new, strategic partnerships and
relationships;
. respond effectively to competitive pressures; and
. continue to develop and improve our technology to meet the needs of our
clients.
If we are unsuccessful in addressing these risks, sales of our products and
services, as well as our ability to maintain or increase our client base, will
be substantially diminished.
We have not been profitable since 1994 and we may not achieve profitability
again.
We have not operated profitably since 1994. We incurred net losses of $4.8
million in 1998 and $5.6 million for the nine-month period ended September 30,
1999. At September 30, 1999, we had accumulated losses since inception of $15.5
million. We intend to continue to make significant investments in our research
and development, marketing and sales operations. We anticipate that these
expenses could significantly precede any revenues generated by the increased
spending. As a result, we are likely to continue to experience losses and
negative cash flow from operations in future quarters. We will need to generate
significant revenue to achieve profitability and we may not be able to do so.
Even if we do achieve profitability we cannot assure you that we will be able
to sustain or increase profitability on a quarterly or annual basis in the
future.
Further, we will likely have to recognize significant additional charges
relating to non-cash compensation in connection with options that we granted in
1997, 1998 and 1999 and that we expect to grant prior to the closing of this
offering. These additional charges will further decrease our ability to become
profitable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" on page 18 for more information regarding
these charges.
We have never been able to fully fund operations from cash generated by our
business, and we may not be able to do so in the future.
We have not operated profitably since 1994. We have principally financed our
operations through the private placement of our convertible preferred shares,
bank borrowings and short-term loans. If we do not generate sufficient cash
resources from our business to fund operations, our growth could be limited
unless we are able to obtain additional capital through equity or debt
financings. Our inability to grow as planned may reduce our chances of
achieving profitability, which, in turn, could have a material adverse affect
on the market price of our common shares.
4
<PAGE>
Our lengthy sales cycle has contributed and may continue to contribute to the
quarter-to-quarter variability and unpredictability of our revenue and
operating results which could adversely affect the market price of our
common shares.
We have generally experienced a lengthy product sales cycle, averaging
approximately six to nine months. We consider the life of the sales cycle to
begin on the first face-to-face meeting with the prospective client and end
when we ship the product. Our prospective clients' decisions to license our
product often require significant investment and executive level
decisionmaking, and depend on a number of factors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview" on
page 18 for a description of these factors.
The lengthy sales cycle is one of the factors that has caused, and may in
the future continue to cause, our software revenue and operating results to
vary significantly from quarter to quarter, which makes it difficult for us to
forecast software license revenue and could cause volatility in the market
price of our common shares. Excessive delay in the product sales cycle could
materially and adversely affect our business, financial condition and results
of operations.
Our future business prospects depend in part on our ability to maintain and
improve our current product and to develop new products and product
features.
We believe that our future business prospects depend in large part on our
ability to maintain and improve our current product and to develop new products
and product features on a timely basis. Our product will have to achieve market
acceptance, maintain technological competitiveness and meet an expanding range
of client requirements. As a result of the complexities inherent in our
product, major new products and product features require long development and
testing periods. We may not be successful in developing and marketing, on a
timely and cost effective basis, new products or product features that respond
to technological change, evolving industry standards or client requirements.
Significant delays in the general availability of new releases of our product
or significant problems in the installation or implementation of new releases
of our product could have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to modify our product in a timely and cost effective manner
to respond to technological change.
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
product obsolete or noncompetitive. The market for our product is characterized
by:
. rapid technological change;
. significant development costs;
. frequent new product introductions;
. changes in the requirements of our clients and their customers; and
. evolving industry standards.
Our product is designed to work in conjunction with and on a variety of
hardware and software platforms used by our clients. However, our software may
not operate correctly on evolving versions of hardware and software platforms,
programming languages, database environments and other systems that our clients
use. Also, we must constantly modify and improve our product to keep pace with
changes made to these platforms and to database systems and other applications.
This may result in uncertainty relating to
5
<PAGE>
the timing and nature of new product announcements, introductions or
modifications, which may cause confusion in the market and harm our business.
If we fail to promptly modify or improve our products in response to evolving
industry standards or client demands, our product could rapidly become
obsolete, which would materially and adversely affect our business, financial
condition and results of operations.
Competition could reduce our market share and decrease our revenue.
The market for our product is highly competitive and we expect competition
to increase significantly in the future. In addition, because our industry is
new and evolving and characterized by rapid technological change, it is
difficult for us to predict whether, when and by whom new competing
technologies or new competitors may be introduced into our markets. Currently,
our competition comes from platform providers, interaction management solution
providers and stand-alone point solution providers--See "Business--Competition"
on page 37 for a list of these competitors.
We cannot assure you that we will be able to compete successfully against
current or future competitors. In addition, increased competition or other
competitive pressures may result in price reductions, reduced profit margins or
loss of market share, each of which could have a material adverse effect on our
business, financial condition and results of operations. See "Business--
Competition" on
page 37 for more information on the competition we face.
Demand for communications and interaction management software for multimedia
contact centers may grow more slowly than we currently anticipate.
The majority of our revenue has been generated from licenses of our product
and related support and professional services, and we expect this trend to
continue for the foreseeable future. The market for our product and services is
still emerging. If the demand for communications and interaction management
software does not continue to grow as anticipated within our targeted markets,
our ability to expand our business as planned could be materially and adversely
affected.
Our existing and future clients may not order the e-mail and web-based
functionality of our product.
Currently, our clients primarily use our product to manage voice
interactions. Although new orders for our product increasingly include voice
and Internet-based functionality, such as e-mail or web, only a small number of
our clients have actually implemented our product to manage e-mail and web-
based interactions. If businesses do not implement e-mail and web strategies or
do not want an integrated approach to handling all of their customer
interactions, we may not be able to grow our business as quickly as
anticipated, if at all.
If we fail to establish and maintain strategic relationships, our ability to
increase our revenue and profitability will suffer.
We currently have strategic relationships with resellers, an original
equipment manufacturer, or OEM, system integrators and enterprise application
providers. We depend on these relationships to:
. distribute our products;
. generate sales leads;
. build brand and market awareness; and
. implement and support our solution.
We believe that our success depends, in part, on our ability to develop and
maintain strategic relationships with resellers, OEMs, system integrators and
enterprise application providers. In addition, we intend to train and certify
more strategic partners to provide the professional services required to
implement
6
<PAGE>
our solution in an effort to expand our client base. We generally do not have
long-term or exclusive agreements with these strategic partners. If any of our
strategic relationships are discontinued, sales of our product and services and
our ability to maintain or increase our client base may be substantially
diminished.
If our strategic partners fail to market our product and services effectively
or provide poor customer service, our reputation will suffer and we could
lose clients.
If our strategic partners fail to market our product and services
effectively, we could lose market share. Some of our strategic partners also
provide professional services to our clients in connection with the
implementation of our product. Additionally, if a strategic partner provides
poor customer service, the value of our brand could be diminished. Therefore,
we must maintain relationships with strategic partners throughout the world
that are capable of providing high-quality sales and service efforts. If we
lose a strategic partner in a key market, or if a current or future strategic
partner fails to adequately provide customer service, our reputation will
suffer and sales of our product and services will be substantially diminished.
We may have difficulties successfully managing our growth, which may reduce our
chances of achieving profitability.
Our revenue has increased from $665,000 in 1995 to $9.1 million in 1998, and
we intend to continue to expand our business operations significantly in the
future. We have also increased the number of our employees from seven at March
31, 1996, to 136 at September 30, 1999. Our existing management, operational,
financial and human resources and management information systems and controls
may be inadequate to support our future growth. If we are not able to manage
our growth successfully, we will not grow as planned and our business could be
adversely affected.
Infringement of our proprietary rights could affect our competitive position,
harm our reputation or cost us money.
We regard our product as proprietary. In an effort to protect our
proprietary rights, we rely primarily on a combination of patent, copyright,
trademark and trade secret laws, as well as licensing and other agreements with
consultants, suppliers, strategic partners, resellers and our clients, and
employee and third-party non-disclosure agreements. These laws and agreements
provide only limited protection of our proprietary rights. In addition, we have
not signed agreements containing these types of protective provisions in every
case, and the contractual provisions that are in place and the protection they
provide vary and may not provide us with adequate protection in all
circumstances. Although we have patented or filed patent applications for some
of the inventions embodied in our software, our means of protecting our
proprietary rights may not be adequate. It may be possible for a third party to
copy or otherwise obtain and use our technology without authorization and
without our detection and without infringing our patents. A third party could
also develop similar technology independently. In addition, the laws of some
countries in which we sell our product do not protect our software and
intellectual property rights to the same extent as the laws of the United
States. Unauthorized copying, use or reverse engineering of our product could
materially adversely affect our business, financial condition and results of
operation.
Infringement claims could adversely affect us.
A third party could claim that our technology infringes its proprietary
rights. As the number of software products in our target market increases and
the functionality of these products overlap, we believe that software
developers may face infringement claims. Although we are not aware that our
product infringes any patents, if certain software and technology patents were
interpreted broadly, claims of infringement against us, if successful, could
have a material adverse effect on us.
Infringement claims, even if without merit, can be time consuming and
expensive to defend. A third party asserting infringement claims against us or
our clients with respect to our current or future products
7
<PAGE>
may require us to enter into costly royalty arrangements or litigation, or
otherwise materially and adversely affect us. Beginning in June 1999, we
received letters from Rockwell Electronic Commerce Corporation claiming that
our product utilizes technologies pioneered and patented by Rockwell. On
January 5, 2000, we received a letter from Rockwell that it had filed, but not
served, a complaint in the United States District Court for the Northern
District of Illinois asserting that we had infringed four of its patents
identified in Rockwell's previous correspondence. The complaint seeks a
permanent injunction and unspecified damages. Our patent counsel has completed
its initial review of the claims being asserted by Rockwell and believes that
we likely have meritorious defenses to such claims. If a negotiated resolution
of this matter is required, it could involve payment of license fees which
would increase our expenses. We cannot assure you that the terms of any
licensing arrangement would be favorable to us. A resolution could also require
a redesign of our product or the removal of some of our product features. If a
negotiated resolution is not achieved, we will vigorously defend this action.
If we do not prevail, damages could be awarded and an injunction could be
issued requiring us to cease certain activities. If infringement is deemed to
be willful, a court may triple the awarded damages. Any of these activities
could have a material adverse effect on our business, financial condition and
results of operations. Regardless of outcome, litigation may result in
substantial expense and significant diversion of our management and technical
personnel. See "Business--Legal Proceedings" on page 41 for a description of
this dispute.
We may not be able to hire and retain the personnel we need to sustain our
business.
We depend on the continued services of our executive officers and other key
personnel. The loss of services of any of our executive officers or key
personnel could have a material adverse effect on our business, financial
condition and results of operations.
We need to attract and retain highly-skilled technical and managerial personnel
for whom there is intense competition. We have had some difficulty hiring
highly skilled technical people due to the high market demand for their
services. If we are unable to attract and retain qualified technical and
managerial personnel, our results of operations could suffer and we may never
achieve profitability.
Our financial success depends to a large degree on the ability of our direct
sales force to increase sales. Therefore, our ability to increase revenue in
the future depends considerably upon our success in recruiting, training and
retaining additional direct sales personnel and the success of the direct sales
force. Also, it may take a new salesperson a number of months before he or she
becomes a productive member of our direct sales force. Our business will be
harmed if we fail to hire or retain qualified sales personnel, or if newly
hired salespeople fail to develop the necessary sales skills or develop these
skills more slowly than we anticipate.
Our international operations and expansion involve financial and operational
risks.
We intend to continue to expand our international operations and enter
additional international markets. The expansion of our international operations
will require significant management attention and financial resources to
establish additional foreign operations, hire additional personnel and recruit
additional international resellers. Revenue from international expansion may be
inadequate to cover the expenses of international expansion.
Our expansion into new international markets may take longer than anticipated
and could directly impact how quickly we increase product sales into these
markets. International markets may take additional time and resources to
penetrate successfully. Our product needs to be conformed to the language and
infrastructure requirements of other countries. In addition, the acceptance of
new technologies, such as e-mail and web-based forms of communication, may not
occur as rapidly as in North America. This could have a material adverse impact
on our business, financial condition and results of operation.
Other risks we may encounter in conducting international business activities
generally could include the following:
. economic and political instability;
. unexpected changes in foreign regulatory requirements and laws;
. tariffs and other trade barriers;
8
<PAGE>
. timing, cost and potential difficulty of adapting our product to the
local language standards in those foreign countries that do not use the
English alphabet;
. longer sales cycles and accounts receivable payment cycles;
. potentially adverse tax consequences;
. fluctuations in foreign currencies; and
. restrictions on the repatriation of funds.
Our product and third party software we sell with our product could have
defects for which we are potentially liable and that could result in loss of
revenue, increased costs, loss of our credibility or delay in acceptance of
our product in the market.
Our product, including components supplied by others, may contain errors or
defects, especially when first introduced or when new versions are released.
The portions of our product used to manage e-mail and web-based interactions
are relatively new and have not, as of yet, had significant client usage.
Despite internal product testing, we have in the past discovered software
errors in some of the versions of our product after their introduction. Errors
in new products or versions could be found after commencement of commercial
shipments, and this could result in additional development costs, diversion of
technical and other resources from our other development efforts, or the loss
of credibility with current or future clients. This could result in a loss of
revenue or delay in market acceptance of our product, which could have a
material adverse effect upon our business, financial condition and results of
operations.
In addition, we have warranted to some of our clients and resellers that our
software is free of viruses. If a virus infects a client's computer software,
the client could assert claims against us that could be costly and could have a
material adverse effect on our business, financial condition and results of
operations.
Our license agreements with our clients typically contain provisions
designed to limit our exposure to potential product liability and some contract
claims. Our license agreements also typically limit our client's entire remedy
to either a refund of the price paid or modification of our product to satisfy
our warranty. However, not all of these agreements contain these types of
provisions and, where present, these provisions vary as to their terms and may
not be effective under the laws of some jurisdictions. We also do not have
executed license agreements with all of our clients. A product liability,
warranty, or other claim brought against us could have a material adverse
effect on our business, financial condition and results of operations.
Performance interruptions at our client's system, most of which currently do
not have back-up systems, could negatively affect demand for our products or
give rise to claims against us.
The third party software we sell with our product may also contain errors or
defects. Typically, our license agreements transfer any warranty from the
original manufacturer of third party software to our clients to the extent
permitted, but in some cases we provide warranties regarding third party
software. Product liability, warranty or other claims brought against us with
respect to such warranties could have a material adverse affect on our
business, financial condition and results of operations.
Year 2000 issues may adversely affect our business.
Many computer systems and software products are coded to understand only
dates that have two digits for the relevant year. These systems and products
need upgrading to accept four digit entries in order to distinguish 21st
century dates from 20th century dates. Without upgrading, many computer
applications could fail or create erroneous results beginning in the Year 2000.
We have tested and evaluated our product for Year 2000 compliance. Based on
this testing and evaluation, we believe that the current version of our product
is capable of adequately distinguishing 21st century dates from 20th century
dates. As of the date of this prospectus, we were not aware of any problems or
interruptions in our product or the third party software we sell with our
product related to Year 2000 problems. However, we cannot assure you that
either our product or the third party software we sell with our product does
not contain undetected errors or defects associated with the Year 2000
problems. Since we have warranted to several of our clients that our current
product and the third party software we sell with
9
<PAGE>
our product is Year 2000 compliant, any such errors or defects in our product
or in the third party software we sell with our product could cause our clients
to assert claims against us that, if successful, could be costly and have a
material adverse effect on our business, financial condition and results of
operations.
Although we have not incurred any material costs or experienced material
disruptions in our business associated with our internal systems, we cannot
assure you that our internal systems will not experience any Year 2000 problems
in the future. The failure of our internal systems as a result of the Year 2000
problem could cause a material adverse effect on our business, financial
condition and results of operations.
In addition, the purchasing patterns of our clients and potential clients
may be affected by Year 2000 issues as businesses have expended significant
resources to correct or upgrade their current software systems for Year 2000
compliance. These expenditures may reduce the funds available to purchase the
product we offer. To the extent Year 2000 issues significantly disrupt
decisions to purchase our product or our services, our business, financial
condition and results of operations could be materially and adversely affected.
For a more detailed description of our Year 2000 assessment, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" on page 26.
We depend on Microsoft Corporation technologies and other third party software
on which our product relies.
Our software currently runs only on Microsoft Windows NT(TM) servers. A
decline in market acceptance for Microsoft technologies or the increased
acceptance of other server technologies could cause us to incur significant
development costs and could have a material adverse effect on our ability to
market our current product. Although we believe that Microsoft technologies
will continue to be widely used by businesses, we cannot assure you that
businesses will adopt these technologies as anticipated or will not in the
future migrate to other computing technologies that we do not currently
support. In addition, our products and technologies must continue to be
compatible with new developments in Microsoft technologies.
We sell third party software with our product. If one or more of these third
parties cease to sell their software, we will need to modify our product to use
an alternative supplier or eliminate the affected product function, either of
which could have a material adverse effect on our business and financial
condition.
We may not be able to obtain adequate financing to implement our growth
strategy.
Successful implementation of our growth strategy will likely require
continued access to capital. If we do not generate sufficient cash from
operations, our growth could be limited unless we are able to obtain capital
through additional debt or equity financings. We cannot assure you that debt or
equity financings will be available as required to fund growth and other needs.
Even if financing is available, it may not be on terms that are favorable to us
or sufficient for our needs. If we are unable to obtain sufficient financing,
we may be unable to fully implement our growth strategy.
If our clients do not perceive our product or services to be effective or of
high quality, our brand and name recognition would suffer.
We believe that establishing and maintaining brand and name recognition is
critical for attracting and expanding our targeted client base. We also believe
that the importance of reputation and name recognition will increase as
competition in our market increases. Promotion and enhancement of our name will
depend on the effectiveness of our marketing and advertising efforts and on our
success in continuing to provide high-quality products and services, neither of
which can be assured. If our clients do not perceive our product or services to
be effective or of high quality, our brand and name recognition would suffer
which would have a material adverse effect on our business.
The growth of our business may be impeded without increased use of the
Internet.
The use of the Internet as a commercial marketplace is at an early stage of
development. Demand and market acceptance for recently introduced products and
services available over the Internet are still
10
<PAGE>
uncertain. In addition, governmental regulation of the Internet, such as
imposing sales and other taxes, access charges, and pricing controls and
inhibiting cross-border commerce, may reduce the use of the Internet by
businesses for their electronic commerce and customer service needs. To date,
governmental regulations have not materially restricted commercial use of the
Internet. However, the legal and regulatory environment that pertains to the
Internet is uncertain and may change. New regulations could reduce the use of
the Internet by our clients and their customers. The lack of acceptance of the
Internet as a forum for conducting business could reduce growth in demand for
our product and limit the growth of our revenue.
Natural Microsystems, Inc. may become unwilling or unable to continue to supply
us with voice processing boards, requiring us to find a substitute supplier
which could prove difficult or costly.
Natural Microsystems, Inc. is currently our only supplier of the voice
processing boards that are necessary for the operation of our product. If
Natural Microsystems becomes unable or unwilling to continue to supply these
voice processing boards in the volume, at the price and with the technical
specifications we require, then we would have to adapt our product to perform
with the voice processing boards of a substitute supplier. Introducing a new
supplier of voice processing boards could result in unforeseen additional
product development or customization costs and could also introduce hardware
and software compatibility problems. These problems could affect product
shipments, be costly to correct or damage our reputation in the markets in
which we operate, and could have a material adverse affect on our business,
financial condition and results of operations.
Risks Related to this Offering
Our share price is likely to be highly volatile and could drop unexpectedly.
Following this offering, the price for our common shares could be highly
volatile and subject to wide fluctuations in response to the following factors:
. quarterly variations in our operating results due to prolonged sales
cycles and deviations between actual and expected sales;
. announcements of technical innovations, new products or services by us
or our competitors;
. changes in investor perception of us or the market for our product;
. changes in financial estimates by securities analysts; and
. changes in general economic and market conditions.
The stocks of many technology companies have experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to operating performance. Declines in the market price of our common
shares could also materially and adversely affect employee morale and
retention, our access to capital and other aspects of our business.
If our share price is volatile, we may become subject to securities litigation,
which is expensive and could divert our resources.
In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Many companies in our industry have been subject to this type of litigation. If
the market value of our common shares experience adverse fluctuations, and we
become involved in this type of litigation, regardless of the outcome, we could
incur substantial legal costs and our management's attention could be diverted,
causing our business to suffer.
We may face a financial liability arising out of a possible violation of
Section 5 of the Securities Act of 1933 in connection with an e-mail sent to
all of our employees regarding participation in our directed share program.
As part of our initial public offering, we and the underwriters have
determined to make available up to of our common shares at the initial
public offering price for business associates and related persons
11
<PAGE>
associated with us. On November 24, 1999, we sent an e-mail with respect to
the proposed directed share program to all of our 147 employees setting forth
procedural aspects of the directed share program and informing the recipients
that their immediate families might have an opportunity to participate in the
proposed directed share program. No person who received this e-mail should
rely on it in any manner in making a decision whether to purchase our common
shares in this offering. We did not deliver a preliminary prospectus prior to
distribution of this e-mail as required by the Securities Act of 1933. In
addition, the e-mail may have constituted a non-conforming prospectus under
the Securities Act of 1933. As a result, we may have a contingent liability
under Section 5 of the Securities Act of 1933. Any liability would depend upon
the number of common shares purchased by the recipients of the e-mail. The
recipients of the e-mail who purchase common shares in this offering may have
a right for a period of one year from the date of the purchase to obtain
recovery of the consideration paid in connection with their purchase of our
common shares or, if they had already sold the stock, sue us for damages
resulting from their purchase of our common shares. If any liability is
asserted with respect to the e-mail, we will contest the matter vigorously.
However, if all of the purchasers in the directed share program are awarded
damages after an entire or substantial loss of their investment, the damages
could total up to approximately $ plus interest based on the assumed
initial public offering price of $ per share. If this occurs, our
financial condition could be materially adversely affected.
No public market has existed for our shares and an active trading market may
not develop or be sustained.
Before this offering, there has been no public market for our common
shares. We cannot assure you that an active trading market will develop or be
sustained after this offering. You may not be able to resell your shares at or
above the initial public offering price. The initial public offering price
will be determined through negotiations between the underwriters and us and
may not be indicative of the market price for our common shares after this
offering. See "Underwriting" on page 62 for the factors that were considered
in determining the initial public offering price.
Our executive officers, directors and principal shareholders control us and
may make decisions that you do not consider to be in your best interest.
Immediately after this offering, our executive officers, directors and
principal shareholders will, in the aggregate, hold approximately % of our
outstanding shares. Accordingly, these shareholders will be able to control us
through their ability to determine the outcome of the election of our
directors, amend our articles of incorporation and bylaws and take other
actions requiring the vote or consent of shareholders, including mergers,
going private transactions and other extraordinary transactions, and the terms
of any of these transactions. The ownership position of these shareholders may
have the effect of delaying, deterring or preventing a change in control or a
change in the composition of our board of directors. See "Principal and
Selling Shareholders" on page 51 for information concerning the beneficial
ownership of our common shares.
The sale of a substantial number of our common shares after this offering may
affect our share price.
The market price of our common shares could decline as a result of sales of
substantial amounts of common shares in the public market after the closing of
this offering or the perception that substantial sales could occur. These
sales also might make it difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.
After this offering, we will have outstanding common shares. This
includes the common shares we are selling in this offering, which may be
resold in the public market immediately. The remaining common shares, or
% of our total outstanding shares, and our common shares subject to
outstanding warrants and options are restricted from immediate resale under
the federal securities laws and lock-up agreements between our current
security holders and the underwriters, but may be sold into the market in the
near future. These common shares will become available for sale at various
times following the
12
<PAGE>
expiration of the lock-up agreements which is 180 days after the date of this
prospectus and subject to volume limitations under Rule 144 of the Securities
Act of 1933. See "Shares Eligible for Future Sale" on page 56 for more
information regarding common shares that may be sold in the market after the
closing of this offering.
Investors will incur immediate dilution and may experience further dilution.
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common shares immediately
after this offering, which was a deficit of $ per share as of September 30,
1999. If you purchase our common shares in this offering, you will incur
immediate and substantial dilution in the net tangible book value per common
share from the price you pay per common share. We also have outstanding a large
number of stock options and warrants to purchase common shares with exercise
prices significantly below the initial public offering price of the common
shares. To the extent these options and warrants are exercised, there will be
further dilution. We intend to continue to grant stock options to our employees
as part of our general compensation practices. See "Dilution" on page 16 for
more information on the dilution our investors will incur.
We may use the proceeds from this offering in ways with which you may not
agree.
We have significant flexibility in applying the proceeds we receive in this
offering. Other than repayment of a portion of our indebtedness, including
accrued interest, we are not required to allocate the proceeds we receive in
this offering to any specific investment or transaction. Therefore, you cannot
determine the value or propriety of our use of proceeds. If we do not apply the
funds we receive effectively, our accumulated deficit will increase and we may
lose significant business opportunities. See "Use of Proceeds" on page 14 for a
more detailed description of how we intend to apply the proceeds from this
offering.
Our amended and restated articles of incorporation, our amended and restated
bylaws and Illinois law make it difficult for a third party to acquire us,
despite the possible benefits to our shareholders.
Our amended and restated articles of incorporation, our amended and restated
bylaws and Illinois law contain provisions that may inhibit changes in control
of us not approved by our board of directors. These provisions may have the
effect of delaying, deferring or preventing a change of control of us despite
possible benefits to our shareholders, may discourage bids at a premium over
the market price of our common shares and may adversely affect the market price
of our common shares, and the voting and other rights of the holders of our
common shares. See "Description of Capital Stock" on page 54 for more
information regarding these provisions.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seeks" and "estimates", and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed, implied or forecasted in the forward-looking statements. In
addition, the forward-looking events discussed in this prospectus might not
occur. These risks and uncertainties include, among others, those described in
"Risk Factors" on page 4 and elsewhere in this prospectus. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect our management's view only as of the date of this prospectus.
Except as required by law, we undertake no obligation to update any forward-
looking statement, whether as a result of new information, future events or
otherwise.
13
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $ million from the sale
of common shares at the initial public offering price of $
per share after deducting underwriting commissions and discounts of $ million
and estimated expenses of $ million. If the underwriters exercise their
over-allotment option in full, then the net proceeds will be approximately
$ . We will not receive any proceeds from the sale of shares by the
selling shareholder.
$8.0 million of the net proceeds from this offering will be used to repay
debt. Of the $8.0 million, (1) $1.5 million will be used to repay subordinated
convertible promissory notes with a stated interest rate of 10% per annum which
mature on the earlier to occur of May 12, 2000 or our initial public offering,
(2) $5.0 million will be used to repay a secured bridge loan with a stated
interest rate of 9.25% per annum which matures on March 31, 2000 and (3) the
remaining $1.5 million will be used to repay a portion of the amount
outstanding under our revolving credit facility which has a stated interest
rate of the prime rate plus 1.25% per annum and matures on March 16, 2000. See
"Certain Transactions" on page 53 and "Underwriting" on page 62 for more
information regarding the subordinated convertible promissory notes and the
secured bridge loan. After application of the net proceeds of this offering,
$2.2 million will remain outstanding under our revolving credit facility. We
currently estimate that we will use the balance of the net proceeds of this
offering as follows:
. 11% for research and development;
. 11% for expansion of our sales channels;
. 9% for increased marketing programs;
. 2% for capital expenditures; and
.67% for working capital and other general corporate purposes.
The amounts described above reflect our estimate of the use of our net
proceeds from this offering, based on our current plans for anticipated
expenditures. Our actual expenditures may vary significantly from these
estimates based upon a number of factors, including progress of our marketing
programs, changing technologies and success of our sales channels. As a result,
we may find it necessary or advisable to reallocate the net proceeds within the
uses outlined above or to use portions of the net proceeds for other purposes.
Accordingly, our management will have significant flexibility in applying the
net proceeds from this offering.
Pending any use, the net proceeds of this offering will be invested in
short-term, interest bearing investment grade securities.
DIVIDEND POLICY
We have not paid any dividends in the past and do not intend to pay cash
dividends on our capital stock for the foreseeable future. Instead, we intend
to retain all earnings for use in the operation and expansion of our business.
Our board of directors will make any future determination of the payment of
dividends based upon various factors then existing, including, but not limited
to, our financial condition, operating results and current and anticipated cash
needs. The payment of dividends may be limited by financing agreements that we
may enter into in the future.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. on an actual basis;
. on a pro forma basis to give effect to (1) the conversion of all of our
outstanding convertible preferred shares into common shares upon the
closing of this offering on a split adjusted basis to reflect the seven-
for-four stock split of our common shares and (2) the consummation of a
$5.0 million secured bridge loan in November 1999; and
. on a pro forma as adjusted basis to give effect to (1) the sale by us of
common shares, after deducting underwriting discounts and
commissions and estimated offering expenses and (2) the use of $8.0
million of the estimated net proceeds to repay a portion of our
outstanding indebtedness. See "Use of Proceeds" on page 14 for more
information regarding our use of the net proceeds of this offering to
repay debt.
The table reflects a seven-for-four stock split of our common shares
occurring immediately prior to the closing of this offering.
