<PAGE>
As filed with the Securities and Exchange Commission on January 24, 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. 3
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)
-----------
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 24, 2000
PROSPECTUS
3,200,000 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 $13.00 and $15.00 per share.
--------
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 from each of them up to 240,000 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)]
[Logo]
Multimedia interaction management for eBusiness.
[Flap 2 and 3]
[Logo]
[Graphic depiction of the components of the Apropos solution.]
Multimedia Interaction Management for eBusiness providing email, web and
voice management capabilities to enable eBusiness sales, marketing and service.
The Apropos Solution
email
web
voice
. Seamless management of all real-time customer interactions, regardless
of media
. Allows online customers access to human assistance with the click of a
mouse
. Prioritizes customer interactions based on business value or service
level
. Provides critical metrics on business performance and quality of service
across all interactions
. Gathers valuable customer and market information
Customers, Vendors & Employees
eBusiness
Sales, Marketing & Service
<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.................................................................. 26
Management................................................................ 39
Principal and Selling Shareholders........................................ 48
Certain Transactions...................................................... 50
Description of Capital Stock.............................................. 51
Shares Eligible for Future Sale........................................... 53
U.S. Federal Tax Considerations for Non-U.S. Holders...................... 56
Underwriting.............................................................. 60
Legal Matters............................................................. 62
Experts................................................................... 62
Where You Can Find More Information....................................... 62
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 150 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 ABN Amro Holding N.V.,
Artist Direct, Carlson Companies, Inc., Freightliner Corp., Pfizer, Inc.,
Seagate Software, Inc. and 3Com Corporation. No client accounted for 10% or
more of our total revenues for 1997, 1998 or 1999. See "Business--Clients" on
page 32 for more information regarding these clients.
We were incorporated in 1989 in Illinois. 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. 3,200,000 shares
Common shares to be outstanding
after this offering............. 13,245,061 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>
--------------------
The share amounts in this table are based on shares outstanding as of
December 31, 1999. This table excludes:
. 4,600,000 common shares reserved for issuance under our 2000 omnibus
incentive plan, of which 3,355,222 shares were subject to outstanding
options at December 31, 1999, at a weighted average exercise price of
$0.46 per share;
. 393,105 common shares issued upon exercise of outstanding options
between December 31, 1999 and January 20, 2000;
. 1,000,000 common shares reserved for issuance under our employee stock
purchase plan of 2000;
. 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 at
an exercise price of $5.34 per share.
--------------------
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 the audited consolidated financial statements of
Apropos for the three years ended December 31, 1999 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>
Year Ended
December 31,
-------------------------
1997 1998 1999
------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenue............................. $ 4,093 $ 9,142 $18,166
Loss from operations...................... (3,708) (5,044) (7,150)
Net loss.................................. $(3,567) $(4,822) $(8,509)
Net loss per share--basic and diluted..... $ (1.22) $ (1.64) $ (2.85)
Shares used in calculation of basic and
diluted loss per share................... 2,923 2,947 2,983
</TABLE>
The pro forma balance sheet data summarized below gives effect to the
conversion of all of our outstanding convertible preferred shares into our
common shares at the closing of this offering.
The pro forma as adjusted balance sheet data summarized below reflects the
sale of 3,200,000 common shares in this offering at an assumed initial public
offering price of $14.00 per share after deducting underwriting discounts and
commissions and estimated offering expenses 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>
December 31, 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.................... $ 3,467 $ 3,467 $35,631
Working capital (deficit).................... (1,472) (1,472) 38,792
Total assets................................. 15,434 15,434 47,598
Short-term debt.............................. 8,361 8,361 361
Long-term debt............................... 314 314 314
Convertible preferred shares................. 16,079 -- --
Total shareholders' equity (deficit)......... (15,629) 450 40,614
</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 $8.5 million for the year ended December 31, 1999. At
December 31, 1999, we had accumulated losses since inception of $18.6 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 20 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 34 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 34 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, original equipment
manufacturers, or OEMs, 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 could 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 $18.2 million in 1999,
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 154 at December 31, 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 do not believe 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 38 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, resellers and OEMs
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 are 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 some of our clients, resellers and OEMs
that our current product and the third party
9
<PAGE>
software we sell with 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 24.
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 320,000 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 $4.5 million plus interest based on the
assumed initial public offering price of $14.00 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 60 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 75.3% 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 48 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 13,638,166 common shares.
This includes the 3,200,000 common shares we are selling in this offering,
which may be resold in the public market immediately. 109,335 common shares
may also be resold in the public market immediately. The remaining 10,328,831
common shares, or 75.7% 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
12
<PAGE>
the near future. These common shares will become available for sale at various
times following the 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 53 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.
If you purchase common shares in this offering, you will experience
immediate and substantial dilution of $10.93 in pro forma net tangible book
value per share based on our book value as of December 31, 1999 and an assumed
initial public offering price of $14.00 per 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 51 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 $40.2 million from the sale of
3.2 million common shares at the assumed initial public offering price of
$14.00 per share after deducting underwriting commissions and discounts of $3.1
million and estimated expenses of $1.5 million. If the underwriters exercise
their over-allotment option in full, then the net proceeds will be
approximately $43.2 million. 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 50 and "Underwriting" on page 60 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 the progress or results of
our marketing programs, changing technologies, shifts in client demand 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 December 31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to 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
. on a pro forma as adjusted basis to give effect to (1) the sale by us of
3,200,000 common shares at an assumed initial public offering price of
$14.00 per share, 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>
December 31, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
amounts)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 3,467 $ 3,467 $ 35,631
======== ======== ========
Short-term debt................................ 8,361 8,361 361
======== ======== ========
Long-term debt................................. $ 314 $ 314 314
-------- -------- --------
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,
60,000,000 shares authorized, 3,052,966,
10,045,061 and 13,245,061 shares issued and
outstanding actual, pro forma and as
adjusted, respectively...................... 53 123 155
Additional paid-in-capital................... 2,932 18,941 59,073
Accumulated deficit.......................... (18,614) (18,614) (18,614)
-------- -------- --------
Total shareholders' equity (deficit)....... (15,629) 450 40,614
Total capitalization...................... $ 9,125 $ 9,125 $ 41,289
======== ======== ========
</TABLE>
15
<PAGE>
DILUTION
Our pro forma net tangible book value at December 31, 1999 was $450,000, or
$0.04 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 $40.2 million of net
proceeds from this offering, based on an assumed initial public offering price
of $14.00 per share, the pro forma net tangible book value of the common shares
as of December 31, 1999 would have been $40.6 million, or $3.07 per share. This
amount represents an immediate increase in net tangible book value of $3.03 per
share to the existing shareholders and an immediate dilution in net tangible
book value of $10.93 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 $14.00 per share even though the
per share value of our assets after subtracting our liabilities is only $3.07.
In addition, the total consideration from new investors will be $44.8 million,
which is 73.5% of the total of $60.9 million paid for all common shares
outstanding, but new investors will own only 24.2% of our outstanding common
shares. The following table illustrates such dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $14.00
Pro forma net tangible book value per share at December 31,
1999........................................................ $0.04
Increase per share attributable to new investors............. 3.03
-----
Pro forma net tangible book value per share after this
offering...................................................... 3.07
------
Dilution per share to new investors............................ $10.93
======
</TABLE>
The following table sets forth, as of December 31, 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....... 10,045,061 75.8% $16,132,000 26.5% $ 1.61
New investors............... 3,200,000 24.2 44,800,000 73.5 14.00
---------- ----- ----------- -----
Total................... 13,245,061 100.0% $60,932,000 100.0% $ 4.60
========== ===== =========== =====
</TABLE>
The share amounts in the tables above are based on shares outstanding as of
December 31, 1999. The tables exclude:
. 4,600,000 common shares reserved for issuance under our 2000 omnibus
incentive plan, of which 3,355,222 shares were subject to outstanding
options at December 31, 1999, at a weighted average exercise price of
$0.46 per share;
. 393,105 common shares issued upon exercise of outstanding options between
December 31, 1999 and January 20, 2000;
. 1,000,000 common shares reserved for issuance under our employee stock
purchase plan of 2000;
. 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 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 notes to those
consolidated financial statements 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,
1997, 1998 and 1999, and the consolidated balance sheet data as of December 31,
1998 and 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 1996 and the
consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited consolidated financial statements which are not
included in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations:
Revenue:
Software licenses... $ 417 $ 1,424 $ 2,669 $ 5,697 $ 10,300
Services and other.. 248 582 1,424 3,445 7,866
------- ------- ------- -------- --------
Total revenue..... 665 2,006 4,093 9,142 18,166
Costs and expenses:
Cost of software.... 341 10 26 31 296
Cost of service and
other.............. -- 348 1,308 3,084 5,611
Research and
development........ 65 491 1,271 2,805 4,441
Sales and marketing. 93 1,418 3,644 6,030 9,704
General and
administrative..... 745 960 1,552 2,236 5,264
------- ------- ------- -------- --------
Total costs and
expenses......... 1,244 3,227 7,801 14,186 25,316
------- ------- ------- -------- --------
Loss from operations.. (579) (1,221) (3,708) (5,044) (7,150)
Other income
(expense)............ -- 21 141 222 (1,359)
------- ------- ------- -------- --------
Net loss.............. $ (579) $(1,200) $(3,567) $(4,822) $ (8,509)
======= ======= ======= ======== ========
Net loss per share-
basic and diluted.... $(19.30) $ (0.42) $ (1.22) $ (1.64) $ (2.85)
======= ======= ======= ======== ========
Shares used to compute
net loss per share--
basic and diluted.... 30 2,868 2,923 2,947 2,983
<CAPTION>
December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Consolidated
Balance Sheet Data:
Cash and cash
equivalents.......... $ 45 $ 6,211 $ 1,984 $ 3,170 $ 3,467
Working capital
(deficit)............ (508) 6,194 2,299 4,916 (1,472)
Total assets.......... 140 7,140 4,395 8,649 15,434
Short-term debt....... -- 98 -- -- 8,361
Long-term debt........ -- 151 -- -- 314
Convertible preferred
shares............... -- 8,093 8,093 16,079 16,079
Total common
shareholders'
deficit.............. (482) (1,699) (5,261) (10,010) (15,629)
</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 10% of our total revenue for 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 original equipment manufacturers, or OEMs in
North America, Europe, South America, Asia, Africa and Australia. We currently
have relationships with 15 value added resellers and two OEMs. We are
aggressively expanding both our direct sales force and our reseller and OEM
relationships. Sales to our resellers and OEMs accounted for 7.0% of our total
revenue for 1998 and 22.0% of our total revenue for 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 product 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 contracts contain additional provisions regarding product technical
specifications, labeling instructions and other instructions regarding
customization and rebranding. Our OEM contracts contain volume discounts.
Sales to clients outside the United States accounted for 6.6% of our revenue
in 1998 and 20.8% of our total revenue for 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, 1999, we
had $15.6 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 1999, we recorded stock compensation
charges of $0, $69,000 and $229,000, 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 December 31, 1999, we will
record a stock compensation charge of $853,000, $831,000 and $784,000 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
December 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Software licenses..................................... 65.2 % 62.3 % 56.7 %
Services and other.................................... 34.8 37.7 43.3
------- ------- -------
Total revenue....................................... 100.0 100.0 100.0
------- ------- -------
Costs and expenses:
Cost of software...................................... 0.6 0.3 1.6
Cost of services and other............................ 32.0 33.7 30.9
Research and development.............................. 31.0 30.7 24.4
Sales and marketing................................... 89.0 66.0 53.4
General and administrative............................ 37.9 24.4 29.0
------- ------- -------
Total costs and expenses............................ 190.5 155.1 139.3
------- ------- -------
Operating loss.......................................... (90.5) (55.1) (39.3)
Other income (expense).................................. 3.4 2.4 (7.5)
------- ------- -------
Net loss................................................ (87.1)% (52.7)% (46.8)%
======= ======= =======
</TABLE>
Years Ended December 31, 1997, 1998 and 1999
Revenue. Our total revenue increased by 123.4% from $4.1 million in 1997 to
$9.1 million in 1998 and increased 98.7% to $18.2 million in 1999. Revenue
from international sales increased by 512.6% from $604,000 in 1998 to $3.7
million in 1999. We had no revenue from international sales prior to 1998.
