UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITITES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
-----------
COMMISSION FILE NUMBER 000-30654
---------
APROPOS TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------
ILLINOIS 36-3644751
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
-----------
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)
-----------
Indicate by check mark whether the registrant(1)has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports),and(2)has been subject to such filing
requirements for the past 90 days. X Yes No
On August 4, 2000, approximately 16,073,596 of the Registrant's Common Shares,
$0.01 par value, were outstanding.
<PAGE>
INDEX
APROPOS TECHNOLOGY, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - 3
June 30, 2000 and December 31, 1999
Condensed consolidated statements of operations - 4
three and six months ended June 30, 2000 and 1999
Condensed consolidated statements of cash flows - 5
three and six months ended June 30, 2000 and 1999
Notes to condensed consolidated financial statements - 6
June 30, 2000
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT PER SHARE DATA
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
ASSETS (UNAUDITED) (NOTE 1)
----------- --------
<S> <C> <C>
CURRENT ASSETS :
CASH AND CASH EQUIVALENTS $ 67,143 $ 3,467
ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS OF
$485 IN 2000 AND $462 IN 1999 11,502 8,942
INVENTORY 407 364
PREPAID AND OTHER CURRENT ASSETS 1,565 371
--------- ---------
TOTAL CURRENT ASSETS 80,617 13,144
EQUIPMENT, NET 2,310 1,618
NOTE RECEIVABLE FROM SHAREHOLDER 57 54
OTHER ASSETS 449 618
--------- ---------
TOTAL ASSETS $ 83,433 $ 15,434
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES :
REVOLVING LINE OF CREDIT $ - $ 3,216
SUBORDINATED CONVERTIBLE PROMISSORY NOTES - 1,474
BRIDGE LOAN - 3,485
ACCOUNTS PAYABLE 1,720 1,094
ACCRUED EXPENSES 2,607 1,808
ACCRUED COMPENSATION AND RELATED ACCRUALS 1,799 1,292
ADVANCE PAYMENTS FROM CUSTOMERS 675 584
DEFERRED REVENUES 2,211 1,355
CURRENT PORTION OF CAPITAL LEASE OBLIGATIONS 122 122
CURRENT PORTION OF LONG-TERM DEBT - 186
--------- ---------
TOTAL CURRENT LIABILITIES 9,134 14,616
CAPITAL LEASE OBLIGATIONS 7 54
LONG-TERM DEBT, LESS CURRENT PORTION - 314
CONVERTIBLE PREFERRED SHARES, $0.01 PAR VALUE, NONE AUTHORIZED, ISSUED AND
OUTSTANDING AT JUNE 30, 2000, 3,995,483 AUTHORIZED, ISSUED AND OUTSTANDING AT
DECEMBER 31 , 1999 - 16,079
SHAREHOLDERS' EQUITY (DEFICIT) :
PREFERRED SHARES, $0.01 PAR VALUE, 5,000,000 AUTHORIZED, NO SHARES
ISSUED AND OUTSTANDING - -
COMMON SHARES, $0.01 PAR VALUE, 60,000,000 AUTHORIZED, 16,028,907
ISSUED AND OUTSTANDING AT JUNE 30, 2000, 3,055,883 ISSUED AND
OUTSTANDING AT DECEMBER 31, 1999 146 53
ADDITIONAL PAID-IN CAPITAL 99,062 2,932
ACCUMULATED DEFICIT (24,916) (18,614)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 74,292 (15,629)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 83,433 $ 15,434
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
<TABLE>
APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE DATA
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE :
SOFTWARE LICENSES $ 4,038 $ 2,468 $ 7,540 $ 4,178
SERVICES AND OTHER 2,972 1,632 5,312 3,214
---------- --------- ---------- ----------
TOTAL REVENUE 7,010 4,100 12,852 7,392
COSTS AND EXPENSES :
COST OF SOFTWARE 104 44 204 80
COST OF SERVICES AND OTHER 1,971 1,151 3,868 2,370
SALES AND MARKETING 3,497 2,293 6,715 4,701
RESEARCH AND DEVELOPMENT 1,738 958 3,381 1,827
GENERAL AND ADMINISTRATIVE 2,745 858 4,735 1,763
---------- --------- ---------- ----------
TOTAL COSTS AND EXPENSES 10,055 5,304 18,903 10,741
---------- --------- ---------- ----------
LOSS FROM OPERATIONS (3,045) (1,204) (6,051) (3,349)
OTHER INCOME (EXPENSE) :
INTEREST INCOME 1,101 5 1,556 27
INTEREST EXPENSE (29) (30) (1,806) (46)
---------- --------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 1,072 (25) (250) (19)
---------- --------- ---------- ----------
NET LOSS (1,973) (1,229) (6,301) (3,368)
========== ========= ========== ==========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.13) $ (0.41) $ (0.50) $ (1.13)
========== ========= ========== ==========
SHARES USED IN COMPUTING BASIC AND DILUTED NET