This table should be read in conjunction with the consolidated financial
statements and notes to those consolidated financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
amounts)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 401 $ 5,401 $
======== ======== ======
Short-term debt................................ 4,783 9,783
======== ======== ======
Long-term debt................................. $ 292 $ 292
-------- -------- ------
Series A convertible preferred shares, par
value $0.01 per share, 1,242,858 shares
authorized, 1,242,858 shares issued and
outstanding actual, none issued or
outstanding pro forma or as adjusted........ 2,119 -- --
Series B convertible preferred shares, par
value $0.01 per share, 1,599,888 shares
authorized, 1,599,888 shares issued and
outstanding actual, none issued or
outstanding pro forma or as adjusted........ 5,974 -- --
Series C convertible preferred shares, par
value $0.01 per share, 1,152,737 shares
authorized, 1,152,737 shares issued and
outstanding actual, none issued or
outstanding pro forma or as adjusted........ 7,986 -- --
Shareholders' equity (deficit):
Preferred shares, par value $0.01 per share,
5,000,000 shares authorized, none issued or
outstanding actual, pro forma or as
adjusted.................................... -- -- --
Common shares, par value $0.01 per share,
55,000,000 shares authorized, 3,017,958,
10,010,052 and shares issued and
outstanding actual, pro forma and as
adjusted, respectively...................... 37 107
Additional paid-in-capital................... 297 16,306
Accumulated deficit.......................... (15,713) (15,713)
-------- -------- ------
Total shareholders' equity (deficit)....... (15,379) 700
Total capitalization...................... $ 5,775 $ 10,775 $
======== ======== ======
</TABLE>
15
<PAGE>
DILUTION
Our pro forma net tangible book value at September 30, 1999 was $700,000, or
$0.07 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets less our total liabilities, divided by the
total number of common shares outstanding after giving effect to the conversion
of all of our outstanding convertible preferred shares.
After giving effect to this offering and the receipt of $ million of net
proceeds from this offering, the pro forma net tangible book value of the
common shares as of September 30, 1999 would have been $ million, or $
per share. This amount represents an immediate increase in net tangible book
value of $ per share to the existing shareholders and an immediate dilution
in net tangible book value of $ or $ per share to purchasers of common
shares in this offering. Dilution is determined by subtracting pro forma net
tangible book value per share after this offering from the amount of cash paid
by a new investor for a common share. The new investors will have paid $
per share even though the per share value of our assets after subtracting our
liabilities is only $ . In addition, the total consideration from new
investors will be $ million, which is % of the total of $ million
paid for all common shares outstanding, but new investors will own only %
of our outstanding common shares. The following table illustrates such
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $
Pro forma net tangible book value per share at September 30,
1999.......................................................... $0.07
Increase per share attributable to new investors...............
-----
Pro forma net tangible book value per share after this offering..
----
Dilution per share to new investors.............................. $
====
</TABLE>
The following table sets forth, as of September 30, 1999, on the pro forma
basis described above, the number of common shares purchased from us, the total
consideration paid to us and the average price per share paid by existing
shareholders and by new investors who purchase common shares in this offering,
before deducting the underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 10,010,052 % $16,413,000 % $
New investors...............
---------- ----- ----------- -----
Total................... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The share amounts in the tables above are based on shares outstanding as of
September 30, 1999. The tables exclude:
. 4,600,000 common shares reserved for issuance under our 1999 omnibus
incentive plan, of which 3,307,867 shares are subject to outstanding
options, at a weighted average exercise price of $0.348 per share;
. 151,812 shares subject to outstanding options, granted between September
30, 1999 and December 2, 1999, at a weighted average exercise price of
$2.53 per share;
. 1,000,000 common shares reserved for issuance under our 1999 employee
stock purchase plan;
. 106,274 common shares issuable upon exercise of outstanding warrants, at
an exercise price of $3.97 per share; and
. 262,500 common shares issuable upon exercise of outstanding warrants
granted between September 30, 1999 and December 2, 1999, at an exercise
price of $5.34 per share.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes on
page F-1 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 18. The consolidated statement of operations
data for the years ended December 31, 1996, 1997 and 1998 and the nine-month
period ended September 30, 1999, and the consolidated balance sheet data as of
December 31, 1997, 1998 and September 30, 1999, are derived from our audited
consolidated financial statements, which are included elsewhere in this
prospectus. The consolidated statement of operations data for the year ended
December 31, 1995 and the consolidated balance sheet data as of December 31,
1994, 1995 and 1996 are derived from our audited consolidated financial
statements which are not included in this prospectus. The consolidated
statement of operations data for the nine-month period ended September 30, 1998
is derived from our unaudited consolidated financial statements contained
elsewhere in this prospectus. The consolidated statement of operations data for
the year ended December 31, 1994 is derived from our unaudited consolidated
financial statements which are not included in this prospectus. Unaudited
consolidated financial statements include, in our belief, all adjustments,
consisting of only normal recurring adjustments, necessary for fair
presentation of such data. The financial data for the interim periods are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
---------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
----- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations:
Revenue:
Software licenses... $ 352 $ 417 $ 1,424 $ 2,669 $ 5,697 $ 3,968 $ 7,016
Services and other.. -- 248 582 1,424 3,445 2,433 5,384
----- ------- ------- ------- ------- ------- -------
Total revenue..... 352 665 2,006 4,093 9,142 6,401 12,400
Costs and expenses:
Cost of software.... 37 341 10 26 31 26 176
Cost of service and
other.............. -- -- 348 1,308 3,084 2,198 3,997
Research and
development........ -- 65 491 1,271 2,805 1,890 2,957
Sales and marketing. -- 93 1,418 3,644 6,030 4,202 6,984
General and
administrative..... 241 745 960 1,552 2,236 1,485 3,727
----- ------- ------- ------- ------- ------- -------
Total costs and
expenses......... 278 1,244 3,227 7,801 14,186 9,801 17,841
----- ------- ------- ------- ------- ------- -------
Income (loss) from
operations........... 74 (579) (1,221) (3,708) (5,044) (3,400) (5,441)
Other income
(expense)............ -- -- 21 141 222 174 (167)
----- ------- ------- ------- ------- ------- -------
Net income (loss)..... $ 74 $ (579) $(1,200) $(3,567) $(4,822) $(3,226) $(5,608)
===== ======= ======= ======= ======= ======= =======
Net income (loss) per
share-basic and
diluted.............. $4.11 $(19.30) $ (0.42) $ (1.22) $ (1.64) $ (1.10) $ (1.88)
===== ======= ======= ======= ======= ======= =======
Shares used in
calculation of basic
and diluted.......... 18 30 2,868 2,923 2,947 2,942 2,987
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
---- ----- ------- ------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Consolidated
Balance Sheet Data:
Cash and cash
equivalents........... $ 5 $ 45 $ 6,211 $ 1,984 $ 3,170 $ 401
Working capital
(deficit)............. 74 (508) 6,194 2,299 4,916 (536)
Total assets........... 122 140 7,140 4,395 8,649 11,010
Short-term debt........ -- -- 98 -- -- 4,783
Long-term debt......... -- -- 151 -- -- 292
Convertible preferred
shares................ -- -- 8,093 8,093 16,079 16,079
Total common
shareholders' equity
(deficit)............. 91 (482) (1,699) (5,261) (10,010) (15,379)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes to those consolidated financial statements
included elsewhere in this prospectus.
Overview
We develop, market and support a market leading customer interaction
management solution for multimedia contact centers. We commenced operations in
January 1989, and, from inception to early 1995, our operating activities
consisted primarily of research and development and consulting, and we derived
revenue primarily from consulting. In March 1995, we began shipping our first
software product.
Revenue. We derive revenue principally from the sale of software licenses
and from fees for implementation, technical support and training services. We
also derive revenue from the sale of certain third party hardware products such
as voice cards required to implement our solution. Revenue from the sale of
hardware constituted less than 12% of our total revenue for the nine months
ended September 30, 1999, and is included in revenue from services and other.
We expect the hardware component of our total revenue to decrease as a
percentage of total revenue over time. We now encourage the majority of our
clients to purchase servers directly from third party manufacturers and have
discontinued paying commissions to our sales force for the sale of third party
hardware products. We expect to offer voice cards and other hardware to our
clients on a limited basis in the near term.
We market our solution to our clients primarily through our direct sales
force, value added resellers and an original equipment manufacturer, or OEM in
North America, Europe, South America, Asia, Africa and Australia. We currently
have relationships with 15 value added resellers and one OEM. We are
aggressively expanding both our direct sales force and our reseller and OEM
relationships. Sales to our resellers and OEM accounted for 7.0% of our total
revenue for 1998 and 20.0% of our total revenue for the nine months ended
September 30, 1999. We expect that revenue derived from sales to resellers and
OEMs will continue to increase as a percentage of total revenue for the
foreseeable future as we expand and focus on our international sales efforts
and distribution channels.
Although we enter into general sales contracts with our clients and
resellers, none of our clients or resellers is obligated to purchase our
product or our services pursuant to these contracts. We rely on our clients and
resellers to submit purchase orders for our products and services. All of our
sales contracts contain provisions regarding the following:
. product features and pricing;
. order dates, rescheduling and cancellations;
. warranties and repair procedures; and
. marketing and/or sales support and training obligations.
Typically, these contracts provide that the exclusive remedy for breach of our
specified warranty is either a refund of the price paid or modification of our
product to satisfy our warranty.
We have generally experienced a product sales cycle of six to nine months.
We consider the life of the sales cycle to begin on the first face-to-face
meeting with the prospective client and end when we ship our product. The
length of the sales cycle for client orders depends on a number of factors
including:
. a client's awareness of the capabilities of the type of solution we sell
and the amount of client education required;
. concerns that our client may have about our limited operating history
and track record and our size compared to many of our larger
competitors;
18
<PAGE>
. a client's budgetary constraints;
. the timing of a client's budget cycles;
. concerns of our client about the introduction of new products by us or
our competitors that would render our current product noncompetitive or
obsolete; and
. downturns in general economic conditions, including reductions in demand
for contact center services.
Our OEM contract contains additional provisions regarding product technical
specifications, labeling instructions and other instructions regarding
customization and rebranding. Our OEM contract contains volume discounts.
Sales to clients outside the United States accounted for 6.6% of our revenue
in 1998 and 18.5% of our total revenue for the nine months ended September 30,
1999. We expect the portion of our total revenue derived from sales to clients
outside the United States to increase as we expand our international sales
efforts and distribution channels.
We recognize revenue from the sale of software and hardware upon shipment.
Beginning in 1998, we recognized revenue from fees for implementation services
using the percentage of completion method. We calculate percentage of
completion based on the estimated total number of hours of service required to
complete an implementation project and the number of actual hours of service
rendered. Prior to 1998, we recognized revenue from implementation services as
those services were completed. We recognize support and maintenance services
ratably over the term of our maintenance contracts, which are typically annual
contracts. Training services are recognized as such services are completed.
Cost of revenue. Our cost of revenue consists primarily of:
. the cost of compensation for technical support, education and
professional services personnel;
. other costs related to facilities and office equipment for technical
support, education and professional services personnel;
. the cost of third party hardware we resell as part of our solution; and
. payments for third party software used with our product.
We recognize costs of software, maintenance, support and training services
and hardware as they are incurred. Prior to 1997, we recognized costs of
implementation services as they were incurred. In 1997, we began to recognize
costs of implementation services using the percentage of completion method
described above.
Other operating expenses. We generally recognize our operating expenses as
we incur them. Our sales and marketing expenses consist primarily of
compensation, commission and travel expenses along with other marketing
expenses, including trade shows, public relations, telemarketing campaigns and
other promotional expenses. Our research and development expenses consist
primarily of compensation expenses for our personnel and, to a lesser extent,
independent contractors who adapt our product for specific countries. Our
general and administrative expenses consist primarily of compensation for our
administrative, financial and information technology personnel and a number of
non-allocable costs, including professional fees, legal fees, accounting fees
and bad debts.
Interest income and expenses. Interest income is generated by the investment
of cash raised in prior rounds of equity financing. Interest expense is
generated primarily from amounts we owe under our line of credit and capital
lease lines of credit.
Income taxes. There has been no provision or benefit for income taxes for
any period since 1995 due to our operating losses. As of December 31, 1998, we
had $12.8 million of net operating loss carryforwards for federal income tax
purposes, which expire beginning 2012. Our use of these net operating losses
may be limited in future periods. See note 5 of notes to consolidated financial
statements on page F-12 regarding the use of our net operating loss
carryforwards.
19
<PAGE>
Stock compensation. In 1997, 1998 and for the nine months ended September
30, 1999, we recorded stock compensation charges of $0, $69,000 and $119,000,
respectively. Stock compensation charges represent the difference between the
exercise price of options granted to acquire our common shares during these
periods and the deemed fair value for financial reporting purposes of our
common shares on the measurement date which is the same as the date of grant
for our options. Stock compensation is amortized over the vesting period of
the options granted, which is typically four years. Based on the outstanding
options at September 30, 1999, we will record a stock compensation charge of
$93,000 in the fourth quarter of 1999 and $229,000, $229,000 and $229,000 in
2000, 2001 and 2002, respectively.
Results of Operations
The following table sets forth financial data for the periods indicated as
a percentage of total revenue.
<TABLE>
<CAPTION>
Percentage of Revenue
-------------------------------------------
Years Ended Nine Months Ended
December 31, September 30,
----------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses................. 71.0% 65.2% 62.3% 62.0% 56.6%
Services and other................ 29.0 34.8 37.7 38.0 43.4
------- ------- ------- ----- -------
Total revenue................... 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ----- -------
Costs and expenses:
Cost of software.................. 0.5 0.6 0.3 0.4 1.4
Cost of services and other........ 17.3 32.0 33.7 34.3 32.2
Research and development.......... 24.5 31.0 30.7 29.5 23.9
Sales and marketing............... 70.7 89.0 66.0 65.7 56.3
General and administrative........ 47.8 37.9 24.4 23.2 30.1
------- ------- ------- ----- -------
Total costs and expenses........ 160.8 190.5 155.1 153.1 143.9
------- ------- ------- ----- -------
Operating loss...................... (60.8) (90.5) (55.1) (53.1) (43.9)
Other income (expense).............. 1.0 3.4 2.4 2.7 (1.3)
------- ------- ------- ----- -------
Net loss............................ (59.8)% (87.1)% (52.7)% (50.4)% (45.2)%
======= ======= ======= ===== =======
</TABLE>
Nine Months Ended September 30, 1998 and 1999
Revenue. Our total revenue increased 93.7% from $6.4 million for the nine
months ended September 30, 1998 to $12.4 million for the nine months ended
September 30, 1999. International revenue increased by 1,328.6% and was
$161,000 for the nine months ended September 30, 1998 and $2.3 million for the
nine months ended September 30, 1999. The increase in total revenue resulted
from increases in the number of software licenses and the growth in
professional services and support revenue. The growth in revenue is due
primarily to increased name recognition and acceptance of our product in our
market.
Revenue from software licenses. Our software revenue increased 76.8% from
$4.0 million for the nine months ended September 30, 1998 to $7.0 million for
the nine months ended September 30, 1999. This increase in software revenue
resulted primarily from a significantly higher number of software licenses we
sold as a result of the continued market acceptance of our product, product
enhancements and the establishment of sales offices in Europe and Asia, which
led to increasing international demand. The increase in software revenue also
resulted from the sale of additional licenses to existing clients.
Revenue from services and other. Revenue from services and other increased
121.3% from $2.4 million for the nine months ended September 30, 1998 to $5.4
million for the nine months ended September 30, 1999. This increase in
services revenue resulted primarily from an increase in the number of systems
sold
20
<PAGE>
and growth in revenue from maintenance services due to our expanding installed
base of clients. In addition, revenue from training services increased due to
increased client demand for these services. Revenue from the sale of hardware
was $880,000, or 13.7% of total revenue, for the nine months ended September
30, 1998 and $1.4 million, or 11.1% of total revenue, for the nine months ended
September 30, 1999. The increase in hardware revenue resulted primarily from an
increase in the number of systems sold. However, hardware revenue as a
percentage of total revenue decreased over this time period primarily because
of an increase in the number of clients who purchased hardware directly from
third parties.
Costs and expenses. Our total costs and expenses increased by 82.0% from
$9.8 million for the nine months ended September 30, 1998 to $17.8 million for
the nine months ended September 30, 1999. This increase primarily reflects an
increase in overall headcount and our investments in research and development,
marketing, sales and services efforts. Overall headcount increased from 86 in
September 1998 to 136 in September 1999.
Cost of software. Cost of software increased by 576.9% from $26,000 for the
nine months ended September 30, 1998 to $176,000 for the nine months ended
September 30, 1999. The increase resulted primarily from increased software
sales.
Cost of services and other. Cost of services and other increased by 81.8%
from $2.2 million for the nine months ended September 30, 1998 to $4.0 million
for the nine months ended September 30, 1999. This represents 90.3% of service
and other revenue for the nine months ended September 30, 1998 and 74.2% of
service and other revenue for the nine months ended September 30, 1999. The
increase in year over year cost reflects our continued investment in our
service organization which consists of expenses associated with an increase in
headcount from 24 at December 31, 1998 to 43 at September 30, 1999. These
expenses include compensation, fixed assets and office space.
Research and development. Research and development expenses increased by
56.5% from $1.9 million for the nine months ended September 30, 1998 to $3.0
million for the nine months ended September 30, 1999. The increase in research
and development expenses related primarily to the addition of software
developers required to enhance our product, integrate our product into our
application partners' products and efforts to adapt our product for
international markets.
Sales and marketing. Sales and marketing expenses increased by 66.2% from
$4.2 million for the nine months ended September 30, 1998 to $7.0 million for
the nine months ended September 30, 1999. The increase reflects the hiring of
additional sales and marketing personnel throughout the United States, Europe
and Asia and expanded marketing activities.
General and administrative. General and administrative expenses increased by
151.0% from $1.5 million for the nine months ended September 30, 1998 to $3.7
million for the nine months ended September 30, 1999. The increase resulted
primarily from the addition of personnel to support the growth of our business
and an increased amount of professional fees. The increased professional fees
consisted of an increase in legal fees from $127,000 for the nine months ended
September 30, 1998 to $390,000 for the nine months ended September 30, 1999 and
an increase in accounting fees from $35,000 for the nine months ended September
30, 1998 to $80,000 for the nine months ended September 30, 1999. The increase
in legal fees was a result of additional patent applications, an increased
number of client licenses and an arbitration proceeding in connection with a
dispute with one of our former resellers. The increase in accounting fees
related to our international expansion and the growth in our business.
Interest income and interest expense. Interest income decreased 503.1% from
$193,000 for the nine months ended September 30, 1998 to $32,000 for the nine
months ended September 30, 1999. The decrease is due to the declining cash
balance from the venture capital round of financing completed in March 1998.
Interest expense was $19,000 for the nine months ended September 30, 1998 and
$199,000 for the nine months ended September 30, 1999. The increase is due to
increased utilization of our receivables-based line of credit in 1999.
21
<PAGE>
Years Ended December 31, 1996, 1997 and 1998
Revenue. Our total revenue increased by 104.0% from $2.0 million in 1996 to
$4.1 million in 1997 and increased 123.4% to $9.1 million in 1998. Revenue from
international sales was $604,000 in 1998. We had no revenue from international
sales prior to 1998.
Revenue from software licenses. Revenue from the sale of licenses for
software increased 87.4% from $1.4 million in 1996 to $2.7 million in 1997 and
increased 113.5% to $5.7 million in 1998. The increase in software revenue from
1996 to 1997 resulted primarily from the release of a new version of our
product and our initial North American sales efforts. The increase in software
revenue from 1997 to 1998 resulted from a growing market acceptance of our
solution, our expanded sales and marketing efforts, our entrance into
international markets and introduction of new product features.
Revenue from services and other. Revenue from fees we receive for services
and other increased 144.7% from $582,000 in 1996 to $1.4 million in 1997 and
increased 141.9% to $3.4 million in 1998. The growth in revenue from services
and other resulted primarily from the growth in our professional services and
maintenance revenue as our client base increased over this period. The growth
in revenue from services and other also resulted from sales of hardware, which
accounted for 9.3% of total revenue in 1996, 13.8% of total revenue in 1997 and
12.7% of total revenue in 1998. We anticipate that hardware revenue will
continue to decline as a percentage of total revenue in the future. We now
encourage the majority of our clients to purchase servers directly from third
party manufacturers and have discontinued paying commissions to our sales force
on the sale of third party hardware products. We expect to offer voice cards
and other hardware to our clients on a limited basis in the near term.
Costs and expenses. Our total costs and expenses increased 141.7% from $3.2
million in 1996 to $7.8 million in 1997 and increased 81.8% to $14.2 million in
1998. These increases primarily reflected increases in our research and
development and sales and marketing efforts over the three-year period. These
investments included headcount additions of 33 employees in 1997 and 32
employees in 1998. As a percentage of total revenue, our costs and expenses
were 160.8% in 1996, 190.5% in 1997 and 155.1% in 1998.
Cost of software. Cost of software increased 160.0% from $10,000 in 1996 to
$26,000 in 1997 and increased 19.2% to $31,000 in 1998. This cost represented
0.7% of software revenue in 1996, 1.0% of software revenue in 1997 and 0.5% of
software revenue in 1998. The increases in amount from 1996 to 1998 resulted
primarily from increased software sales.
Cost of services and other. Cost of services and other increased 275.9% from
$348,000 in 1996 to $1.3 million in 1997 and increased 135.8% to $3.1 million
in 1998. The increases from 1996 to 1998 are due primarily to the hiring of
additional project managers, programmers, technical support and trainers to
expand our professional services organization. The increase from 1997 to 1998
also reflects the cost of third party hardware sold to our clients during these
periods.
Research and development. Research and development expenses increased 158.9%
from $491,000 in 1996 to $1.3 million in 1997 and increased 120.7% to $2.8
million in 1998. The increases in research and development expenses from 1996
to 1998 related primarily to the increase in software developers and testing
personnel to develop and enhance our product.
Sales and marketing. Sales and marketing expenses increased 157.0% from $1.4
million in 1996 to $3.6 million in 1997 and increased 65.5% to $6.0 million in
1998. The increases in sales and marketing expenses from 1996 to 1998 resulted
primarily from our investment in sales and marketing personnel. This investment
included the establishment of our initial North American field sales offices in
1996 and 1997 and our European region sales office in 1997 and additional sales
channels in Europe and Asia in 1998. The increase in sales and marketing
expenses also reflects increased marketing activities, including tradeshows,
public relations activities and advertisements during these periods.
22
<PAGE>
General and administrative. General and administrative expenses increased
61.7% from $960,000 in 1996 to $1.6 million in 1997 and increased 44.1% to $2.2
million in 1998. The increases from 1996 to 1998 were primarily due to
additional personnel necessary to support our growing operations in the United
States and expenses related to the establishment of our international
subsidiary in the United Kingdom. Our headcount in the United Kingdom increased
from three employees in 1996 to eight employees in 1998. Our expenses related
to the United Kingdom operations increased from zero in 1996 to $726,000 in
1998.
Interest income and interest expense. Interest income was $32,000 in 1996,
$210,000 in 1997 and $245,000 in 1998. The increase is due to income earned on
the investment of cash raised in venture capital equity financings. Interest
expense was $11,000 in 1996, $25,000 in 1997 and $23,000 in 1998. The increases
from 1996 to 1998 resulted primarily from significant increases in debt payable
for our line of credit and the interest portion of our capital leases. See
notes 3 and 4 of our notes to our consolidated financial statements beginning
on page F-11.
23
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods indicated, our consolidated
financial information for the last nine quarters expressed in dollars and as a
percentage of total revenue. We prepared this information using our unaudited
interim consolidated financial statements that, in our opinion, have been
prepared on a basis consistent with our annual consolidated financial
statements. We believe that these interim statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this information when read in conjunction with our consolidated
financial statements and notes to those consolidated financial statements. The
operating results for any quarter do not necessarily indicate the results to be
expected for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1997 1998 1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- -------- -------- -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... $ 577 $1,193 $ 1,020 $1,270 $ 1,678 $ 1,729 $ 1,710 $ 2,468 $ 2,838
Services and other..... 209 810 747 937 749 1,012 1,582 1,632 2,170
------- ------ ------- ------ ------- ------- ------- ------- -------
Total revenue........ 786 2,003 1,767 2,207 2,427 2,741 3,292 4,100 5,008
Costs and expenses:
Cost of software....... 2 14 8 14 4 5 36 44 96
Cost of services and
other software........ 325 504 793 718 687 886 1,219 1,151 1,627
Research and
development........... 344 392 553 581 756 915 869 958 1,130
Sales and marketing.... 934 1,195 1,164 1,478 1,560 1,828 2,408 2,293 2,283
General and
administrative........ 361 410 517 460 508 751 905 858 1,964
------- ------ ------- ------ ------- ------- ------- ------- -------
Total costs and
expenses:........... 1,966 2,515 3,035 3,251 3,515 4,385 5,437 5,304 7,100
------- ------ ------- ------ ------- ------- ------- ------- -------
Operating loss.......... (1,180) (512) (1,268) (1,044) (1,088) (1,644) (2,145) (1,204) (2,092)
Other income (expense).. 43 (31) 22 87 65 48 6 (25) (148)
------- ------ ------- ------ ------- ------- ------- ------- -------
Net loss................ $(1,137) $ (543) $(1,246) $ (957) $(1,023) $(1,596) $(2,139) $(1,229) $(2,240)
======= ====== ======= ====== ======= ======= ======= ======= =======
Net loss per share--
basic and diluted...... $ (0.39) $(0.19) $ (0.43) $(0.33) $ (0.35) $ (0.54) $ (0.72) $ (0.41) $ (0.75)
======= ====== ======= ====== ======= ======= ======= ======= =======
Shares used in
calculation of basic
and diluted............ 2,923 2,923 2,929 2,935 2,941 2,947 2,975 2,977 2,987
<CAPTION>
As a Percentage of Revenue
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... 73.4% 59.6% 57.7% 57.5% 69.1% 63.1% 51.9% 60.2% 56.7%
Services and other..... 26.6 40.4 42.3 42.5 30.9 36.9 48.1 39.8 43.3
------- ------ ------- ------ ------- ------- ------- ------- -------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of software....... 0.3 0.7 0.5 0.6 0.2 0.2 1.1 1.1 1.9
Cost of services and
other software........ 41.3 25.2 44.9 32.5 28.3 32.3 37.0 28.1 32.5
Research and
development........... 43.8 19.5 31.3 26.3 31.1 33.4 26.4 23.4 22.6
Sales and marketing.... 118.8 59.7 65.9 67.0 64.3 66.7 73.1 55.9 45.6
General and
administrative........ 45.9 20.5 29.2 20.9 20.9 27.4 27.5 20.9 39.2
------- ------ ------- ------ ------- ------- ------- ------- -------
Total costs and
expenses:........... 250.1 125.6 171.8 147.3 144.8 160.0 165.1 129.4 141.8
------- ------ ------- ------ ------- ------- ------- ------- -------
Operating loss.......... (150.1) (25.6) (71.8) (47.3) (44.8) (60.0) (65.1) (29.4) (41.8)
Other income (expense).. 5.5 (1.5) 1.2 3.9 2.7 1.8 0.1 (0.6) (2.9)
------- ------ ------- ------ ------- ------- ------- ------- -------
Net loss................ (144.6)% (27.1)% (70.6)% (43.4)% (42.1)% (58.2)% (65.0)% (30.0)% (44.7)%
======= ====== ======= ====== ======= ======= ======= ======= =======
</TABLE>
24
<PAGE>
Revenue. Our revenue from software licenses and our revenue from services
and other have generally increased in each of the last nine quarters due
primarily to the increased market acceptance of our solution, the growth and
increased productivity of our direct sales force and an increase in the number
of value added resellers and OEMs. We do not believe that we will achieve
similar percentage increases in future periods.
We anticipate that revenue from software licenses will continue to represent
a majority of our revenue for the foreseeable future. We also expect our
revenue from services and other to increase primarily as a result of our
growing installed client base. We also anticipate hardware revenue to decline
as a percentage of total revenue in the future. We now encourage the majority
of our clients to purchase servers directly from third party manufacturers and
have discontinued paying commissions to our sales force on the sale of third
party hardware products. We expect to offer voice cards and other hardware to
our clients on a limited basis in the near term.
Cost of revenue. Our cost of revenue has generally increased in each of the
last nine quarters. We expect our cost of software to continue to increase as
our revenue from software increases, particularly if we integrate additional
third-party applications into our product offerings. We expect our cost of
services and other to increase in the future as we continue to make investments
in our service organization to support our client base. We expect, however,
that our cost of services and other will decrease as a percentage of our total
revenue as our client base grows and as our total hardware sales decrease. We
also intend to pursue a strategy of expanding our relationships with value
added resellers, OEMs and other strategic partners that will enable us to
outsource implementation and some support services to these parties.
Operating expenses. Our total operating expenses have generally increased in
each of the last nine quarters. We have increased our spending in every
functional area of the organization since 1995. However, the percentage
increases in spending for each quarter have generally been less than the
percentage increases in our revenue for the corresponding quarter. We
anticipate that our operating expenses will increase for the foreseeable future
as we continue to:
. invest in our sales and marketing efforts to build market and brand
awareness and enlarge our United States and international client base;
. invest in research and development, which we believe will be critical to
maintaining technological leadership; and
. expand our administrative infrastructure and incur additional expenses
associated with becoming a public company.
Our investments in these activities could significantly precede any revenue
generated by the increased spending. If we do not experience significantly
increased revenue from these efforts, our business, financial condition and
results of operations could be materially and adversely affected.
Liquidity and Capital Resources
Since 1995, we have funded our operations primarily through the private
placement of our convertible preferred shares, and to a lesser extent, through
bank borrowings and capital equipment lease financing. As of September 30,
1999, we had cash and cash equivalents of $401,000 and no availability under
our revolving line of credit. Our operating activities resulted in net cash
outflows of $1.7 million in 1996, $3.8 million in 1997, $5.8 million in 1998
and $7.1 million for the nine month period ended September 30, 1999. The
operating cash outflows for these periods resulted from significant investments
in research and development, sales, marketing and services, which resulted in
operating losses.
To date, our investing activities have consisted primarily of capital
expenditures for property and equipment, including $872,000 of capital
expenditures for the nine months ended September 30, 1999. These capital
expenditures have consisted primarily of computer hardware, software and
furniture and fixtures for our growing employee base. At December 31, 1998 and
September 30, 1999, we did not have any material commitments for future capital
expenditures.