Revenue from software licenses. Revenue from the sale of licenses for
software increased 113.5% from $2.7 million in 1997 to $5.7 million in 1998
and increased 80.8% to $10.3 million in 1999. The increase in software revenue
from 1997 to 1999 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 141.9% from $1.4 million in 1997 to $3.4 million in 1998
and increased 128.2% to $7.9 million in 1999. 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 13.8% of total revenue in 1997, 12.7% of
20
<PAGE>
total revenue in 1998 and 9.9% of total revenue in 1999. 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 81.8% from $7.8
million in 1997 to $14.2 million in 1998 and increased 78.5% to $25.3 million
in 1999. 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 32 employees in 1998 and 60
employees in 1999. As a percentage of total revenue, our costs and expenses
were 190.6% in 1997, 155.2% in 1998 and 139.3% in 1999.
Cost of software. Cost of software increased 19.2% from $26,000 in 1997 to
$31,000 in 1998 and increased 854.8% to $296,000 in 1999. This cost represented
1.0% of software revenue in 1997, 0.5% of software revenue in 1998 and 2.9% of
software revenue in 1999. The increases in amount from 1997 to 1998 resulted
primarily from increased software sales. The increase in amount from 1998 to
1999 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 135.8% from
$1.3 million in 1997 to $3.1 million in 1998 and increased 81.9% to $5.6
million in 1999. The increases from 1997 to 1999 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 1999 also reflects the cost of third party hardware sold to our clients
during these periods.
Research and development. Research and development expenses increased 120.7%
from $1.3 million in 1997 to $2.8 million in 1998 and increased 58.3% to $4.4
million in 1999. The increases in research and development expenses from 1997
to 1999 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 65.5% from $3.6
million in 1997 to $6.0 million in 1998 and increased 60.9% to $9.7 million in
1999. The increases in sales and marketing expenses from 1996 to 1998 resulted
primarily from our investment in sales and marketing personnel. This investment
included establishment of our European regional sales office in 1997,
additional sales channels in Europe and Asia in 1998 and 1999 and additional
North American field sales offices in 1997, 1998 and 1999. The increase in
sales and marketing expenses also reflects increased marketing activities,
including tradeshows, public relations activities and advertisements during
these periods.
General and administrative. General and administrative expenses increased
44.1% from $1.6 million in 1997 to $2.2 million in 1998 and increased 135.4% to
$5.3 million in 1999. The increases from 1997 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. The increases in 1999 were due to additional
personnel as well as accruals for compensation expense related to option
grants, litigation expense and state sales taxes.
Interest income and interest expense. Interest income was $210,000 in 1997,
$245,000 in 1998 and $42,000 in 1999. Interest expense was $25,000 in 1997,
$23,000 in 1998 and $1.4 million in 1999. The decrease in interest income is a
result of declining cash balances, due to cash being used to fund operations.
The increase in interest expense is primarily due to a charge for the fair
market value of the warrants that were issued in connection with our bridge
loan, as well as increases in debt payable under our line of credit and capital
leases. See notes 3 and 4 of our notes to our consolidated financial statements
on page F-10.
21
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods indicated, our consolidated
financial information for the last eight 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
------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... $ 1,020 $1,270 $ 1,678 $ 1,729 $ 1,710 $ 2,468 $ 2,838 $ 3,284
Services and other..... 747 937 749 1,012 1,582 1,632 2,170 2,482
------- ------ ------- ------- ------- ------- ------- -------
Total revenue........ 1,767 2,207 2,427 2,741 3,292 4,100 5,008 5,766
Costs and expenses:
Cost of software....... 8 14 4 5 36 44 96 120
Cost of services and
other software........ 793 718 687 886 1,219 1,151 1,627 1,614
Research and
development........... 553 581 756 915 869 958 1,130 1,484
Sales and marketing.... 1,164 1,478 1,560 1,828 2,408 2,293 2,283 2,720
General and
administrative........ 517 460 508 751 905 858 1,964 1,537
------- ------ ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 3,035 3,251 3,515 4,385 5,437 5,304 7,100 7,475
------- ------ ------- ------- ------- ------- ------- -------
Operating loss.......... (1,268) (1,044) (1,088) (1,644) (2,145) (1,204) (2,092) (1,709)
Other income (expense).. 22 87 65 48 6 (25) (148) (1,192)
------- ------ ------- ------- ------- ------- ------- -------
Net loss................ $(1,246) $ (957) $(1,023) $(1,596) $(2,139) $(1,229) $(2,240) $(2,901)
======= ====== ======= ======= ======= ======= ======= =======
Net loss per share--
basic and diluted...... $ (0.43) $(0.33) $ (0.35) $ (0.54) $ (0.72) $ (0.41) $ (0.75) $ (0.97)
======= ====== ======= ======= ======= ======= ======= =======
Shares used in
calculation of basic
and diluted............ 2,929 2,935 2,941 2,947 2,975 2,977 2,987 2,983
<CAPTION>
As a Percentage of Revenue
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... 57.7% 57.5% 69.1% 63.1% 51.9% 60.2% 56.7% 57.0%
Services and other..... 42.3 42.5 30.9 36.9 48.1 39.8 43.3 43.0
------- ------ ------- ------- ------- ------- ------- -------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of software....... 0.5 0.6 0.2 0.2 1.1 1.1 1.9 2.1
Cost of services and
other software........ 44.9 32.5 28.3 32.3 37.0 28.1 32.5 28.0
Research and
development........... 31.3 26.3 31.1 33.4 26.4 23.4 22.6 25.7
Sales and marketing.... 65.9 67.0 64.3 66.7 73.1 55.9 45.6 47.2
General and
administrative........ 29.2 20.9 20.9 27.4 27.5 20.9 39.2 26.6
------- ------ ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 171.8 147.3 144.8 160.0 165.1 129.4 141.8 129.6
------- ------ ------- ------- ------- ------- ------- -------
Operating loss.......... (71.8) (47.3) (44.8) (60.0) (65.1) (29.4) (41.8) (29.6)
Other income (expense).. 1.2 3.9 2.7 1.8 0.1 (0.6) (2.9) (20.7)
------- ------ ------- ------- ------- ------- ------- -------
Net loss................ (70.6)% (43.4)% (42.1)% (58.2)% (65.0)% (30.0)% (44.7)% (50.3)%
======= ====== ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
Revenue. Our revenue from software licenses and our revenue from services
and other have generally increased in each of the last eight 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 eight 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 December 31, 1999,
we had cash and cash equivalents of $3.5 million and no availability under our
revolving line of credit. Our operating activities resulted in net cash
outflows of $3.8 million in 1997, $5.8 million in 1998 and $8.7 million in
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 $999,000 of capital
expenditures in 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 December 31, 1999, we did not have any material
commitments for future capital expenditures.
23
<PAGE>
At December 31, 1999, we had $3.2 million outstanding under our revolving
line of credit. The line of credit is secured. As of December 31, 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 will increase to the initial public
offering price, 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.
24
<PAGE>
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.
25
<PAGE>
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.
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 interaction types for
which our product is licensed. Administrator is used to establish and modify
the
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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.
Clients
We have a diverse base of over 150 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 1999. Revenues from our international sales as a
percentage of total revenue were 6.6% in 1998 and 20.8% for 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-16 regarding international
sales.
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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 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.
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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.
OEMs. We have two partners who brand our solution under their corporate
name. Mitel Corporation sells and markets our solution under the name Mitel
Call Center Commander. Baan Development B.V. also sells and markets our
solution under the Baan name.
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
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. 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.
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 prioritizes, routes and manages all customer
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.
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. 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, scalable 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 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 become aware of 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 $1.3 million, $2.8
million and $4.4 million in 1997, 1998 and 1999, respectively, 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.
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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.
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 38 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 December 31, 1999, we had 154 employees worldwide, including 48 in
research and development, 45 in service and support, 46 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.
37
<PAGE>
Facilities
We lease approximately 31,000 square feet of office space in our
headquarters building in Oakbrook Terrace, Illinois. As of December 31, 1999,
the lease required payments of approximately $2.9 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 Tempe, Arizona;
San Ramon, California; Atlanta, Georgia; Brunswick, Maine; Caldwell, New
Jersey; Tarrytown, New York; and Dallas, Texas. The majority of these leases
are short-term leases.
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 this dispute. 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.
38
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following persons are our executive officers and directors as of January
20, 2000:
<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, Treasurer and Secretary
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
</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.
39
<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
40
<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. Immediately prior to 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, but will be six
upon Ms. Brady's resignation from our board of directors immediately prior to
completion of this offering. 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 Ian M. Larkin;
directors whose terms expire in 2002 are Keith L. Crandell and Maurice A. Cox,
Jr. and directors whose terms expire in 2003 are Kevin G. Kerns and George B.
Koch. All of the
41
<PAGE>
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.
We have an executive committee, audit committee and a compensation
committee. The members of the executive committee are Patrick K. Brady, Maurice
A. Cox, Jr., Keith L. Crandell and Kevin G. Kerns. The members of the
compensation and audit committees are Maurice A. Cox, Jr., George B. Koch and
Keith L. Crandell.
The executive committee has the authority of the Board of Directors to
manage our business, subject to the restrictions of Illinois law.
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.
42
<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 $1,140,226 $1,733,092
James M. Nelson......... -- -- -- -- -- --
Jody P. Wacker.......... -- -- -- -- -- --
Richard D. Brown........ 35,000 5.0 0.91 1/09 760,151 1,155,394
Patrick K. Brady........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Assumes that the fair market value of each grant on the date of grant was
equal to the assumed initial public offering price of $14.00 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 except Richard D. Brown who exercised options for 35,000 of
our common shares. The value of "in-the-money" options represents the
difference between the exercise price of an option and the assumed initial
public offering price of $14.00 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 $10,221,092/$1,171,408
James M. Nelson........... 188,125/21,875 2,633,750/306,250
Jody P. Wacker............ 128,333/99,167 1,796,662/1,388,338
Richard D. Brown.......... 8,749/58,334 122,486/816,676
Patrick K. Brady.......... 47,214/14,036 660/996/196,504
</TABLE>
Compensation of Directors
Except with respect to our nonemployee directors who receive an annual grant
of options to purchase 10,000 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
43
<PAGE>
committee, which bonus could be up to $60,000. In addition, we granted Mr.
Kerns options to purchase 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 January 20, 2000, 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 our Board of Directors based on Ms. Wacker's performance. If Ms.
Wacker is terminated by us without cause or by Ms. Wacker within six months of
a change of control or within three months of a material reduction in her
salary or benefits or a material change in her responsibilities, Ms. Wacker
will receive severance pay equal to six months base salary.
We have an employment agreement with Richard D. Brown, our Vice President,
International Operations, entered into 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 our Board of Directors based on our financial results and Mr.
Brown's performance. 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 in
connection with this employment agreement. 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 Mr. Brady terminates employment 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. Mr. Brady is entitled to be one of our directors until the
expiration of his employment agreement.
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.
2000 Omnibus Incentive Plan
Our 2000 omnibus incentive plan was approved by our board of directors on
January 20, 2000 and is expected to be adopted by our shareholders prior to the
offering. 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, 3,355,222 of which were outstanding at
December 31, 1999, and 192,794 of which have been exercised. The outstanding
options have a weighted average exercise price of $0.46 per share. The plan
amends and restates our 1995 stock option plan.
44
<PAGE>
The 2000 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.
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 2000 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 2000 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 2000 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 2000 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 2000 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 2000 omnibus incentive plan after the
tenth anniversary of its initial adoption.
Options and Awards Under the 2000 Omnibus Incentive Plan. We cannot now
determine the number of options or awards to be granted in the future under the
2000 omnibus incentive plan to our officers, directors, employees and
consultants.
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<PAGE>
Employee Stock Purchase Plan of 2000
Introduction. Our employee stock purchase plan of 2000 was approved by our
board of directors on January 20, 2000 and is expected to be adopted by our
shareholders prior to completion of this offering. 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.
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
employee stock purchase plan of 2000 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;
46
<PAGE>
. 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.
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 and Keith L. Crandell. None of the members of the compensation
committee has been an officer or employee of Apropos at any time. 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 50 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.
47
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding common shares as of December 31, 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 240,000 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. Applicable percentage ownership is based on 10,045,061 common shares
outstanding at December 31, 1999.