LOSS PER SHARE 15,749 2,977 12,559 2,976
========== ========= ========== ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
<TABLE>
APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
NET LOSS $ (6,301) $ (3,368)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED FOR
OPERATING ACTIVITIES :
DEPRECIATION AND AMORTIZATION 355 255
PROVISION FOR DOUBTFUL ACCOUNTS 63 16
STOCK COMPENSATION EXPENSE 508 -
AMORTIZATION OF DEBT DISCOUNT 1,549 -
CHANGES IN OPERATING ASSETS AND LIABILITIES :
ACCOUNTS RECEIVABLE (2,623) (2,223)
INVENTORY (43) (82)
PREPAID EXPENSES AND OTHER CURRENT ASSETS (1,194) (120)
OTHER ASSETS 161 (27)
NOTES RECEIVABLE FROM SHAREHOLDER (2) (2)
ACCOUNTS PAYABLE 626 362
ACCRUED EXPENSES 798 189
ACCRUED COMPENSATION AND RELATED ACCRUALS 507 (23)
ADVANCED PAYMENTS FROM CUSTOMERS 91 298
DEFERRED REVENUE 856 205
------------ ------------
NET CASH USED FOR OPERATING ACTIVITIES (4,649) (4,520)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES :
PURCHASES OF EQUIPMENT (1,047) (494)
------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (1,047) (494)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES :
PAYMENT ON REVOLVING LINE OF CREDIT (3,216) -
PAYMENT ON BRIDGE LOAN (5,000) -
PAYMENT ON SUBORDINATED PROMISSORY NOTES (1,500) -
REPAYMENTS OF NOTES PAYABLE (500) -
PROCEEDS FROM REVOLVING LINE OF CREDIT - 1,750
PROCEEDS FROM NOTE PAYABLE - 42
PROCEEDS FROM BRIDGE LOAN - 1,500
PRINCIPAL PAYMENTS OF CAPITAL LEASE OBLIGATIONS (47) (75)
PROCEEDS FROM EXERCISE OF OPTIONS 315 -
NET PROCEEDS FROM ISSUANCE OF COMMON SHARES 79,320 -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 69,372 3,217
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 63,676 (1,797)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,467 3,170
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 67,143 $ 1,373
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Apropos Technology, Inc. (the "Company") is engaged in the business of
developing and selling software and 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 communication 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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In management's
opinion, the statements include all adjustments necessary (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended December 31, 1999,
included its Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on February 16, 2000. The results of
operations for the interim periods presented are not necessarily indicative of
the results of operations to be expected for any other interim period or for the
full fiscal year.
2. 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 following table presents the calculation of basic and diluted net loss per
share (in thousands, except per share amounts ):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ----- ----- ----
<S> <C> <C> <C> <C>
NET LOSS $ (1,973) $ (1,229) $ (6,301) $ (3,368)
BASIC AND DILUTED
-----------------
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET
LOSS PER SHARE : 15,749 2,977 12,559 2,976
---------- ---------- ---------- ----------
BASIC AND DILUTED NET LOSS PER SHARE : $ (0.13) $ (0.41) $ (0.50) $ (1.13)
========== ========== ========== ==========
</TABLE>
6
<PAGE>
The Company's calculation of diluted loss per share excludes potential common
shares as the effect would be antidilutive. Potential common shares are composed
of common shares of the Company issuable upon the exercise of stock options.
Options to purchase 1,673,849 common shares with exercise prices of $0.10 to
$17.00 per share were outstanding as of June 30, 2000 and options to purchase
3,196,008 common shares with exercise prices of $0.10 to $1.37 per share were
outstanding as of June 30, 1999.
3. SHAREHOLDERS' EQUITY
On February 23, 2000, the Company completed an initial public offering of
3,977,500 shares at an offering price of $22.00 per share. The net proceeds to
the Company from the public offering after deducting the underwriting discounts
and commissions and offering expenses payable by the Company, were approximately
$79.3 million. The Company used approximately $10.5 million to repay principal
and interest on debt. The balance of the net proceeds are held in commercial
paper.