25
<PAGE>
At September 30, 1999, we had $3.2 million outstanding under our revolving
line of credit. The line of credit is secured. As of September 30, 1999, we
were not in compliance with a financial covenant set forth in our line of
credit regarding our ratio of current assets to current liabilities. We have
obtained a waiver with respect to our non-compliance. We issued warrants that
will be converted, upon completion of this offering, into warrants to purchase
30,625 common shares at an exercise price of $3.97 per share, in connection
with increasing the amount available under our revolving line of credit from $2
million to $3.5 million.
In June 1999, we also issued $1.5 million of subordinated convertible
promissory notes to some of our preferred shareholders. In connection with
these notes, we issued warrants to these shareholders that will be converted,
upon completion of this offering, into warrants to purchase 75,649 common
shares at an exercise price of $3.97 per share.
In November 1999, a $5.0 million secured bridge loan was made to us by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
in this offering. Certain employees and entities associated with Hambrecht &
Quist LLC have a $1.4 million participation in this loan and ARCH Venture Fund
III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. We granted to Access Technology Partners,
L.P. warrants that can be exercised to purchase 236,250 common shares in
connection with this loan and the employees and entities associated with
Hambrecht & Quist LLC that are participating in this loan have the right to
receive their pro rata portion of the warrants granted. We also granted ARCH
Venture Fund III, L.P. warrants that can be exercised to purchase 26,250 common
shares. The exercise price for all of the warrants granted in connection with
this loan is initially $5.34 per share but is subject to a one-time adjustment
on or before November 5, 2000, to the 20-day average market price if the
average market price is less than the initial public offering price.
It is anticipated that a portion of the proceeds of this offering will be
used to repay a portion of the revolving line of credit and all of the
subordinated convertible promissory notes and the secured bridge loan. See "Use
of Proceeds" on page 14 for more information regarding our use of proceeds from
this offering to repay a portion of our debt. We believe that the net proceeds
of this offering, together with existing cash and cash equivalents and amounts
that will become available under our existing revolving line of credit, will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months.
We may also need to raise additional funds in order to fund more rapid
expansion, including significant increases in personnel and office facilities,
to develop new or enhance existing products or respond to competitive
pressures. We cannot assure you that additional financing will be available at
all or that, if available, will be on terms favorable to us or that any
additional financing will not dilute your ownership interest in Apropos. See
"Risk Factors--We may not be able to obtain adequate financing to implement our
growth strategy" on page 10.
Year 2000 Compliance
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on or before
January 1, 2000, computer systems and software used by many companies and
organizations in a wide variety of industries will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly. Significant uncertainty exists in the software industry and other
industries concerning the scope and magnitude of problems associated with the
century change.
We have addressed or are addressing the Year 2000 issues in the following
principal areas:
. our product;
. internal management and information systems;
. key suppliers; and
. clients.
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We have not retained any independent parties to verify or validate our
evaluation of Year 2000 issues or any related cost estimates.
Our product. We have warranted to our clients that our current product is
Year 2000 compliant. We conduct periodic testing of our product for Year 2000
compliance, and as of the date of this prospectus, are not aware of any
problems with our product related to Year 2000 compliance. However, even though
we have not experienced any problems with our product or the third party
software we sell with our product since January 1, 2000, we cannot assure you
that either our product or the third party software we sell with our product,
does not contain undetected errors or defects associated with Year 2000
problems. Further, our product is sometimes integrated into enterprise systems
involving sophisticated hardware and complex software products developed by
third parties, which may themselves have a Year 2000 related problem. This may
also affect the operation of our product. Based on our assessments to date, we
believe that our product will not experience any material disruption as a
result of any Year 2000 problems with the product. However, if our product has
Year 2000 problems, the worst case scenario is that we could lose current or
potential clients, incur costs related to replacing our product or face claims
based on Year 2000 problems under our warranties, including Year 2000 problems
in third party software we sell with our product, any of which could have a
material adverse effect on our business, financial condition and results of
operations. Since we are in the business of selling software, our risk of
facing claims relating to Year 2000 issues is greater than that of companies in
some other industries.
Internal management and information systems. We use a combination of our own
software and other commercially available software for our internal operations.
These internal computer systems include our file servers and groupware systems,
desktop and laptop systems, printer and storage systems, fax machines, copiers
and security access system. We have evaluated and tested each of these internal
systems and all of them were Year 2000 compliant. At this time, we believe that
there will be no significant costs associated with the Year 2000 issue for
internal operations.
Key suppliers. We have contacted all of our key suppliers regarding Year
2000 issues and have received adequate assurance from all of these suppliers,
including our third party software vendors, that their respective products are
Year 2000 compliant. These assurances include written statements that our PBX
systems located within the corporate telecommunications infrastructure is Year
2000 compliant and that our accounting and remote access systems are Year 2000
compliant.
Clients. We believe that the purchasing patterns of current and potential
clients may continue to be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance. These expenditures may reduce the funds available to
license software products such as those we offer. To the extent Year 2000
issues significantly disrupt decisions to license our product or purchase our
services, our business, financial condition and results of operations could be
materially adversely affected.
To date, we have not deferred any other information technology projects due
to our Year 2000 efforts and we have not incurred any material costs directly
associated with our Year 2000 compliance efforts. Our costs to date primarily
consist of compensation expense associated with our employees who have devoted
some of their time to our Year 2000 assessment and remediation efforts.
Currently, we do not expect the total cost of Year 2000 problems to be material
to our business, financial condition and results of operations. Despite our
current assessment, we may not identify and correct all significant Year 2000
problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could materially
adversely affect our business, financial condition and results of operations.
We currently have no contingency plans to address the risks associated with
unremediated Year 2000 problems. See "Risk Factors--Year 2000 issues may
adversely affect our business" on page 9 for more information on risks related
to Year 2000 issues.
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BUSINESS
Overview
We develop, market and support a comprehensive customer interaction
management solution for multimedia contact centers. Our solution combines
patented customer interaction management software with a proven delivery
methodology and high quality support services. The Apropos solution enables the
real-time management of multimedia customer interactions, including traditional
voice interactions, e-mails and web-based forms of communications.
Industry Background
Competitive global markets and the increasing acceptance of the Internet as
an important medium for business and customer interaction have led to greater
customer demands for higher levels of service, responsiveness, convenience,
personalization and quality. With the dramatic growth of Internet-based
communications and commerce, businesses must provide consistent high quality
customer care and service across a variety of communications media. Providing
an appropriate level of service in this environment is more complex than in the
past when customer interactions were primarily voice-based and businesses
provided service to their customers through traditional voice call centers. In
the future, an increasing number of customer interactions will be through
Internet-based communications, such as e-mail and web-based contacts. The
Gartner Group estimates/1/ that "by 2001, businesses will receive 25% of all
customer inquiries via e-mail and web-based forms of communication."
The Emergence of the Internet and eBusiness
The Internet is rapidly emerging as an extremely important sales, service
and communications medium that is altering the way companies manage external
and internal relationships. International Data Corporation, or IDC, estimates
that the number of users of the Internet will increase from 142 million in 1998
to 502 million in 2003. In addition, the amount spent to purchase goods and
services on the Internet is expected to increase dramatically. IDC estimates
that spending on the Internet will increase from $50.3 billion in 1998 to $1.3
trillion in 2003.
This growth in Internet-based commerce has created the need for businesses
to establish systems and infrastructure to support the growing volume of
Internet-based customer interactions. IDC estimates that in 2002, license
revenue for e-commerce customer support software applications will reach $1.6
billion. This represents a significant trend as many businesses attempt to
implement the necessary infrastructure for Internet-based sales and service
initiatives.
These "eBusiness" initiatives require the seamless integration of new
Internet-based forms of customer interaction, such as e-mail and web, with
traditional voice call centers. In many cases, customers desire to interact
with a customer service representative to close an eBusiness transaction.
Jupiter Communications, Inc. estimates that 41% of online consumers indicate
that they would be more likely to complete a transaction online if web chat or
callback were available. Accordingly, to meet customer needs, an eBusiness
infrastructure must include both voice-based and Internet-based customer
interaction capabilities.
The Need for Multimedia Customer Contact Centers
In order to provide superior service and enhance customer loyalty and
retention, businesses need to provide customers with a variety of choices in
how they interact with their business. Businesses need a multimedia solution
that can support their eBusiness initiatives while maintaining or improving the
level of service of their traditional business. As a result, businesses face
significant challenges in managing and optimizing traditional voice and new
Internet-based customer interactions. These challenges include:
. added complexity as a result of the need to receive and respond to
customer interactions across a variety of communications media;
. a need for additional skills and resources to respond to e-mail and web-
based interactions;
- ------
1 Gartner Group, Customer Service and Support: Morphing the Call Center to
the Contact Center, C. Anuso, D. Fluss, D. Hope-Ross, C. Lusher, C.
Smith, November 16, 1998.
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. heightened customer demands for high quality service regardless of the
communications media used; and
. a need for better insight into the overall performance of the contact
center due to the increased number and type of customer interactions.
We believe that in order for businesses to meet these challenges, they need
a comprehensive solution that enables them to provide high quality service
across multiple communications media. The ideal solution should:
. manage multiple types of interactions through one application;
. produce real-time information across all media types to enable real-time
allocation of resources within the contact center, or media blending;
. create consolidated reports across multiple interactions and media to
enable businesses to better understand key business metrics and trends
in order to improve the overall performance of their business;
. be completely switch and network independent to allow businesses to
preserve their investment in their existing communications
infrastructure;
. provide enterprise application independence to enable seamless
integration of traditional and eBusiness applications;
. easily expand both in functionality and capacity as business needs
change;
. enable rapid implementation to ensure solution can be deployed within
the time, resource and cost constraints of the client;
. provide maximum flexibility to configure and administer a multimedia
contact center in reaction to and in anticipation of, changing business
conditions;
. lower a business' total cost of ownership by implementing one integrated
multimedia solution versus multiple point products; and
. interoperate with and allow businesses to take advantage of new Internet
protocol, or IP-based network technologies.
The Apropos Solution
We develop, market and support a comprehensive customer interaction
management solution for multimedia contact centers. Our solution combines
patented customer interaction management software with a proven delivery
methodology and high quality support services. The Apropos solution enables the
real-time management of multimedia customer interactions, including traditional
voice interactions, e-mails and web-based forms of communications.
Our customer interaction management software enables clients to prioritize,
route and respond to customer interactions across multiple communications media
based on a single set of business rules. Our clients can establish business
rules to manage customer interactions based on their business value or service
level. For example, clients can, on a real-time basis, (1) route specific types
of customer interactions to an agent based on that agent's particular skills
and (2) adjust the number of interactions and agents assigned to a queue to
ensure maximum responsiveness to the customer. Clients can also monitor the
status of each interaction and the performance of each contact center agent.
Our solution provides comprehensive real-time and historical reporting on each
customer interaction and on the contact center resources necessary to manage
those interactions.
Our solution provides the following benefits to our clients:
Seamless management of multiple communications media through one business
rules driven interface. Our solution is designed to allow clients to manage
customer interactions on a real-time basis
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across a variety of communications media through one business rules driven
interface. Clients can establish business rules to manage customer interactions
based on their business value or service level regardless of whether the
customer made the contact via the Internet or telephone.
Comprehensive real-time information. Our solution provides real-time
information on the overall performance of the contact center. Supervisors
receive information that enables them to immediately react to changing business
conditions. For example, if one or more agents is servicing e-mail interactions
and a supervisor is notified that a queue for incoming voice calls has exceeded
pre-defined thresholds, the supervisor can reassign these e-mail agents to
handle the voice calls with a simple mouse click.
Integrated decision management reporting capabilities. Our decision
management application enables our clients to view historical reports through
an advanced web-based interface. It provides information on contact center
performance by the hour, shift, day or month. Our solution reports on critical
aspects of the contact center's operation, including agent performance,
interaction volume, interaction types and interaction disposition. It provides
"cradle to grave" reporting on each interaction, from initial customer contact
to closure, allowing clients to better understand the entire interaction cycle.
The decision management application also combines customer interaction
information across multiple communication media in a single integrated report
allowing clients to better understand and manage their business.
Interoperability. Our solution is designed to operate within the existing
infrastructure of an enterprise, including most voice systems, e-mail and web
servers. Our solution is also interoperable with most client business
applications, thereby providing the necessary integration between the incoming
interaction, business application and historical customer data. As the trend of
consolidation within industries continues, we believe that the ability of our
solution to operate with a variety of different communications systems and
applications provides a significant benefit to our clients as they integrate
new businesses.
Modularity. The modular design of our solution allows our clients to add
functionality as their needs evolve. For example, clients may initially choose
to implement our solution for their traditional call center/voice
infrastructure and then add other media types, such as e-mail and web, as they
further develop their eBusiness strategies. We believe the ability to easily
add functionality is extremely important to our clients as they transition from
traditional voice-based call centers to multimedia contact centers.
Scalability. The Apropos solution is designed to allow for maximum
scalability, providing a variety of system configurations that can complement
the deployment needs of our client base. The solution uses sophisticated
internal messaging software to enable the distribution of various system
components across wide area, local area and IP-based networks. As a client's
business grows, our solution can be configured for additional capacity. Our
solution can provide scalability for up to 600 agents.
Rapid implementation. Based on our experience in implementing multimedia
contact centers, we have developed Apropos Methods, a repeatable consulting,
design and delivery methodology that is followed by our application
consultants, professional services team and partners. Apropos Methods allows
our clients to accurately estimate the resources required to implement their
multimedia contact center solution. In addition, our software is designed with
several unique tools to insure rapid implementation and integration with our
clients' business applications. Apropos Methods also allows us to quickly and
effectively train our partners in the implementation requirements of our
solution.
Flexibility. A client can configure and administer our solution through our
web-based application interface. This approach is much easier and more cost-
effective than traditional hardware-based systems, which may require code
modification and recompilation. Clients can configure our solution over a
number of locations and can connect remote users, such as agents working from
home. For example, when a hurricane disabled a client's contact center, our
solution permitted our client to rapidly establish full service at another
geographic location.
Lower total cost of ownership. Our integrated software-based solution
results in a lower total cost of ownership in comparison to multiple point
products, which require integration and maintenance of various and disparate
hardware and software products.
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Support of converged voice and data networks. Our solution supports our
clients' desires to transition from traditional circuit-switched communications
infrastructure to IP-based infrastructures. This enables our clients to take
advantage of the benefits of high performance converged voice and data
networks.
The Apropos Strategy
Our strategy is to become the leading provider of customer interaction
management solutions for multimedia contact centers. The key elements of our
strategy are to:
Expand our leading technology position. We have significant technical
expertise in the field of customer interaction management. Our product is
designed to be interoperable with most communications systems and business
applications and scaleable through our modular architecture. We have a patented
visual queuing capability and we believe we were one of the first companies to
develop and offer a software-based, skills-based automatic call distribution
capability and an integrated multimedia customer interaction management system.
We will continue to make significant investments in research and development in
our effort to maintain our leadership position.
Enhance our product offering. We intend to enhance and broaden our product
offering with additional features and products. We plan to create additional
functionality to enhance the integration of multiple contact centers operating
on separate servers thereby allowing clients more flexibility in how they
manage each customer interaction and more timely and accurate reporting on the
real-time performance of geographically distant contact centers. In addition,
we plan to add new applications that will expand the delivery of information
about customers and suppliers across the enterprise.
Increase our distribution capabilities. We plan to expand the number of
value added resellers and original equipment manufacturers, or OEMs, in North
America, Europe, South America, Asia, Africa and Australia. We also plan to
increase our direct sales force in North America and expand selling efforts in
Europe. In addition, we plan to focus our expansion efforts on developing
strategic partnerships with system integrators. We believe these efforts will
result in increased sales and market penetration of our solution.
Further develop our strategic partnerships. We intend to forge new and
strengthen existing strategic partnerships with leading providers of marketing,
sales and service applications. This will open new market opportunities as the
Apropos solution enhances the value of our partners' applications by providing
real-time management of voice, e-mail and web-based interactions. We believe
these new and strengthened strategic partnerships will generate sales leads,
expand our client base and enhance our market and brand awareness.
Build market and brand awareness. We believe building market and brand
awareness of our company and product will be essential, as we compete against
larger traditional contact center suppliers. We currently build market and
brand awareness of our solution through seminars, trade show participation,
web-site marketing, co-marketing with strategic partners and print advertising.
We intend to devote significant resources to continue to build our market and
brand awareness by expanding our marketing efforts.
Expand penetration into major international markets. In order to further
penetrate global markets, we are developing new internationalized versions of
our software for use outside of North America. We are adapting our software to
conform to the language and infrastructure requirements of Asia, Europe and
South America. We will continue to develop and release additional language
versions of our software as our international client base grows.
Pursue a software business model. We will continue our emphasis on
developing and selling software and de-emphasize sales of hardware and services
which have significantly lower profit margins. We plan to continue to outsource
the implementation function to value added resellers, OEMs and system
integrators as we develop and expand our strategic partners.
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Product
Our solution provides a single integrated application for the seamless
management of customer interactions and resources in a multimedia contact
center. Through our solution, we provide the routing, queuing, tracking and
reporting on a variety of customer interactions such as live calls, web
requests, e-mail, voice mail and fax, through one common business-rules driven
application. Our solution's capabilities include a decision management system
that provides critical metrics needed to manage a multimedia contact center and
important information on how a client is managing its customer relationships.
[Graph of Customer Interaction Management Components]
Components. Our solution consists of Interaction Manager and Interaction
Database which operate on single or multiple servers, and the following client
software applications: Agent Desktop, Resource Manager, Decision Manager,
Administrator and Application Designer.
Interaction Manager. Interaction Manager is a high-performance Windows
NT(TM) application connecting to voice and data networks. The Interaction
Manager integrates the following telephony and Internet functions into one
comprehensive application:
. Automatic caller identification. Automatic caller identification is
achieved through a combination of advanced capabilities, such as
automatic number identification, dialed number identification service
and caller ID. These capabilities, along with integrated voice response
features, enable Interaction Manager to identify most callers upon
receipt of the call at the contact center.
. Skills-based call distribution. Interaction Manager organizes incoming
calls into queues and distributes them based on skills profile and
availability of the agent. Interaction Manager can distribute calls in
either a traditional "force" mode, meaning the call is sent to the agent
who has been idle the longest or through our patented "pull or take"
mode which allows an agent to choose a particular call or customer to
respond to from a visual queue of incoming transactions. For example,
some contact centers may wish agents to service calls from priority
customers before other calls.
. Intelligent call and message distribution. Interaction Manager supports
skills- and value-based routing of calls, e-mail and web contacts. In
addition to skill information, Interaction Manager can use current
business data--such as account status, customer profile and last agent
contact--to enable more efficient routing of customer interactions.
. Interactive voice response, or IVR. Interaction Manager allows clients
to create self-service applications that their customers can access from
touch-tone telephones. These applications can read and update
information stored in databases and mainframe systems to perform account
look-ups and other operations.
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. Web and e-mail routing. Interaction Manager can handle web and e-mail
events like any other contact center interaction. Interaction Manager
can route e-mail, web callback and web chat requests. E-mail management
also provides automatic response capabilities to acknowledge receipt of
an e-mail request and to offer customers self-servicing options. Web
callback lets customers make requests to receive a callback directly
from a corporate web site. Web chats enable customers to communicate
with agents through interactive, browser-based on-line text messaging.
. Synchronized contact and data delivery. Synchronized contact and data
delivery enables Interaction Manager to simultaneously deliver a call,
e-mail or web contact with associated data about the interaction. Based
on the type of application and the stated objectives of the client, the
data collected by Interaction Manager can be used to populate the
appropriate fields on business applications, such as Baan Company N.V.,
Remedy Corporation or Siebel Systems, Inc. in advance of the interaction
being delivered to the agent. As a result, agents have access to
valuable information about the customer before they begin their
interaction with the customer.
Interaction Database. Interaction Database serves as the data repository for
all information created and used by the Apropos solution. It serves as the
central repository for all information and is used by Decision Manager to
create reports. The database is fully redundant with back-up and recovery
capabilities. The database is traditionally housed on an independent server,
providing customers the ability to generate on-demand reports at anytime
without system degradation.
Agent Desktop. Agent Desktop runs on Windows-based personal computers in
conjunction with applications such as order entry, customer service and help
desk. Customers' names, the reasons they are calling and the types of
interactions appear in a visual queue on an agent's workstation. Agent Desktop
allows agents to view any customer interactions including queued e-mail, web
chat or web callback requests, live voice calls, faxes, and even abandoned call
information on one screen from their desktop. The agent can select a customer
based on business priorities rather than on a first-come, first-serve basis.
Agent Desktop has extensive automated follow-up capabilities. Automatic
generation of letters, faxes, or e-mails can be accomplished directly from the
agent's desktop. Agent Desktop can automate the entire process so that an
order, support call or general inquiry can be confirmed to a customer at
another time or in a matter of seconds.
Resource Manager. Resource Manager monitors real-time activity within local
and remote contact centers, tracking agent performance for each type of
interaction. A contact center supervisor is able to determine which agents are
active or ready for customers and monitor the activity level for each agent.
Resource Manager assigns agents to queues and to workgroups built on
organizational responsibilities. Resource Manager provides real-time
information on all activities in the contact center through over 60 different
charts that reflect the state of the contact center. A supervisor can set
alerts that indicate when performance thresholds have been reached and can
dynamically reassign agents as necessary.
Decision Manager. Decision Manager is a web-based application that allows
clients to create, view and publish reports from any location based on their
choice of parameters. Decision Manager provides timely and accurate information
on the overall performance of the contact center by the hour, shift, day,
month, or any time interval required. It reports on critical aspects of the
contact center's operation, including agent performance, interaction volume,
interaction types and interaction disposition. Pre-defined templates are
provided with Decision Manager. Custom reports can also be created and loaded
into the Decision Manager framework. Decision Manager provides information on
all interactions that enter the contact center. This information can be used to
understand and improve levels of service, capture customer behavior patterns
and improve contact center performance.
Administrator. Administrator is a web-based application that monitors the
number of agents, supervisors and server ports, as well as the types of
interactions, such as voice, e-mail and web chat, for all
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interaction types for which our product is licensed. Administrator is used to
establish and modify the business rules for a particular contact center. It
also provides for easy modification of such rules through its web-based
interface. Using this application, a system administrator adds, moves and
changes agent profiles, supervisors, queues, queue groups, and workgroups.
Administrator establishes prioritization of each interaction type, based on the
clients' business needs and can also develop escalation procedures for
particular interactions.
Application Designer. Application Designer is a high level code generator
that allows clients to develop a graphical object-based representation of
customer interaction workflow. The interaction workflow is automatically
generated into code that can be utilized by the Interaction Manager.
Application Designer can be run locally or remotely.
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Clients
We have a diverse base of over 140 clients that utilize our solution for a
variety of applications, such as customer service and support, help desk and
field service management. Below is a list of our clients that generated the
largest portion of our revenue since our inception in each of the specified
industries. This list illustrates that we have clients in many different
industries and that we are not dependent on any specific industry or client.
Communications Consumer Products
Cable & Wireless-Omnes Carlson Companies, Inc.
GTE Corporation Danka Omnifax
Nokia Corporation Nestle USA, Inc.
3Com Corporation PepsiCo, Inc.
Technology/Software Internet
FileNet Corporation Amazon.com, Inc.
Remedy Corporation Artist Direct
Seagate Software, Inc. Flashnet Communications, Inc.
Veritas Software GoodHome, L.L.C.
Corporation
Health Care Manufacturing
AMR Corporation Freightliner Corp.
Pfizer, Inc. Siemens Electromechanical
Sterling Diagnostic Components, Inc.
Imaging, Inc. Zebra Technologies Corporation
Vision Service Plan
Financial
ABN Amro Holding N.V.
Chase Manhattan Corporation
Harris Trust & Savings Bank
Corporation
Lending Solutions, Inc.
We intend to expand our client base by, among other things, expanding the
number of our strategic partners and leveraging their distribution capabilities
to sell our product, increasing our co-marketing activities with our strategic
partners, increasing the size of our direct sales force and increasing our
market and brand awareness. No client accounted for 10% or more of our total
revenues for 1998 or the first three quarters of 1999. Revenues from our
international sales as a percentage of total revenue were 6.6% in 1998 and
18.5% for the nine months ended September 30, 1999. Prior to 1998 we did not
have any revenue from international sales. See note 10 of the notes to our
consolidated financial statements on page F-17 regarding international sales.
Currently, our clients primarily use our solution to manage voice
interactions. However, all of these clients can expand the functionality of our
solution to include e-mail and web-based communications. New orders for our
product increasingly include voice and Internet-based functionality, such as e-
mail or web. See "Risk Factors--Our existing and future clients may not order
the e-mail and web-based functionality of our product" on page 6 for more
information on this risk.
Professional Services and Support Services
Professional Services. We believe the professional services used to
implement our product are paramount to client satisfaction. We offer a wide
variety of services for implementation and design, including
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application development, project management and support. Our methodology for
consultation, design and delivery of our product, Apropos Methods, is used by
us and our strategic partners for each client.
Apropos Methods. We have developed a design and implementation methodology,
termed Apropos Methods, that is focused on delivering high quality solutions to
our clients. Through the use of Apropos Methods, experience and structure are
brought into each project in a consistent and repeatable manner. This
methodology helps manage the risk of project overruns, budget overages and the
delivery of a solution that does not meet our client's expectations.
Support Services. We provide hotline support for our solution as well as
support for our client's tailored applications and solutions. Our customer
service professionals can be reached via phone, fax, e-mail or web-based
communications. The center is staffed with trained professionals who have
experience in the software and communications industries. We use our solution
to manage our multimedia contact center, so we understand our client's needs
from a user's perspective.
Training. We offer an extensive training curriculum to our clients and
alliance partners.
Client Training. We offer complete system administration, technical and user
training to our clients. System administration and technical training takes
place at our corporate headquarters and provides instruction on the
implementation, maintenance and administration of our solution. User training
takes place at the client's location and is tailored for their needs. Ongoing
training is made available to our clients as they add features and
functionality.
Strategic Partner Training. We educate our alliance partners on all facets
of selling and implementing our solution. Courses are available in both the
pre-sale and post-sale processes. Specific courses are also available on the
implementation of our product. A certification process on Apropos Methods is
offered to any partner who wants to implement our solution.
Sales and Marketing
Sales
Direct Sales Force. We have a direct sales force in the United States which
consists of regional sales managers and application consultants. Regional sales
managers have direct responsibility for selling and account management, while
application consultants provide analysis and design of the solution to ensure
the sales proposal covers all aspects of the clients' needs. Application
consultants also provide the foundation for the implementation and delivery of
the solution to ensure client satisfaction.
We have regional sales managers in Arizona, Northern California, Southern
California, Florida, Illinois, Maryland, Massachusetts, New Jersey, New York,
Ohio and Texas. We have application consultants located in these regions as
well. Our international direct sales are managed from our office in Windsor,
United Kingdom. Our international sales force includes two sales managers and
two application consultants. We have designated channel managers in both the
United States and the United Kingdom to support the sales efforts of our value
added resellers around the world.
Resellers. We have a network of 15 resellers that distribute and implement
our solution around the globe. Our value added resellers are an extension of
our direct sales force and have taken our solution into their portfolio. They
have extensive experience in the contact center market and customer
relationship management industry. We have resellers in the following countries:
Australia, Canada, Chile, China, Finland, Germany, Japan, Mexico, the
Netherlands, South Africa and the United States.
OEM. We have a partner who brands our solution under its corporate name.
Mitel Corporation sells and markets our solution under the name Mitel Call
Center Commander. Our solution is sold as part of their product portfolio and
is sold by both their direct sales representatives as well as their Elite
Dealer channel.
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Marketing
Our marketing efforts are focused on developing and executing sales lead
generation programs that result in qualified client leads, developing market
awareness of our products and services, building our corporate image and
developing marketing programs that support our strategic partners.
We have developed several programs to accomplish these goals including:
. a co-marketing program through the Apropos Global Alliance Program;
. a global seminar series;
. tradeshow participation and speaking opportunities, directly and with
our strategic partners;
. direct mail programs;
. public relations activities;
. traditional print and online advertising;
. web site marketing; and
. editorial placements.
Apropos Global Alliance Program.
Our Global Alliance Program provides a wide array of opportunities to expand
and enhance the product and service offerings of our strategic partners. We
target enterprise application companies as well as platform providers and
system integrators to participate in the program. In some cases, we participate
in similar programs sponsored by these partners. The programs provide for joint
marketing opportunities to generate sales leads and referrals. Our application
partners consist of enterprise software providers, such as Remedy Corporation,
Baan Company N.V., Peregrine Systems, Inc., Onyx Software Corporation, Siebel
Systems, Inc. and Point Information Systems, Inc. Services partners consist of
system integrators that provide outsourcing capabilities to implement our
solution, as well as, participate in co-marketing activities. These services
partners include AnswerThink Consulting Group, Inc. and Cap Gemini S.A.
Competition
The market for our product is highly competitive and we expect competition
to increase significantly in the future. We cannot assure you that we will be
able to compete successfully against current and future competitors. Our
competition currently comes from several different market segments including:
. platform providers such as Aspect Telecommunications Corporation, Cisco
Systems, Inc., Lucent Technologies, Inc., Nortel Networks Corporation,
Rockwell International Corporation and Siemens Corporation;
. interaction management solution providers such as Genesys
Telecommunications Laboratories, Inc., which has agreed to be acquired
by Alcatel SA, and Interactive Intelligence, Inc.; and
. stand-alone point solution providers such as Acuity Corporation, which
has been acquired by Quintus Corporation, eGain Communications
Corporation, Kana Communications, Inc. and Webline Communications
Corporation, which has been acquired by Cisco Systems, Inc.