<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 7.7% 5.9%
62 East Broad Street, 3rd Floor
Columbus, OH 43215
William Blair Capital Partners V,
L.P.(2).......................... 2,552,136 2,552,136 25.4% 19.3%
222 W. Adams Street
Chicago, IL 60606
ARCH Venture Fund III, L.P.(3).... 2,578,387 2,578,387 25.7% 19.5%
8725 W. Higgins Road, Suite 290
Chicago, IL 60631
Allstate Insurance Company........ 1,185,429 1,185,429 11.8% 8.9%
2775 Sanders Road, Suite A3
Northbrook, IL 60062
William W. Bach(4)................ 720,155 720,155 6.9% 5.3%
One Tower Lane, 18th Floor
Oakbrook Terrace, IL 60181
Directors and Officers:
Kevin G. Kerns(5)................. 761,432 761,432 7.0% 5.4%
Jody P. Wacker(6)................. 137,813 137,813 1.4% 1.0%
Richard D. Brown(7)............... 52,500 52,500 * *
Patrick K. Brady(8)............... 2,571,786 2,571,786 25.5% 19.3%
James M. Nelson(9)................ 196,875 196,875 1.9% 1.5%
Catherine R. Brady(10)............ 2,571,786 2,571,786 25.5% 19.3%
Keith L. Crandell(11)............. 2,578,387 2,578,387 25.7% 19.5%
Ian M. Larkin(12)................. 2,552,136 2,552,136 25.4% 19.3%
Maurice A. Cox, Jr.(13)........... 778,041 778,041 7.7% 5.9%
George B. Koch(14)................ 20,125 20,125 * *
All Executive Officers and
Directors as a Group
(14 people)(11)(12)(13)(15)...... 10,652,802 10,652,802 91.8% 71.9%
</TABLE>
48
<PAGE>
- ---------------------
* 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 382,002 shares subject to stock options exercisable within 60
days after December 31, 1999.
(5) Represents 761,432 shares subject to stock options exercisable within 60
days after December 31, 1999.
(6) Represents 137,813 shares subject to stock options exercisable within 60
days after December 31, 1999.
(7) Includes 14,583 shares subject to stock options exercisable within 60 days
after December 31, 1999.
(8) Includes 49,766 shares subject to stock options exercisable within 60 days
after December 31, 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 196,875 shares subject to stock options exercisable within 60
days after December 31, 1999.
(10) Includes 1,348,510 of our common shares and 49,766 of our common shares
subject to stock options exercisable within 60 days after December 31,
1999, owned by Patrick K. Brady, Ms. Brady's spouse. Ms. Brady disclaims
beneficial ownership of these shares.
(11) Includes 2,525,091 of our common shares and warrants to purchase 53,296 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 756,484 of our common shares and warrants to purchase 21,557 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 20,125 shares subject to stock options exercisable within 60 days
after December 31, 1999.
(15) Includes 1,562,596 shares subject to stock options exercisable within 60
days after December 31, 1999.
49
<PAGE>
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
will increase to the initial public offering price 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.
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
50
<PAGE>
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 42 for more information
regarding these option grants.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 65,000,000 shares, of which
60,000,000 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 January 20, 2000,
there were 10,438,166 common shares outstanding, held of record by 37
shareholders, and no preferred shares were outstanding. There will be
13,638,166 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, as amended,
which you can access through the SEC's website at http://www.sec.gov 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
51
<PAGE>
of directors voting together as a single class, and the affirmative vote
of a majority of these shares held by disinterested shareholders,
. 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.
52
<PAGE>
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 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 13,638,166 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 10,438,166 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
53
<PAGE>
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
following table shows approximately when the restricted shares will be
available for sale in the public market:
Eligibility of Restricted Shares for Sale in the Public Market
<TABLE>
<S> <C>
At the date of this prospectus.................................. 109,335
180 days after the date of this prospectus...................... 9,897,073
Thereafter upon expiration of one year holding periods.......... 431,758
</TABLE>
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
At December 31, 1999, we had outstanding options to purchase 3,355,222
common shares pursuant to our 2000 omnibus incentive plan, and an additional
1,244,778 common shares are available for grant of future options thereunder.
See "Management--2000 Omnibus Incentive Plan" on page 44 for more information
on this plan. We have also granted warrants to purchase 368,774 of our common
shares. See "Certain Transactions" on page 50 and "Underwriting" on page 60 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 2000 omnibus incentive plan and (2) reserved for issuance under
our employee stock purchase plan of 2000. 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.
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<PAGE>
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;
. 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
2000 omnibus incentive plan; or
. the issuance by us of any of our common shares pursuant to our employee
stock purchase plan of 2000.
Registration Rights
Demand Rights. Our existing shareholders have the right to demand
registration of 6,992,095 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 some of our warrant holders
have piggyback registration rights for an aggregate of 8,458,729 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.
In a subsequent public offering effected at our initiation, Catherine R.
Brady is entitled to piggyback registration rights after each former preferred
shareholder has (1) received an amount of net proceeds which is in the same
proportion to each former preferred shareholder's then current market value of
their common shares as the net proceeds received by Ms. Brady in this offering
bears to the market value of her common shares at the initial public offering
price or (2) waived their registration rights with respect to the subsequent
public offering.
55
<PAGE>
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.
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
56
<PAGE>
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.
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.
57
<PAGE>
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 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.
58
<PAGE>
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.
59
<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........................................................... 3,200,000
=========
</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 $1.5 million.
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
240,000 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 240,000 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
60
<PAGE>
exercise these options, each of the underwriters will have a firm commitment to
purchase approximately the 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 employee stock
purchase plan of 2000. We may also grant additional options or other awards
under our 2000 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 320,000
common shares for sale at the initial public offering price to our 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.
61
<PAGE>
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
will increase to the initial public offering price 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.
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, 1999 and 1998 and for each of
the three years in the period ended December 31, 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.
62
<PAGE>
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.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1997, 1998 and 1999........ F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated Statements of Common Shareholders' Deficit for the years
ended December 31, 1997, 1998 and 1999................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 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, 1998 and 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, 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, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/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
------------------ December 31,
1998 1999 1999
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................. $ 3,170 $ 3,467 $ 3,467
Accounts receivable, less allowance for
doubtful accounts of $151 in 1998 and $462
in 1999................................... 3,818 8,942 8,942
Inventory.................................. 283 364 364
Prepaid expenses and other current assets.. 225 371 371
-------- -------- --------
Total current assets..................... 7,496 13,144 13,144
Equipment, net............................... 1,021 1,618 1,618
Note receivable from shareholder............. 51 54 54
Other assets................................. 81 618 618
-------- -------- --------
Total assets............................. $ 8,649 $ 15,434 $ 15,434
======== ======== ========
Liabilities and common shareholders' equity
(deficit)
Current liabilities:
Revolving line of credit................... $ -- $ 3,216 $ 3,216
Subordinated convertible promissory notes.. -- 1,474 1,474
Bridge loan................................ -- 3,485 3,485
Accounts payable........................... 661 1,094 1,094
Accrued expenses........................... 194 1,808 1,808
Accrued compensation and related accruals.. 698 1,292 1,292
Advance payments from customers............ 393 584 584
Deferred revenue........................... 478 1,355 1,355
Current portion of capital lease
obligations............................... 156 122 122
Current portion of long-term debt.......... -- 186 186
-------- -------- --------
Total current liabilities................ 2,580 14,616 14,616
Capital lease obligations.................... -- 54 54
Long-term debt, less current portion......... -- 314 314
Convertible preferred shares, $.01 par value,
authorized, issued, and outstanding
3,995,483 shares (liquidation value of
$16,112 at December 31, 1999)............... 16,079 16,079 --
Common shareholders' equity (deficit):
Common shares, no par value, authorized
7,694,384 shares, 2,948,124 issued and
outstanding at December 31, 1998, and
3,052,966 issued and outstanding at
December 31, 1999 and shares
issued and outstanding at pro forma
December 31, 1999......................... 26 53 123
Additional paid-in capital................. 69 2,932 18,941
Accumulated deficit........................ (10,105) (18,614) (18,614)
-------- -------- --------
Total common shareholders' equity
(deficit)............................... (10,010) (15,629) 450
-------- -------- --------
Total liabilities and common
shareholders' equity (deficit).......... $ 8,649 $ 15,434 $ 15,434
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Software licenses................................. $ 2,669 $ 5,697 $10,300
Services and other................................ 1,424 3,445 7,866
------- ------- -------
Total revenue................................... 4,093 9,142 18,166
Costs and expenses:
Cost of software.................................. 26 31 296
Cost of services and other........................ 1,308 3,084 5,611
Research and development.......................... 1,271 2,805 4,441
Sales and marketing............................... 3,644 6,030 9,704
General and administrative........................ 1,552 2,236 5,264
------- ------- -------
Total costs and expenses........................ 7,801 14,186 25,316
------- ------- -------
Loss from operations................................ (3,708) (5,044) (7,150)
Other income (expense):
Interest income................................... 210 245 42
Interest expense.................................. (25) (23) (1,414)
Miscellaneous expense............................. (44) -- 13
------- ------- -------
Total other income (expense).................... 141 222 (1,359)
------- ------- -------
Net loss............................................ $(3,567) $(4,822) $(8,509)
======= ======= =======
Net loss per share--basic and diluted............... $ (1.22) $ (1.64) $ (2.85)
Shares used to compute net loss per share--
basic and diluted................................. 2,923 2,947 2,983
</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, 1997... 2,860,172 $17 $ -- $ (1,716) $ (1,699)
Exercise of stock options.... 68,110 5 -- -- 5
Net loss..................... -- -- -- (3,567) (3,567)
--------- --- ------ -------- --------
Balance at December 31, 1997. 2,928,282 22 -- (5,283) (5,261)
Exercise of stock options.... 19,842 4 -- -- 4
Compensation expense related
to stock options............ -- -- 69 -- 69
Net loss..................... -- -- -- (4,822) (4,822)
--------- --- ------ -------- --------
Balance at December 31, 1998. 2,948,124 26 69 (10,105) (10,010)
Exercise of stock options.... 104,842 27 -- -- 11
Compensation expense related
to stock options............ -- -- 229 -- 229
Value of warrants issued with
debt........................ -- -- 2,634 -- 2,634
Net loss..................... -- -- -- (8,509) (8,509)
--------- --- ------ -------- --------
Balance at December 31, 1999. 3,052,966 $53 $2,932 $(18,614) $(15,629)
========= === ====== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss............................................ $(3,567) $(4,822) $(8,509)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization..................... 173 363 640
Amortization of debt discount..................... -- -- 1,084
Loss (gain) on sale of equipment.................. 44 -- (13)
Provision for doubtful accounts................... 46 101 311
Stock compensation expense........................ -- 69 229
Changes in operating assets and liabilities:
Accounts receivable............................. (1,028) (2,399) (5,435)
Inventory....................................... (80) (203) (81)
Prepaid expenses and other current assets....... (95) (103) (137)
Other assets.................................... (13) (55) (537)
Note receivable from shareholder................ -- (51) (3)
Accounts payable................................ 230 351 433
Accrued expenses................................ (92) 67 1,614
Accrued compensation and related accruals....... 261 251 594
Advance payments from customers................. -- 342 191
Deferred revenue................................ 273 244 877
------- ------- -------
Net cash used for operating activities.............. (3,848) (5,845) (8,742)
Cash flows from investing activities
Purchases of equipment.............................. (235) (721) (999)
------- ------- -------
Net cash used for investing activities.............. (235) (721) (999)
Cash flows from financing activities
Net proceeds from line of credit.................... -- -- 3,216
Net proceeds from subordinated convertible
promissory notes and detachable warrants........... -- -- 1,500
Proceeds from long-term debt........................ -- -- 500
Net proceeds from issuance of convertible preferred
shares............................................. -- 7,986 --
Proceeds from exercise of stock options............. 5 4 27
Principal payments of capital lease obligations..... (149) (238) (205)
Proceeds from bridge loan and detachable warrants... -- -- 5,000
------- ------- -------
Net cash provided by (used for) financing
activities......................................... (144) 7,752 10,038
------- ------- -------
Net change in cash and cash equivalents............. (4,227) 1,186 297
Cash and cash equivalents, beginning of period...... 6,211 1,984 3,170
------- ------- -------
Cash and cash equivalents, end of period............ $ 1,984 $ 3,170 $ 3,467
======= ======= =======
Supplemental disclosures of cash flow information:
Borrowings under capital lease obligations........ $ 294 $ -- $ 225
Non-cash deferred financing costs................. $ -- $ -- $ 2,634
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
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 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
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
F-8
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $65,905, $158,209 and $180,629 for the years ended December 31, 1997, 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 is the local
currency. 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 between completion of the
working model and the point at which the product is ready for general release
have not been significant. Through December 31, 1999, all software development
costs have been expensed.
F-9
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2,589,733 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.