4. STOCK COMPENSATION
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common shares as of the grant date for
each stock option. The Company has recorded stock compensation of $254,000 and
$508,000 through the three and six month period ended June 30, 2000. This stock
compensation expense represents the difference at the grant date between the
exercise price and the pre-IPO fair value of the common shares underlying the
options. This amount is being amortized in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28 over the vesting period of the
individual options, generally four years.
5. GEOGRAPHIC INFORMATION
Geographic information on revenue for the three months and six months ended June
30, 2000 and 1999, respectively are as follows :
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NORTH AMERICA 74.8% 86.0% 72.4% 84.4%
INTERNATIONAL 25.2% 14.0% 27.6% 15.6%
----- ----- ----- -----
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
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.
6. CONTINGENCIES
In June 2000, an arbitration proceeding was concluded with respect to a claim
which was previously brought by a former reseller, alleging that the Company had
breached a contract between the two companies. Under the arbitration settlement,
which releases the Company from further liability, the Company agreed to provide
monetary relief in the amount of $1,350,000. The payment was made on July 3,
2000. The Company had previously recorded an estimated liability in the amount
of $400,000 for the probable exposure. The additional charge of $950,000 was
recognized in the second quarter of 2000, and was included in "General and
administrative" expenses in the accompanying financial statements.
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, Rockwell filed 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
7
<PAGE>
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.
As part of the Company's initial public offering of common shares, the Company
and its underwriters made available up to 370,000 common shares at the initial
public offering price for directors, business associates and related persons
associated with the Company (the "directed share program"). On November 24,
1999, prior to effectiveness of the Company's registration statement, the
Company sent an electronic mail message with respect to the proposed directed
share program to all of the Company's 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. The Company did not deliver a preliminary prospectus
prior to distribution of this electronic mail as required by the Securities Act
of 1933. In addition, the electronic mail message may have constituted a
non-conforming prospectus under the Securities Act of 1933. As a result, the
Company 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 electronic mail. The recipients of the electronic mail
message who purchased common shares in the initial public 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 common shares or,
if they had already sold the shares, file a claim against the Company for
damages resulting from their purchase of the common shares. If any liability is
asserted with respect to the electronic mail message, the Company 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 $8.1 million plus
interest based on the initial public offering price of $22.00 per share.
Although there can be no assurance as to the ultimate disposition of this
matter, it is the opinion of the Company's management, based upon the
information available at this time, that the expected outcome of this matter
will not have a material adverse effect on the results of operations and
financial condition of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained in this section, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Apropos' actual results could differ significantly from those
discussed herein. Factors that could cause or contribute to these differences
include, but are not limited to, those discussed in its quarterly report on Form
10-Q for the quarter ended March 31, 2000, this quarterly report on Form 10-Q
and in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission in connection with the Company's initial
public offering. Any forward-looking statements speak only as of the date such
statements are made.
OVERVIEW
The Company develops, markets and supports a market leading customer interaction
management solution for multimedia contact centers. The Company's operations
commenced in January 1989, and, from inception to early 1995, operating
activities consisted primarily of research and development and consulting. In
March 1995, the first software product was shipped. In February 2000, the
Company completed its initial public offering.
Revenue. Revenue is derived principally from the sale of software licenses and
from fees for implementation, technical support and training services. Revenue
is also derived from the sale of certain third party hardware products such as
voice cards required to implement the Company's solution.
Revenue is recognized from the sale of software and hardware upon shipment.
Revenue from fees for implementation services is recognized using the percentage
of completion method. Percentage of completion is calculated 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.
Support and maintenance services are recognized ratably over the term of the
maintenance contract, which are typically annual contracts. Training services
are recognized as such services are completed.
Cost of revenue. Cost of revenue consists primarily of:
8
<PAGE>
o the cost of compensation for technical support, education and
professional services personnel;
o other costs related to facilities and office equipment for technical
support, education and professional services personnel;
o the cost of third party hardware the Company resells as part of its
solution; and
o payments for third party software used with the Company's product.
Costs of software, maintenance, support and training services and hardware are
recognized as they are incurred.