We believe that the principle competitive factors in our market include
product performance and features, quality of client support and service, time
to implement, product scalability, sales and distribution capabilities and
overall cost of ownership. Although we believe that our solution currently
competes favorably with respect to these factors, our market is relatively new
and evolving rapidly. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support and technical resources.
37
<PAGE>
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition and a larger installed
base of customers than we do. Recently, a number of our current and potential
competitors have been acquired by large, well-capitalized companies. As a
result, these competitors may be able (1) to respond to new or emerging
technologies and changes in client requirements faster and more effectively
than we can, and (2) to devote greater resources to the development, promotion
and sale of products than we can. Current competitors have merged with or
acquired other competitors or established cooperative relationships with other
competitors to increase the ability of their products to address the needs of
our current or prospective clients. If these competitors were to acquire
additional market share, it could have a material adverse effect on our
business, financial condition and results of operations.
Technology and Research and Development
Technology
Our software is based on our proprietary distributed component-based
architecture. The architecture of our software relies upon industry standards
and employs several leading technologies, such as the following programming
languages: Java, C++, Microsoft Foundation Class, or MFC, and Active Server
Pages, or ASP. Our architecture provides a unified method for managing incoming
and outgoing multimedia interactions. The technologies providing this
capability include:
. Multimedia integration technologies. We have developed an integration
technology that allows our solution to receive and process all types of
interactions that enter a system, regardless of media type. This
technology enables our solution to connect to and communicate with
external systems and applications used by our clients. The external
systems include e-mail, Internet and telephone systems. Our integration
technology provides compatibility with most e-mail servers, web servers
and telephone switches, allowing our clients to maintain their existing
technological infrastructure.
. Interaction distribution engine. We have developed an interaction
distribution engine that routes and manages all interactions that enter
a system. This allows our clients to manage their business according to
their specific business needs, because it determines which interaction
types and/or customers need to be handled first. Our interaction
distribution engine ensures all interactions that enter into the system
are placed in a unified queue and then presented to the agents based on
the pre-determined business rules of the client. Our engine ensures that
various media types including voice, e-mail and web, are managed in a
consistent manner and are tied to the clients' corporate data for
screen-pops.
. Messaging software. We have developed messaging software that allows
different portions of our product to communicate with each other using
the standard Internet communication protocol, TCP/IP. The messaging
software was developed using a publish and subscribe methodology, which
ensures that messages that flow through our system are sent to the
correct software components or processes. This allows us to build fault
tolerant and scalable software because processes are distributed across
multiple servers. It also makes it easy to add new functionality across
this distributed architecture.
. Business application integration software. We have developed integration
software that allows our solution to integrate with other business
software, such as application software for sales, marketing and customer
service. This enhances the value of our product as it allows our clients
to use their existing desktop business applications. We have built
fault-tolerant, scaleable integration software and used common
programming techniques and technologies in this integration software.
These technologies include open database connectivity, or ODBC,
component object model, or COM, dynamic link library, or DLL, and
dynamic data exchange, or DDE.
. Comprehensive decision management reporting software. We have developed
our decision management reporting software using a uniform database for
all interactions. This allows our clients to receive information about
their customers and the performance of their contact center in a single
integrated report for various media types. The reporting software
captures all information
38
<PAGE>
that passes through the system and publishes the information through a
standard web-based interface. This software uses a comprehensive
scheduling process to gather and report information that allows clients
to schedule the creation of their reports and to publish both real-time
and historical reports.
. Real-time resource management software. We have developed a monitoring
technology that presents real-time information to the client on
interactions in their contact center. The software presents information
such as hold time, number of e-mails in queue and number of agents
active, and provides the information in a dashboard like presentation.
Through this monitoring software, clients can notice trends and
operational problems that are occurring and make instant modifications
and changes to the system to rectify the problems. This technology
allows supervisors to make these instant changes using basic drag and
drop techniques.
. Administration technology. We have developed an administration
capability for our product that allows clients to use one uniform
administration function across all Windows NT servers in their
configuration. This capability allows clients to administer and modify
changes across the solution in one place using a web-based interface.
This provides for ease of use and also provides for the scalability and
fault tolerance of our solution.
We sell third party software which is included with our product. This
software includes:
. Crystal Reports, which is an off the shelf software package used to
create report templates;
. PC Anywhere, which is an off the shelf communication package used for
remote troubleshooting; and
. Sybase Enterprise Data Studio Programs, a database management
application.
We purchase Crystal Reports and PC Anywhere from third party resellers. We
have a commercial agreement with Sybase, Inc. for the purchase and distribution
of its software. If one or more of these third parties cease to sell their
software, we will need to modify our product to use an alternative supplier or
eliminate the affected product function, either of which could have a material
adverse effect on our business, financial condition and results of operations.
Research and Development
We believe that our product development capabilities are essential to our
strategy of expanding our leading technology position. Our product development
team consists of 37 engineers and software developers with experience in voice
communications, eBusiness, e-mail and web technology. We believe the
combination of diverse technical and communications expertise contributes to
the highly integrated functionality of our product. We spent $491,000, $1.3
million and $2.8 million in 1996, 1997 and 1998, respectively, and $3.0 million
for the nine months ended September 30, 1999, on research and development.
We have invested significant time and resources in creating a structured
process for undertaking all product development. A formal product introduction
process is used as a framework for defining, developing and delivering products
to the market.
Intellectual Property and Other Proprietary Rights
To protect our proprietary rights, we rely primarily on a combination of:
. patent, copyright, trade secret and trademark laws;
. confidentiality agreements with employees and third parties; and
. protective contractual provisions such as those contained in license and
other agreements with consultants, suppliers, strategic partners,
resellers and clients.
39
<PAGE>
We have not signed agreements containing protective contractual provisions
in every case and the contractual provisions that are in place and the
protection they provide vary and may not provide us with adequate protection in
all circumstances. Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our products and obtain and use
information that we regard as proprietary. Other parties may breach
confidentiality agreements and other protective contracts we have entered into,
and we may not become aware of these breaches or have adequate remedies for
them.
We generally require our employees to enter into confidentiality agreements
containing non-disclosure, non-competition and non-solicitation provisions.
When they begin employment, our employees also generally sign offer letters
specifying the basic terms and conditions of their employment.
We currently have five patents granted in the United States and one patent
granted in each of Ireland, the Netherlands and the United Kingdom. These
patents cover a system and method for:
. distributing and routing calls as electronic interactions and allowing
agents to select calls from a visible queue at their desktop;
. collecting and grouping caller identifications and associating them with
third party databases; and
. recording calls along with information related to the calls which is
used to retrieve the recorded calls.
We also have four pending U.S. patent applications, three of which relate to
the system and method described above and one of which relates to blending
electronic interactions, such as voice mail, outbound calls, e-mail, web-based
communications and fax, for queuing and distribution to agents. None of our
patents expire before June 2012.
We have several pending U.S. trademark applications, including Apropos.
See "--Legal Proceedings" on page 41 for a description of a claim received
by us from a large, well capitalized competitor claiming that our product
utilizes technologies pioneered and patented by it.
Employees
As of September 30, 1999, we had 136 employees worldwide, including 37 in
research and development, 43 in service and support, 41 in sales and marketing
and 15 in finance and administration. Our future performance depends in
significant part upon the continued service of our key technical, sales and
marketing, and senior management personnel. The loss of the services of one or
more of our key employees could harm our business.
Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense. Due to the limited number of people
available with the necessary technical skills we can give no assurance that we
can retain or attract key personnel in the future. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Facilities
We lease approximately 21,000 square feet of office space in our
headquarters building in Oakbrook Terrace, Illinois. As of September 30, 1999,
the lease required payments of approximately $2.7 million over the remaining
term of the lease, which expires in November 2003. We lease space for our
European headquarters in Windsor, United Kingdom, which consists of
approximately 2,500 square feet. The lease for that facility ends in June 2000.
We also lease space for our various sales offices located in San Ramon,
California; Tempe, Arizona; Dallas, Texas; Atlanta, Georgia; Caldwell, New
Jersey; Tarrytown, New York; and Brunswick, Maine. The majority of these leases
are short-term leases.
40
<PAGE>
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
Legal Proceedings
As of the date of this prospectus, we are not engaged in any legal
proceeding that we expect to have a material adverse effect on our business,
financial condition and results of operations.
Beginning in June 1999, we received letters from Rockwell Electronic
Commerce Corporation claiming that our product utilizes technologies pioneered
and patented by Rockwell and suggesting that we discuss the terms of a
potential license of their technologies. These patented technologies relate to
a variety of call management systems or functions. On January 5, 2000, we
received a letter from Rockwell that it had filed, but not served, a complaint
in the United States District Court for the Northern District of Illinois
asserting that we had infringed four of its patents identified in Rockwell's
previous correspondence. The complaint seeks a permanent injunction and
unspecified damages. Our patent counsel has completed its initial review of the
claims being asserted by Rockwell and believes that we likely have meritorious
defenses to such claims. However, it is not possible at this time to
definitively anticipate the final results of patent counsel's analysis. If a
negotiated resolution of this matter is required, it could involve payment of
license fees which would increase our expenses. We cannot assure you that the
terms of any licensing arrangement would be favorable to us. A resolution could
also require a redesign of our product or the removal of some of our product
features. If a negotiated resolution is not achieved, we will vigorously defend
this action. If we do not prevail, damages could be awarded and an injunction
could be issued requiring us to cease certain activities. If infringement is
deemed to be willful, a court may triple the awarded damages. Any of these
activities could have a material adverse effect on our business, financial
condition and results of operations. Regardless of outcome, litigation may
result in substantial expense and significant diversion of our management and
technical personnel.
41
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following persons are our executive officers and directors as of
December 20, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Kevin G. Kerns.......... 41 Director, Chief Executive Officer and President
Michael J. Profita...... 44 Chief Financial Officer, Vice President, Finance and Treasurer
Patrick K. Brady........ 44 Director and Chief Technology Officer
Jody P. Wacker.......... 43 Vice President, Marketing
James M. Nelson......... 47 Vice President, Sales
William W. Bach......... 38 Vice President, Technology
Brian C. Derr........... 39 Vice President, Business Development and
Professional Services
Richard D. Brown........ 36 Vice President, International Operations
Paul L. Conti........... 54 Vice President, Human Resources
Keith L. Crandell....... 39 Director
Ian M. Larkin........... 33 Director
Maurice A. Cox Jr. ..... 49 Director
George B. Koch.......... 53 Director
Catherine R. Brady...... 40 Director and Secretary
</TABLE>
Kevin G. Kerns joined Apropos in January 1996 as President and Chief
Operating Officer. He was appointed as a director of Apropos in 1996. In 1998,
Mr. Kerns was named Chief Executive Officer. From 1989 through 1995, Mr. Kerns
established and led a strategic software consulting firm, Mandalay Associates,
based in Dallas, Texas. From 1983 through 1989, Mr. Kerns held a number of
executive management positions with a computer-aided-engineering software
company, CASE Technology, Inc. He was elected Chief Executive Officer and
President of CASE Technology, Inc. in 1985 and remained in that position until
the business was acquired by Teradyne, Inc. in 1987. Mr. Kerns holds a B.S. in
General Engineering from the University of Illinois at Urbana-Champaign.
Michael J. Profita joined Apropos in September 1996 as Chief Financial
Officer and Vice President, Finance. Prior to joining Apropos, from September
1989 to September 1996, Mr. Profita worked at Mentor Graphics, an electronic
design automation software company, where his most recent assignment was Chief
Financial Officer of MicroTec Research Inc., a subsidiary of Mentor Graphics
which focused on embedded software. Mr. Profita also served as Controller for
Mentor Graphics Corporation, Latin America. Prior to joining Mentor Graphics,
Mr. Profita held several financial management positions at CIMLINC,
Incorporated, a mechanical CAD software company, and various financial
positions with Rockwell Switching Systems and Abbott Laboratories. Mr. Profita
holds an M.B.A. from the University of Chicago and a B.S. in Finance and
Economics from Marquette University.
Patrick K. Brady co-founded Apropos in March 1989. Mr. Brady served as Chief
Executive Officer and Chief Technology Officer until December 1998. Since then,
he has served as our Chief Technology Officer. He has also served as a director
of Apropos since 1989. From 1990 to 1992, Mr. Brady was an independent
technical consultant to Motorola, Inc.'s Domestic, GSM and International
Cellular divisions. From 1980 to December 1989, Mr. Brady held various
technical positions with AT&T Bell Laboratories, the most recent as Senior
Technical Associate. From 1987 to 1989, Mr. Brady worked at AT&T Bell
Laboratories in feature and architecture of central office switching as a
member of the Technical Staff. Mr. Brady serves as Chairman of the Computer
Telephony Integration Futures committee of the Multi-Media Telecommunications
Association and holds 16 U.S. and foreign patents. Mr. Brady holds an M.A. in
Electrical Engineering from Northwestern University and a B.S. in Astronomy
from the University of Illinois at Urbana-Champaign. Mr. Brady is the spouse of
one of our directors, Catherine R. Brady.
42
<PAGE>
Jody P. Wacker joined Apropos in August 1997 as Vice President, Marketing.
From October 1982 to August 1997, Ms. Wacker worked at AT&T Corporation, most
recently as Global Marketing Director for AT&T Call Center Solutions. From 1988
to 1997, Ms. Wacker held various marketing positions in the areas of product
management, marketing communications and business development. From 1982 to
1988, Ms. Wacker served as a programmer, analyst and architect of several
network systems. Ms. Wacker holds an M.B.A. from Fairleigh Dickinson
University, an Advanced Management Certificate from the University of North
Carolina at Chapel Hill, and a B.S. in Mathematics from Montclair State
University.
James M. Nelson joined Apropos in May 1996 as Vice President, Sales. Mr.
Nelson oversees all direct sales in North America, Latin America and Asia.
Prior to joining Apropos in May 1996, Mr. Nelson spent eight years in a variety
of senior management positions at Aspect Telecommunications Corporation, a
communications hardware provider. He was responsible for national accounts,
distribution and federal government sales. Prior to Aspect, Mr. Nelson held
several sales and sales management positions with ROLM Corporation, a
communications hardware provider, and IBM Corporation, Data Processing
Division. Mr. Nelson holds an M.B.A from Northern Illinois University and a
B.B.A from St. Norbert College.
William W. Bach joined Apropos full-time in 1995 as Vice President,
Engineering, after providing two years of assistance to Mr. Brady with respect
to product research, design and development. In March 1999, Mr. Bach was
appointed Vice President, Technology. Prior to joining Apropos, Mr. Bach worked
at Technisource, Inc. as a consultant to Motorola, Inc.'s Cellular
Infrastructure Group working with cellular switching products. From 1987 to
1990, Mr. Bach was a senior software engineer for Software Productivity
Solutions, a "think-tank" operation specializing in development of advanced
software development practices and tools for the defense industry. Mr. Bach
holds a M.S. in Computer Science from the Florida Institute of Technology and a
B.S. in Computer Science from the University of Wisconsin at LaCrosse.
Brian C. Derr joined Apropos in 1996 as Vice President, Professional
Services. In January 1999, Mr. Derr was named Vice President, Business
Development and Professional Services. Mr. Derr was Vice President, Business
Development of AllTank, a software company, from 1995 to 1996. From 1990 to
1995, Mr. Derr was founder and Chief Executive Officer of BPSI, Inc., a
software product and professional services organization for the wireless
industry. BPSI and Mr. Derr, who had personally guaranteed obligations of BPSI,
declared bankruptcy in 1995. Prior to BPSI, Mr. Derr held the position of Vice
President for Whitman-Hart, Inc., a systems consulting firm headquartered in
Chicago, Illinois.
Richard D. Brown joined Apropos in June 1997 as Vice President,
International Operations. Prior to joining Apropos, Mr. Brown worked at Aspect
Telecommunications Corporation from 1989 to 1997, where his most recent
assignment was Director of International Marketing. Other positions held at
Aspect included UK Channel Marketing Manager, Worldwide Channel Support Manager
and various positions within the sales organization. From 1987 to 1989, Mr.
Brown served in sales management for Mitel Corporation, a telecommunications
hardware provider, in the United Kingdom. Mr. Brown holds a B.A. in Business
and Marketing from Coventry University and is a member of the Chartered
Institute of Marketing.
Paul L. Conti joined Apropos in September 1999 as Vice President, Human
Resources. Prior to joining Apropos, from 1997 to 1999, Mr. Conti served as the
Senior Vice President for Aon Enterprise Insurance Services with responsibility
for Human Resources and Information Technology. From 1993 to 1996, Mr. Conti
served as Vice President, Operations of Alexander & Alexander, Inc., an
insurance brokerage. From 1987 to 1993, Mr. Conti served as a Regional Director
of Ernst & Young, LLP. Mr. Conti holds an M.B.A. and a B.A. from Southern
Illinois University.
Keith L. Crandell has served as a director of Apropos since March 1996. Mr.
Crandell serves as a senior principal of ARCH Venture Partners, a venture
capital firm. He has acted in this capacity from July 1994 to present and
during this time has acted as senior principal of various venture capital funds
associated with ARCH. From January 1988 to July 1994, Mr. Crandell served as
Senior Manager at ARCH Development
43
<PAGE>
Corporation, a company affiliated with the University of Chicago, where he was
responsible for new company formation. Mr. Crandell holds a B.S. from St
Lawrence University, M.S. from the University of Texas at Arlington and an
M.B.A. from the University of Chicago.
Ian M. Larkin has served as a director of Apropos since March 1996. Mr.
Larkin is a managing director in William Blair & Co., L.L.C., a global venture
capital firm based in Chicago, Illinois. Mr. Larkin joined William Blair as an
associate in 1992 following two years as a financial analyst in the firm's
corporate finance department. Previously, he was an analyst in Dean Witter's
principal business, DWR Capital, focusing on leveraged buyouts. Mr. Larkin
serves as a director of several portfolio companies, including Morton Grove
Pharmaceuticals, Inc., Pink Dot, Smith, Bucklin & Associates and Sweetwater
Sound, Inc. Mr. Larkin holds a B.B.A. from the University of Notre Dame.
Maurice A. Cox, Jr. has served as a director of Apropos since March 1998.
Mr. Cox founded The Ohio Partners, a venture capital fund, in July 1995 and
serves as President and Chief Executive Officer. From 1979 to 1995, Mr. Cox
worked for CompuServe Corporation, an information and communications services
provider, in various positions within sales, marketing, product management and
general management before being named president in December 1990. Prior to
CompuServe, Mr. Cox worked in sales for Service Bureau Corporation. Mr. Cox
serves on the board of directors of Huntington National Bank in Columbus, Ohio;
Guidant Corporation, Indianapolis, Indiana; and the boards of various private
companies in which The Ohio Partners has invested. Mr. Cox holds a B.S. from
Purdue University.
George B. Koch has served as a director of Apropos since September 1998. Mr.
Koch has significant experience in the software industry, most recently as
Senior Vice President of Worldwide Applications at Oracle Corporation, from
which he retired in 1994, to enter the ministry. He has been the Pastor of the
Church of the Resurrection in West Chicago, Illinois since 1994 to the present.
Prior to Oracle, Mr. Koch was Director of the Advanced Technologies division of
Software Alliance, a Teknekron Company. Prior to Teknekron, he was President
and CEO of Koch Systems Corporation, a developer of Oracle-based financial
applications. Mr. Koch received his B.A. in Physics from Elmhurst College in
1968, and in 1992 an M.Div. from Church Divinity School of the Pacific, an
Episcopalian seminary, in Berkeley, California.
Catherine R. Brady has served as a director of Apropos since 1989. Since
1996, Ms. Brady has served as an executive and as a consultant to various early
stage technology companies in Illinois. Ms. Brady co-founded Apropos and from
1989 to 1996, Ms. Brady worked at Apropos in various capacities focusing
primarily on strategic marketing and corporate communications. From March 1997
to October 1998, Ms. Brady served as a project director for ARCH Development
Corporation, a company affiliated with the University of Chicago. From 1979 to
1989, Ms. Brady served as an independent interest rate and equity futures and
options trader. During this period she also taught investments and finance at
Elmhurst College and Keller Graduate School. Ms. Brady holds an M.A. in Finance
from Northern Illinois University and a B.S. in economics from Benedictine
University. Ms. Brady is the spouse of Patrick K. Brady, who is our Chief
Technology Officer and a director. Upon completion of this offering, Ms. Brady
will resign as one of our directors.
Board of Directors and Committees of the Board
Our articles of incorporation, as amended and restated, provide that the
number of members of our board of directors shall be not less than six and not
more than nine. The number of directors is currently seven. Our board of
directors has been divided into three classes, and each class will be kept as
nearly equal in number as possible. At each annual meeting of shareholders, the
successors to the class of directors whose term expires at that time will be
elected to hold office for a term of three years and until their respective
successors are elected and qualified. Directors whose terms expire in 2001 are
Patrick K. Brady and Catherine R. Brady; directors whose terms expire in 2002
are George B. Koch and Ian M. Larkin and directors whose terms expire in 2003
are Kevin G. Kerns, Maurice A. Cox, Jr. and Keith L. Crandell. All of the
officers identified above serve at the discretion of our board of directors.
The first annual meeting of shareholders following completion of this offering
will be held in 2001.
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<PAGE>
We have an audit committee and a compensation committee. The members of the
compensation committee are Maurice A. Cox, Jr., George B. Koch, Catherine R.
Brady and Keith L. Crandell and the members of our audit committee are Maurice
A. Cox, Jr., Ian M. Larkin and Patrick K. Brady.
The compensation committee reviews and approves the compensation of our
executive officers, including payment of salaries, bonuses and incentive
compensation, determines our compensation policies and programs and administers
our stock option and stock purchase plans.
The audit committee oversees the retention, performance and compensation of
our independent public accountants, and the establishment and oversight of our
internal accounting and auditing control systems.
The board of directors does not have a nominating committee. However, the
board of directors will consider nomination recommendations from shareholders,
which should be addressed to our corporate secretary at our principal executive
offices.
Executive Compensation
The following table identifies all compensation paid by us to our chief
executive officer and our four other most highly compensated executive officers
in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------------------- -------------------
Securities
Underlying
Other Annual Options/
Year Salary Bonus Compensation SARs
---- -------- ------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Kevin G. Kerns.......... 1999 $150,000 $46,750 -- 52,500
Chief Executive Officer
and President
James M. Nelson......... 1999 199,132(1) 18,000 -- --
Vice President, Sales
Jody P. Wacker.......... 1999 141,750 36,000 -- --
Vice President,
Marketing
Richard D. Brown........ 1999 140,997(2) 16,000 $20,000(3) 35,000
Vice President,
International
Operations
Patrick K. Brady........ 1999 137,500 32,000 -- --
Chief Technology Officer
</TABLE>
---------------------
(1)Includes $79,132 in sales commissions.
(2)Includes $19,261 in sales commissions.
(3)Includes $20,000 car allowance.
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<PAGE>
Option Grants in 1999
The following table contains information concerning our grant of stock
options to our chief executive officer and our four other most highly
compensated executive officers in 1999. Potential realizable value is presented
net of the option exercise price, but before any Federal or state income taxes
associated with exercise, and is calculated assuming that the fair market value
on the date of the grant appreciates at the indicated annual rates, compounded
annually, for the ten-year term of the option. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the SEC and do not represent our
estimate or projection of future increases in the price of our common shares.
Actual gains will depend on the future performance of our common shares and the
option holder's continued employment throughout the vesting period. The amounts
reflected in the following table may not be achieved.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Number of Percent of Price
Shares Total Options Per Share Appreciation for
Underlying Granted to Exercise Option Term(1)
Options Employees in or Base Expiration ---------------------
Name Granted Fiscal Year Price Date 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kevin G. Kerns.......... 52,500 7.7% $0.91 1/09
James M. Nelson......... -- -- -- -- -- --
Jody P. Wacker.......... -- -- -- -- -- --
Richard D. Brown........ 35,000 5 0.91 1/09
Patrick K. Brady........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Assumes that the fair market value of each grant on the date of grant was
equal to the initial public offering price of $ per share.
1999 Option Values
The following table contains information regarding unexercised options held
by our chief executive officer and our four other most highly compensated
executive offices at December 31, 1999. None of these individuals exercised any
options during 1999. The value of "in-the-money" options represents the
difference between the exercise price of an option and the initial public
offering price of $ per share.
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1999 December 31, 1999
Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------- -------------------------
<S> <C> <C>
Kevin G. Kerns............ 730,078 / 83,672
James M. Nelson........... 188,125 / 21,875
Jody P. Wacker............ 128,333 / 99,167
Richard D. Brown.......... 39,375 / 65,625
Patrick K. Brady.......... 47,214 / 14,036
</TABLE>
Compensation of Directors
Except with respect to Mr. Koch who receives an annual grant of options to
purchase 14,000 of our common shares, our directors do not receive compensation
for serving as directors or attending board of directors or committee meetings
except reimbursement for out-of-pocket expenses.
Employment Agreements
On March 19, 1996, we entered into an employment agreement with Kevin G.
Kerns, our Chief Executive Officer and President, which expires on March 19,
2000. Mr. Kerns currently receives an annual base salary of $150,000 and is
entitled to receive an annual bonus at the discretion of the compensation
committee, which bonus could be up to $60,000. In addition, we granted Mr.
Kerns options to purchase
46
<PAGE>
700,000 common shares at an exercise price of $0.10 per share as consideration
for entering into this employment agreement. If Mr. Kerns is terminated by us
without cause, or by Mr. Kerns within six months of a change of control or
within three months of a material reduction in his salary or benefits or a
material change in his responsibilities, then Mr. Kerns will receive severance
pay equal to six months base salary.
On August 4, 1997, we entered into an employment agreement with Jody P.
Wacker, our Vice President, Marketing. Ms. Wacker currently receives an annual
base salary of $148,000 and is entitled to receive an annual bonus at the
discretion of the compensation committee, which bonus could be up to $40,000.
In addition, we granted Ms. Wacker options to purchase 210,000 of our common
shares at an exercise price of $0.21 per share as consideration for entering
into this employment agreement. If Ms. Wacker is terminated without cause, Ms.
Wacker will receive severance pay equal to six months base salary.
We also entered into a employment agreement with Richard D. Brown, our Vice
President, International Operations, on April 23, 1997. Mr. Brown receives an
annual base salary of $119,955 and is entitled to receive an annual bonus at
the discretion of the compensation committee, which bonus could be up to
$38,888. In addition, we granted Mr. Brown an option to purchase 35,000 of our
common shares at an exercise price of $0.21 per share. Mr. Brown is also
entitled to an annual car allowance of $20,000.
We also entered into an employment agreement with Patrick K. Brady, our
Chief Technology Officer, on March 19, 1996, as amended in December 1998, which
expires on March 19, 2000. Mr. Brady receives an annual base salary of $140,000
and is entitled to receive an annual bonus at the discretion of the
compensation committee, which bonus could be up to $40,000. If Mr. Brady is
terminated by us without cause, or by Mr. Brady within six months of a change
of control or within three months of a material reduction in his salary or
benefits or a change in his responsibilities, then Mr. Brady will receive
severance pay equal to six months base salary.
In connection with their respective employment agreements, each of the
officers entered into a noncompetition, nondisclosure and developments
agreement with us. The nondisclosure provisions in these agreements continue
indefinitely after termination of employment. The noncompete provisions
continue during their period of employment and for a period of six months after
termination of employment for any reason and the nonsolicitation provisions
continue for two years after termination of employment. Each agreement also
provides that the officer assigns to us any and all right to any intellectual
property designed or developed by the officer during his or her period of
employment except in specified circumstances.
None of the other named executive officers is party to an employment
agreement with us.
1999 Omnibus Incentive Plan
Our 1999 omnibus incentive plan was adopted by our board of directors in
, 2000 and by our shareholders in , 2000. Under this plan, our
officers, directors, employees and consultants, are eligible to receive awards
of stock options, stock appreciation rights, performance stock, performance
units, restricted stock and other stock and cash awards. Options granted under
the plan may be incentive stock options or nonqualified stock options. Stock
appreciation rights may be granted by our compensation committee at any time
either in tandem with an option or on a free-standing basis. A total of
4,600,000 common shares have been authorized to date for issuance under the
plan, 3,427,307 of which have been granted through December 2, 1999, and
149,695 of which have been exercised. These options have a weighted average
exercise price of $0.45 per share. The plan amends and restates our 1995 stock
option plan.
The 1999 omnibus incentive plan is administered by the compensation
committee of our board. Subject to the provisions of the plan, the compensation
committee will determine the type of award, when and to whom awards will be
granted, the number of shares or amount of cash covered by each award and the
terms and kind of consideration payable with respect to awards. The
compensation committee may interpret the plan and may at any time adopt the
rules and regulations for the plan as it deems advisable. In determining the
persons to whom awards shall be granted and the number of shares or amount of
cash covered by each award, the compensation committee may take into account
any factors it deems relevant.
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Stock Options. The compensation committee may grant both incentive stock
options and non-qualified stock options. An option may be granted on the terms
and conditions as the compensation committee may approve except that no
incentive stock option may be exercised more than ten years from the date of
grant. Incentive stock options will be granted with an exercise price equal to
the fair market value on the date of grant. The compensation committee may
authorize loans to individuals to finance their exercise of vested options.
Options granted under the 1999 omnibus incentive plan will become exercisable
at those times and under the conditions determined by the compensation
committee. To date, the options that have been granted to our executive
officers and employees will generally vest automatically in the event that we
are consolidated with or acquired by another entity in a merger or other
reorganization or in the event of a sale of all or substantially all of our
assets. Future option grants will generally vest upon a change of control.
Stock Appreciation Rights. Our 1999 omnibus incentive plan also permits the
compensation committee to grant stock appreciation rights either in tandem with
a stock option or on a free-standing basis. Generally, stock appreciation
rights may be exercised upon such terms and conditions as the compensation
committee determines except that the term shall not exceed the option term in
the case of a tandem stock appreciation right or ten years in the case of a
free-standing stock appreciation right. Upon exercise of a stock appreciation
right, a grantee will receive for each share for which a stock appreciation
right is exercised, an amount in cash or common shares, as determined by the
compensation committee, equal to the excess of the fair market value of a
common share on the date the stock appreciation right is exercised over the
grant price per share to which the stock appreciation right relates.