3. Equipment
Equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Computer equipment....................................... $ 742 $ 1,339
Office equipment......................................... 49 101
Furniture and fixtures................................... 576 1,070
Software................................................. 170 256
Leasehold improvements................................... 102 97
------ -------
Gross equipment........................................ 1,639 2,863
Less: Accumulated depreciation and amortization.......... (618) (1,245)
------ -------
Equipment, net........................................... $1,021 $ 1,618
====== =======
</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 (8.50% at December 31, 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 December 31, 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 (8.50% at December 31, 1999) plus 1.25%. At
December 31, 1999, equipment advances aggregated $500,000 and are due June
2002. As of December 31, 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.
F-10
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (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 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 became 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 December 31, 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%.
Bridge Loan
In November 1999, a $5,000,000 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
of the Company's anticipated initial public offering. Certain employees and
entities associated with Hambrecht & Quist LLC have a $1.4 million
participation in this loan and ARCH Venture Fund III, LP, a preferred
shareholder, has a $500,000 participation in this loan. This loan and interest
of 9.25% are due on March 31, 2000. If any principal balance is not paid in
full on the due date, such overdue principal amount shall bear interest at 15%
and will be payable on demand. If a sale event, as defined, does not occur the
Company will pay a commitment fee of $50,000 on the date the loan is due.
The Company granted to Access Technology Partners, L.P. and other
participants warrants to purchase 236,250 common shares in connection with this
loan. The Company also granted ARCH Venture Fund III, LP warrants that can be
exercised to purchase 26,250 common shares. The exercise price of the warrants
is initially $5.34 per share but will increase to the initial public offering
price, 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. The fair value of these warrants as calculated
using the Black-Scholes method, was estimated at $2,525,250 at the time of
issuance of the loan. No warrants have been exercised at December 31, 1999.
This fair value has been reflected as a reduction of the carrying amount of the
loan increasing the effective interest rate on the loan to 121%.
F-11
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 for warrants
issued with the line of credit and the subordinated convertible promissory
notes and $14.00 for warrants issued with the bridge loan. 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 to purchase Series C
Preferred Shares with a weighted average exercise price of $6.94 per share and
262, 500 warrants to purchase common shares with a weighted average exercise
price of $5.34 per share. No warrants had been exercised at December 31, 1999.
Annual maturities of the Company's long-term debt at December 31, 1999, are
$204,493 in 2001 and $109,938 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, 1997, 1998
and 1999.
At December 31, 1999, the Company has net operating loss carryforwards
aggregating approximately $15,614,000, 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,
---------------
1998 1999
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 3,185 $6,090
Amounts to adjust from accrual method to the cash
method of accounting used for tax purposes........... (650) --
Research and development tax credit carryforwards..... -- 333
Other................................................. 15 118
------- ------
Total deferred tax assets............................... 2,550 6,541
Valuation allowance for deferred tax assets............. (2,550) (6,541)
------- ------
$ -- $ --
======= ======
</TABLE>
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 one or more series of preferred shares and to
establish the rights and preferences of such preferred shares.
F-12
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible Preferred Shares
The following table reflects the various convertible preferred shares issued
through December 31, 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 December 31, 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 (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.
F-13
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Voting
Preferred shareholders are entitled to votes equal to the number of shares
of common shares which may be obtained upon conversion.
Stock Split
The Board of Directors has declared 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.
Stock Option Plan
Utilizing the intrinsic value method of APB 25, the Company recognized $0,
$69,000 and $229,000 of stock compensation expense during the years ended
December 31, 1997, 1998 and 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 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net loss--as reported............................... $3,567 $4,822 $8,509
Net loss--pro forma................................. $3,592 $4,884 $8,723
Pro forma loss per share............................ $ 1.23 $ 1.66 $ 2.92
</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, 4.65% for 1998 and 5.71% for 1997; and a
weighted-average expected option life of four years.
Information related to the Plan is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... 1,840,875 $.100 2,337,069 $.131 2,912,382 $ .202
Options granted......... 651,436 .214 698,249 .454 684,600 1.533
Options exercised....... (68,110) .100 (19,842) .109 (104,842) .256
Options canceled........ (87,132) .100 (103,094) .237 (136,918) .894
Options outstanding, end
of period.............. 2,337,069 .131 2,912,382 .202 3,355,222 .457
Option price range at
end of period.......... $.100-$.214 $.100-$.628 $.100-$5.94
Weighted-average fair
value of options
granted during the
period................. $.342 $.805 $5.883
Options available for
grant at period end.... 570,662 565,552 68,138
Exercisable at December
31, 1999............... 2,083,836 .209
</TABLE>
F-14
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The outstanding options at December 31, 1999, have a weighted-average
remaining contractual life of 7.70 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 12/31/99 Price
--------------- --------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.100 1,645,237 6.42 $0.100 1,504,578 $0.100
$0.214 675,938 7.72 $0.214 367,712 $0.214
$0.400 252,173 8.84 $0.400 90,384 $0.400
$0.629-$0.914 310,774 9.21 $0.761 81,451 $0.761
$1.371 425,600 9.73 $1.371 38,870 $1.371
$5.943 45,500 9.99 $5.943 841 $5.943
--------- ---- ------ --------- ------
$0.100-$5.943 3,355,222 7.70 $0.457 2,083,836 $0.209
========= ==== ====== ========= ======
</TABLE>
7. Lease Commitments
At December 31, 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>
December 2000........................................... $122 $ 850
December 2001........................................... 72 678
December 2002........................................... -- 622
December 2003........................................... -- 593
---- ------
194 $2,743
======
Less: Amounts representing interest..................... 18
----
Obligations under capital leases........................ 176
Less: Obligations due within one year................... 122
----
Long-term obligation under capital leases............... $ 54
====
</TABLE>
Rent expense for operating leases was $157,496, $374,165 and $879,337 for
the years ended December 31, 1997, 1998, and 1999, respectively.
Assets recorded under capitalized lease agreements included in equipment at
December 31, 1999, consist of the following (in thousands):
<TABLE>
<S> <C>
Computer equipment.................................................. $100
Furniture and fixtures.............................................. 200
----
300
Accumulated depreciation and amortization........................... (121)
----
$179
====
</TABLE>
F-15
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 ($54,363 at
December 31, 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 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%, 6.6% and 20.8% of the Company's total revenues in 1997, 1998
and 1999, respectively.
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.
As part of the Company's initial public offering of common shares, the
Company and its underwriters have determined to make available up to 320,000
common shares at the initial public offering price for 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
F-16
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 purchase 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 stock, 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 $4.5 million plus
interest based on the assumed initial public offering price of $14.00 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.
F-17
<PAGE>
[Flap 4]
[(Inside Back Cover)]
[Graphic depiction of the Apropos logo.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,200,000 Shares
[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............................... 87,000
Accounting fees and expenses..................................... 300,000
Legal fees and expenses.......................................... 350,000
Transfer agent fees and expenses................................. 25,000
Printing and engraving expenses.................................. 250,000
Directors and officers insurance premiums........................ 450,000
Miscellaneous expenses........................................... 16,634
----------
Total.......................................................... $1,500,000
==========
</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 January 1, 1997 and January 1, 2000 we issued options to purchase
1,874,600 common shares at exercise prices ranging from $0.214 to $5.94 to
employees.
Between January 1, 1997 and January 1, 2000, an aggregate of 347,445 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 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, as amended.
10.3 Employment Agreement dated January 19, 2000 between the Registrant and
Richard D. Brown.
10.4 Employment Agreement dated January 19, 2000 between the Registrant and
Jody P. Wacker.
10.5 2000 Omnibus Incentive Plan.
10.6 Employee Stock Purchase Plan of 2000.
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 21, 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 21, 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
Year ended December 31,
1999
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $151,000 311,000 -- -- $462,000
</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, 1998 and 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, 1999, and have issued our report
thereon dated January 13, 2000 (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.
/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 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, as amended.
10.3 Employment Agreement dated January 19, 2000 between the Registrant and
Richard D. Brown.
10.4 Employment Agreement dated January 19, 2000 between the Registrant and
Jody P. Wacker.
10.5 2000 Omnibus Incentive Plan.
10.6 Employee Stock Purchase Plan of 2000.
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 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
APROPOS TECHNOLOGY, INC.
The original Articles of Incorporation of Apropos Technology, Inc.
were filed with the Secretary of State of Illinois on April 17, 1989. The name
of the Corporation under which it was originally incorporated was Teledata
Solutions, Inc. The original Articles of Incorporation were amended on June 13,
1997 to change the Corporation's name to Apropos Technology, Inc. This Amended
and Restated Articles of Incorporation not only restates and integrates the
original Articles of Incorporation and all amendments thereto, but also includes
amendments adopted by the shareholders of Apropos Technology, Inc. on the date
hereof. This Amended and Restated Articles of Incorporation was duly adopted in
accordance with the applicable provisions of Sections 10.20 and 7.10 of the
Illinois Business Corporation Act of 1983, as amended and shall become effective
upon filing with the Secretary of State of the State of Illinois. Each of the
Articles contained in this Amended and Restated Articles of Incorporation,
except the First, have been both amended and restated.
FIRST: The name of the Corporation is Apropos Technology, Inc.
-----
SECOND: The Corporation's registered office in the State of Illinois
------
is located at 208 S. LaSalle Street, Chicago, Illinois, 60604 in the County of
Cook and CT Corporation System is the Corporation's registered agent at such
address.
THIRD: The duration of the Corporation is perpetual.
-----
FOURTH: The purpose for which the Corporation is organized is to
------
carry on and to engage in any lawful act or activity for which corporations may
be organized under the Illinois Business Corporation Act of 1983, as amended.
FIFTH: Paragraph 1: The aggregate number of shares which the
-----
Corporation is authorized to issue is 65,000,000 divided into two classes. The
designations of each class, the number of shares of each class and the par
value, if any, of the shares of each class, or a statement that the shares of
any class are without par value, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Par value per share or
Class Series (if any) No. of Shares statement that shares
are without par value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common None 60,000,000 $.01
- ------------------------------------------------------------------------------------------------
Preferred Issuable in series as 5,000,000 $.01
determined by Board of
Directors
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
No holder of Preferred Shares or Common Shares of the Corporation shall be
entitled to cumulate votes in any matter brought to a vote of the shareholders
including the election of directors.
Paragraph 2: The preferences, qualifications, limitations,
restrictions and the special or relative rights in respect of the shares of each
class are:
PREFERRED SHARES
----------------
1. Authority is hereby vested in the Board of Directors (by adoption
of a resolution and filing and recording of a statement in accordance with the
laws of the State of Illinois) to divide any or all of the authorized Preferred
Shares into series and, within the limitations provided by law, to fix and
determine:
(a) The rate per annum, if any, at which the holders of shares
of any series shall be entitled to receive dividends out of any funds of the
Corporation at that time legally available for dividends and as declared by the
Board of Directors;
(b) The price or prices and other terms and conditions, if any,
on which shares of any series of Preferred Shares shall be redeemed;
(c) The amount or amounts per share payable on the Preferred
Shares in the event of any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
(d) Sinking fund provisions, if any, for the redemption or
purchase of shares of any such series;
(e) The terms and conditions on which shares of any series may
be converted into shares of another class, if the shares of any series are
issued with the privilege of conversion; and
(f) The limitation or denial of voting rights, or the grant of
special voting rights for any series.
2. The Board of Directors may increase the number of shares
designated for any existing series by a resolution adding to such series
authorized and unissued Preferred Shares not designated for any other series.
COMMON SHARES
-------------
1. The holders of Common Shares shall be entitled to vote as
provided by law.
2. The holders of Common Shares are entitled to receive dividends
when and as declared by the Board of Directors, and after provision for all
dividends on the Preferred
-2-
<PAGE>
Shares as hereinabove set forth, provided no dividend shall be declared or paid
hereunder unless it is declared and paid at the same time and in the same manner
on all outstanding Common Shares.
3. None of the Common Shares of the Corporation shall be subject to
mandatory redemption.
PREEMPTIVE RIGHTS
-----------------
Except for the conversion of Preferred Shares as may be determined by the
Board of Directors, no holder of shares of any class of the Corporation shall
have any preemptive right to subscribe for or acquire additional shares of the
Corporation of the same or any other class, or any other securities convertible
into or evidencing or accompanied by any right to subscribe for, purchase or
acquire shares of stock of any class of the Corporation, whether such shares be
hereby or hereafter authorized; all additional shares may be sold for the
consideration, at the time, and to the person or persons as the Board of
Directors may from time to time determine, subject to the limitations
hereinabove set forth.