Other operating expenses. Operating expenses are recognized as incurred. 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. Research and
development expenses consist primarily of compensation expenses for personnel
and, to a lesser extent, independent contractors who adapt product for specific
countries. General and administrative expenses consist primarily of compensation
for 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 charges for amounts owed under the Company's line of credit and
capital lease lines of credit.
RESULTS OF OPERATIONS
The following table sets forth financial data for the periods indicated as a
percentage of total revenue.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF REVENUE OF REVENUE OF REVENUE OF REVENUE
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE
30, 30, 30, 30,
------------------------------------------------------------------------------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUE :
SOFTWARE LICENSES 57.6% 60.2% 58.7% 56.5%
SERVICES AND OTHER 42.4 39.8 41.3 43.5
------------------------------------------------------
TOTAL REVENUE 100.0 100.0 100.0 100.0
------------------------------------------------------
COSTS AND EXPENSES :
COST OF SOFTWARE 1.5 1.1 1.6 1.1
COST OF SERVICES AND OTHER 28.1 28.1 30.1 32.0
SALES AND MARKETING 49.9 55.9 52.3 63.6
RESEARCH AND DEVELOPMENT 24.8 23.4 26.3 24.7
GENERAL AND ADMINISTRATIVE 39.1 20.9 36.8 23.9
------------------------------------------------------
TOTAL COSTS AND EXPENSES 143.4 129.4 147.1 145.3
------------------------------------------------------
OPERATING LOSS (43.4) (29.4) (47.1) (45.3)
OTHER INCOME (EXPENSE) : 15.3 (0.6) (1.9) (0.3)
------------------------------------------------------
NET LOSS (28.1)% (30.0)% (49.0)% (45.6)%
======================================================
</TABLE>
9
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue. Revenue increased by 71.0% to $7.0 million for the three months ended
June 30, 2000 from $4.1 million for the three months ended June 30, 1999.
Revenue from international sales increased by $1.2 million to $1.8 million for
the three months ended June 30, 2000 from $0.6 million for the three months
ended June 30, 1999.
Revenue from software licenses. Revenue from the sale of licenses for software
increased 63.6% to $4.0 million for the three months ended June 30, 2000 from
$2.5 million for the three months ended June 30, 1999. The increase in software
revenue resulted from a growing market acceptance of the Company's solution, its
expanded sales and marketing efforts and the introduction of new product
features.
Revenue from services and other. Revenue from fees for services and other
increased 82.1% to $3.0 million for the three months ended June 30, 2000 from
$1.6 million for the three months ended June 30, 1999. The growth in revenue
from services and other resulted primarily from growth in professional services
and maintenance revenue as the Company's client base increased over this period.
Costs and expenses. Total costs and expenses increased 89.6% to $10.1 million
for the three months ended June 30, 2000 from $5.3 million for the three months
ended June 30, 1999. These increases primarily reflect increases in the
Company's sales and marketing efforts and general and administrative expenses.
The continued investment in staffing resulted in headcount additions increasing
total headcount by 61.9% to 191 employees at June 30, 2000 from 118 employees at
June 30, 1999. As a percentage of total revenue, costs and expenses were 143.4%
for the three months ended June 30, 2000 and 129.4% for the three months ended
June 30, 1999.
Cost of software. Cost of software increased 136.4% to $104,000 for the three
months ended June 30, 2000 from $44,000 for the three months ended June 30,
1999. This cost represented 2.6% of software revenue for the three months ended
June 30, 2000 and 1.8% of software revenue for the three months ended June 30,
1999. These increases resulted from increased software sales and increased third
party content required for various new product features.
Cost of services and other. Cost of services and other increased 71.2% to $2.0
million for the three months ended June 30, 2000 from $1.2 million for the three
months ended June 30, 1999. These costs represented 66.3% of services and other
revenue for the three months ended June 30, 2000 and 70.5% of services and other
revenue for the three months ended June 30, 1999. These increases are due
primarily to the hiring of additional project managers, programmers, technical
support and trainers to expand the professional services organization. These
increases also reflect the cost of third party hardware sold to clients during
these periods.
Sales and marketing. Sales and marketing expenses increased 52.5% to $3.5
million for the three months ended June 30, 2000 from $2.3 million for the three
months ended June 30, 1999. The increases in sales and marketing expenses
resulted primarily from a continued investment in sales and marketing personnel,
an increase in sales commissions associated with increased revenues, and
increased marketing activities, including tradeshows, public relations
activities and advertisements.