Restricted Stock. The 1999 omnibus incentive plan further provides for the
granting of restricted stock awards, which are awards of common shares that may
not be disposed of for a period of time determined by the compensation
committee and which vest during a specified period of employment.
Performance Stock and Performance Units. The 1999 omnibus incentive plan
further provides that the compensation committee may grant performance stock or
performance units which may be earned upon the attainment of performance goals
specified by the compensation committee. The compensation committee may make a
cash payment equal to the fair market value of the common shares otherwise
required to be issued to a participant pursuant to a performance stock award.
Performance units entitle the participant to a payment in cash equal to the
fair market value of a designated number of common shares upon the attainment
of specified performance goals. The compensation committee may substitute
common shares for the cash payment otherwise required to be made pursuant to a
performance unit award.
Our board of directors may amend or terminate the 1999 omnibus incentive
plan. However, no change shall be effective without the approval of our
shareholders if shareholder approval is required by any law, regulation or
stock exchange rule. In addition, no change may adversely affect an award
previously granted, except with the written consent of the grantee.
No awards may be granted under the 1999 omnibus incentive plan after the
tenth anniversary of its initial adoption.
Options and Awards Under the 1999 Omnibus Incentive Plan. We cannot now
determine the number of options or awards to be granted in the future under the
1999 omnibus incentive plan to our officers, directors, employees and
consultants.
1999 Employee Stock Purchase Plan
Introduction. Our 1999 employee stock purchase plan was adopted by our board
of directors in 2000 and approved by our shareholders in 2000. The
plan will become effective immediately upon the date of the consummation of
this offering. The plan is designed to allow our eligible employees to purchase
our common shares, at semi-annual intervals after the initial offering period
through voluntary automatic payroll deductions at a discount.
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Share Reserve. We have initially reserved 1,000,000 common shares.
Offering Periods. The plan will be implemented by consecutive offering
periods. The initial offering period will commence on the date of this offering
and will continue until March 31, 2001. Thereafter, new offering periods will
commence on the first trading day on or after April 1 and October 1 of each
year, or on such other dates the compensation committee shall determine and
continuing until the last trading day of the respective six-month period or
such other date as the compensation committee shall determine.
Eligible Employees. All of our regular employees may participate in our 1999
employee stock purchase plan other than, in the discretion of the compensation
committee, employees whose customary employment is 20 hours or less a week,
employees whose customary employment is for not more than five months per year
and employees who have not been employed by us for at least one year as of the
first day of any offering period.
Payroll Deductions. A participant may contribute up to 10% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be no less than the lesser of 85% of the closing
price per share at the beginning of the offering period or on the last trading
day of such offering period. No participant's rights to purchase shares shall
accrue at a rate in excess of $25,000 of the fair market value of such shares
for each calendar year in which the right is outstanding at any time.
The board may at any time amend, suspend or discontinue the plan, subject to
any required shareholder approval to comply with the requirements of the
Securities and Exchange Commission and the Internal Revenue Code.
Limitation of Liability and Indemnification Matters
We are incorporated under the laws of the state of Illinois. Our amended and
restated articles of incorporation provide that our directors shall not be
personally liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director to the fullest extent permitted under the Illinois
Business Corporation Act except for:
. any breach of the director's duty of loyalty to us;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 8.65 of the Illinois Business Corporation Act, as it
currently exists or may in the future be amended; or
. any transaction from which the director derived an improper benefit.
Our amended and restated bylaws provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Illinois law, subject to very limited exceptions;
. we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors, unless otherwise required by
law, our amended and restated articles of incorporation, our amended and
restated bylaws or other agreements; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with legal proceedings to the fullest extent
permitted by Illinois law, subject to very limited exceptions.
In addition, we intend to obtain directors' and officers' insurance
providing indemnification for our directors and officers for certain
liabilities, including liabilities under the Securities Act of 1933. We have
also entered into indemnity agreements with our directors and some of our
executive officers providing for the indemnification described above.
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These provisions may discourage shareholders from bringing a lawsuit against
our directors for breach of their fiduciary duty. These provisions may also
have the effect of reducing the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise benefit us and our shareholders. Furthermore, a shareholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions. We believe that these provisions, the insurance and
agreements are necessary to attract and retain talented experienced directors
and officers.
The underwriting agreement also provides for indemnification by the
underwriters of our officers and directors for specified liabilities under the
Securities Act of 1933.
At present, there is no pending litigation or proceeding involving any of
our directors or officers where indemnification will be required or permitted.
We are not aware of any threatened litigation or proceeding that might result
in a claim for such indemnification.
Compensation Committee Interlocks and Insider Participation
Our compensation committee currently consists of Maurice A. Cox, Jr., George
B. Koch, Catherine R. Brady and Keith L. Crandell. None of the members of the
compensation committee has been an officer or employee of Apropos at any time,
except Ms. Brady. None of our executive officers serves as a member of the
board of directors or compensation committee of any other company that has one
or more executive officers serving as a member of our board of directors or
compensation committee. Mr. Crandell is senior principal of ARCH Venture Fund,
which along with its affiliates, is one of our preferred shareholders and
noteholders. Mr. Cox is a principal of The Ohio Partners, Ltd. which is one of
our preferred shareholders and noteholders. In June 1999, we issued a
subordinated convertible promissory note to ARCH Venture Fund III, L.P. for
$523,277.90 and to The Ohio Partners, Ltd. for $427,444.20. In connection with
these notes, we also issued warrants to purchase 15,455 of our series C
convertible preferred shares to ARCH Venture Fund III, L.P. and warrants to
purchase 12,318 of our series C convertible preferred shares to The Ohio
Partners, Ltd. These warrants automatically convert to warrants to purchase
27,046 of our common shares and 21,557 of our common shares, respectively, at
an exercise price of $3.97 per share upon completion of this offering. In
November 1999, ARCH Venture Fund III, L.P. also participated in $500,000 of a
$5.0 million secured bridge loan made to us. We issued warrants to purchase
26,250 of our common shares at an exercise price of $5.34 per share to ARCH
Venture Fund III, L.P. in connection with this loan. See "Certain Transactions"
on page 53 for information regarding transactions between The Ohio Partners,
Ltd. and us, and between ARCH Venture Fund III, L.P. and us.
401(k) Plan
Effective January 1, 1997, we implemented a 401(k) profit-sharing plan
covering substantially all employees who meet defined service requirements. The
plan provides for deferred salary contributions by the plan participants and a
contribution from us. Our contributions, if any, are at the discretion of the
board of directors and are not to exceed the amount deductible under applicable
income tax laws. We have not made contributions since inception of the plan.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding common shares as of December 2, 1999 by:
. each person who is the beneficial owner of more than 5% of our common
shares;
. each of our directors;
. each of our named executive officers; and
. all of our executive officers and directors as a group.
Catherine R. Brady has granted the underwriters an option to purchase an
additional common shares to cover over-allotments.
The following table assumes the conversion of all of our issued and
outstanding convertible preferred shares and the seven-for-four stock split of
our common shares which will occur immediately prior to the completion of this
offering.
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficially Owned Beneficially Owned
--------------------- ----------------------
Prior to After Prior to After
Name Offering Offering Offering Offering
- ---- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Five Percent Shareholders:
The Ohio Partners, Ltd.(1)...... 778,041 778,041 7.8%
62 East Broad Street, 3rd Floor
Columbus, OH 43215
William Blair Capital Partners
V, L.P.(2)..................... 2,552,136 2,552,136 25.5
222 W. Adams Street
Chicago, IL 60606
ARCH Venture Fund III, L.P.(3).. 2,579,387 2,579,387 25.8
8725 W. Higgins Road, Suite 290
Chicago, IL 60631
Allstate Insurance Company...... 1,185,429 1,185,429 11.8
2775 Sanders Road, Suite A3
Northbrook, IL 60062
William W. Bach(4).............. 719,978 719,978 6.9
One Tower Lane, 18th Floor
Oakbrook Terrace, IL 60181
Directors and Officers:
Kevin G. Kerns(5)............... 747,031 747,031 6.9
Jody P. Wacker(6)............... 133,073 133,073 1.3
Michael J. Profita(7)........... 119,583 119,583 1.2
Patrick K. Brady(8)............. 2,569,234 2,569,234 25.5
James M. Nelson(9).............. 192,500 192,500 1.9
Catherine R. Brady(10).......... 2,569,234 2,569,234 25.5
Keith L. Crandell(11)........... 2,579,387 2,579,387 25.6
Ian M. Larkin(12)............... 2,552,136 2,552,136 25.5
Maurice A. Cox, Jr.(13)......... 778,041 778,041 7.8
George B. Koch(14).............. 18,667 18,667 * *
All Executive Officers and
Directors as a Group
(14 people)(11)(12)(13)(15).... 10,586,207 10,586,207 86.3%
</TABLE>
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- ---------------------
* Less than 1%
(1) Includes warrants to purchase 21,557 of our common shares.
(2) Includes warrants to purchase 27,046 of our common shares.
(3) Includes 1,412,133 of our common shares owned by ARCH Venture Fund II,
L.P., 142,002 of our common shares owned by ARCH II Parallel Fund, L.P.
and warrants to purchase 53,296 of our common shares.
(4) Includes 373,735 shares subject to stock options exercisable within 60
days after December 2, 1999.
(5) Represents 747,031 shares subject to stock options exercisable within 60
days after December 2, 1999.
(6) Represents 133,073 shares subject to stock options exercisable within 60
days after December 2, 1999.
(7) Represents 119,583 shares subject to stock options exercisable within 60
days after December 2, 1999.
(8) Includes 47,214 shares subject to stock options exercisable within 60 days
after December 2, 1999. Includes 1,173,510 shares owned by Catherine R.
Brady, Mr. Brady's spouse. Mr. Brady disclaims beneficial ownership of
these shares.
(9) Represents 192,500 shares subject to stock options exercisable within 60
days after December 2, 1999.
(10) Includes 1,349,787 of our common shares and 47,214 of our common shares
subject to stock options within 60 days after December 2, 1999, owned by
Patrick K. Brady, Ms. Brady's spouse. Ms. Brady disclaims beneficial
ownership of these shares.
(11) Includes 2,578,386 of our common shares owned by ARCH Venture Fund II,
L.P. and its affiliates, of which Mr. Crandell is a principal. Mr.
Crandell disclaims beneficial ownership of these shares.
(12) Includes 2,525,090 of our common shares and warrants to purchase 27,046 of
our common shares owned by William Blair Capital Partners V, L.P., of
which Mr. Larkin is a managing director. Mr. Larkin disclaims beneficial
ownership of these shares.
(13) Includes 778,041 of our common shares owned by The Ohio Partners, Ltd., of
which Mr. Cox is a principal. Mr. Cox disclaims beneficial ownership of
these shares.
(14) Includes 18,667 shares subject to stock options exercisable within 60 days
after December 2, 1999.
(15) Includes 1,805,453 shares subject to stock options exercisable within 60
days after December 2, 1999.
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CERTAIN TRANSACTIONS
Since our inception, we have issued convertible preferred shares in private
placement transactions as follows:
. 1,242,858 Series A convertible preferred shares at $1.75 per share on
March 19, 1996, which are convertible into 2,175,001 common shares;
. 1,599,888 Series B convertible preferred shares at $3.75 per share on
December 20, 1996, which are convertible into 2,799,804 common shares;
and
. 1,152,737 Series C convertible preferred shares at $6.94 per share on
March 11, 1998, which are convertible into 2,017,289 common shares.
Each series of our convertible preferred shares will automatically convert
to our common shares after giving effect to the seven-for-four stock split of
our common shares which will occur immediately prior to the completion of this
offering,
The following table summarizes the convertible preferred shares purchased by
our 5% shareholders in private placement transactions:
<TABLE>
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible
Investor Preferred Shares Preferred Shares Preferred Shares
- -------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
The Ohio Partners, Ltd...... -- -- 432,277
William Blair Capital
Partners V, L.P............ 621,429 533,296 288,184
ARCH Venture Fund III, L.P.. -- 266,648 288,184
ARCH Venture Fund II, L.P... 570,416 236,517 --
ARCH II Parallel Fund, L.P.. 51,013 30,131 --
Allstate Insurance Company.. -- 533,296 144,092
</TABLE>
In addition, in June 1999, we issued subordinated convertible promissory
notes in the aggregate principal amount of $1.5 million to William Blair
Capital Partners V, L.P., ARCH Venture Fund III, L.P. and The Ohio Partners,
Ltd. In connection with these notes, we issued warrants to purchase 43,228 of
our Series C convertible preferred shares to these investors at an exercise
price of $6.94 per share. The warrants to purchase our Series C convertible
preferred shares automatically convert to warrants to purchase 75,649 of our
common shares at an exercise price of $3.97 per share upon completion of this
offering. We plan on using a portion of the net proceeds of this offering to
repay these notes.
In November 1999, a $5.0 million secured bridge loan was made to us by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
in this offering. Certain employees and entities associated with Hambrecht &
Quist LLC have a $1.4 million participation in this loan and ARCH Venture Fund
III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. We granted to Access Technology Partners,
L.P. warrants that can be exercised to purchase 236,250 common shares in
connection with this loan and the employees and entities associated with
Hambrecht & Quist LLC that are participating in this loan have the right to
receive their pro rata portion of the warrants granted. We also granted ARCH
Venture Fund III, L.P. warrants that can be exercised to purchase 26,250 common
shares. The exercise price of the warrants is initially $5.34 per share but is
subject to adjustment.
On March 19, 1996, we entered into an Employment Agreement with William W.
Bach, our Vice President, Technology and one of our 5% shareholders, which
expires on March 19, 2000. Mr. Bach receives an annual base salary of $120,000
and is entitled to receive an annual bonus at the discretion of our
compensation committee, which bonus could be up to $25,000. If Mr. Bach is
terminated by us without cause, or by Mr. Bach within three months of a
material reduction in his salary or benefits not agreed to by
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him or a material change in his responsibilities not agreed to by him, then Mr.
Bach will receive severance pay equal to six months base salary. In connection
with his employment agreement, Mr. Bach also entered into a noncompetition,
nondisclosure and developments agreement with us.
We have granted options to our executive officers and one of our directors.
See "Management--Executive Compensation" on page 45 for more information
regarding these option grants.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 60,000,000 shares, of which
55,000,000 shares are common shares, par value $0.01 per share, and 5,000,000
shares are preferred shares, par value $0.01 per share. At December 22, 1999,
there were 10,010,052 common shares outstanding, held of record by 21
shareholders, and no preferred shares were outstanding. There will be
common shares outstanding, assuming no exercise of outstanding options or
warrants, after giving effect to this offering. Because this is a summary
description, it does not contain every term of our capital stock contained in
our amended and restated articles of incorporation and in our amended and
restated bylaws, and we refer you to the exhibits to our registration statement
filed with the SEC on November 12, 1999, which you can access through the SEC's
website at http://www.sec.gov/edgarhp.htm/ and to Illinois law.
Common Shares
Our issued and outstanding common shares have been validly issued and are
fully paid and nonassessable. The common shares to be issued upon completion of
this offering will also be fully paid and nonassessable. Subject to the right
of holders of preferred shares that may come into existence, the holders of
outstanding common shares are entitled to receive dividends out of assets
legally available therefore at the times and in the amounts as our board of
directors may from time to time determine. See "Dividend Policy" on page 14 for
information regarding our dividend policy. The common shares are neither
redeemable nor convertible, and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. There is no sinking fund
provision applicable to the common shares. Upon our liquidation, dissolution or
winding up, the holders of common shares are entitled to receive pro rata, our
assets that are legally available for distribution, after payment of all debts
and other liabilities and subject to the prior rights of any holders of
preferred shares then outstanding. Each outstanding common share is entitled to
one vote on all matters submitted to a vote of shareholders. There is no
cumulative voting in the election of directors.
Preferred Shares
Our amended and restated articles of incorporation authorize our board of
directors to issue preferred shares in series and to establish the rights and
preferences of any series with respect to the rate of dividends, the price and
terms and conditions on which shares may be redeemed, the terms and conditions
on which shares may be converted, voting rights and other terms. We may issue,
without approval of the holders of common shares, preferred shares that have
voting, dividend or liquidation rights superior to the common shares and that
may adversely affect the rights of holders of common shares. The issuance of
preferred shares, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the voting
power of the holders of common shares and could have the effect of
discouraging, delaying, deferring or preventing a change in control. We have no
present plan to issue any preferred shares.
Certain Statutory Provisions
We are subject to Section 7.85 of the Business Corporation Act of Illinois.
Section 7.85 prohibits a publicly held Illinois corporation from engaging in a
business combination with an interested shareholder, unless the proposed
business combination
. receives the affirmative vote of the holders of at least 80% of the
combined voting power of the then outstanding shares of all classes and
series of the corporation entitled to vote generally in the election of
directors voting together as a single class, and the affirmative vote of
a majority of these shares held by disinterested shareholders,
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. is approved by at least two-thirds of the disinterested directors, or
. provides for consideration offered to shareholders that meets specified
fair price standards and satisfies specified procedural requirements.
These fair price standards require that the fair market value per share of such
consideration be equal to or greater than the higher of
. the highest price paid by the interested shareholder during the two-year
period immediately prior to the first public announcement of the proposed
business combination or in the transaction by which the interested
shareholder became such, and
. the higher of the fair market value per common share on the first trading
date after the date the first public announcement of the proposed
business combination or after the date of the first public announcement
that the interested shareholder has become such.
For purposes of Section 7.85, disinterested director means any member of the
board of directors of the corporation who
. is neither the interested shareholder nor an affiliate or associate
thereof,
. was a member of the board of directors prior to the time that the
interested shareholder became such or was a director of the corporation
before January 1, 1997 or was recommended to succeed a disinterested
director by a majority of the disinterested directors then in office and
. was not nominated for election as a director by the interested
shareholder of any affiliate or associate thereof.
For purposes of Section 7.85 and Section 11.75 described below, a business
combination includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested shareholder, and an interested shareholder
is a person who, together with affiliates and associates, owns, or within the
prior three years, did own, 15% or more of the combined voting power of the
outstanding shares entitled to vote, subject to specified exceptions.
Further, we are subject to Section 11.75 of the Business Corporation Act of
Illinois which prohibits business combinations with interested shareholders for
a period of three years following the date that such shareholder became an
interested shareholder, unless
. prior to such time, our board of directors approved either the business
combination or the transaction which resulted in the shareholder becoming
an interested shareholder, or
. upon consummation of the transaction which resulted in the shareholder
becoming an interested shareholder, the interested shareholder owned at
least 85% of the voting shares outstanding at the time such transaction
commenced, excluding shares owned by directors who are also officers and
shares reserved under an employee stock plan, or
. at or subsequent to such time, the business combination is approved by
our board of directors and authorized at a meeting of the shareholders by
66 2/3% of the outstanding voting shares not owned by the interested
shareholder.
Although Illinois law generally requires the affirmative votes of at least
two-thirds of the votes of our shares entitled to vote to approve or authorize
an amendment of our amended and restated articles of incorporation, we have
elected, as permitted by Illinois law, to require only majority vote for the
approval or authorization of an amendment if the majority of our board of
directors recommends the adoption of an amendment to our shareholders. The
substitution of the majority voting requirement may have the effect of
permitting an amendment to our amended and restated articles of incorporation
not favored by a shareholder or group of shareholders holding a substantial
minority of the outstanding voting stock.
Charter and Bylaw Provisions
Our amended and restated articles of incorporation and our amended and
restated bylaws contain provisions that may inhibit a change in control not
approved by our board of directors. These provisions include (1) the division
of our board of directors into three classes serving staggered three year
terms, (2) a
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<PAGE>
requirement that special meetings of shareholders be called only by our board
of directors or president, unless otherwise required by law, (3) advance notice
requirements for shareholder proposals and nominations and (4) the authority of
our board of directors to issue, without shareholder approval, preferred shares
with such terms as our board of directors may determine.
Our amended and restated articles of incorporation eliminate the liability
of our directors to us or our shareholders for monetary damages resulting from
breaches of their fiduciary duties as directors. Directors remain liable for
breaches of their duty of loyalty to us or our shareholders, as well as for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law and transactions from which a director derives
improper personal benefit. Our amended and restated articles of incorporation
also do not absolve directors of liability under Section 8.65 of the Business
Corporation Act of Illinois, which makes directors personally liable for:
. unlawful dividends or unlawful stock repurchases or redemptions if the
director did not act in good faith,
. the barring of known claims against the corporation after dissolution,
and
. debts incurred by a dissolved corporation in carrying on its business.
The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their
fiduciary duty of care, including any such actions involving gross negligence.
We believe that this provision does not eliminate the liability of our
directors to us or our shareholders for monetary damages under the federal
securities laws. Our bylaws also provide indemnification for the benefit of our
directors and officers to the fullest extent permitted by Illinois law,
including most circumstances under which indemnification otherwise would be
discretionary.
Transfer Agent and Registrar
The transfer agent and registrar for the common shares is Harris Trust &
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common shares and
we cannot make any predictions as to the effect, if any, that market sales of
shares or the availability of our common shares for future sale will have on
the market price of the common shares from time to time. Sales of substantial
amounts of our common shares in the public market following this offering could
adversely affect the market price of our common shares and our ability to raise
additional capital.
Upon completion of this offering, we will have common shares
outstanding assuming that the underwriters do not exercise their over-allotment
options and that no participants exercise their outstanding options under our
stock option plan or warrants. Our common shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, except for any of those shares that are beneficially
owned at any time by our affiliates, as defined in Rule 144 under the
Securities Act of 1933, which sales will be subject to the timing, volume and
manner of sale limitations of Rule 144. The remaining 10,010,052 common shares
outstanding after this offering held by those who were shareholders prior to
this offering will be restricted securities, as defined in Rule 144. These
restricted securities may be sold in the public market if they are registered
under the Securities Act of 1933 or they are exempted by an exemption from
registration, such as the exemptions provided by Rule 144 and 701 under the
Securities Act of 1933. As a result of the 180 day lock-up described below and
the provisions of Rule 144 and 701, the restricted shares will be available for
sale in the public market as follows:
Eligibility of Restricted Shares for Sale in the Public Market
<TABLE>
<S> <C>
At the date of this prospectus........................................
180 days after the date of this prospectus............................
Thereafter upon expiration of one year holding periods................
</TABLE>
56
<PAGE>
Most of the restricted shares that will become available for sale in the
public market starting 180 days after the date of this prospectus will be
subject to volume and other resale restrictions under Rule 144 because the
holders are our affiliates.
Rule 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year will be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the then outstanding
common shares, or the average weekly trading volume of our common shares during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain provisions regarding the manner of sale, notice requirements
and the availability of current public information about us. If two years have
elapsed since the date of acquisition of restricted common shares from us or
any of our affiliates and the holder is not deemed to have been an affiliate of
ours for at least three months prior to a proposed transaction, such person
would be entitled to sell such shares under Rule 144 without regard to the
limitations described above.
Rule 701
In general, under Rule 701 of the Securities Act, any of our employees,
consultants or advisors who purchased common shares from us under a stock
option plan or other written agreement can resell those shares 90 days after
the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions contained in Rule 144, including the
holding period.
Stock Options
Through December 2, 1999, we have granted options to purchase 3,427,307
common shares to specified persons pursuant to our 1999 omnibus incentive plan,
and an additional 1,172,693 common shares are available for grant of future
options thereunder. See "Management--1999 Omnibus Incentive Plan" on page 47
for more information on this plan. We have also granted warrants to purchase
368,774 of our common shares. See "Certain Transactions" on page 53 and
"Underwriting" on page 62 for more information regarding these warrants. In
addition, if we do not repay the portion of the outstanding amount under our
revolving line of credit that is in excess of our borrowing base, by March 16,
2000, we will be required to issue an additional warrant to purchase 30,625
common shares to our lender. We intend to file a registration statement on Form
S-8 as soon as practicable after the date of this prospectus to register our
common shares that are (1) issuable upon the exercise of stock options either
outstanding or available for grant pursuant to our 1999 omnibus incentive plan
and (2) reserved for issuance under our 1999 employee stock purchase plan.
Following effectiveness, shares covered by the registration statement on Form
S-8 will be eligible for sale in the public markets, subject to Rule 144
limitations applicable to affiliates, as well as to the limitations on sale and
vesting described above.
Lock-Up Agreements
We, our directors and executive officers and most of our shareholders, have
agreed or will agree prior to completion of this offering, for a period of 180
days after the date of this prospectus not to directly or indirectly, sell,
offer, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
transfer the economic risk of ownership in, make any short sale, pledge, lend
or otherwise dispose of or transfer, directly or indirectly, any of our common
shares or any securities convertible into or exchangeable or exercisable for or
any other rights to purchase or acquire our common shares without the prior
written consent of Hambrecht & Quist LLC on behalf of the underwriters.
However, these restrictions will not apply to:
. this offering, including the common shares which may be sold by the
selling shareholder;
. the issuance by us of any of our common shares upon the exercise of an
outstanding option or warrant;
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<PAGE>
. the issuance by us of any of our common shares or the grant by us of
options to purchase our common shares or other awards pursuant to our
1999 omnibus incentive plan; or
. the issuance by us of any of our common shares pursuant to our 1999
employee stock purchase plan.
Registration Rights
Demand Rights. Our existing shareholders and some of our warrant holders
have the right to demand registration of 7,067,744 of the common shares they
hold.
At any time at least six months after this offering, our shareholders that
previously held our convertible preferred shares prior to this offering are
entitled to one demand registration upon initiation by holders of at least 40%
of the common shares then outstanding which were convertible preferred shares
prior to this offering. Thereafter, a second demand registration may be
initiated under the same conditions.
If these shareholders request us to register less than all of their common
shares held at that time, then we are only required to effect a registration if
at least 20% of the common shares that were convertible preferred shares prior
to this offering are to be sold in the demand offering or a lesser percentage
if the anticipated aggregate offering price of such demand registration exceeds
$5,000,000. These holders will be entitled to sell all of the shares requested
to be registered. Shareholders with registration rights may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations.
Piggyback Rights. Our existing shareholders and warrant holders have
piggyback registration rights for an aggregate of 7,360,868 shares covering
future offerings by us.
Our shareholders that previously held our convertible preferred shares prior
to this offering have waived their piggyback registration rights with respect
to this offering. In a subsequent public offering effected at our initiation,
these holders are entitled to piggyback registration rights, subject to
reduction in the underwriters' discretion.
In May 1999, we granted a warrant to Silicon Valley Bank to purchase 17,500
of our Series C preferred shares which will convert to a warrant to purchase
30,625 of our common shares upon completion of this offering. In November 1999,
we granted warrants to purchase 262,500 of our common shares in connection with
a $5 million secured bridge loan. If at any time after this offering we
register any of our common shares for our own account or for the account of any
of our shareholders, other than a registration on Form S-1, S-4 or S-8, we will
have to register the common shares underlying all of these warrants.
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of common shares
by a beneficial owner that is a non-U.S. holder. As used in this prospectus, a
non-U.S. holder is defined as a holder that for U.S. federal income tax
purposes is an individual or entity other than:
. a citizen or individual resident of the United States;
. a corporation or partnership created or organized in or under the laws
of the United States or of any political subdivision thereof, other than
a partnership treated as foreign under U.S. Treasury regulations;
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
. a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
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<PAGE>
This discussion does not address all aspects of U.S. federal income and
estate taxes that:
. may be relevant to non-U.S. holders in light of their personal
circumstances, including the fact that in the case of a non-U.S. holder
that is a partnership, the U.S. tax consequences of holding and disposing
of common shares may be affected by determinations made at the partner
level, or
. may be relevant to non-U.S. holders which may be subject to special
treatment under U.S. federal income tax laws such as insurance companies,
tax-exempt organizations, financial institutions, dealers in securities
and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction."
This discussion also does not address any tax consequences arising under the
laws of any state, local or foreign jurisdiction. Furthermore, this discussion
is based on provisions of the Internal Revenue Code of 1986, as amended,
existing and proposed regulations promulgated thereunder and administrative and
judicial interpretations thereof, all as of the date hereof, and all of which
are subject to change, possibly with retroactive effect. The following summary
is included herein for general information. Accordingly, investors are urged to
consult their tax advisers regarding the U.S. federal, state, local and non-
U.S. income and other tax consequences of acquiring, holding and disposing of
common shares.
Dividends
We do not anticipate paying cash dividends on our common shares in the
foreseeable future. In the event, however, that dividends are paid on our
common shares, dividends paid to a non-U.S. holder of common shares generally
will be subject to withholding of U.S. federal income tax at a 30% rate, or
such lower rate as may be provided by an applicable income tax treaty. Non-U.S.
holders should consult their tax advisors regarding their entitlement to
benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax if the non-U.S.
holder files the appropriate U.S. Internal Revenue Service form with the payor.
This form under U.S. Treasury regulations generally requires the non-U.S.
holder to provide a U.S. taxpayer identification number. Any such U.S. trade or
business income received by a non-U.S. holder that is a corporation may also be
subject to an additional "branch profits tax" at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.
Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability
of a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000, however, a non-U.S. holder of our common
shares who wishes to claim the benefit of an applicable treaty rate generally
will be required to satisfy applicable certification and other requirements. In
addition, under these regulations, in the case of our common shares held by a
foreign partnership or other pass-through entity, the certification requirement
will generally be applied to the partners of the partnership and the
partnership will be required to provide specified information, including a U.S.
taxpayer identification number. The regulations generally effective for
payments made after December 31, 2000 also provide look-through rules for
tiered partnerships. Further, the Internal Revenue Service intends to issue
regulations under which a foreign trustee or foreign executor of a U.S. or
foreign trust or estate, depending on the circumstances, will be required to
furnish the appropriate withholding certificate on behalf of the beneficiaries,
trust or estate, as the case may be.