STOCK SPLIT
-----------
Notwithstanding anything in these Amended and Restated Articles of
Incorporation to the contrary, each Common Share of the Corporation issued and
outstanding immediately prior to the effective date of these Amended and
Restated Articles of Incorporation shall be automatically converted, without
further action, into 1.75 Common Shares authorized herein. On such effective
date, outstanding certificates representing Common Shares shall thereafter
automatically be deemed to represent certificates for the number of Common
Shares determined as set forth in the preceding sentence; provided, however,
that the holders thereof shall be entitled to present such certificates to the
Corporation for replacement with certificates reflecting the number of Common
Shares into which the shares have been converted.
SIXTH: The number of Directors shall be fixed in the manner provided
-----
by the By-laws. The By-laws may establish a variable range for the size of the
Board of Directors by prescribing a minimum and maximum number of directors. If
the Board of Directors is to consist of six or more members, the Directors of
the Corporation shall be divided into three classes: Class I, Class II and Class
III. Each class shall consist, as nearly as may be possible, of one-third of the
whole number of the Board of Directors. If the Board of Directors is not evenly
divisible by three, the Board of Directors shall determine the number of
Directors to be elected to each class. The initial members of Class I shall be
Patrick K. Brady and Ian M. Larkin and they shall hold office for a term to
expire at the annual meeting of the shareholders to be held in 2001; the initial
members of Class II shall be Maurice A. Cox, Jr. and Keith L. Crandell and they
shall hold office for a term to expire at the annual meeting of the shareholders
to be held in 2002; and the initial members of Class III shall be Kevin G. Kerns
and George B. Koch and they shall hold office for a term to expire at the annual
meeting of the shareholders to be held in 2003, and in the case of each class,
until their respective successors are duly elected and qualified. At each annual
election held commencing with the annual election in 2001, the Directors elected
to succeed those whose terms expire shall be identified as being of the same
class as the Directors
-3-
<PAGE>
they succeed and shall be elected to hold office for a term to expire at the
third annual meeting of the shareholders after their election and until their
respective successors are duly elected and qualified.
SEVENTH: Special meetings of the shareholders, for any purpose or
-------
purposes (except to the extent otherwise provided by law or these Amended and
Restated Articles of Incorporation), may only be called by the President or the
Board of Directors.
EIGHTH: In the event the Board of Directors of the Corporation shall,
------
by resolution adopted by a majority of the Directors then in office, recommend
to the shareholders the adoption of an amendment to these Amended and Restated
Articles of Incorporation, the shareholders of record holding a majority of the
total voting power of all then outstanding shares entitled to vote in the
election of Directors of the Corporation, voting as a single class (unless
otherwise required by law), may so amend these Articles of Incorporation.
NINTH: In furtherance and not in limitation of the powers conferred
-----
by the laws of the State of Illinois, the Board of Directors is expressly
authorized and empowered to make, alter, amend and repeal the By-laws of the
Corporation in any respect not inconsistent with the laws of the State of
Illinois or with these Amended and Restated Articles of Incorporation.
TENTH: The books of the Corporation may be kept at such place within
-----
or without the State of Illinois as the By-laws of the Corporation may provide
or as may be designated from time to time by the Board of Directors of the
Corporation.
ELEVENTH: A Director of the Corporation shall not be personally
--------
liable to the Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 8.65 of the Illinois Business
Corporation Act, as the same exists or hereafter may be amended, or (iv) for any
transaction from which the Director derived an improper personal benefit.
If the Illinois Business Corporation Act hereafter is amended to
authorize the further elimination or limitation of the liability of Directors,
then the liability of the Corporation's Directors shall be eliminated or limited
to the full extent authorized by the Illinois Business Corporation Act, as so
amended.
Any repeal or modification of this Article shall not adversely affect
any right or protection of a Director of the Corporation existing at the time of
such repeal or modification.
TWELVTH: As of the date of adoption of these Amended and Restated
-------
Articles of Incorporation, 1,969,183 Common Shares of the Corporation are
outstanding, 1,242,858 Shares of Series A convertible preferred stock are
outstanding, 1,599,888 shares of Series B convertible preferred stock are
outstanding, 1,152,737 shares of Series C convertible preferred stock are
outstanding and the Corporation's paid-in-capital is $16,201,250.
-4-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Articles of Incorporation to be signed by its duly authorized officers
this ___ day of _____________, 2000.
Attest: APROPOS TECHNOLOGY, INC.
________________________________ By: ________________________________
Secretary Its: ________________________________
-5-
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
APROPOS TECHNOLOGY, INC.
(AN ILLINOIS CORPORATION)
(adopted on January 20, 2000)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 OFFICES.......................................................................................... 1
Section 1.1 PRINCIPAL OFFICE................................................................. 1
Section 1.2 REGISTERED OFFICE................................................................ 1
ARTICLE 2 MEETINGS OF SHAREHOLDERS......................................................................... 1
Section 2.1 PLACE OF MEETINGS................................................................ 1
Section 2.2 ANNUAL MEETINGS.................................................................. 1
Section 2.3 SPECIAL MEETINGS................................................................. 1
Section 2.4 NOTICE OF MEETINGS............................................................... 1
Section 2.5 WAIVER OF NOTICE................................................................. 2
Section 2.6 CLOSING OF TRANSFER BOOKS AND FIXING OF RECORD DATE.............................. 2
Section 2.7 VOTING LISTS..................................................................... 2
Section 2.8 QUORUM........................................................................... 3
Section 2.9 MANNER OF ACTING................................................................. 3
Section 2.10 PROXIES.......................................................................... 3
Section 2.11 VOTING OF SHARES BY CERTAIN HOLDERS.............................................. 3
Section 2.12 NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS................................... 4
Section 2.13 INSPECTORS OF ELECTION........................................................... 6
ARTICLE 3 DIRECTORS........................................................................................ 6
Section 3.1 GENERAL POWERS................................................................... 6
Section 3.2 NUMBER, TENURE AND QUALIFICATIONS................................................ 6
Section 3.3 REGULAR MEETINGS................................................................. 6
Section 3.4 SPECIAL MEETINGS................................................................. 6
Section 3.5 NOTICE........................................................................... 7
Section 3.6 QUORUM........................................................................... 7
Section 3.7 MANNER OF ACTING................................................................. 7
Section 3.8 VACANCIES........................................................................ 7
Section 3.9 RESIGNATION...................................................................... 8
Section 3.10 COMPENSATION..................................................................... 8
Section 3.11 PRESUMPTION OF ASSENT............................................................ 8
Section 3.12 COMMITTEES....................................................................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
Section 3.13 REMOVAL OF DIRECTORS............................................................. 9
Section 3.14 INFORMAL ACTION BY DIRECTORS..................................................... 9
Section 3.15 RELIANCE ON BOOKS................................................................ 10
ARTICLE 4 OFFICERS......................................................................................... 10
Section 4.1 NUMBER........................................................................... 10
Section 4.2 ELECTION AND TERM OF OFFICE...................................................... 10
Section 4.3 REMOVAL.......................................................................... 10
Section 4.4 VACANCIES........................................................................ 10
Section 4.5 CHAIRMAN OF THE BOARD OF DIRECTORS............................................... 10
Section 4.6 THE CHIEF EXECUTIVE OFFICER...................................................... 10
Section 4.7. PRESIDENT........................................................................ 11
Section 4.8 CHIEF FINANCIAL OFFICER.......................................................... 11
Section 4.9 VICE PRESIDENTS.................................................................. 11
Section 4.10 TREASURER........................................................................ 11
Section 4.11 SECRETARY........................................................................ 11
Section 4.12 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES................................... 12
Section 4.13 SALARIES......................................................................... 12
ARTICLE 5 SHARES, CERTIFICATES FOR SHARES AND TRANSFER OF SHARES........................................... 12
Section 5.1 REGULATION....................................................................... 12
Section 5.2 CERTIFICATES FOR SHARES.......................................................... 12
Section 5.3 CANCELLATION OF CERTIFICATES..................................................... 13
Section 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES........................................... 13
Section 5.5 TRANSFER OF SHARES............................................................... 13
Section 5.6 FACSIMILE SIGNATURE.............................................................. 13
ARTICLE 6 CONTRACTS........................................................................................ 13
ARTICLE 7 FISCAL YEAR...................................................................................... 14
ARTICLE 8 DIVIDENDS........................................................................................ 14
ARTICLE 9 SEAL............................................................................................. 14
ARTICLE 10 INDEMNIFICATION................................................................................. 14
Section 10.1 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION......................... 14
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
Section 10.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.................................... 14
Section 10.3 AUTHORIZATION OF INDEMNIFICATION................................................. 15
Section 10.4 PAYMENT OF EXPENSES IN ADVANCE................................................... 15
Section 10.5 SUCCESSFUL DEFENSES.............................................................. 15
Section 10.6 PROVISIONS NOT EXCLUSIVE......................................................... 15
Section 10.7 INSURANCE........................................................................ 16
Section 10.8 NOTICE TO SHAREHOLDERS........................................................... 16
Section 10.9 DEFINITIONS...................................................................... 16
Section 10.11 CONTINUATION OF RIGHTS........................................................... 16
Section 10.12 PAYMENTS A BUSINESS EXPENSE...................................................... 16
ARTICLE 11 AMENDMENTS...................................................................................... 17
ARTICLE 12 VOTING SHARES OF INTERESTS IN OTHER CORPORATIONS................................................ 17
</TABLE>
-iii-
<PAGE>
AMENDED AND RESTATED BY-LAWS
----------------------------
OF
--
APROPOS TECHNOLOGY, INC.
------------------------
ARTICLE 1
OFFICES
Section 1.1 PRINCIPAL OFFICE. The principal office of the
corporation shall be located at One Tower Lane, Oakbrook Terrace, Illinois, and
the corporation may have and maintain such other business office or offices,
either within or without the State of Illinois, as it may require from time to
time.
Section 1.2 REGISTERED OFFICE. The registered office of the
corporation required by The Business Corporation Act of Illinois, as amended
(the "Act") to be maintained in the State of Illinois may be, but need not be,
identical with the principal office in the State of Illinois, and the address of
the registered office may be changed from time to time by the Board of
Directors.
ARTICLE 2
MEETINGS OF SHAREHOLDERS
Section 2.1 PLACE OF MEETINGS. All meetings of the shareholders may
be held at such place as shall be designated from time to time by the Board of
Directors and stated in the notice of meeting or in a duly executed waiver of
notice thereof. If no designation is made, the place of meeting shall be the
principal office of the corporation.
Section 2.2 ANNUAL MEETINGS. An annual meeting of the shareholders,
commencing in 2001, shall be held each year within 180 days after the close of
the immediately preceding fiscal year of the corporation, at such time and place
as shall be designated by the Board of Directors.
Section 2.3 SPECIAL MEETINGS. Special meetings of the shareholders,
for any purpose or purposes, unless otherwise prescribed by the Act, the Amended
and Restated Articles of Incorporation (the "Articles of Incorporation") or
these Amended and Restated By-laws (the "By-laws"), may only be called by the
President, the Chief Executive Officer or the Board of Directors. Such request
shall state the purpose or purposes of the proposed special meeting. Business
transacted at any special meeting of shareholders shall be limited to the
purpose or purposes stated in the notice to the shareholders of the meeting and
to matters incidental or germane thereto.
Section 2.4 NOTICE OF MEETINGS. Written notice stating the place,
day and hour of the meeting of shareholders and, in case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered not
less than ten days (or in a case
<PAGE>
involving a merger, consolidation, share exchange, dissolution or sale, lease or
exchange of assets, not less than twenty days) nor more than sixty days before
the date of the meeting, either personally or by mail, by or at the direction of
the Chairman of the Board, Chief Executive Officer, President, the Secretary or
the officer or persons calling the meeting, to each shareholder of record
entitled to vote at the meeting. If mailed, the notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the shareholder
at his or her address as it appears on the records of the corporation, with
postage thereon prepaid.
Section 2.5 WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of these By-laws or under the provisions of the
Articles of Incorporation or under the provisions of the Act or otherwise, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Attendance at any meeting shall
constitute waiver of notice thereof unless the person at the meeting objects to
the holding of the meeting because proper notice was not given.
Section 2.6 CLOSING OF TRANSFER BOOKS AND FIXING OF RECORD DATE.