Research and development. Research and development expenses increased 81.4% to
$1.7 million for the three months ended June 30, 2000 from $958,000 for the
three months ended June 30, 1999. The increases in research and development
expenses related primarily to the increase in software developers and testing
personnel to develop and enhance product.
General and administrative. General and administrative expenses increased $1.9
million to $2.7 million for the three months ended June 30, 2000 from $858,000
for the three months ended June 30, 1999. The increases in general and
administrative expenses were primarily due to additional personnel necessary to
support the Company's growing operations in the United States and its
international subsidiary in the United Kingdom, as well as accruals for
compensation expense related to option grants and other general corporate
expenses. In addition, an accrual of $950,000 was recorded for an arbitration
settlement related to a dispute with a former reseller.
10
<PAGE>
Other income and expense. Interest income increased to $1.1 million for the
three months ended June 30, 2000 from $5,000 for the three months ended June 30,
1999. The increase in interest income is a result of higher cash balances
primarily from the net proceeds from the initial public offering.
Income Taxes. There has been no provision or benefit for income taxes for any
period since 1995 due to operating losses. As of June 30, 2000, the Company had
$21.9 million of net operating loss carryforwards for federal income tax
purposes, which expire beginning 2012. The use of these net operating losses may
be limited in future periods.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue. Revenue increased by 73.9% to $12.9 million for the six months ended
June 30, 2000 from $7.4 million for the six months ended June 30, 1999. Revenue
from international sales increased by $2.4 to $3.6 million for the six months
ended June 30, 2000 from $1.2 million for the six months ended June 30, 1999.
Revenue from software licenses. Revenue from the sale of licenses for software
increased 80.5% to $7.5 million for the six months ended June 30, 2000 from $4.2
million for the six months ended June 30, 1999. The increase in software revenue
resulted from a growing market acceptance of the Company's solution, its
expanded sales and marketing efforts and the introduction of new product
features.
Revenue from services and other. Revenue from fees for services and other
increased 65.3% to $5.3 million for the six months ended June 30, 2000 from $3.2
million for the six months ended June 30, 1999. The growth in revenue from
services and other resulted primarily from growth in professional services and
maintenance revenue as the Company's client base increased over this period.
Costs and expenses. Total costs and expenses increased 76.0% to $18.9 million
for the six months ended June 30, 2000 from $10.7 million for the six months
ended June 30, 1999. These increases primarily reflect increases in the
Company's sales and marketing efforts and general and administrative expenses.
As a percentage of total revenue, costs and expenses were 147.1% for the six
months ended June 30, 2000 and 145.3% for the six months ended June 30, 1999.
Cost of software. Cost of software increased 155.0% to $204,000 for the six
months ended June 30, 2000 from $80,000 for the six months ended June 30, 1999.
This cost represented 2.7% of software revenue for the six months ended June 30,
2000 and 1.9% of software revenue for the six months ended June 30, 1999. These
increases resulted from increased software sales and increased third party
content required for various new product features.
Cost of services and other. Cost of services and other increased 63.2% to $3.9
million for the six months ended June 30, 2000 from $2.4 million for the six
months ended June 30, 1999. These costs represented 72.8% of services and other
revenue for the six months ended June 30, 2000 and 73.7% of services and other
revenue for the six months ended June 30, 1999. These increases are due
primarily to the hiring of additional project managers, programmers, technical
support and trainers to expand the professional services organization. These
increases also reflect the cost of third party hardware sold to clients during
these periods.
Sales and marketing. Sales and marketing expenses increased 42.8% to $6.7
million for the six months ended June 30, 2000 from $4.7 million for the six
months ended June 30, 1999. The increases in sales and marketing expenses
resulted primarily from a continued investment in sales and marketing personnel,
an increase in sales commissions associated with increased revenues, and
increased marketing activities, including tradeshows, public relations
activities and advertisements.
Research and development. Research and development expenses increased 85.1% to
$3.4 million for the six months ended June 30, 2000 from $1.8 million for the
six months ended June 30, 1999. The increases in research and development
expenses related primarily to the increase in software developers and testing
personnel to develop and enhance product.
General and administrative. General and administrative expenses increased 168.6%
to $4.7 million for the six months ended June 30, 2000 from $1.8 million for the
six months ended June 30, 1999. The increases in general and administrative
11
<PAGE>
expenses were primarily due to additional personnel necessary to support the
Company's growing operations in the United States and its international
subsidiary in the United Kingdom, as well as accruals for compensation expense
related to option grants and other general corporate expenses. In addition, an
accrual of $950,000 was recorded for an arbitration settlement related to a
dispute with a former reseller.