A non-U.S. holder of our common shares that is eligible for a reduced rate
of U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
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<PAGE>
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, income tax treaty benefits are denied to
foreigners receiving income derived through a partnership, or otherwise
fiscally transparent entity, in certain circumstances. Prospective investors
should consult with their own tax advisers concerning the effect, if any, of
these new Treasury regulations and this recent legislation on an investment in
our common shares.
Gain on disposition of common shares
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain realized on a disposition of our common shares unless:
. the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S.
holder;
. the non-U.S. holder is an individual who holds our common shares as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for 183 or more days in the
taxable year of the disposition and meets other requirements;
. the non-U.S. holder is subject to tax under the provisions of the U.S.
tax law applicable to certain United States expatriates; or
. we are or have been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the five-
year period preceding such disposition or the period that the non-U.S.
holder held our common shares.
We believe that we have not been, are not currently, and do not anticipate
becoming, a "U.S. real property holding corporation" for U.S. federal income
tax purposes.
If a non-U.S. holder who is an individual is subject to tax on gain which is
U.S. trade or business income, such individual generally will be taxed on the
net gain derived from a sale of common shares under regular graduated U.S.
federal income tax rates. If an individual non-U.S. holder is subject to tax
because such individual holds our common shares as a capital asset, is present
in the United States for 183 or more days in the taxable year of the
disposition and meets other requirements, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale. This gain may be
offset by U.S. capital losses, notwithstanding the fact that the individual is
not considered a resident alien of the United States. Thus, individual non-U.S.
holders who have spent, or expect to spend, more than a de minimis period of
time in the United States in the taxable year in which they contemplate a sale
of common shares are urged to consult their tax advisers prior to the sale
concerning the U.S. tax consequences of such sale.
If a non-U.S. holder that is a foreign corporation is subject to tax on gain
which is U.S. trade or business income, it generally will be taxed on its net
gain under regular graduated U.S. federal income tax rates and, in addition,
will be subject to the branch profits tax equal to 30% of its "effectively
connected earnings and profits," within the meaning of the Internal Revenue
Code for the taxable year, as adjusted for specific items, unless it qualifies
for a lower rate under an applicable tax treaty.
Federal estate tax
Common shares owned or treated as owned by an individual who is neither a
U.S. citizen nor a U.S. resident, as defined for U.S. federal estate tax
purposes, at the time of death will be included in the individual's gross
estate for U.S. federal estate tax purposes and may be subject to U.S. federal
estate tax, unless an applicable estate tax or other treaty provides otherwise.
Information reporting and backup withholding tax
Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to
these holders, the name and address of the recipient and
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<PAGE>
the tax withheld with respect to such dividends. Copies of the information
returns reporting such dividends and withholding may also be made available to
the tax authorities in the country in which the non-U.S. holder is a resident
under the provisions of an applicable income tax treaty or agreement.
Currently, U.S. backup withholding, which generally is a withholding tax
imposed at the rate of 31% on payments to persons that fail to furnish
specified information under the U.S. information reporting requirements,
generally will not apply:
. to dividends paid to non-U.S. holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or
. before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual
knowledge that the payee is a U.S. person.
Backup withholding and information reporting generally will apply to dividends
paid to addresses inside the United States on our common shares to beneficial
owners that are not "exempt recipients" and that fail to provide identifying
information in the manner required.
The payment of the proceeds of the disposition of our common shares by a
holder to or through the U.S. office of a broker or through a non-U.S. branch
of a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common shares to or through a non-U.S. office of a non-U.S. broker will not
be subject to backup withholding or information reporting unless the non-U.S.
broker has particular types of U.S. relationships. In the case of the payment
of proceeds from the disposition of our common shares effected by a foreign
office of a broker that is a U.S. person or a U.S. related person, existing
regulations require information reporting on the payment unless the broker
maintains documentary evidence that the holder is a non-U.S. holder and that
certain conditions are met. For this purpose, a U.S. related person is defined
as:
. a "controlled foreign corporation" for U.S. federal income tax purposes;
or
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided:
. directly by the non-U.S. holder;
. in the case of a non-U.S. holder that is treated as a partnership, trust
or estate, or by the partners or beneficiaries of such entity; or
. by qualified financial institutions or other qualified entities on
behalf of the non-U.S. holder.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a non-U.S. holder will be refunded,
or credited against the holder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the Internal Revenue
Service.
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<PAGE>
UNDERWRITING
Hambrecht & Quist LLC, SG Cowen Securities Corporation and U.S. Bancorp
Piper Jaffray Inc. are the representatives of the underwriters. Subject to the
terms and conditions of the underwriting agreement, the underwriters named
below, through their representatives, have severally agreed to purchase from us
the following respective numbers of common shares:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ------------
<S> <C>
Hambrecht & Quist LLC........................................
SG Cowen Securities Corporation..............................
U.S. Bancorp Piper Jaffray Inc...............................
------------
Total........................................................
============
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the common shares
offered by us if they purchase any shares.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.
Underwriting Discounts and Commissions
<TABLE>
<CAPTION>
Without With
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per Share................................... $ $
Total....................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $ .
The underwriters propose to offer the common shares directly to the public
at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may re-allow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The representatives have advised us
that the underwriters do not intend to confirm discretionary sales in excess of
5% of the common shares offered in this offering.
We have granted to the underwriters a 30-day option to purchase up to
additional common shares and Catherine R. Brady, the selling shareholder, has
granted to the underwriters a 30-day option to purchase up to an aggregate of
common shares owned by her, at the initial public offering price, less
the underwriting discount set forth on the cover page of this prospectus. To
the extent that the underwriters exercise these options, each of the
underwriters will have a firm commitment to purchase approximately the
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<PAGE>
same percentage thereof which the number of common shares to be purchased by it
shown in the above table bears to the total number of common shares offered
hereby. We and the selling shareholder will be obligated, pursuant to these
options, to sell shares to the underwriters to the extent the options are
exercised. The underwriters may exercise these options only to cover over-
allotments made in connection with the sale of common shares offered by us.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of these liabilities.
Substantially all of our securityholders and all of our executive officers
and directors have agreed or will agree prior to completion of this offering,
that they will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of any shares of capital stock, options or
warrants to acquire shares of capital stock or securities exchangeable for or
convertible into shares of capital stock owned by them for a period of 180 days
following the date of this prospectus. We have agreed that we will not, without
the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise
dispose of any shares of capital stock, options or warrants to acquire shares
of capital stock or securities exchangeable for or convertible into shares of
capital stock for a period of 180 days following the date of this prospectus,
except that we may issue shares upon the exercise of options and warrants
granted prior to the date hereof and in connection with our 1999 employee stock
purchase plan. We may also grant additional options or other awards under our
1999 omnibus incentive plan. Without the prior written consent of Hambrecht &
Quist LLC, any additional options granted shall not be exercisable during this
180-day period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common shares at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid or effecting of any purchase, for
the purpose of pegging, fixing or maintaining the price of the common shares. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from
a syndicate member in connection with the offering when common shares sold by
the syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for our common
shares. The initial public offering price for the common shares will be
determined by negotiations among us and the representatives. Among the factors
to be considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenue and earnings, market
valuations of other companies engaged in activities similar to our business
operations and our management. The estimated initial public offering price
range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.
In addition, at our request, the underwriters have reserved up to
common shares for sale at the initial public offering price to our directors,
officers, employees, business associates and related persons. The number of
common shares available for sale to the general public will be reduced if such
persons purchase the reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
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In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common shares on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
In November 1999, a $5.0 million secured bridge loan was made to us by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
in this offering. Certain employees and entities associated with Hambrecht &
Quist LLC have a $1.4 million participation in this loan and ARCH Venture Fund
III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. We granted to Access Technology Partners,
L.P. warrants that can be exercised to purchase 236,250 common shares in
connection with this loan and the employees and entities associated with
Hambrecht & Quist LLC that are participating in this loan have the right to
receive their pro rata portion of the warrants granted. We also granted ARCH
Venture Fund III, L.P. warrants that can be exercised to purchase 26,250 common
shares. The exercise price of the warrants is initially $5.34 per share but is
subject to adjustment.
We have applied for listing of our common shares on the Nasdaq National
Market under the symbol APRS.
LEGAL MATTERS
McDermott, Will & Emery, Chicago, Illinois, will pass upon the validity of
the common shares offered hereby. Legal matters relating to this offering will
be passed upon for the underwriters by Davis Polk & Wardwell, Menlo Park,
California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998, 1997 and September 30,
1999 and for each of the three years in the period ended December 31, 1998 and
for the nine-month period ended September 30, 1999, as set forth in their
reports. We have included our consolidated financial statements and schedule in
this prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common shares offered hereby. This prospectus does not contain all of the
information set forth in the registration statement, certain portions of which
are omitted as permitted by the rules and regulations of the Securities and
Exchange Commission. For further information pertaining to us and the common
shares to be sold in this offering, reference is made to the registration
statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
registration statement or such other document, each such statement being
qualified in all respects by such reference.
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On the closing of the offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will file reports,
proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information, as well as
the registration statement and the exhibits and schedules thereto, may be
inspected, without charge, at the public reference facility maintained by the
Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Seven World Trade Center, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain
information on the operation of the SEC public reference room in Washington,
D.C. by calling the SEC at 1-800-SEC-0330. Such materials can also be inspected
on the Securities and Exchange Commission's web site at www.sec.gov.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and September
30, 1999................................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1998
(unaudited) and 1999..................................................... F-4
Consolidated Statements of Common Shareholders' Deficit for each of the
three years in the period ended December 31, 1996, 1997 and 1998 and for
the nine month period ended September 30, 1999........................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1998
(unaudited) and 1999..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Apropos Technology, Inc.
We have audited the accompanying consolidated balance sheets of Apropos
Technology, Inc. as of December 31, 1997, 1998, and September 30, 1999, and the
related consolidated statements of operations, common shareholders' deficit,
and cash flows for each of the three years in the period ended December 31,
1998 and for the nine-month period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Apropos
Technology, Inc. at December 31, 1997, 1998, and September 30, 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 and for the nine-month period ended September
30, 1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 21, 1999, except
for Note 12, as to which the
date is November 5, 1999
The foregoing report is in the form that will be signed upon the effective
date of the stock split described in the first paragraph of Note 12 to the
consolidated financial statements.
/s/ Ernst & Young LLP
Chicago, Illinois
January 13, 2000
F-2
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, Pro forma
----------------- September 30, September 30,
1997 1998 1999 1999
------- -------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.... $ 1,984 $ 3,170 $ 401 $ 401
Accounts receivable, less
allowance for doubtful
accounts of $50 in 1997,
$151 in 1998, and $291 in
1999........................ 1,520 3,818 8,318 8,318
Inventory.................... 80 283 387 387
Prepaid expenses and other
current assets.............. 122 225 305 305
------- -------- -------- ---------
Total current assets....... 3,706 7,496 9,411 9,411
Equipment, net................. 663 1,021 1,458 1,458
Note receivable from
shareholder................... -- 51 53 53
Other assets................... 26 81 88 88
------- -------- -------- ---------
Total assets............... $ 4,395 $ 8,649 $ 11,010 $ 11,010
======= ======== ======== =========
Liabilities and common
shareholders' deficit
Current liabilities:
Accounts payable............. $ 310 $ 661 $ 1,331 $ 1,331
Accrued expenses............. 127 194 994 994
Accrued compensation and
related accruals............ 447 698 933 933
Advance payments from
customers................... 51 393 568 568
Deferred revenue............. 234 478 1,205 1,205
Current portion of capital
lease obligations........... 238 156 133 133
Current portion of long-term
debt........................ -- -- 113 113
Revolving line of credit..... -- -- 3,216 3,216
Subordinated convertible
promissory notes............ -- -- 1,454 1,454
------- -------- -------- ---------
Total current liabilities.. 1,407 2,580 9,947 9,947
Capital lease obligations...... 156 -- 71 71
Long-term debt, less current
portion....................... -- -- 292 292
Convertible preferred shares,
$.01 par value, authorized,
issued, and outstanding
3,995,483 shares (liquidation
value of $16,112 at September
30, 1999)..................... 8,093 16,079 16,079 --
Common shareholders' deficit:
Common shares, no par value,
authorized 7,694,384 shares,
2,922,591 issued and
outstanding at December 31,
1997, 2,960,914 issued and
outstanding at December 31,
1998, and 3,017,958 issued
and outstanding at September
30, 1999 and shares
issued and outstanding at
pro forma September 30,
1999........................ 22 26 37
Additional paid-in capital... -- 69 297
Accumulated deficit.......... (5,283) (10,105) (15,713) (15,713)
------- -------- -------- ---------
Total common shareholders'
deficit................... (5,261) (10,010) (15,379) (15,379)
------- -------- -------- ---------
Total liabilities and
common shareholders'
deficit................... $ 4,395 $ 8,649 $ 11,010 $ 11,010
======= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses........... $ 1,424 $ 2,669 $ 5,697 $ 3,968 $ 7,016
Services and other.......... 582 1,424 3,445 2,433 5,384
------- ------- ------- ------- -------
Total revenue............. 2,006 4,093 9,142 6,401 12,400
Costs and expenses:
Cost of software............ 10 26 31 26 176
Cost of services and other.. 348 1,308 3,084 2,198 3,997
Research and development.... 491 1,271 2,805 1,890 2,957
Sales and marketing......... 1,418 3,644 6,030 4,202 6,984
General and administrative.. 960 1,552 2,236 1,485 3,727
------- ------- ------- ------- -------
Total costs and expenses.. 3,227 7,801 14,186 9,801 17,841
------- ------- ------- ------- -------
Loss from operations.......... (1,221) (3,708) (5,044) (3,400) (5,441)
Other income (expense):
Interest income............. 32 210 245 193 32
Interest expense............ (11) (25) (23) (19) (199)
Miscellaneous expense....... -- (44) -- -- --
------- ------- ------- ------- -------
Total other income
(expense)................ 21 141 222 174 (167)
------- ------- ------- ------- -------
Net loss...................... $(1,200) $(3,567) $(4,822) $(3,226) $(5,608)
======= ======= ======= ======= =======
Net loss per share--basic and
diluted...................... $ (.42) $ (1.22) $ (1.64) $ (1.10) $ (1.88)
Shares used to compute net
loss per share--
basic and diluted........... 2,868 2,923 2,947 2,942 2,987
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Common Shares
---------------- Additional
Number of Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996... 2,868 $17 $ -- $ (499) $ (482)
Acquisition and retirement of
common shares............... -- -- -- (17) (17)
Net loss..................... -- -- -- (1,200) (1,200)
----- --- ----- -------- --------
Balance at December 31, 1996. 2,868 17 -- (1,716) (1,699)
Exercise of stock options.... 55 5 -- -- 5
Net loss..................... -- -- -- (3,567) (3,567)
----- --- ----- -------- --------
Balance at December 31, 1997. 2,923 22 -- (5,283) (5,261)
Exercise of stock options.... 39 4 -- -- 4
Compensation expense related
to stock options............ -- -- 69 -- 69
Net loss..................... -- -- -- (4,822) (4,822)
----- --- ----- -------- --------
Balance at December 31, 1998. 2,962 26 69 (10,105) (10,010)
Exercise of stock options.... 56 11 -- -- 11
Compensation expense related
to stock options............ -- -- 119 -- 119
Value of warrants issued with
debt........................ -- -- 109 -- 109
Net loss..................... -- -- -- (5,608) (5,608)
----- --- ----- -------- --------
Balance at September 30,
1999........................ 3,018 $37 $297 $(15,713) $(15,379)
===== === ===== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net loss...................... $(1,200) $(3,567) $(4,822) $(3,226) $(5,608)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization............... 70 173 363 243 389
Amortization of debt
discount................... -- -- -- -- 44
Loss on sale of equipment... -- 44 -- -- --
Provision for doubtful
accounts................... 65 46 101 101 140
Stock compensation expense.. -- -- 69 -- 119
Changes in operating assets
and liabilities:
Accounts receivable....... (535) (1,028) (2,399) (1,567) (4,575)
Inventory................. -- (80) (203) 44 (104)
Prepaid expenses and other
current assets........... (39) (95) (103) (99) 29
Other assets.............. -- (13) (55) (226) (7)
Note receivable from
shareholder.............. -- -- (51) -- (2)
Accounts payable.......... (58) 230 351 477 670
Accrued expenses.......... 281 (92) 67 101 800
Accrued compensation and
related accruals......... 261 251 (102) 235
Advance payments from
customers................ -- -- 342 514 175
Deferred revenue.......... (250) 273 244 (212) 727
------- ------- ------- ------- -------
Net cash used for operating
activities................... (1,666) (3,848) (5,845) (3,952) (6,968)
Cash flows from investing
activities
Purchases of equipment........ (212) (235) (721) (717) (647)
------- ------- ------- ------- -------
Net cash used for investing
activities................... (212) (235) (721) (717) (647)
Cash flows from financing
activities
Net proceeds from line of
credit....................... -- -- -- -- 3,107
Net proceeds from subordinated
demand notes................. -- -- -- -- 1,500
Proceeds from long-term debt.. -- -- -- -- 405
Net proceeds from issuance of
convertible preferred shares. 8,093 -- 7,986 7,986 --
Proceeds from exercise of
stock options................ -- 5 4 3 11
Principal payments of capital
lease obligations............ (32) (149) (238) (199) (177)
Repurchase of common shares... (17) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used
for) financing activities.... 8,044 (144) 7,752 7,790 4,846
------- ------- ------- ------- -------
Net change in cash and cash
equivalents.................. 6,166 (4,227) 1,186 3,121 (2,769)
Cash and cash equivalents,
beginning of period.......... 45 6,211 1,984 1,984 3,170
------- ------- ------- ------- -------
Cash and cash equivalents, end
of period.................... $ 6,211 $ 1,984 $ 3,170 $ 5,105 $ 401
======= ======= ======= ======= =======
Supplemental disclosures of
cash flow information:
Borrowings under capital
lease obligations.......... 183 294 -- -- 225
Warrants issued to debt
holders.................... -- -- -- -- 109
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
1. Nature of Business
Apropos Technology, Inc. (the Company) is engaged in the business of
developing and selling software, implementation, maintenance, and training
services to companies in diversified industries. The Company's product enables
customer interaction management for multimedia contact centers. The Company's
core competency is its skill in developing advanced software applications and
successfully linking those applications to a number of telephone systems,
networks, and databases. Principal operations of the Company commenced during
1995. The Company currently derives substantially all of its revenues from
licenses of its product and related services.
On June 9, 1997, the Company established a wholly owned subsidiary in the
United Kingdom, Apropos Technology, Limited. The purpose of this entity is to
market the Company's product throughout Europe.
2. Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Apropos Technology, Limited. All significant
intercompany balances and transactions have been eliminated.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. The Company classifies its
marketable securities as available-for-sale and states them at amortized cost
plus accrued interest, which approximates fair market value.
Inventory
Inventories are stated at the lower of cost (first in, first out method) or
market.
Income Taxes
The Company provides for income taxes under the liability method, which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under this method, a valuation allowance
is required against net deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
Management evaluates the recoverability of the deferred tax assets and the
level of the valuation allowance. At such time as it is determined that it is
more likely than not that deferred tax assets are realizable, the valuation
allowance will be appropriately reduced.
F-7
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
Equipment
Equipment is stated at cost. The Company provides for depreciation and
amortization using the straight-line method over their estimated useful lives
as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
-------------------- ----------------------
<S> <C>
Computer equipment................................ 3 years
Software.......................................... 3 years
Office equipment.................................. 5 years
Furniture and fixtures............................ 7 years
Furniture and fixtures for trade shows............ 2 years
Leasehold improvements (capital leases with a Estimated useful
bargain purchase option)..........................life.or life of lease
(whichever is shorter)
</TABLE>
Repairs and maintenance are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is included in the results of
operations.
Revenue Recognition
The Company generates software revenues from licensing the right to use its
software products and also generates service revenues from implementation and
installation services, ongoing maintenance (post-contract technical support and
product upgrades), training services, and professional services performed for
resellers and clients. The Company provides a warranty for 90 days on all
software licenses. Customers are allowed to return licenses under certain
conditions. The Company establishes a liability for estimates of returns and
allowances. The Company issues product upgrades on a when and if available
basis.
Revenue from software license agreements is recognized upon shipment of the
software if:
. persuasive evidence of an arrangement exists;
. sufficient vendor-specific objective evidence exists to support
allocating the total fee to all elements of the arrangement;
. the fee is fixed or determinable; and
. collection is probable.
Shipment is further defined in certain contracts as delivery of the product
master or first copy for noncancelable product licensing arrangements under
which the reseller has certain software distribution rights. Software licenses
are shipped to resellers upon receipt of a binding purchase order from an end
customer. The Company recognizes revenue from the sale of software licenses
placed through a reseller upon shipment of the license to the reseller or the
end customer. The right of the resellers' customers are consistent with the
rights of other customers in that the resellers' customers receive a 90-day
warranty.
Revenue from ongoing client maintenance is recognized ratably over the
postcontract support term, which is 12 months. Revenue from training services
and professional services is recognized when the services are completed. Prior
to 1998 the Company recognized revenue from implementation and installation
F-8
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
services when the services were completed. Beginning in 1998, the Company
recognized revenue from implementation and installation services using the
percentage of completion method. The Company calculates percentage of
completion based on the estimated total number of hours of service required to
complete an implementation project and the number of actual hours of service
rendered. Implementation and installation services are completed within 120
days. The cumulative impact of this change in accounting principle was not
material to the results of operations. Amounts received prior to revenue
recognition and for prepaid maintenance revenue are classified as deferred
revenue.
The Company provides a master copy of its software license to original
equipment manufacturers (OEM). The Company recognizes revenue from an OEM upon
notification from the OEM that delivery of the software license to an end
customer has occurred.
Advertising
Advertising costs are generally expensed as incurred. Advertising expenses
were $50,118, $65,905, and $158,209 for the years ended December 31, 1996,
1997, and 1998, respectively, and $101,439 and $148,400 for the nine-month
periods ended September 30, 1998 and 1999, respectively.
Use of Accounting Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company's foreign operations are the local
currencies. Accordingly, all assets and liabilities are translated into U.S.
dollars using year-end exchange rates, and all revenues and expenses are
translated using weighted-average exchange rates during the year. The amount of
foreign currency translation is not material to the results of operations and
the financial position of the Company.
Financial Instruments and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
trade accounts receivable, and short- and long-term debt (capital lease
obligation), which had fair values that approximate their carrying amounts. The
Company invests its excess cash primarily in investment-grade commercial paper.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed,
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company
F-9
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
between completion of the working model and the point at which the product is
ready for general release have not been significant. Through September 30,
1999, all software development costs have been expensed.
Stock Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), the Company uses the
intrinsic value method to account for stock options as set forth in Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees (APB 25).
Loss Per Share
Basic loss per share is calculated based on the weighted-average number of
outstanding common shares. Diluted loss per share is calculated based on the
weighted-average number of outstanding common shares plus the effect of
dilutive potential common shares. The Company's calculation of diluted net loss
per share excludes potential common shares as the effect would be antidilutive.
Potential common shares include stock options, warrants, and redeemable
convertible preferred stock. The weighted average number of options and
warrants to purchase common stock using the treasury stock method for 1997,
1998 and 1999 were 877,361, 1,986,722 and 3,009,598 shares, respectively. The
weighted average number of shares of redeemable convertible preferred stock
using the if-converted method for 1997, 1998 and 1999 were 4,974,806, 6,992,095
and 6,992,095 shares, respectively.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements as of September
30, 1998, and for the nine months ended September 30, 1998, have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X
of the Securities and Exchange Commission. Accordingly, such consolidated
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of the Company, all adjustments considered necessary to
present fairly the consolidated financial position as of September 30, 1998,
and the consolidated statements of operations, shareholders' deficit, and cash
flows for the nine-month period ended September 30, 1998, have been included.
Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. Comprehensive loss is the same as net loss for the Company.
Accordingly, the adoption of SFAS 130 had no impact on the Company's net loss
or shareholders' deficit.
Effective January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information (SFAS 131). SFAS 131 requires public business enterprises
to report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports. The adoption of SFAS 131 did not require
disclosure of segment information as the Company continues to consider its
business activities as a single segment.
F-10
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
3. Equipment
Equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
----- ------ -------------
<S> <C> <C> <C>
Computer equipment.......................... $ 371 $ 742 $ 1,212
Office equipment............................ 7 49 94
Furniture and fixtures...................... 372 576 867
Software.................................... 106 170 241
Leasehold improvements...................... 62 102 97
----- ------ -------
Gross equipment........................... 918 1,639 2,511
Less: Accumulated depreciation and
amortization............................... (255) (618) (1,053)
----- ------ -------
Equipment, net.............................. $ 663 $1,021 $ 1,458
===== ====== =======
</TABLE>
4. Debt
Revolving Line of Credit
During 1998, the Company entered into a credit agreement (the Agreement)
with a bank that provided for a secured line-of-credit facility of $400,000.
Borrowings under the Agreement are secured by the assets of the Company and
bear interest at the prime rate (8.25% at September 30, 1999) plus 1%.
On August 5, 1999, the Company amended the Agreement (Amended Agreement).
Under the Amended Agreement, the revolving credit facility was increased to
$3,500,000 (including letters of credit of up to $300,000) with a maturity of
the earlier to occur of March 16, 2000 or completion of the Company's initial
public offering. At September 30, 1999, borrowings under the Amended Agreement
were $3,216,000 and outstanding letters of credit were $284,000. The Amended
Agreement also provides for equipment advances of not more than $500,000,
bearing interest at the prime rate (8.25% at September 30, 1999) plus 1.25%. At
September 30, 1999, equipment advances aggregated $405,000 and are due March
2001. As of September 30, 1999 the Company was not in compliance with certain
covenants set forth in the Amended Agreement. The Company obtained a waiver for
the covenant violation.
In accordance with the Amended Agreement, the Company issued detachable
warrants to the bank which permit the bank to purchase 17,500 Series C
preferred shares for $6.94 per share. The warrants to purchase the Series C
convertible preferred shares automatically convert to warrants to purchase
30,625 of common shares at an exercise price of $3.97 per share upon the
completion of an initial public offering. If the Company does not repay the
portion of the outstanding amount under its revolving line of credit that is in
excess of the borrowing base, which amount could be up to $1.5 million, by
March 16, 2000, the lender would be entitled to an additional warrant to
purchase 17,500 Series C preferred shares for $6.94 per share, which would
automatically convert to a warrant to purchase 30,625 common shares at an
exercise price of $3.97 per share upon completion of an initial public
offering.. The fair value of these warrants, as calculated using the Black-
Scholes method, has been estimated at $32,000 at the time of issuance of these
notes. This fair value has been reflected as deferred financing costs in other
assets and is being amortized over the term of the line of credit.
Subordinated Convertible Promissory Notes
During 1999, the Company issued subordinated convertible promissory notes
with a face value of $1,500,000 and a stated interest rate of 10%, together
with warrants, to certain preferred shareholders. The
F-11
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
notes are due on the earlier of May 12, 2000 or completion of the Company's
initial public offering. Borrowings under the subordinated convertible
promissory notes are subordinated to the revolving line of credit. The
subordinated convertible promissory notes are required to be repaid upon the
completion of an initial public offering.
These warrants, which become exercisable upon the issuance of the notes,
allow the note holders to purchase 43,228 shares of Series C Preferred Shares
for $6.94 per share. The warrants to purchase the Series C convertible
preferred shares automatically convert to warrants to purchase 75,649 of the
common shares at an exercise price of $3.97 per share upon completion of the
initial public offering. The fair value of these warrants, as calculated using
the Black-Scholes method, was estimated at $77,000 at the time of issuance of
the notes. No warrants have been exercised at September 30, 1999. This fair
value has been reflected as a reduction of the carrying amount of the
subordinated convertible promissory notes increasing the effective interest
rate on the subordinated convertible promissory notes to 15%.
In applying the Black-Scholes method, the Company has used an expected
dividend yield of zero, a risk-free interest rate of 5%, a volatility factor
of 136% and a fair value of the underlying common shares of $4.32. The lives
used to value each of the warrants was based on the term of each warrant as
described above.
During 1999, the Company granted 60,728 warrants with an exercise price of
$6.94 per share. No warrants had been exercised at September 30, 1999.
Annual maturities of the Company's long-term debt at September 30, 1999,
are $162,000 in 2001 and $130,000 in 2002.
5. Income Taxes
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 34% is due to net operating losses not being benefited. Accordingly, there
is no provision for income taxes for the years ended December 31, 1996, 1997
and 1998 and the nine month period ended September 30, 1999.
At September 30, 1999, the Company has net operating loss carryforwards
aggregating approximately $12,849,000, which begin to expire in 2012. Based on
Internal Revenue Code regulations relating to changes in ownership of the
Company, utilization of the net operating loss carryforwards may be subject to
annual limitations. For financial reporting purposes, the entire amount of
deferred tax assets related principally to the net operating loss
carryforwards has been offset by a valuation allowance due to uncertainty
regarding realization of the asset.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....... $ 2,046 $ 3,185 $ 4,816
Amounts to adjust from accrual method
to the cash method of accounting used
for tax purposes...................... (282) (650) --
Research and development tax credit
carryforwards......................... -- -- 334
Other.................................. 10 15 (7)
------- ------- -------
Total deferred tax assets................ 1,774 2,550 5,143
Valuation allowance for deferred tax
assets.................................. (1,774) (2,550) (5,143)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-12
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
6. Shareholders' Deficit
Authorization of Common and Convertible Preferred Shares
Effective May 14, 1997, the Company's Board of Directors adopted and the
shareholders approved an increase in the number of authorized capital shares
from 8,442,634 to 11,689,867, of which 7,694,384 shares were designated as
common shares and 3,995,483 shares were designated as convertible preferred
shares. The Company's Board of Directors has the authority, without shareholder
approval, to issue in one or more series of preferred shares and to establish
the rights and preferences of such preferred shares.