For the purpose of determining shareholders entitled to notice of or to vote at
any meeting of shareholders, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors of the corporation may provide that the
share transfer books shall be closed for a stated period, but not to exceed, in
any case, sixty days. If the share transfer books shall be closed for the
purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least ten days (or in
a case involving a merger, consolidation, share exchange, dissolution or sale,
lease or exchange of assets, at least twenty days) immediately preceding the
meeting. In lieu of closing the share transfer books, the Board of Directors may
fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than sixty days and, in case
of a meeting of shareholders, not less than ten days (or in a case involving a
merger, consolidation, share exchange, dissolution or sale, lease or exchange of
assets, not less than twenty days) immediately preceding such meeting. If the
share transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment of the meeting.
Section 2.7 VOTING LISTS. The officer or agent having charge of the
transfer books for shares of the corporation shall make, within twenty days
after the record date for a meeting of shareholders, or ten days before each
such meeting, whichever is earlier, a complete list of shareholders entitled to
vote at such meeting, arranged in alphabetical order, with the address of and
the number of shares held by each, which list, for a period of ten days prior to
such meeting, shall be kept on file at the registered office of the corporation
and shall be subject to inspection by any shareholder, and to copying at the
shareholder's expense, at any time during usual business hours. Such list shall
also be produced and kept open at the time and place of meeting and shall be
subject to the inspection of any shareholder during the whole time
2
<PAGE>
of the meeting. The original share ledger or transfer book, or a duplicate
thereof kept in the State of Illinois, shall be prima facie evidence as to who
are the shareholders entitled to examine such list or share ledger or transfer
book or to vote at any meeting of shareholders. Failure to comply with the
requirements of this section shall not affect the validity of any action taken
at such meeting.
Section 2.8 QUORUM. Unless otherwise provided in the Act or
Articles of Incorporation, a majority of votes of the shares, entitled to vote
on a matter, represented in person or by proxy, shall constitute a quorum for
consideration of such matter at a meeting of shareholders, but in no event shall
a quorum consist of less than one-third of the votes of the shares entitled so
to vote. If, however, such quorum shall not be present or represented by proxy
at any meeting of the shareholders, the shareholders entitled to vote thereat,
present in person or represented by proxy, the Chairman of the Board, the Chief
Executive Officer or the President, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, except as
hereinafter provided, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the original
meeting. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
Section 2.9 MANNER OF ACTING. If a quorum is present, the
affirmative vote of a majority of the votes of the shares represented at the
meeting and entitled to vote on a matter shall be the act of the shareholders,
unless the vote of a greater number or voting by classes is required by the Act
or the Articles of Incorporation.
Section 2.10 PROXIES. A shareholder may appoint a proxy to vote or
otherwise act for the shareholder by delivering a valid appointment form to the
person so appointed or to a proxy solicitation firm, proxy support service
organization, or like agent duly authorized by the shareholder to receive the
transmission. Without limiting the manner in which a shareholder may appoint
such a proxy pursuant to these Bylaws, the following shall constitute valid
means by which a shareholder may make such an appointment:
(1) A shareholder may sign a proxy appointment form. The
shareholder's signature may be affixed by any reasonable means,
including, but not limited to, by facsimile signature.
(2) A shareholder may transmit or authorize the transmission of a
telegram, cablegram, or other means of electronic transmission;
provided that any such transmission must either set forth or be
submitted with information from which it can be determined that
the telegram, cablegram, or other electronic transmission was
authorized by the shareholder. If it is determined that the
telegram, cablegram, or other electronic transmission is valid,
the inspectors or, if there are no inspectors, such other persons
making that determination shall specify the information upon
which they relied.
3
<PAGE>
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission may be substituted or used in lieu of the original
writing or transmission for any and all purposes for which the original writing
or transmission could be used, provided, that the copy, facsimile
telecommunication, or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
No proxy shall be valid after the expiration of eleven months from the date
thereof, unless otherwise provided in the proxy. Each proxy continues in full
force and effect until revoked by the person executing it prior to the vote
pursuant thereto, except as otherwise provided by law. Such revocation may be
effected by a writing delivered to the Corporation stating that the proxy is
revoked or by a subsequent proxy executed by, or by attendance at the meeting
and voting in person by, the person executing the proxy. The dates contained on
the forms of proxy presumptively determine the order of execution, regardless of
the postmark dates on the envelopes in which they are mailed.
Section 2.11 VOTING OF SHARES BY CERTAIN HOLDERS. (a) Shares
registered in the name of another corporation, domestic or foreign, may be voted
by such officer, agent, proxy or other legal representative authorized to vote
such shares under the law of incorporation of such corporation. The corporation
may treat the president or other person holding the position of chief executive
officer of such other corporation as authorized to vote such shares, together
with any other person indicated and any other holder of an office indicated by
the corporate shareholder to the corporation as a person or as an officer
authorized to vote such shares. Such persons and officers indicated shall be
registered by the corporation on the transfer books for shares and included in
any voting list prepared in accordance with Section 2.7.
(b) Shares registered in the name of a deceased person, a minor ward
or person under legal disability may be voted by his or her administrator,
executor, or court-appointed guardian, either in person or by proxy, without a
transfer of such shares into the name of such administrator, executor, or court-
appointed guardian. Shares registered in the name of a trustee may be voted by
him or her, either in person or by proxy.
(c) Shares registered in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his or her name, if authority to
do so is contained in an appropriate order of the court by which such receiver
was appointed.
(d) A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so transferred.
(e) Shares of its own stock belonging to this corporation shall not
be voted, directly or indirectly, at any meeting and shall not be counted in
determining the total number of outstanding shares at any given time, but shares
of its own stock held by it in a fiduciary capacity may be voted and shall be
counted in determining the total number of outstanding shares entitled to vote
at any given time.
4
<PAGE>
Section 2.12 NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS.
(a) Annual Meetings of Shareholders. (1) Nominations of persons for
-------------------------------
election to the Board of Directors of the corporation and the proposal of
business to be considered by the shareholders may be made at an annual meeting
of shareholders (A) by or at the direction of the Board of Directors of (B) by
any shareholder of the corporation who was a shareholder of record at the time
of giving of notice provided for in this By-Law, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought before
an annual meeting by a shareholder pursuant to clause (B) of paragraph (a)(1) of
this By-Law, the shareholder must have given timely notice thereof in writing to
the Secretary of the corporation and such other business must otherwise be a
proper matter for shareholder action. To be timely, a shareholder's notice shall
be delivered to the Secretary at the principal executive offices of the
corporation not later than the close of business on the 90th day, nor earlier
than the close of business on the 110th day, prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the shareholder to be timely must be so
delivered not later than the 10th day following the day on which public
announcement (as hereinafter defined) of the date of such meeting is first made
by the corporation. In no event shall the public announcement of an adjournment
of an annual meeting commence a new time period for the giving of a
shareholder's notice as described above. Such shareholder's notice shall set
forth (A) as to each person whom the shareholder proposes to nominate for
election or re-election as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the shareholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the shareholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
shareholder, as they appear on the corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the corporation which are owned
beneficially and of record by such shareholder and such beneficial owner.
(b) Special Meetings of Shareholders. Only such business shall be
--------------------------------
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of shareholders at which directors are to be elected pursuant to the
corporation's notice of meeting (A) by or at the direction of the Board of
Directors or (B) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any shareholder of the
corporation who is a shareholder of record at the time of giving of notice
provided for in this By-Law, who shall be entitled to vote at the
5
<PAGE>
meeting and who complies with the notice procedures set forth in this By-Law. In
the event the corporation calls a special meeting of shareholders for the
purpose of electing one or more directors to the Board of Directors, any such
shareholder may nominate a person or persons (as the case may be), for election
of such position(s) as specified in the corporation's notice of meeting, if the
shareholder's notice required by paragraph (a)(2) of this By-Law shall be
delivered to the Secretary at the principal executive offices of the corporation
not earlier than the close of business on the 110th day prior to such special
meeting and not later than the close of business on the later of the 90th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a shareholder's notice as described
above.
(c) General. (1) Only such persons who are nominated in accordance
-------
with the procedures set forth in this By-Law shall be eligible to serve as
directors and only such business shall be conducted at a meeting of shareholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this By-Law. Except as otherwise provided by law, the Chairman of
the meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made or proposed, as
the case may be, in accordance with the procedures set forth in this By-Law and,
if any proposed nomination or business is not in compliance with this By-Law, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. Nothing in this By-Law shall be deemed to affect any
rights (i) of shareholders to request inclusion of proposals in the
corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of preferred stock to elect directors under
specified circumstances.
Section 2.13 INSPECTORS OF ELECTION. The Board of Directors, in
advance of any meeting of shareholders, may appoint one or more persons as
inspectors to act at such meeting or any adjournment thereof. If inspectors of
election are not so appointed, the person acting as chairman at any such meeting
may, and on the request of any shareholder shall, make such appointment. In case
any person appointed as inspector shall fail to appear or to act, the vacancy
may be filled by appointment made by the Board of Directors in advance of the
meeting or at the meeting by the officer or person acting as chairman.
The inspectors shall ascertain and report the number of shares
represented at the meeting, based upon their determination of the validity and
effect of proxies; count all votes and report the results; and do such other
acts as are proper to conduct the election and voting with impartiality and
fairness to all the shareholders.
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Each report of an inspector shall be in writing and signed by him or
her or by a majority of them if there be more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall be
the report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
ARTICLE 3
DIRECTORS
Section 3.1 GENERAL POWERS. The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors.
Section 3.2 NUMBER, TENURE AND QUALIFICATIONS. The number of
directors which shall constitute the whole Board of the corporation shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by the Board of Directors but in no event shall the number of
Directors of the corporation be less than 6 nor more than 9. Directors need not
be residents of the State of Illinois nor shareholders of the corporation.
The Board of Directors shall be divided into three classes in the
manner provided by the Articles of Incorporation.
Section 3.3 REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without other notice than this By-law, immediately
after, and at the same place as, the annual meeting of shareholders. The Board
of Directors may provide, by resolution, the time and place, either within or
without the State of Illinois, for the holding of additional regular meetings in
which case no other notice need be given.
Section 3.4 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the Chairman of the Board, the
Chief Executive Officer, the President or any three directors. The person or
persons authorized to call special meetings of the Board of Directors may fix
any place, either within or without the State of Illinois, as the place for
holding any special meeting of the Board of Directors.
Section 3.5 NOTICE. Written notice of any special meeting of
directors shall be given as follows:
(a) By mail to each director at his business address at least three
days prior to the meeting; or
(b) By personal delivery, telegram or facsimile to each director at
his business address at least 24 hours prior to the meeting, or in the event
such notice is given on a Saturday, Sunday or holiday, to each director at his
residence address at least 24 hours prior to the meeting.
(c) If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail so addressed, with postage thereon prepaid.
If notice is given by telegram, such notice shall be deemed to be delivered when
the telegram is delivered to the telegraph
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company. If notice is given by facsimile, such notice shall be deemed given when
sent with confirmation of receipt.
(d) Any director may waive notice of any meeting. The attendance of a
director at any meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
Section 3.6 QUORUM. A majority of the number of the Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors. If less than a majority of such directors are
present at said meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice until a quorum shall be
present.
Unless specifically prohibited by the Articles of Incorporation,
members of the Board of Directors or of any committee of the Board of Directors
may participate in and act at any meeting of such Board of Directors or
committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in such a meeting shall constitute attendance at the
meeting of the person or persons so participating.
Section 3.7 MANNER OF ACTING. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors unless a greater number is required by the Articles of
Incorporation.
Section 3.8 VACANCIES. Any vacancy occurring in the Board of
Directors and any directorship to be filled by reason of an increase in the
number of directors may be filled by election at any annual meeting or at a
special meeting of the shareholders called for that purpose. In addition, any
vacancy occurring in the Board of Directors arising between meetings of
shareholders by reason of an increase in the number of directors or otherwise
may be filled by the affirmative vote of at least a majority of the remaining
directors in office. A director appointed by the Board of Directors to fill a
vacancy shall serve until the next meeting of shareholders at which directors
are to be elected.
Section 3.9 RESIGNATION. A director may resign at any time by
giving written notice to the Board of Directors, its chairman, or to the
president or secretary of the corporation. A resignation is effective when the
notice is given unless the notice specifies a future date. The pending vacancy
may be filled before the effective date, but the successor shall not take office
until the effective date.
Section 3.10 COMPENSATION. The Board of Directors, irrespective of
any personal interest of any of the members, shall have the authority to fix the
compensation of Directors. The Directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at meetings or a stated salary as Directors. These payments shall
not preclude any Director from serving the corporation in any
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other capacity and receiving compensation therefor. Member of special or
standing committees may be allowed like compensation.