Other income and expense. Interest income increased to $1.6 million for the six
months ended June 30, 2000 from $27,000 for the six months ended June 30, 1999.
Interest expense increased to $1.8 million for the six months ended June 30,
2000 from $46,000 for the six months ended June 30, 1999. The increase in
interest income is a result of higher cash balances primarily from the net
proceeds from the initial public offering. The increase in interest expense is
primarily due to a charge of $1.6 million for the fair market value of warrants
issued in connection with a bridge loan, which was repaid on February 29, 2000,
and to a lesser extent increases in debt payable under the Company's line of
credit and capital leases.
Income Taxes. There has been no provision or benefit for income taxes for any
period since 1995 due to operating losses. As of June 30, 2000, the Company had
$21.9 million of net operating loss carryforwards for federal income tax
purposes, which expire beginning 2012. The use of these net operating losses may
be limited in future periods.
Liquidity and Capital Resources
In February 2000, the Company sold 3,977,500 common shares in its initial public
offering and realized net proceeds of approximately $79.3 million. Prior to the
offering, the Company had financed its operations primarily from the private
sales of convertible preferred shares totaling approximately $16.0 million, bank
debt, and to a lesser extent, from lease financing.
Operating activities used $4.6 million of cash for the six months ended June 30,
2000, which is primarily attributable to net losses experienced during the
period as the Company continues to invest in product development, expansion of
its sales force and infrastructure to support growth. The cash used in
operations was offset by amortization of stock-based compensation and the
amortization of debt discount. Operating activities used $4.5 million of cash
for the six months ended June 30, 1999, which was primarily attributable to net
losses experienced during that period.
Investing activities, consisting primarily of purchases of computer hardware,
software and furniture and fixtures and leasehold improvements to support the
Company's growing number of employees, used $1.0 million of cash for the six
months ended June 30, 2000. Investing activities used $494,000 of cash for the
six months ended June 30, 1999, which was primarily due to purchases of computer
hardware, software and furniture and fixtures, and leasehold improvements.
Financing activities generated $69.4 million in cash for the six months ended
June 30, 2000, primarily from the net proceeds of the Company's initial public
offering offset by repayment of debt. Financing activities generated $3.2
million in cash for the six months ended June 30, 1999, primarily from proceeds
from the Company's revolving line of credit and a bridge loan.
The Company expects to devote substantial resources to continue research and
development efforts, expand sales channels, increase marketing programs, fund
capital expenditures, and provide for working capital and other general
corporate purposes. Management believes that the net proceeds from the sale of
the common shares in the initial public offering will be sufficient to meet the
working capital and capital expenditure requirements for at least the next 12
months. However, the Company 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. Additional funding may not be available on favorable
terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company develops products in the United States and sells these products in
North America, Europe, South America, Asia, Africa, and Australia. As a result,
its financial results could be affected by various factors, including changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
As sales are generally made in U.S. dollars or British pound sterling, a
strengthening of the dollar or pound could make the Company's products less
competitive in foreign markets.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Company's unaudited condensed consolidated financial
statements in Part I - Item 1, of this quarterly report on Form 10-Q, which is
hereby incorporated by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) - (c) Not applicable.
Use of Proceeds from Sales of Registered Securities.
(d) On February 23, 2000, Apropos consummated its initial public offering of its
Common Shares, $0.01 par value. The Common Shares sold in the offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (Reg. No. 333-90873) that was declared effective by the
SEC on February 16, 2000.
The net offering proceeds to Apropos, after deducting expenses, were
approximately $79.3 million. From the effective date of such Registration
Statement to June 30, 2000, approximately $10.5 million of the net proceeds were
used for the repayment of debt and approximately $4.7 million were used for
general corporate purposes including operating losses, working capital and
capital expenditures.
The balance of the net proceeds were held in commercial paper at June 30, 2000.
None of the Company's expenses or use of proceeds described above were direct or
indirect payments to directors , officers, general partners of the Company or
its associates, persons owning 10% or more of any class of equity securities of
the Company or affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein :
(27) Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 2000.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APROPOS TECHNOLOGY, INC.
------------------------
(REGISTRANT)
Date : August 10, 2000 By : /s/ Francis J. Leonard
--------------- --------------------------------------
Francis J. Leonard
Chief Financial Officer
14