Convertible Preferred Shares
The following table reflects the various convertible preferred shares issued
through September 30, 1999:
<TABLE>
<CAPTION>
Amount (Net of
Shares Issuance Costs)
--------- --------------
(in thousands)
<S> <C> <C>
Series A, issued March 1997.................... 1,242,858 $ 2,119
Series B, issued December 1997................. 1,599,888 5,974
Series C, issued March 1998.................... 1,152,737 7,986
--------- -------
Balance at September 30, 1999.................. 3,995,483 $16,079
========= =======
</TABLE>
Convertible preferred shares are subject to the following rights and
privileges.
Conversion and Redemption
The holders of preferred shares have the right, at anytime, to convert the
preferred shares into common shares. In addition, effective upon the closing of
an initial public offering of the Company's common shares, which results in
proceeds of at least $20,000,000 and a per share price of at least $11.25, each
preferred share will automatically convert into 1.75 common shares.
If the Company has not effected a liquidation, merger, consolidation, or
other disposition of all or substantially all of its assets, or completed a
qualified public offering (as defined), prior to March 19, 2001, the holders of
the convertible preferred shares, upon approval of holders of 66 2/3% of the
shares, have the right to require the Company to redeem 33 1/3%, 50%, and 100%
of the shares on March 19, 2001, March 19, 2002, and March 19, 2003,
respectively.
Dividends
Preferred shareholders shall be entitled to receive dividends at the same
rate as dividends are paid with respect to the common shares. Such preferred
dividends will be determined by the number of common shares into which each
preferred share could then be converted, as defined.
Liquidation
In certain events, including liquidation, dissolution, or winding up of the
Company as defined, the holders of the Series C Preferred Shares shall be
entitled, before any distribution or payment is made upon any shares with
liquidation preferences junior to the Series C Preferred Shares, to be paid
$6.94 per share
F-13
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
(as adjusted for share split, share dividends, and the like) plus any dividends
declared but unpaid thereon. Further, upon any such liquidation, dissolution,
or winding up of the Company, after the holders of Series C Preferred Shares
are paid in full the amounts to which they are entitled, the holders of the
Series B Preferred Shares are entitled, before any distribution or payment is
made upon any shares with liquidation preferences junior to the Series B
Preferred Shares, to be paid $3.75 per share plus (as adjusted for share split,
share dividends, and the like), any dividends declared but unpaid thereon.
Further, upon any such liquidation, dissolution, or winding up of the Company,
after the holders of Series C and B Preferred Shares are paid in full the
amounts to which they are entitled, the holders of the Series A Preferred
Shares are entitled, before any distribution or payment is made upon any shares
with liquidation preferences junior to the Series A Preferred Shares, to be
paid $1.70 per share plus (as adjusted for share split, share dividends, and
the like) any dividends declared but unpaid theron.
Voting
Preferred shareholders are entitled to votes equal to the number of shares
of common shares which may be obtained upon conversion.
Stock Option Plan
Utilizing the intrinsic value method of APB 25, the Company recognized
$69,000 and $119,000 during the year ended December 31, 1998 and for the nine
months ended September 30, 1999, respectively.
The Company's 1995 stock option plan (the Plan) provides for the issuance of
incentive stock options and nonqualified stock options to eligible employees
and officers of the Company. The options can be granted for periods of up to
ten years and generally vest ratably over a four-year period with initial
vesting occurring on the first anniversary from the grant date and monthly
thereafter.
Had stock options been accounted for under the fair value method recommended
by SFAS 123, the Company's net loss as follows would have been on a pro forma
basis (in thousands):
<TABLE>
<CAPTION>
Year ended December Nine months
31, ended
-------------------- September 30,
1996 1997 1998 1999
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Net loss--as reported.................. $1,200 $3,567 $4,822 $5,608
Net loss--pro forma.................... $1,200 $3,592 $4,884 $5,817
Pro forma loss per share............... $ .42 $ 1.23 $ 1.66 $ 1.95
</TABLE>
The fair value of stock options used to compute pro forma net loss is the
estimated present value at the grant date using the minimum value option-
pricing model with the following assumptions: dividend yield of 0%; risk-free
interest rates of 5.00% for 1999 and 4.65% for 1998; and a weighted-average
expected option life of four years.
F-14
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
Information related to the Plan is as follows:
<TABLE>
<CAPTION>
Nine months ended
1996 1997 1998 September 30, 1999
------------------- ---------------------- ---------------------- -----------------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
--------- --------- ----------- --------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... 177,586 $.100 1,840,875 $.100 2,350,850 $.131 2,903,703 $ .202
Options granted......... 1,663,289 .100 651,436 .214 698,249 .454 503,911 1.177
Options exercised....... -- -- (54,329) .100 (38,931) .109 (56,435) .208
Options canceled........ -- -- (87,132) .100 (106,465) .237 (43,312) .478
Options outstanding, end
of period.............. 1,840,875 .100 2,350,850 .131 2,903,703 .202 3,307,867 .348
Option price range at
end of period.......... $.100 $.100-$.214 $.100-$.628 $.100-$1.371
Options available for
grant at period end.... 142,639 570,662 565,552 161,388
Exercisable at September
30, 1999............... 1,984,610 .170
Weighted-average fair
value of options
granted during the
period................. $.100 $.342 $.805 $3.445
</TABLE>
The outstanding options at September 30, 1999, have a weighted-average
remaining contractual life of 7.56 years.
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Exercisable Average
Range of Number of Contractual Exercise Options as Exercise
Exercise Prices Shares Life (in years) Price of 9/30/99 Price
--------------- --------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.100 1,638,418 6.42 $0.100 1,444,488 $0.100
$0.214 622,599 7.72 $0.214 348,104 $0.214
$0.400 345,625 8.84 $0.400 98,888 $0.400
$0.629-$0.914 410,813 9.21 $0.761 79,722 $0.761
$1.371 290,413 9.73 $1.371 13,408 $1.371
--------- ---- ------ --------- ------
$0.100-$1.371 3,307,867 7.56 0.350 1,984,610 $0.170
========= ==== ====== ========= ======
</TABLE>
F-15
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
7. Lease Commitments
At September 30, 1999, the Company was obligated for future minimum lease
payments under capital and operating leases that have initial or remaining
noncancelable terms in excess of one year, as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
September 2000.......................................... $133 $ 657
September 2001.......................................... 90 666
September 2002.......................................... -- 671
September 2003.......................................... -- 663
September 2004.......................................... -- 151
---- ------
223 $2,808
======
Less: Amounts representing interest..................... 19
----
Obligations under capital leases........................ 204
Less: Obligations due within one year................... 133
----
Long-term obligation under capital leases............... $ 71
====
</TABLE>
Rent expense for operating leases was $88,098, $157,496, and $374,165 for
the years ended December 31, 1996, 1997, and 1998, respectively, and $229,564
and $603,402 for the nine-month periods ended September 30, 1998 and 1999,
respectively.
Assets recorded under capitalized lease agreements included in equipment at
September 30, 1999, consist of the following (in thousands):
<TABLE>
<S> <C>
Computer equipment.................................................. $100
Furniture and fixtures.............................................. 200
----
300
Accumulated depreciation and amortization........................... (79)
----
$221
====
</TABLE>
8. Related Party Transactions
The Company has a note receivable in the amount of $50,000 from one of its
employee/shareholders. The note bears interest at 5.77%, payable quarterly in
arrears, and is due in full on the earlier of: (1) March 31, 2003; (2) the date
of termination of employment for any reason; (3) the date of the sale of all or
substantially all of the Company's assets; (4) the sale of any portion of
securities owned by the employee/shareholder or any successor to the Company;
or (5) the earliest date on which the employee/shareholder would be able to
sell any portion of securities owned by the employee/shareholder as a result of
such securities being registered under the Securities Act of 1933. The
outstanding balance of the note plus accrued interest receivable ($52,909 at
September 30, 1999) has been classified as noncurrent in the balance sheet.
9. 401(k) Profit-Sharing Plan
Effective January 1, 1997, the Company implemented a 401(k) profit-sharing
plan covering substantially all employees who meet defined service
requirements. The plan provides for deferred salary contributions by
F-16
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to nine-month period ended September 30, 1998 is
unaudited)
the plan participants and a Company contribution. Company contributions, if
any, are at the discretion of the Board of Directors and are not to exceed the
amount deductible under applicable income tax laws. No Company contributions
have been made since inception of the plan.
10. Geographic Information
Revenues derived from customers outside of North America accounted for
approximately 0% and 6.6% of the Company's total revenues in 1997 and 1998,
respectively, and 18.5% in the first nine months of 1999.
The Company attributes its revenues to countries based on the country in
which the client is located. The Company's long-lived assets located outside
the United States are not considered material.
11. Contingencies
The Company had a dispute with a former reseller in which the reseller
alleged that the Company had breached a contract between the two companies. The
dispute was submitted to a binding resolution by an arbitrator. On September
15, 1999, the arbitrator ruled that the Company had breached its contract with
a former reseller. The damages phase of the arbitration proceedings is
scheduled to be held in January 2000. The Company has recorded a provision for
the settlement of this arbitration. Management believes this amount is not
material. Management does not believe this arbitration will have a material
adverse affect on the Company's financial condition.
Beginning in June 1999, the Company received letters from Rockwell
Electronic Commerce Corporation claiming that the Company's product utilizes
technologies pioneered and patented by that competitor and suggesting that the
Company discuss the terms of a potential license of their technologies. On
January 5, 2000, the Company received a letter from Rockwell that it had filed,
but not yet served, a complaint in the United States District Court for the
Northern District of Illinois asserting that the Company had infringed four of
its patents identified in Rockwell's previous correspondence. The complaint
seeks a permanent injunction and unspecified damages. Based upon the initial
review by its patent counsel of the claims being asserted by Rockwell, the
Company believes that it likely has meritorious defenses to such claims and it
intends to vigorously defend its position.
12. Subsequent Events
Stock Split
The Board of Directors will declare a seven-for-four stock split effective
immediately prior to the closing of an initial public offering of the Company's
common shares. All common share and per share amounts and information
concerning stock option plans have been adjusted retroactively to give effect
to this stock split.
Bridge Loan
In November 1999, a $5.0 million secured bridge loan was made to the Company
by Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
in this offering. Certain employees and entities associated with Hambrecht &
Quist LLC have a $1.4 million participation in this loan and ARCH Venture Fund
III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. Apropos granted to Access Technology
Partners, L.P. warrants that can be exercised to purchase 236,250 common shares
in connection with this loan and the employees and entities associated with
Hambrecht & Quist LLC that are participating in this loan have the right to
receive their pro rata portion of the warrants granted. The Company also
granted ARCH Venture Fund III, L.P. warrants that can be exercised to purchase
26,250 common shares. The exercise price of the warrants is initially $5.34 per
share but is subject to adjustment.
F-17
<PAGE>
[Flap 4]
[(Inside Back Cover)]
[Graphic depiction of the Apropos logo.]
Apropos Technology. . . providing customer interaction management solutions
for your traditional and ebusiness needs.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Apropos Technology, Inc. [logo]
Common Shares
----------------
PROSPECTUS
----------------
CHASE H&Q
SG COWEN
U.S. BANCORP PIPER JAFFRAY
----------------
, 2000
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, common shares only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this prospectus or
of any sale of our common shares.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common shares or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until , 2000, all dealers that buy, sell or trade in our common
shares, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by us, will be
substantially as set forth below. All amounts are estimated except the
Securities and Exchange Commission registration fee, the National Association
of Securities Dealers filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Item Amount
---- -------
<S> <C>
Securities and Exchange Commission registration fee................. $15,346
NASD filing fee..................................................... 6,020
Nasdaq National Market listing fee..................................
Accounting fees and expenses........................................
Legal fees and expenses.............................................
Transfer agent fees and expenses....................................
Printing and engraving expenses.....................................
Directors and officers insurance premiums...........................
Miscellaneous expenses..............................................
-------
Total............................................................. $
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitation of Liability and Indemnification Matters
We are incorporated under the laws of the State of Illinois. Section 8.75 of
the Illinois Business Corporation Act provides generally that an Illinois
corporation may indemnify its directors and officers against (1) expenses,
including attorneys' fees, in the case of actions by or in the right of the
corporation or (2) against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement in all other cases, actually and
reasonably incurred by them in connection with any action, suit, or proceeding
if, in connection with the matters in issue, they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interests
of the corporation and, in connection with any criminal suit or proceeding, if
in connection with the matters in issue, they had no reasonable cause to
believe their conduct was unlawful. Section 8.75 further permits an Illinois
corporation to grant to its directors and officers additional rights of
indemnification through bylaw provisions, agreements, votes of shareholders or
disinterested directors, or otherwise. An Illinois corporation may also
purchase indemnity insurance on behalf of such indemnifiable persons and to
advance to such indemnifiable persons expenses incurred in defending a suit or
proceeding upon receipt of an undertaking by such persons to repay such amount
if it is ultimately determined that such person is not entitled to be
indemnified by us in accordance with Section 8.75.
Our amended and restated articles of incorporation provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for breach of fiduciary duty as a director, except for (1) for any
breach of the director's duty of loyalty to us, (2) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) under Section 8.65 of the Illinois Business Corporation Act, as the
same exists or hereafter may be amended or (4) for any transaction from which
the director derived an improper benefit. Our amended and restated articles of
incorporation also provide that if the Illinois Business Corporation Act is
amended to authorize the further elimination or limitation of the liability of
directors, then the liability of our directors shall be eliminated or limited
to the full extent authorized by the Illinois Business Corporation Act as
amended.
Our amended and restated bylaws provide that we shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of the
II-1
<PAGE>
corporation, by reason of the fact that he is or was one of our directors or
officers, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suitor proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in and not opposed to our best interests, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Such person is also entitled to indemnification in
connection with an action or suit by or in the right of us against expenses,
including attorneys' fees actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, if such
person acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, our best interests provided that no such indemnification
may be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to us unless and only to the extent that
the court in which such action or suit was brought shall determine that,
despite the adjudication of liability but in consideration of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. In addition, all
of our directors and officers are expected to be covered by insurance policies
maintained by us against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act.
The underwriting agreement also provides for indemnification by the
underwriters of our officers and directors for specified liabilities under the
Securities Act of 1933.
We have entered into agreements to indemnify our directors and some of our
executive officers, in addition to the indemnification provided for in our
amended and restated bylaws. These agreements, among other things, will
indemnify our directors and such executive officers for all direct and indirect
expenses and costs including, without limitation, all reasonable attorneys'
fees and related disbursements, other out of pocket costs and reasonable
compensation for time spent by such persons for which they are not otherwise
compensated by us or any third person, and liabilities of any type whatsoever,
including, but not limited to, judgments, fines and settlement fees, actually
and reasonably incurred by such person in connection with either the
investigation, defense, settlement or appeal of any threatened, pending or
completed action, suit or other proceeding, including any action by or in the
right of the corporation, arising out of such person's services as a director
or officer or as a director, officer, employee or other agent of any or our
subsidiaries or any other company or enterprise to which the person provides
services at our request if such director or officer acted in good faith and in
a manner he or she reasonably believed to be in, or not opposed to, our best
interests and, with respect to any criminal action or proceeding, if he or she
had no reasonable cause to believe his or her conduct was unlawful. We believe
that these provisions and agreements are necessary to attract and retain
talented and experienced directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information reflects our recent sales of unregistered
securities:
On or about March 19, 1996, we issued 1,242,858 shares of Series A
convertible preferred shares to three investors consisting of partnerships for
an aggregate consideration of $2,175,000.
On or about December 20, 1996, we issued 1,599,888 shares of Series B
convertible preferred shares to five investors consisting of partnerships and a
corporation for an aggregate consideration of $6,000,000.
On or about March 11, 1998, we issued 1,152,737 shares of our Series C
convertible preferred shares to four investors consisting of partnerships and a
corporation for an aggregate consideration of $8,000,000.
In June 1999, we issued subordinated convertible promissory notes with a
face value of $1.5 million and a stated interest rate of 10% per annum. In
connection with these notes, we issued warrants to purchase 43,228 shares of
our Series C convertible preferred shares to these holders at an exercise price
of $6.94 per
II-2
<PAGE>
share. The warrants to purchase our Series C convertible preferred shares
automatically convert to warrants to purchase 75,649 of our common shares at an
exercise price of $3.97 per share upon completion of this offering.
In May 1999, we also issued a warrant to purchase 17,500 shares of our
Series C convertible preferred shares at an exercise price of $6.94 per share
to Silicon Valley Bank. This warrant will automatically convert to a warrant to
purchase 30,625 of our common shares at an exercise price of $3.97 per share
upon completion of this offering. Silicon Valley Bank is also entitled to an
additional identical warrant if we do not repay the portion of the outstanding
amount under our revolving line of credit that is in excess of the borrowing
base, which amount could be up to $1.5 million, by March 16, 2000.
In November 1999, a $5.0 million secured bridge loan was made to Apropos by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
in this offering. Certain employees and entities associated with Hambrecht &
Quist LLC have a $1.4 million participation in this loan and ARCH Venture Fund
III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. Apropos granted to Access Technology
Partners, L.P. warrants that can be exercised to purchase 236,250 common shares
in connection with this loan and the employees and entities associated with
Hambrecht & Quist LLC that are participating in this loan have the right to
receive their pro rata portion of the warrants granted. Apropos also granted
ARCH Venture Fund III, L.P. warrants that can be exercised to purchase 26,250
common shares. The exercise price of the warrants is initially $5.34 per share
but is subject to adjustment.
No underwriters were involved in any of the transactions described above. We
issued all of the securities in the foregoing transactions in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act,
including Regulation D promulgated thereunder, as transactions by an issuer not
involving any public offering and the transactions involved the issuance and
sale of our securities to financially sophisticated entities or individuals who
represented that they were aware of our activities and business and financial
condition, and who took these securities for investment purposes and understood
the ramifications of their actions. Each security holder represented that they
acquired such securities for investment for their own account and not for
distribution. All certificates representing the stock issued have a legend
imprinted on them stating that the shares have not been registered under the
Securities Act and cannot be transferred until properly registered under the
Securities Act or an exemption applies.
Between November 1, 1996 and November 1, 1999 we issued options to purchase
1,645,125 common shares at exercise prices ranging from $0.117 to $1.60 to
employees.
Between November 1, 1996 and November 1, 1999, an aggregate of 75,381 common
shares were issued upon exercise of options under our stock option plan
No underwriters were involved in any of the transactions relating to options
that are described above. We issued all of the securities in the foregoing
transactions in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Rule 701 promulgated thereunder,
as transactions by an issuer not involving any public offering and pursuant to
a written compensatory benefit plan.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1* Form of Amended and Restated Articles of Incorporation.
3.2* Form of Amended and Restated Bylaws.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
4.1 Specimen Common Share Certificate of the Registrant.
5.1* Form of Opinion of McDermott, Will & Emery.
10.1* Employment Agreement dated March 19, 1996 between the Registrant and
Kevin G. Kerns.
10.2* Employment Agreement dated March 19, 1996 between the Registrant and
Patrick K. Brady.
10.3+ Employment Agreement dated April 23, 1997 between the Registrant and
Richard D. Brown.
10.4+ Employment Agreement dated August 4, 1997 between the Registrant and
Jody P. Wacker.
10.5* 1999 Omnibus Incentive Plan.
10.6* 1999 Employee Stock Purchase Plan.
10.7* Form of Indemnity Agreement.
10.8 Registration Rights Agreement dated March 19, 1996, between the
Registrant and the persons listed on the signature pages thereto, as
amended.
10.9 Amended and Restated Registration Right Agreement dated November 5,
1999, by and among Silicon Valley Bank, Access Technology Partners,
L.P., ARCH Venture Fund III, L.P. and the Registrant.
21* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2+ Consent of McDermott, Will & Emery (incorporated by reference into
Exhibit 5.1).
24.1* Power of Attorney (set forth on the signature page to this registration
statement).
27.1* Financial Data Schedule.
</TABLE>
---------------------
+ To be filed by amendment.
* Previously filed.
Financial Statements and Schedule:
Financial Statements:
Consolidated financial statements filed as a part of this registration
statement are listed in the Index to consolidated financial statements on page
F-1.
Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing of the offering specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Oakbrook Terrace, State of Illinois, on January 13, 2000.
Apropos Technology, Inc.
/s/ Michael J. Profita
By: _________________________________
Michael J. Profita
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed on January 13, 2000, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Name and Signatures Title
------------------- -----
<S> <C>
/s/ Kevin G. Kerns* Director, Chief Executive Officer and
___________________________________________ President
Kevin G. Kerns
/s/ Michael J. Profita Chief Financial Officer (Principal
___________________________________________ Financial and Accounting Officer)
Michael J. Profita
/s/ Patrick K. Brady* Director
___________________________________________
Patrick K. Brady
/s/ Catherine R. Brady* Director
___________________________________________
Catherine R. Brady
/s/ Keith L. Crandell* Director
___________________________________________
Keith L. Crandell
/s/ Ian Larkin* Director
___________________________________________
Ian Larkin
/s/ Maurice A. Cox, Jr.* Director
___________________________________________
Maurice A. Cox, Jr.
/s/ George B. Koch* Director
___________________________________________
</TABLE> George B. Koch
/s/ Michael J. Profita
*By: ________________________________
Michael J. Profita
Attorney-in-fact
II-6
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
APROPOS TECHNOLOGY, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Additions
-------------------
Charged Charged to Balance
Balance at to Costs Other at End
Beginning and Accounts-- Deductions-- of
Description of Period Expenses Describe Describe Period
- ----------- ---------- -------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $ -- 65,000 -- 3,000 (1) $ 62,000
Year ended December 31,
1997
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $ 62,000 46,000 -- 58,000 (1) $ 50,000
Year ended December 31,
1998
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $ 50,000 101,000 -- $151,000
Nine months ended
September 30, 1999
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $151,000 140,000 -- -- $291,000
</TABLE>
- ---------------------
(1) Uncollectible accounts written off, net of recoveries.
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of Apropos
Technology, Inc. as of December 31, 1997 and 1998 and September 30, 1999, and
the related consolidated statements of operations, shareholders' deficit, and
cash flows for each of the three years in the period ended December 31, 1998
and for the nine-month period ended September 30, 1999, and have issued our
report thereon dated October 21, 1999 (except Note 12, as to which the date is
November 5, 1999) (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
October 21, 1999
The foregoing report is in the form that will be signed upon the effective
date of the stock split described in the first paragraph of Note 12 to the
consolidated financial statements.
/s/ Ernst & Young LLP
Chicago, Illinois
January 13, 2000
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1* Form of Amended and Restated Articles of Incorporation.
3.2* Form of Amended and Restated Bylaws.
4.1 Specimen Common Share Certificate of the Registrant.
5.1* Form of Opinion of McDermott, Will & Emery.
10.1* Employment Agreement dated March 19, 1996 between the Registrant and
Kevin G. Kerns.
10.2* Employment Agreement dated March 19, 1996 between the Registrant and
Patrick K. Brady.
10.3+ Employment Agreement dated April 23, 1997 between the Registrant and
Richard D. Brown.
10.4+ Employment Agreement dated August 4, 1997 between the Registrant and
Jody P. Wacker.
10.5* 1999 Omnibus Incentive Plan.
10.6* 1999 Employee Stock Purchase Plan.
10.7* Form of Indemnity Agreement.
10.8 Registration Rights Agreement dated March 19, 1996, between the
Registrant and the persons listed on the signature pages thereto, as
amended.
10.9 Amended and Restated Registration Right Agreement dated November 5,
1999, by and among Silicon Valley Bank, Access Technology Partners,
L.P., ARCH Venture Fund III, L.P. and the Registrant.
21* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2+ Consent of McDermott, Will & Emery (incorporated by reference into
Exhibit 5.1).
24.1* Power of Attorney (set forth on the signature page to this
registration statement).
27.1* Financial Data Schedule.
</TABLE>
- ---------------------
+ To be filed by amendment.
* Previously filed.
<PAGE>
Exhibit 4.1
NUMBER SHARES
APROPOS TECHNOLOGY, INC.
[LOGO]
__________ __________
INCORPORATED UNDER THE LAWS OF THE STATE OF ILLINOIS
COMMON SHARES COMMON SHARES
$0.01 PAR VALUE $0.01 PAR VALUE
CUSIP 038334 10 8
SEE REVERSE FOR CERTAIN DEFINITIONS
This Certifies that
is the owner of
COMMON SHARES OF APROPOS TECHNOLOGY, INC.
(hereinafter called the "Corporation"), transferable on the books of the
Corporation in person or by duly authorized attorney, upon surrender of this
Certificate properly endorsed. This certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
In Witness Whereof, the Corporation has caused this Certificate to be
signed by its duly authorized officers.
Dated:
/s/ Michael J. Profita /s/ Kevin G. Kerns
CHIEF FINANCIAL OFFICER, CHIEF EXECUTIVE OFFICER
VICE PRESIDENT, FINANCE, AND PRESIDENT
TREASURER AND SECRETARY
Countersigned and Registered:
HARRIS TRUST AND SAVINGS BANK
Transfer Agent and Registrar
By:____________________________
Authorized Signature
<PAGE>
APROPOS TECHNOLOGY, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS
A STATEMENT OF ALL OF THE DESIGNATIONS, PREFERENCES, QUALIFICATIONS,
LIMITATIONS, RESTRICTIONS, AND SPECIAL OR RELATIVE RIGHTS OF THE SHARES OF EACH
CLASS AUTHORIZED TO BE ISSUED AND THE VARIATIONS IN THE RELATIVE RIGHTS AND
PREFERENCES BETWEEN THE SHARES OF EACH SUCH SERIES, SO FAR AS THE SAME HAVE BEEN
FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND
DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF TRANSFER MIN ACT - _____ Cust _____
TEN ENT -- as tenants by the entireties (Custodian) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________________ hereby sell, assign and transfer
unto
TAXPAYER IDENTIFYING NUMBER
- -----------------------------------
- -----------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE - NAME AND ADDRESS OF ASSIGNEE)
______________________________________________________________________SHARES
TAXPAYER IDENTIFYING NUMBER
- -----------------------------------
- -----------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE - NAME AND ADDRESS OF ASSIGNEE)
______________________________________________________________________SHARES
of the common shares represented by the within Certificate and do hereby
irrevocably constitute and appoint ________________________________ Attorney to
transfer the said shares on the books of the within named Corporation with full
power of substitution in the premises.
<PAGE>
Dated _______________, 20__
___________________________
Signature(s)
IMPORTANT
BEFORE SIGNING, READ AND COMPLY CAREFULLY WITH REQUIREMENTS PRINTED BELOW
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER. THE SIGNATURE MUST BE GUARANTEED BY A
COMMERCIAL BANK OR TRUST COMPANY, OR BY A NEW YORK OR MIDWEST STOCK EXCHANGE
MEMBER OR FIRM, WHOSE SIGNATURE IS KNOWN TO THE TRANSFER OFFICE.
Signature(s) Guaranteed
IMPORTANT
A NOTARY SEAL IS NOT ACCEPTABLE. THE
SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
SUCH AS A COMMERICAL BANK, TRUST
COMPANY, SAVINGS AND LOAN, CREDIT
UNION OR BROKER WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM, PURSUANT TO
S.E.C. RULE 17Ad-15.
___________________________________
Medallion Signature(s) Guarantee
<PAGE>
Exhibit 10.8
REGISTRATION RIGHTS AGREEMENT
March 19, 1996
To each of the several Purchasers named in
Schedule I to the Series A Convertible Preferred
Stock Purchase Agreement of even date herewith
(each a "Purchaser" and, collectively, the
"Purchasers")
Ladies and Gentlemen:
This will confirm that in consideration of your agreement on the date
hereof to purchase an aggregate of 804 shares (the "Preferred Shares") of Series
A Convertible Preferred Stock, $0.01 par value ("Preferred Stock"), of Teledata
Solutions, Inc., an Illinois corporation (the "Company"), pursuant to the Series
A Convertible Preferred Stock Purchase Agreement of even date herewith (the
"Purchase Agreement") between the Company and you and as an inducement to you to
consummate the transactions contemplated by the Purchase Agreement, the Company
covenants and agrees with each of you as follows:
1. Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, $no par value, of the
Company, as constituted as of the date of this Agreement.
"Conversion Shares" shall mean shares of Common Stock issued upon
conversion of the Preferred Shares.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"Registration Expenses" shall mean the expenses so described in
Section 8.
"Restricted Stock" shall mean the Conversion Shares, excluding
Conversion Shares which have been (a) registered under the Securities Act
pursuant to an effective registration statement filed thereunder and
disposed of in accordance with the registration
<PAGE>
statement covering them or (b) publicly sold pursuant to Rule 144 under the
Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean the expenses so described in Section 8.
2. Restrictive Legend. Each certificate representing Preferred
Shares or Conversion Shares shall, except as otherwise provided in this Section
2 or in Section 3, be stamped or otherwise imprinted with a legend substantially
in the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED
UNDER SUCH ACT AND ALL SUCH APPLICABLE LAWS OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE."
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company (it being agreed that Testa, Hurwitz & Thibeault
shall be satisfactory) the securities represented thereby may be publicly sold
without registration under the Securities Act and any applicable state
securities laws.