Section 3.11 PRESUMPTION OF ASSENT. A director of the corporation
who is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be conclusively presumed to have assented to the
action taken unless his dissent is entered in the minutes of the meeting or
unless he files his written dissent to such action with the person acting as the
secretary of the meeting before the adjournment of the meeting or forwards such
dissent by registered mail to the Secretary of the corporation immediately after
the adjournment of the meeting. Such right to dissent does not apply to a
director who voted in favor of such action.
Section 3.12 COMMITTEES. The Board of Directors, by resolution,
adopted by a majority of directors, may create one or more committees and
appoint members of the Board to serve on the committee or committees. Each
committee shall have two or more members, who serve at the pleasure of the
Board.
Unless the appointment by the Board of Directors requires a greater
number, a majority of any committee shall constitute a quorum and a majority of
a quorum is necessary for committee action. A committee may act by unanimous
consent in writing without a meeting and, subject to the provisions of these By-
laws or action by the Board of Directors, the committee by majority vote of its
members shall determine the time and place of meetings and the notice required
therefor.
To the extent specified by the Board of Directors or in the Articles
of Incorporation or these By-laws, each committee may exercise the authority of
the Board of Directors under the Act; provided, however, a committee may not:
(a) authorize distributions, except for dividends to be paid with
respect to shares of any preferred or special classes or any series
thereof;
(b) approve or recommend to shareholders any act which the Act
requires to be approved by shareholders;
(c) fill vacancies on the Board or on any of its committees;
(d) elect or remove officers or fix the compensation of any member of
the committee;
(e) adopt, amend or repeal these By-laws;
(f) approve a plan of merger not requiring shareholder approval;
(g) authorize or approve reacquisition of shares, except according to
a general formula or method prescribed by the Board;
(h) authorize or approve the issuance or sale, or contract for sale,
of shares, except that the Board may direct a committee (I) to fix the
specific terms
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of the issuance or sale or contract for sale including without limitation
the pricing terms or the designation and relative rights, preferences and
limitations of a series of shares if the Board of Directors has approved
the maximum number of shares to be issued pursuant to such delegated
authority or (II) to fix the price and the number of shares to be allocated
to particular employees under an employee benefit plan; or
(i) amend, alter, repeal, or take action inconsistent with any
resolution or action of the Board of Directors when the resolution or
action of the Board of Directors provides by its terms that it shall not be
amended, altered or repealed by action of a committee.
Section 3.13 REMOVAL OF DIRECTORS. One or more directors may be
removed, with or without cause, at a meeting of shareholders by the affirmative
vote of the holders of a majority of the outstanding shares then entitled to
vote in the election of directors of the corporation, except as follows:
(a) No director shall be removed at a meeting of shareholders unless
the notice of such meeting shall state that a purpose of the meeting is to
vote upon the removal of one or more directors named in the notice. Only
the named director or directors may be removed at such meeting.
(b) If a director is elected by a class or series of shares, he or
she may be removed only by the shareholders of that class or series.
Section 3.14 INFORMAL ACTION BY DIRECTORS. Any action required to be
taken at a meeting of the Board of Directors, or any other action which may be
taken at a meeting of the Board of Directors or a committee thereof, may be
taken without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the directors entitled to vote with respect to
the subject matter thereof or by all the members of such committee, as the case
may be.
Section 3.15 RELIANCE ON BOOKS. A member of the Board of Directors
or a member of any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith upon the
books of account or reports made to the corporation by any of its officers, or
by an independent certified public accountant, or by an appraiser selected with
reasonable care by the Board of Directors or by any committee, or in relying in
good faith upon other records of the corporation.
ARTICLE 4
OFFICERS
Section 4.1 NUMBER. The Board of Directors shall have full
discretion to appoint officers for the corporation. These officers may include a
Chairman of the Board of Directors, a President, a Chief Financial Officer, one
or more Vice Presidents, a Treasurer and a Secretary, each of whom shall be
elected by the Board of Directors. The Board of Directors may
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appoint other officers if deemed necessary who shall have such authority and
shall perform such duties as from time to time may be prescribed by the Board of
Directors. Any two or more offices may be held by the same person.
Section 4.2 ELECTION AND TERM OF OFFICE. The officers of the
corporation shall be elected by the Board of Directors. Vacancies may be filled
or new offices filled at any meeting of the Board of Directors. Each officer
shall hold office until his successor shall have been duly elected and shall
have qualified or until his death or until he shall resign or shall have been
removed in the manner hereinafter provided.
Section 4.3 REMOVAL. Any officer or agent of the corporation may be
removed by the Board of Directors whenever in its judgment the best interests of
the corporation will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election or
appointment of an officer or agent shall not of itself create contract rights.
Section 4.4 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors.
Section 4.5 CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board shall preside at all meetings of the Board of Directors and shareholders.
Section 4.6 THE CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer shall be the chief executive officer of the corporation. The Chief
Executive Officer shall have executive authority to see that all orders and
resolutions of the Board of Directors are carried into effect and, subject to
the control vested in the Board of Directors by statute, by the Articles of
Incorporation or by these By-Laws, shall administer and be responsible for the
overall management of the business and affairs of the corporation. The Chief
Executive Officer shall perform all duties incident to the office of the Chief
Executive Officer and such other duties as from time to time may be assigned to
him by the Board of Directors.
Section 4.7. PRESIDENT. The President shall perform such duties as
from time to time may be assigned to him by the Chief Executive Officer and the
Board of Directors.
Section 4.8 CHIEF FINANCIAL OFFICER. The Chief Financial Officer
(if any) shall act in an executive financial capacity. He shall assist the Chief
Executive Officer and the President in the general supervision of the
corporation's financial policies and affairs.
Section 4.9 VICE PRESIDENTS. Any one or more of the Vice Presidents
may be designated by the Board of Directors as an Executive Vice President,
Senior Vice President or such other designation as the Board of Directors may
deem appropriate. In the absence of the President or in the event of his
inability or refusal to act, the Executive Vice President shall perform the
duties and exercise the functions of the President. If there is no Executive
Vice President, or if there is more than one, the Board of Directors may
determine which one or more of the Vice Presidents shall perform any of such
duties or exercise any of such functions; if such determination is not made by
the Board of Directors, the Chief Executive Officer may make such determination.
Any Vice President may sign, with the Secretary or an
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Assistant Secretary, certificates for shares of the corporation; and shall
perform those other duties which from time to time may be assigned to him by the
Board of Directors or by the Chief Executive Officer or the President.
Section 4.10 TREASURER. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the corporation;
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever and deposit all such moneys in the name of the corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of Article V of these By-laws; and (b) in
general, perform all duties incident to the office of Treasurer and all other
duties as from time to time may be assigned to him by the Board of Directors or
the chief executive officer. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties in the sum
and with a surety or sureties as the Board of Directors shall determine.
Section 4.11 SECRETARY. The Secretary shall: (a) keep the minutes of
the shareholders' and of the Board of Directors' meetings in one or more books
provided for that purpose; (b) see that all notices are duly given in accordance
with the provisions of these By-laws or as required by law; (c) be custodian of
the corporate records and, if the corporation has a corporate seal, of the seal
of the corporation and see that the seal of the corporation is affixed to all
certificates for shares prior to the issue thereof and to all documents, the
execution of which on behalf of the corporation under its seal is duly
authorized in accordance with the provisions of these By-laws; (d) keep a
register of the post office address of each shareholder which shall be furnished
to the Secretary by such shareholder; (e) sign, with the Chief Executive
Officer, the President or a Vice President, certificates for shares of the
corporation, the issue of which shall have been authorized by resolution of the
Board of Directors; (f) have general charge of the share transfer books of the
corporation; and (g) in general, perform all duties incident to the office of
Secretary and all other duties as from time to time may be assigned to him by
the Board of Directors, the Chief Executive Officer or the President.
Section 4.12 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The
Assistant Secretaries as thereunto authorized by the Board of Directors may sign
with the Chief Executive Officer, the President or a Vice President certificates
for shares of the corporation, the issue of which shall have been authorized by
a resolution of the Board of Directors. The Assistant Treasurers and Assistant
Secretaries, in general, shall perform such duties as shall be assigned to them
by the Treasurer or the Secretary, respectively, or by the Board of Directors or
the President. The Assistant Treasurers shall, respectively, if required by the
Board of Directors, give bonds for the faithful discharge of their duties in
sums and with sureties as the Board of Directors shall determine.
Section 4.13 SALARIES. The salaries of the officers shall be fixed
from time to time by the Board of Directors or a committee thereof, and no
officer shall be prevented from receiving such salary by reason of the fact that
he is also a Director of the corporation.
ARTICLE 5
SHARES, CERTIFICATES FOR SHARES AND TRANSFER OF SHARES
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Section 5.1 REGULATION. The Board of Directors may make such rules
and regulations as it may deem expedient concerning the issuance, transfer and
registration of certificates for shares of the corporation, including the
appointment of transfer agents and registrars.
Section 5.2 CERTIFICATES FOR SHARES. The shares of the corporation
shall be represented by certificates which shall be signed by the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Financial
Officer or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, shall be numbered serially for each
class of shares, or series thereof, as they are issued and may be sealed with
the seal, or a facsimile of the seal, of the corporation. If a certificate is
countersigned by a transfer agent or registrar, other than the corporation
itself or its employee, any other signatures or countersignatures on the
certificate may be facsimiles. If the corporation shall be authorized to issue
shares of more than one class, every certificate representing shares issued by
the corporation shall set forth upon the face or back of the certificate a full
or summary 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, if the corporation shall be authorized to
issue any preferred or special class in series, 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. This
statement may be omitted from the certificate if it shall be set forth upon the
face or back of the certificate that such statement, in full, will be furnished
by the corporation to any shareholder upon request and without charge.
Each certificate representing shares shall also state the name of the
corporation, the date of issue, that the corporation is organized under the laws
of the State of Illinois, the name of the person to whom it is issued, the
number and class of shares and the designation of the series, if any, which the
certificate represents. Each certificate shall be otherwise in such form as may
be prescribed by the Board of Directors and as shall conform to the rules of any
Stock Exchange on which the shares may be listed.
Section 5.3 CANCELLATION OF CERTIFICATES. All certificates
surrendered to the corporation for transfer shall be canceled and no new
certificates shall be issued in lieu thereof until the former certificate for a
like number of shares shall have been surrendered and canceled, except as herein
provided with respect to lost, stolen or destroyed certificates.
Section 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES. Any shareholder
claiming that his certificate for shares is lost, stolen or destroyed may make
an affidavit or affirmation of that fact and lodge the same with the Secretary
of the corporation, accompanied by a signed application for a new certificate.
Thereupon, and unless otherwise directed by the Board of Directors, upon the
giving of a satisfactory bond of indemnity to the corporation, a new certificate
may be issued representing the same number, class and series of shares as were
represented by the certificate alleged to be lost, stolen or destroyed.
Section 5.5 TRANSFER OF SHARES. The corporation may from time to
time enter into an agreement or agreements with one or more of its shareholders
restricting the
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transferability of its shares in accordance with the general corporate purpose
to have its shares owned by persons actively engaged in the corporate business.
Subject to the terms of any such agreement, shares of the corporation shall be
transferable on the books of the corporation by the holder thereof, in person or
by his duly authorized attorney, upon the surrender and cancellation of a
certificate or certificates for a like number of shares. Upon presentation and
surrender of a certificate for shares properly endorsed and payment of all
required taxes, if any, the transferee shall be entitled to a new certificate or
certificates in lieu thereof. As against the corporation, a transfer of shares
can be made only on the books of the corporation and in the manner hereinabove
provided, and the corporation shall be entitled to treat the holder of record of
any share as the owner thereof and shall not be bound to recognize any equitable
or other claim to or interest in such share on the part of any other person,
whether or not it shall have express or other notice thereof, except as
expressly provided by the statutes of the State of Illinois.
Section 5.6 FACSIMILE SIGNATURE. Any of or all the signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
ARTICLE 6
CONTRACTS
Except as otherwise required by law, the Articles of Incorporation or
these By-laws, any contracts or other instruments may be executed and delivered
in the name and on behalf of the corporation by such officer or officers of the
corporation as the Board of Directors may from time to time direct. Such
authority may be general or confined to specific instances as the Board may
determine.
ARTICLE 7
FISCAL YEAR
The fiscal year of the corporation shall end on the 31st day of
December in each calendar year.
ARTICLE 8
DIVIDENDS
The Board of Directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and the Articles of Incorporation.
ARTICLE 9
SEAL
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The Board of Directors may provide a corporate seal which shall be in
the form of a circle and shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Illinois."