3. Notice of Proposed Transfer. Prior to any proposed transfer of
any Preferred Shares or Conversion Shares (other than under the circumstances
described in Sections 4, 5 or 6), the holder thereof shall give written notice
to the Company of its intention to effect such transfer. Each such notice shall
describe the manner of the proposed transfer and, if requested by the Company,
shall be accompanied by an opinion of counsel satisfactory to the Company (it
being agreed that Testa, Hurwitz & Thibeault shall be satisfactory) to the
effect that the proposed transfer may be effected without registration under the
Securities Act and any applicable state securities laws, whereupon the holder of
such stock shall be entitled to transfer such stock in accordance with the terms
of its notice; provided, however, that no such opinion of counsel shall be
required for a transfer to one or more partners of the transferor (in the case
of a transferor that is a partnership) or to an affiliated corporation (in the
case of a transferor that is a corporation). Each certificate for Preferred
Shares or Conversion Shares transferred as above provided shall bear the legend
set forth in Section 2, except that such certificate shall not bear such legend
if (i) such transfer is in accordance with the provisions of Rule 144 (or any
other rule permitting public sale without registration under the Securities Act)
or (ii) the opinion of counsel referred to above is to the further effect that
the transferee and any subsequent transferee (other than an affiliate of the
Company) would be entitled to transfer such securities in a public sale without
registration under the Securities Act. The restrictions provided for in this
Section 3 shall not apply to securities which are not required to bear the
legend prescribed by Section 2 in accordance with the provisions of that
Section.
-2-
<PAGE>
4. Required Registration. (a) At any time after the earliest of (i)
six months after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
(ii) six months after the Company shall have become a reporting company under
Section 12 of the Exchange Act, and (iii) the fifth anniversary of the date of
this Agreement, the holders of Restricted Stock constituting at least 40% of the
total shares of Restricted Stock then outstanding may request the Company to
register under the Securities Act all or any portion of the shares of Restricted
Stock held by such requesting holder or holders for sale in the manner specified
in such notice, provided that the shares of Restricted Stock for which
registration has been requested shall constitute at least 20% of the total
shares of Restricted Stock originally issued if such holder or holders shall
request the registration of less than all shares of Restricted Stock then held
by such holder or holders (or any lesser percentage if the reasonably
anticipated aggregate price to the public of such public offering would exceed
$5,000,000). For purposes of this Section 4 and Sections 5, 6, 13(a) and 13(d),
the term "Restricted Stock" shall be deemed to include the number of shares of
Restricted Stock which would be issuable to a holder of Preferred Shares upon
conversion of all Preferred Shares held by such holder at such time, provided,
however, that the only securities which the Company shall be required to
register pursuant hereto shall be shares of Common Stock, and provided, further,
however, that, in any underwritten public offering contemplated by this Section
4 or Sections 5 and 6, the holders of Preferred Shares shall be entitled to sell
such Preferred Shares to the underwriters for conversion and sale of the shares
of Common Stock issued upon conversion thereof. Notwithstanding anything to the
contrary contained herein, no request may be made under this Section 4 within
120 days after the effective date of a registration statement filed by the
Company covering a firm commitment underwritten public offering in which the
holders of Restricted Stock shall have been entitled to join pursuant to
Sections 5 or 6 and in which there shall have been effectively registered all
shares of Restricted Stock as to which registration shall have been requested.
(b) Following receipt of any notice under this Section 4, the Company
shall immediately notify all holders of Restricted Stock from whom notice has
not been received and shall use its best efforts to register under the
Securities Act, for public sale in accordance with the method of disposition
specified in such notice from requesting holders, the number of shares of
Restricted Stock specified in such notice (and in all notices received by the
Company from other holders within 30 days after the giving of such notice by the
Company). If such method of disposition shall be an underwritten public
offering, the holders of a majority of the shares of Restricted Stock to be sold
in such offering may designate the managing underwriter of such offering,
subject to the approval of the Company, which approval shall not be unreasonably
withheld or delayed. The Company shall be obligated to register Restricted
Stock pursuant to this Section 4 on two occasions only, provided, however, that
such obligation shall be deemed satisfied only when a registration statement
covering all shares of Restricted Stock specified in notices received as
aforesaid, for sale in accordance with the method of disposition specified by
the requesting holders, shall have become effective and, if such method of
disposition is a firm commitment underwritten public offering, all such shares
shall have been sold pursuant thereto.
(c) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting holders, shares of Common Stock to be
sold by the Company for its own account,
-3-
<PAGE>
except as and to the extent that, in the opinion of the managing underwriter (if
such method of disposition shall be an underwritten public offering), such
inclusion would adversely affect the marketing of the Restricted Stock to be
sold. Except for registration statements on Form S-4, S-8 or any successor
thereto, the Company will not file with the Commission any other registration
statement with respect to its Common Stock, whether for its own account or that
of other stockholders, from the date of receipt of a notice from requesting
holders pursuant to this Section 4 until the completion of the period of
distribution of the registration contemplated thereby.
5. Incidental Registration. If the Company at any time (other than
pursuant to Section 4 or Section 6) proposes to register any of its securities
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8 or another form not available for
registering the Restricted Stock for sale to the public), each such time it will
give written notice to all holders of outstanding Restricted Stock of its
intention so to do. Upon the written request of any such holder, received by
the Company within 30 days after the giving of any such notice by the Company,
to register any of its Restricted Stock, the Company will use its best efforts
to cause the Restricted Stock as to which registration shall have been so
requested to be included in the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent requisite to
permit the sale or other disposition by the holder of such Restricted Stock so
registered. In the event that any registration pursuant to this Section 5 shall
be, in whole or in part, an underwritten public offering of Common Stock, the
number of shares of Restricted Stock to be included in such an underwriting may
be reduced (pro rata among the requesting holders based upon the number of
shares of Restricted Stock owned by such holders) if and to the extent that the
managing underwriter shall be of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold by the Company therein,
provided, however, that such number of shares of Restricted Stock shall not be
reduced if any shares are to be included in such underwriting for the account of
any person other than the Company or requesting holders of Restricted Stock, and
provided, further, however, that in no event may less than one-third of the
total number of shares of Common Stock to be included in such underwriting be
made available for shares of Restricted Stock. Notwithstanding the foregoing
provisions, the Company may withdraw any registration statement referred to in
this Section 5 without thereby incurring any liability to the holders of
Restricted Stock.
6. Registration on Form S-3. If at any time (i) a holder or holders
of Preferred Shares or Restricted Stock request that the Company file a
registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the shares of Restricted Stock held by such
requesting holder or holders, the reasonably anticipated aggregate price to the
public of which would exceed $1,000,000, and (ii) the Company is a registrant
entitled to use Form S-3 or any successor thereto to register such shares, then
the Company shall use its best efforts to register under the Securities Act on
Form S-3 or any successor thereto, for public sale in accordance with the method
of disposition specified in such notice, the number of shares of Restricted
Stock specified in such notice. Whenever the Company is required by this
Section 6 to use its best efforts to effect the registration of Restricted
Stock, each of the procedures and requirements of Section 4 (including but not
limited to the requirement that the Company notify all holders of Restricted
Stock from whom notice has not been received and provide them with the
opportunity to participate in the offering) shall apply to such registration,
-4-
<PAGE>
provided, however, that there shall be no limitation on the number of
registrations on Form S-3 which may be requested and obtained under this Section
6, and provided, further, however, that the requirements contained in the first
sentence of Section 4(a) shall not apply to any, registration on Form S-3 which
may be requested and obtained under this Section 6.
7. Registration Procedures. If and whenever the Company is required
by the provisions of Sections 4, 5 or 6 to use its best efforts to effect the
registration of any shares of Restricted Stock under the Securities Act, the
Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 4,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Restricted Stock and to each underwriter
such number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or other disposition of the
Restricted Stock covered by such registration statement;
(d) use its best efforts to register or qualify the Restricted Stock
covered by such registration statement under the securities or "blue sky" laws
of such jurisdictions as the sellers of Restricted Stock or, in the case of an
underwritten public offering, the managing underwriter reasonably shall request,
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) use its best efforts to list the Restricted Stock covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify each seller of Restricted Stock and each
underwriter under such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to
-5-
<PAGE>
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(g) if the offering is underwritten and at the request of any seller
of Restricted Stock, use its best efforts to furnish on the date that Restricted
Stock is delivered to the underwriters for sale pursuant to such registration:
(i) an opinion dated such date of counsel representing the Company for the
purposes of such registration, addressed to the underwriters and to such seller,
stating that such registration statement has become effective under the
Securities Act and that (A) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the Securities
Act, (B) the registration statement, the related prospectus and each amendment
or supplement thereof comply as to form in all material respects with the
requirements of the Securities Act (except that such counsel need not express
any opinion as to financial statements contained therein) and (C) to such other
effects as reasonably may be requested by counsel for the underwriters or by
such seller or its counsel and (ii) a letter dated such date from the
independent public accountants retained by the Company, addressed to the
underwriters and to such seller, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
and
(h) make available for inspection by each seller of Restricted Stock,
any underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such seller
or underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the period
of distribution of Restricted Stock in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of distribution
of Restricted Stock in any other registration shall be deemed to extend until
the earlier of the sale of all Restricted Stock covered thereby and 120 days
after the effective date thereof.
In connection with each registration hereunder, the sellers of
Restricted Stock will furnish to the Company in writing such information with
respect to themselves and the proposed distribution by them as reasonably shall
be necessary in order to assure compliance with federal and applicable state
securities laws.
In connection with each registration pursuant to Sections 4, 5 or 6
covering an underwritten public offering, the Company and each seller agree to
enter into a written
-6-
<PAGE>
agreement with the managing underwriter selected in the manner herein provided
in such form and containing such provisions as are customary in the securities
business for such an arrangement between such underwriter and companies of the
Company's size and investment stature.
8. Expenses. All expenses incurred by the Company in complying with
Sections 4, 5 and 6, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, costs of insurance and reasonable fees
and disbursements of one counsel for the sellers of Restricted Stock, but
excluding any Selling Expenses, are called "Registration Expenses". All
underwriting discounts and selling commissions applicable to the sale of
Restricted Stock are called "Selling Expenses."
The Company will pay all Registration Expenses in connection with each
registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. Indemnification and Contribution. (a) In the event of a
registration of any of the Restricted Stock under the Securities Act pursuant to
Sections 4, 5 or 6, the Company will indemnify and hold harmless each seller of
such Restricted Stock thereunder, each underwriter of such Restricted Stock
thereunder and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Restricted Stock was registered under the Securities Act
pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each such seller, each such underwriter and each
such controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by any such seller, any such underwriter or any such controlling
person in writing specifically for use in such registration statement or
prospectus.
(b) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such
Restricted Stock thereunder, severally and not jointly, will indemnify and hold
harmless the Company, each person, if any,
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<PAGE>
who controls the Company within the meaning of the Securities Act, each officer
of the Company who signs the registration statement, each director of the
Company, each underwriter and each person who controls any underwriter within
the meaning of the Securities Act, against all losses, claims, damages or
liabilities, joint or several, to which the Company or such officer, director,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
under which such Restricted Stock was registered under the Securities Act
pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such officer, director,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action, provided, however, that such seller will be
liable hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such seller, as such, furnished
in writing to the Company by such seller specifically for use in such
registration statement or prospectus, and provided, further, however, that the
liability of each seller hereunder shall be limited to the proportion of any
such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of the shares sold by such seller under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not in any event to exceed the proceeds received
by such seller from the sale of Restricted Stock covered by such registration
statement.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 9 and shall only relieve it
from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, provided,
however, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select a separate
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<PAGE>
counsel and to assume such legal defenses and otherwise to participate in the
defense of such action, with the expenses and fees of such separate counsel and
other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Restricted Stock exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 9 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling holder or any such controlling
person in circumstances for which indemnification is provided under this Section
9; then, and in each such case, the Company and such holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the public offering price of all
such Restricted Stock offered by it pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
10. Chances in Common Stock or Preferred Stock. If, and as often as,
there is any, change in the Common Stock or the Preferred Stock by way of a
stock split, stock dividend, combination or reclassification, or through a
merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock or the Preferred Stock as so changed.
11. Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Stock to the public without registration, at all
times after 90 days after any registration statement covering a public offering
of securities of the Company under the Securities Act shall have become
effective, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
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<PAGE>
(c) furnish to each holder of Restricted Stock forthwith upon request
a written statement by the Company as to its compliance with the reporting
requirements of such Rule 144 and of the Securities Act and the Exchange Act, a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed by the Company as such holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing such holder to sell any Restricted Stock without
registration.
12. Representations and Warranties of the Company. The Company
represents and warrants to you as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Charter or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
13. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including without
limitation transferees of any Preferred Shares or Restricted Stock), whether so
expressed or not, provided, however, that registration rights conferred herein
on the holders of Preferred Shares or Restricted Stock shall only inure to the
benefit of a transferee of Preferred Shares or Restricted Stock if (i) there is
transferred to such transferee at least 20% of the total shares of Restricted
Stock originally issued pursuant to the Purchase Agreement to the direct or
indirect transferor of such transferee or (ii) such transferee is a partner,
shareholder or affiliate of a party hereto.
(b) All notices, requests, consents and other communications hereunder
shall be in writing and shall be delivered in person, mailed by certified or
registered mail, return receipt requested, or sent by telecopier or telex,
addressed as follows:
if to the Company or any other party hereto, at the address of such
party set forth in the Purchase Agreement;
if to any subsequent holder of Preferred Shares or Restricted Stock,
to it at such address as may have been furnished to the Company in writing
by such holder;
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<PAGE>
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Preferred Shares or
Restricted Stock). or to the holders of Preferred Shares or Restricted Stock (in
the case of the Company) in accordance with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the holders
of at least two-thirds of the outstanding shares of Restricted Stock.
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(f) The obligations of the Company to register shares of Restricted
Stock under Sections 4, 5 or 6 shall terminate on the fifteenth anniversary of
the date of this Agreement.
(g) If requested in writing by the underwriters for the initial
underwritten public offering of securities of the Company, each holder of
Restricted Stock who is a party to this Agreement shall agree not to sell
publicly any shares of Restricted Stock or any other shares of Common Stock
(other than shares of Restricted Stock or other shares of Common Stock being
registered in such offering), without the consent of such underwriters, for a
period of not more than 270 days following the effective date of the
registration statement relating to such offering; provided, however, that all
persons entitled to registration rights with respect to shares of Common Stock
who are not parties to this Agreement, all other persons selling shares of
Common Stock in such offering, all persons holding in excess of 1% of the
capital stock of the Company on a fully diluted basis and all executive officers
and directors of the Company shall also have agreed not to sell publicly their
Common Stock under the circumstances and pursuant to the terms set forth in this
Section 13(g).
(h) Notwithstanding the provisions of Section 7(a), the Company's
obligation to file a registration statement, or cause such registration
statement to become and remain effective, shall be suspended for a period not to
exceed 90 days in any 24-month period if there exists at the time material non-
public information relating to the Company which, in the reasonable opinion of
the Company, should not be disclosed.
(i) The Company shall not grant to any third party any registration
rights more favorable than or inconsistent with any of those contained herein,
so long as any of the registration rights under this Agreement remains in
effect.
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<PAGE>
(j) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
Please indicate your acceptance of the foregoing by signing and
returning the enclosed counterpart of this letter, whereupon this Agreement
shall be a binding agreement between the Company and you.
Very truly yours,
TELEDATA SOLUTIONS, INC.
By:
-------------------------------
Title:
-------------------------------
AGREED TO AND ACCEPTED as of the date first above written.
Purchasers named in Schedule I to the Purchase Agreement:
ARCH VENTURE FUND II, L.P.
By: ARCH Management Partners II, L.P., its General Partner
By: ARCH Venture Partners, L.P. its General Partner
By: ARCH Venture Corporation, its General Manager
By:
------------------------------------------
Keith Crandell
Managing Director
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<PAGE>
ARCH II PARALLEL FUND, L.P.
By: ARCH Management Partners II, L.P., its General Partner
By: ARCH Venture Partners, L.P., its General Partner
By: ARCH Venture Corporation, its General Manager
By:
----------------------
Keith Crandell
Managing Director
WILLIAM BLAIR CAPITAL PARTNERS V., L.P.
By: William Blair Capital Partners, LLC, its General Partner
By:
----------------------------------
Title:
-------------------------------
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<PAGE>
AMENDMENT NO. 1
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 1, dated as of December 20, 1996 by and among Teledata
Solutions, Inc., an Illinois corporation (the "Company"), certain holders of the
Company's outstanding securities (collectively, the "Existing Investors") and
those purchasers listed in Schedule I to the Series B Convertible Preferred
Stock Purchase Agreement (the "Purchase Agreement") dated the date hereof
(collectively, including such purchasers who participate in any Additional
Closing (as defined in the Purchase Agreement) and who execute a counterpart to
this Agreement, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 19th day of March
1996; and
WHEREAS, the Purchasers are purchasing from the Company and the Company is
issuing and selling to the Purchasers up to 1,599,888 shares (the "Series B
Shares") of Series B Convertible Preferred Stock, par value $.01, ("Series B
Stock") of the Company at the aggregate purchase price of up to $6,000,000
pursuant to the Purchase Agreement, and
WHEREAS, it is a condition to the purchase of the Series B Shares that the
Registration Rights Agreement be amended to grant the Purchasers certain rights
thereunder, and the parties hereto desire to amend the Registration Rights
Agreement as set forth below;
NOW, THEREFORE in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 be and hereby is amended to add the following definition in
appropriate alphabetical order:
"Preferred Shares" shall mean shares of the Company's Series A Convertible
Preferred Stock, par value $.01 and Series B Convertible Preferred Stock,
par value $.01.
2. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
3. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
4. This Amendment No. 1 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
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<PAGE>
COMPANY:
TELEDATA SOLUTIONS, INC.
By:_______________________________________
Name:
Title:
EXISTING AND NEW PURCHASERS:
ARCH VENTURE FUND II, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, its General
Partner
By: ARCH Venture Corporation, its
General Partner
By:________________________
Keith Crandell
Managing Director
ARCH II PARALLEL FUND, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, L.P., its
General Partner
By: ARCH Venture Corporation, its
General Manager
By:________________________
Keith Crandell
Managing Director
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<PAGE>
WILLIAM BLAIR CAPITAL PARTNERS V., L.P.
By: William Blair Capital Partners, LLC, its
General Partner
By:_________________________________
Name: ______________________________
NEW PURCHASERS:
ALLSTATE INSURANCE COMPANY
By: _____________________________________
By: _____________________________________
its Authorized Signatories
ARCH VENTURE FUND III, L.P.
By: ARCH Venture Partners, LLC, its General
Partner
By:______________________________________
Keith Crandell
Managing Director
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<PAGE>
AMENDMENT NO. 2
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 2, dated as of March 11, 1998 by and among Apropos
Technology, Inc. (FKA "Teledata Solutions, Inc."), an Illinois corporation (the
"Company"), certain holders of the Company's outstanding securities
(collectively, the "Existing Investors") and the person listed under the heading
"New Investor" on the signature pages hereto (together with the Existing
Investors, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 19th day of March
1996, as amended by Amendment No. 1 to Registration Rights Agreement dated
December 20, 1996; and
WHEREAS, certain of the Purchasers are purchasing from the Company and the
Company is issuing and selling to such Purchasers an aggregate of 1,152,737
shares (the "Series C Shares") of Series C Convertible Preferred Stock, par
value $.01, of the Company (the "Series C Stock") at the aggregate purchase
price of $8,000,000 pursuant to the certain Series Convertible Preferred Stock
Purchase Agreement dated as of March 11, 1998 between the Company and such
Purchasers (the "Purchase Agreement"); and
WHEREAS, it is a condition to the purchase of the Series C Shares that the
Registration Rights Agreement be further amended to grant the Purchasers certain
rights thereunder, and the parties hereto desire to amend the Registration
Rights Agreement as set forth below;
NOW, THEREFORE in consideration of the foregoing and the promises and
covenant contained herein, the parties hereby agree as follows:
1. That Section 1 of the Registration Rights Agreement be and hereby is
amended to restate the definition of "Preferred Shares" to read in its
entirety as follows:
"Preferred Shares" shall mean shares of the Company's Series A
Convertible Preferred Stock, par value $.01, Series B Convertible
Preferred Stock, par value $.01, and Series Convertible Preferred
Stock, $.01 par value per share.
2. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
3. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
4. This Amendment No. 2 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
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<PAGE>
[Signature Pages Follow Immediately]
IN WITNESS WHEREOF, the Company, the Existing Investors and the New
Investor have executed this Amendment No. 2 as of the day and year first above.
COMPANY:
APROPOS TECHNOLOGY, INC
By:_______________________________________
Name:
Title:
EXISTING INVESTORS:
ARCH VENTURE FUND II, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, its General
Partner
By: ARCH Venture Corporation, its
General Partner
By:________________________
Keith Crandell
Managing Director
ARCH II PARALLEL FUND, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, L.P., its
General Partner
By: ARCH Venture Corporation, its
General Manager
By:________________________
Keith Crandell
Managing Director
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<PAGE>
WILLIAM BLAIR CAPITAL PARTNERS V., L.P.
By: William Blair Capital Partners, LLC, its
General Partner
By:_________________________________
Name: _______________________________
ALLSTATE INSURANCE COMPANY
By: _____________________________________
By: _____________________________________
its Authorized Signatories
ARCH VENTURE FUND III, L.P.
By: ARCH Venture Partners, LLC, its General
Partner
By:______________________________________
Keith Crandell
Managing Director
NEW INVESTOR:
OHIO PARTNERS, LTD.
By:______________________________________
Title:___________________________________
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<PAGE>
Exhibit 10.9
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT is entered
into as of November 5, 1999, by and among Silicon Valley Bank, a California-
chartered bank ("Silicon Valley"), Access Technology Partners, L.P., and ARCH
Venture Fund III, L.P. (each a "New Investor") (Silicon Valley and each New
Investor are hereinafter also referred to individually as a "Purchaser" and
collectively as "Purchasers") and the Company whose name appears on the last
page of this Agreement.
RECITALS
--------
A. Silicon Valley and the Company are parties to a Registration
Rights Agreement dated as of May 20, 1999. Concurrently with the execution of
the Registration Rights Agreement, Silicon Valley purchased from the Company a
Warrant to purchase Stock (the "Silicon Valley Warrant") pursuant to which
Silicon Valley has the right to acquire certain shares from the Company.
B. Concurrently with the execution of this Agreement, each New
Investor is purchasing from the Company a Warrant (the "New Investor Warrants")
pursuant to which each New Investor has the right to acquire certain shares from
the Company. The shares issuable pursuant to the Silicon Valley Warrant and the
New Investor Warrants are hereinafter collectively referred to as the "Shares".
C. The parties desire to amend and restate the Registration Rights
Agreement effective as of November 5, 1999.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "Securities Act"), and the declaration or ordering of effectiveness
of such registration statement or document;
(b) The term "Registrable Securities" means (i) the Shares
(if Common Stock) or all shares of Common Stock of the Company issuable or
issued upon conversion of the Shares and (ii) any Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, any stock referred to in (i).
<PAGE>
(c) The terms "Holder" or "Holders" means the Purchasers or
qualifying transferees under subsection 1.8 hereof who hold Registrable
Securities.
(d) The term "SEC" means the Securities and Exchange
Commission.
1.2 Company Registration.
(a) Registration. If at any time or from time to time. the
Company shall determine to register any of its securities, for its own account
or the account of any of its shareholders, other than a registration on Form
S-I or S-8 relating solely to employee stock option or purchase plans, or a
registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a
registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their
successor forms) or any successor to such forms, which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities, the Company
will:
(i) promptly give to each Holder written notice thereof
(which shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and compliance), and
in any underwriting involved therein, all the Registrable Securities specified
in a written request or requests, made within 30 days after receipt of such
written notice from the Company, by any Holder or Holders, except as set forth
in subsection 1.2(b) below.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.2(a)(i). In such event the right of any Holder to
registration pursuant to this subsection 1.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company.
1.3 Expenses of Registration. All expenses incurred in connection
with any registration, qualification or compliance pursuant to this Section 1
including without limitation, all registration, filing and qualification fees,
printing expenses, fees and disbursements of counsel for the Company and
expenses of any special audits incidental to or required by such registration,
shall be borne by the Company except the Company shall not be required to pay
underwriters' fees, discounts or commissions relating to Registrable Securities.
All expenses of any registered offering not otherwise borne by the Company shall
be borne pro rata among the Holders participating in the offering and the
Company.
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<PAGE>
1.4 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder participating therein advised in writing as to
the initiation of each registration, qualification and compliance and as to the
completion thereof Except as otherwise provided in subsection 1.3, at its
expense the Company will:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to 120 days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
1.5 Indemnification.
(a) The Company will indemnify each Holder of Registrable
Securities and each of its officers, directors and partners, and each person
controlling such Holder, with respect to which such registration, qualification
or compliance has been effected pursuant to this Rights Agreement, and each
underwriter, if any, and each person who controls any underwriter of the
Registrable Securities held by or issuable to such Holder, against all
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<PAGE>
claims, losses, expenses, damages and liabilities (or actions in respect
thereto) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, or any violation or alleged violation by the Company of the
Securities Act, the Securities Exchange Act of 1934, as amended, ("Exchange
Act") or any state securities law applicable to the Company or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any such
state law and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers, directors and partners, and
each person controlling such Holder, each such underwriter and each person who
controls any such underwriter, within a reasonable amount of time after incurred
for any reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability or
action; provided, however, that the indemnity agreement contained in this
subsection 1.5(a) shall not apply to amounts paid in settlement of any such
claim, loss, damage, liability, or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld);
and provided further, that the Company will not be liable in any such case to
the extent that any such claim, loss, damage or liability arises out of or is
based on any untrue statement or omission based upon written information
furnished to the Company by an instrument duly executed by such Holder or
underwriter specifically for use therein.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company within the meaning of the Securities Act, and each other
such Holder, each of its officers, directors and partners and each person
controlling such Holder, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Holders, such directors,
officers, partners, persons or underwriters for any reasonable legal or any
other expenses incurred in connection with investigating, defending or settling
any such claim, loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder specifically for use therein provided, however,
that the indemnity agreement contained in this subsection 1.5(b) shall not apply
to amounts paid in settlement of any such claim, loss, damage, liability or
action if such settlement is effected without the consent of the Holder, (which
consent shall not be unreasonably withheld); and provided further, that the
total amount for which any Holder shall be liable under this subsection 1.5(b)
shall not in any event
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exceed the aggregate proceeds received by such Holder from the sale of
Registrable Securities held by such Holder in such registration.
(c) Each party entitled to indemnification under this
subsection 1.5 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom; provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense; and provided further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations hereunder, unless such failure resulted in
prejudice to the Indemnifying Party; and provided further, that an Indemnified
Party (together with all other Indemnified Parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the Indemnifying Party, if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between such Indemnified Party and any other party represented by such
counsel in such proceeding. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation.
1.6 Information by Holder. Any Holder or Holders of Registrable
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.7 Rule 144 Reporting. With a view to making available to
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees at all times to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, after 90 days after the
effective date of the first registration statement filed by the Company for an
offering of its securities to the general public.
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), and
(c) so long as a Holder owns any Registrable Securities, to
furnish to such Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its
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securities to the general public), and of the Securities Act and Exchange Act
(at any time after it has become subject to such reporting requirements), a copy
of the most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as the Holder may reasonably
request in complying with any rule or regulation of the SEC allowing the Holder
to sell any such securities without registration
1.8 Transfer of Registration Rights. Holders' rights to cause
the Company to register their securities and keep information available, granted
to them by the Company under subsections 1.2 and 1.7 may be assigned to a
transferee or assignee of a Holder's Registrable Securities not sold to the
public, provided, that the Company is given written notice by such Holder at the
time of or within a reasonable time after said transfer, stating the name and
address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned. The Company may
prohibit the transfer of any Holders' rights under this subsection 1. 8 to any
proposed transferee or assignee who the Company reasonably believes is a
competitor of the Company.
2. General.
2.1 Waivers and Amendments. With the written consent of the
record or beneficial holders of at least a majority of the Registrable
Securities, the obligations of the Company and the rights of the Holders of the
Registrable Securities under this Agreement may be waived (either generally or
in a particular instance, either retroactively or prospectively, and either for
a specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that no such modification, amendment or waiver shall reduce
the aforesaid percentage of Registrable Securities without the consent of all of
the Holders of the Registrable Securities. Upon the effectuation of each such
waiver, consent, agreement of amendment or modification, the Company shall
promptly give written notice thereof to the record holders of the Registrable
Securities who have not previously consented thereto in writing. This Agreement
or any provision hereof maybe changed, waived, discharged or terminated only by
a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 2.1.
2.2 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Illinois as such laws are applied to
agreements between Illinois residents entered into and to be performed entirely
within Illinois.
2.3 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
2.4 Entire Agreement. Except as set forth below, this Agreement
and the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof
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2.5 Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by first class
mail, postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Holder, at such Holder's address as set forth below, or at
such other address as such Holder shall have furnished to the Company in
writing, or (b) if to the Company, at the Company's address set forth below, or
at such other address as the Company shall have furnished to the Holder in
writing.
2.6 Severability. In case any provision of this Agreement shall
be invalid, illegal, or unenforceable, the validity, legality and enforceability
of the remaining provisions of this Agreement or any provision of the other
Agreements shall not in any way be affected or impaired thereby.
2.7 Titles and Subtitles. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
2.8 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
SILICON VALLEY BANK COMPANY
By:_______________________________ By:_______________________________
Name: ____________________________ Name: ____________________________
Title: ___________________________ Title: ___________________________
ACCESS TECHNOLOGY PARTNERS, L.P. ARCH VENTURE FUND III, L.P.
By:_______________________________ By:_______________________________
Name: ____________________________ Name: ____________________________
Title: ___________________________ Title: ___________________________
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LIST OF SCHEDULES
-----------------
Schedule I: New Investors
Schedule II: Capitalization
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 21, 1999 (except Note 12, as to which the
date is November 5, 1999), in the Registration Statement, as amended, (Form S-1
No. 333-90873) and related Prospectus of Apropos Technology, Inc. dated
2000.
Ernst & Young LLP
Chicago, Illinois
The foregoing consent is in the form that will be signed upon the effective
date of the stock split described in the first paragraph of Note 12 to the
consolidated financial statements.
/s/ Ernst & Young LLP
Chicago, Illinois
January 13, 2000