ARTICLE 10
INDEMNIFICATION
Section 10.1 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The corporation 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 corporation) by
reason of the fact that he or she is or was a director or officer of the
corporation, or who is or was serving at the request of the 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, suit or proceeding, if
such person acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the corporation or, with respect to
any criminal action or proceeding, that the person had reasonable cause to
believe that his or her conduct was unlawful.
Section 10.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
corporation 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 or suit by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that such person is or was a director or officer of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, 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, the best interests of the
corporation, provided that no indemnification shall be made with respect to any
claim, issue, or matter as to which such person has been adjudged to have been
liable to the corporation, unless, and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
Section 10.3 AUTHORIZATION OF INDEMNIFICATION. Any indemnification
under Sections 10.1 and 10.2 of this Article (unless ordered by a court) shall
be made by the corporation only as authorized in the specific case, upon a
determination that indemnification of the director or officer is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in Sections 10.1. and 10.2. of this Article. Such
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determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by advice of independent legal
counsel, or (3) by the shareholders. In any determination denying
indemnification, the burden of proof shall be on the corporation to prove by
clear and convincing evidence that indemnification should not be allowed.
Section 10.4 PAYMENT OF EXPENSES IN ADVANCE. Notwithstanding any
other provisions of this Article 10, expenses incurred in defending a civil or
criminal action, suit or proceeding shall, unless the Board of Directors
determines otherwise, be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director or officer to repay such amount, if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
corporation as authorized in this Article 10.
Section 10.5 SUCCESSFUL DEFENSES. Notwithstanding any other
provisions of this Article 10, to the extent that a director or officer of the
corporation has been successful, on the merits or otherwise, in the defense of
any action, suit or proceeding referred to in Sections 10.1 and 10.2 of this
Article or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
Section 10.6 PROVISIONS NOT EXCLUSIVE. The indemnification and
advancement of expenses provided by or granted under the other Sections of this
Article 10 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any by-
law, agreement, vote of shareholders or disinterested directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office.
Section 10.7 INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of his
or her status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of this
Article 10.
Section 10.8 NOTICE TO SHAREHOLDERS. If the corporation has paid
indemnity or has advanced expenses to a director, officer, employee or agent,
the corporation shall report the indemnification or advance in writing to the
shareholders with or before the notice of the next shareholders meeting.
Section 10.9 DEFINITIONS. For purposes of this Article 10,
references to "the corporation" shall include, in addition to the surviving
corporation, any merging corporation (including any corporation having merged
with a merging corporation) absorbed in a merger which, if its separate
existence had continued, would have had the power and authority to indemnify its
directors, officers, and employees or agents, so that any person who was a
director,
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officer, employee or agent of such merging corporation, or was serving at the
request of such merging corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article 10 with
respect to the surviving corporation as such person would have with respect to
such merging corporation if its separate existence had continued.
For purposes of this Article 10, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries. A person who acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" as referred to in
this Article 10.
Section 10.11 CONTINUATION OF RIGHTS. The indemnification and
advancement of expenses provided by or granted under this Article 10 shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of that person.
Section 10.12 PAYMENTS A BUSINESS EXPENSE. Any payments made to any
indemnified party under these By-Laws or under any other right to
indemnification shall be deemed to be an ordinary and necessary business expense
of the corporation, and payment thereof shall not subject any person responsible
for the payment, or the Board of Directors, to any action for corporate waste or
to any similar action.
ARTICLE 11
AMENDMENTS
Unless the power to make, alter, amend or repeal these By-laws is
reserved to the shareholders by the Articles of Incorporation, these By-laws may
be made, altered, amended or repealed by the shareholders or the Board of
Directors, but no by-laws adopted by the shareholders may be altered, amended or
repealed by the Board of Directors.
ARTICLE 12
VOTING SHARES OF INTERESTS IN OTHER CORPORATIONS
The Chairman of the Board, the Chief Executive Officer or the President and
each of them, shall have, the authority to act for the corporation by voting any
shares or exercising any other interest owned by the corporation in any other
corporation or other business association, including wholly or partially owned
subsidiaries of the corporation, such authority to include, but not be limited
to, power to attend any meeting of any such corporation or other business
association, to vote shares in the election of directors and upon any other
matter coming before
17
<PAGE>
any such meeting, to waive notice of any such meeting and to consent to the
holding thereof without notice, and to appoint a proxy or proxies to represent
the corporation at any such meeting with all powers that said officer would have
under this section if personally present.
18
<PAGE>
Exhibit 5.1
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
January 21, 2000
Apropos Technology, Inc.
One Tower Lane, 28th Floor
Oakbrook Terrace, IL 60181
Re: Registration Statement on Form S-1
File No. 333-90873
------------------
Ladies and Gentlemen:
You have requested our opinion in connection with the above-referenced
registration statement (the "Registration Statement"), under which (i) Apropos
Technology, Inc. (the "Company") intends to issue and sell in an initial public
offering 3,200,000 common shares, par value $.01 per share, of the Company (the
"Common Shares"), plus up to an additional 240,000 Common Shares granted to the
underwriters by the Company to cover over-allotments (the "Primary Shares") and
(ii) a certain shareholder of the Company intends to grant the underwriters an
option to purchase 240,000 Common Shares to cover over-allotments (the
"Secondary Shares").
In arriving at our opinion expressed below, we have examined the
Registration Statement and such other documents as we have deemed necessary to
enable us to express the opinion hereinafter set forth. In addition, we have
examined and relied, to the extent we deem proper, on certificates of officers
of the Company as to factual matters, and on the originals or copies certified
or otherwise identified to our satisfaction, of all such corporate records of
the Company and such other instruments and certificates of public officials and
other persons as we have deemed appropriate. In our examination, we have assumed
the authenticity of all documents submitted to us as originals, the conformity
to the original documents of all documents submitted to us as copies, the
genuineness of all signatures on documents reviewed by us and the legal capacity
of natural persons.
Based upon and subject to the foregoing, we are of the opinion that
upon filing the Amended and Restated Articles of Incorporation of the Company
filed as Exhibit 3.1 to the Registration Statement, (i) the Primary Shares will
have been duly authorized and, when issued in accordance with the terms and
conditions set forth in the Registration Statement, will be validly issued,
fully paid and non-assessable, and (ii) the Secondary Shares will have been duly
authorized and will have been validly issued and fully paid and will be non-
assessable.
<PAGE>
We hereby consent to the references to our firm under the caption
"Legal Matters" in the Registration Statement and to the use of this opinion as
an exhibit to the Registration Statement. In giving this consent, we do not
hereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ McDermott, Will & Emery
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT, by and between Patrick K. Brady (the "Employee") and
Teledata Solutions, Inc., an Illinois corporation (the "Company"), is made as of
March 19, 1996.
In consideration of the mutual covenants herein contained, and in
consideration of the employment of Employee by the Company, the parties agree as
follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company agrees to employ the Employee under the terms
--------
of this Agreement in the position of Chairman and Chief Executive Officer.
Employee shall report to the Board of Directors of the Company.
(b) Obligations. During the term of this Agreement, the employee shall
-----------
devote his full business efforts and time to the Company.
(c) Director. As long as the Employee serves as Chief Executive Officer
--------
or Chairman, Employee shall be nominated to serve on the Company's Board of
Directors.
2. Compensation.
------------
(a) Base Salary and Bonus. Beginning on the effective date of this
---------------------
Agreement, the Employee shall be paid a base salary (the "Base Compensation) of
$90,000, per year, payable in accordance with the Company's standard payroll
policies. The Board of Directors shall review Employee's performance and the
Company's financial and operating results on at least an annual basis and shall
adjust Employee's base salary as it deems appropriate based on such review.
(b) Bonus. Employee shall also be eligible for a bonus of up to $35,000
-----
for fiscal year 1996 based on the criteria set forth in Exhibit A. The bonus
will be due and payable on the 15th day of February, 1997. The Board of
Directors shall set bonus levels and targets for years after fiscal year 1996 as
it deems appropriate. In the event Employee's employment with the Company
terminates for any reason other than pursuant to Section 6(c) hereof (voluntary
termination by the Employee) or 6(b)(ii) hereof (Termination for Cause),
Employee shall be entitled to receive a pro rated bonus for such year,
determined by dividing the aggregate bonus which he would have earned for the
entire year (assuming he had remained employed for the entire year and the
original revenue/milestone targets established for such year continued to apply)
by the number of full or partial months during which he was employed by the
Company. Such bonus shall be paid on February 15 of the following year. If
Employee's employment with the Company terminates pursuant to Section 6(c)
hereof or Section 6(b)(ii) hereof, Employee shall be deemed to have forfeited
his entire bonus for such year and no such bonus shall be due or payable by the
Company.
(c) Vacation. Employee shall be entitled to three (3) weeks paid vacation
--------
during each year of employment. Such vacation shall be taken at a time mutually
convenient for both the Company and the Employee. Unused vacation time may not
be accrued from year to year during
<PAGE>
the term of this Agreement without the Company's prior written approval. In the
event this Agreement is terminated by either the Company or the Employee, the
Employee shall be paid for any unused, accrued vacation time.
3. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Cause" shall mean the termination of employment of Employee shall
have taken place as a result of (i) act or acts of dishonesty undertaken by
Employee and intended to result in substantial gain or personal enrichment of
Employee at the expense of the Company, (ii) persistent failure by Employee to
perform the duties and obligations of Employee's employment which are not
remedied in a reasonable period of time after receipt of written notice from the
Company; (iii) the conviction of Employee of a felony; or (iv) Employee's
continued breach of any term of this Agreement or any Exhibit to this Agreement
after written notice and a reasonable period to cure.
(b) "Constructive Termination" shall mean (i) a material reduction in
Employee's salary or benefits not agreed to by Employee (except in connection
with a decrease to be applied because the Company's performance has decreased
and which is also applied to other officers, and excluding the substitution of
substantially equivalent compensation and benefits), or (ii) a material change
in Employee's responsibilities (other than as contemplated by, and consistent
with the spirit of, Section l(a)) not agreed to by Employee.
(c) "Disability" shall mean that the Employee, at the time notice is
given, has been unable to perform his duties under this Agreement for a period
of not less than six (6) consecutive months or for a period of two hundred
seventy (270) days in any three hundred sixty-five (365) day period as the
result of his incapacity due to physical or mental illness. In the event that
the Employee resumes the performance of substantially all of his duties
hereunder before the termination of his employment under Section 6(b) (iii)
become effective, the notice of termination shall automatically be deemed to
have been revoked.
(d) "Voluntary Termination of Employment" shall mean Employee voluntarily
terminates his employment with the Company, unless such termination occurs
within three (3) months following a Constructive Termination.
4. Employee Benefits.
-----------------
(a) General. During the term of his employment under this Agreement, the
-------
Employee shall be entitled to the full benefits for which Employee is eligible
under the employee benefit plans and including (without limitation) pension
plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement plans, stock option, incentive or other bonus plans,
life, disability, health, accident and other insurance programs, paid vacations
and sabbatical, and similar plans or programs, subject in each case to the
generally applicable terms and conditions of the plan or program in question and
to the determination of any committee or the Board of Directors administering
such plan or program.
5. Business Expense and Travel. During the term of his employment under
---------------------------
this Agreement, the Employee shall be authorized to incur necessary and
reasonable travel, entertainment and other business expenses in connection with
his duties hereunder. The
-2-
<PAGE>
Company shall reimburse the Employee for such expenses upon presentation of an
itemized account and appropriate supporting documentation, all in accordance
with the Company's generally applicable policies.
6. Term of Employment.
------------------
(a) Basic Rule. The Company agrees to continue the Employee's
----------
employment, and the Employee agrees to remain in the employ of the Company, from
the effective date of this Agreement until the date when the Employee's
employment terminates pursuant to the provisions of this Agreement.
(b) Termination by the Company. The Company may terminate Employee's
--------------------------
employment at any time, for any reason or for no reason.
(i) Termination Without Cause. If the Company terminates
-------------------------
Employee's employment during the term of this Agreement for any reason
whatsoever, other than Voluntary Termination of Employment, Termination for
Cause, or termination as a result of Employee's Death or Disability, the
provisions of Section 7(a) shall apply.
(ii) Termination for Cause. If the Company terminates
---------------------
Employee's employment for Cause during the term of this Agreement, the
provisions of Section 7(b) shall apply.
(iii) Termination on Death or Disability. If the Company
----------------------------------
terminates Employee's employment as a result of Employee's Death or
Disability, the provisions of Section 7(c) shall apply.
(c) Voluntary Termination by the Employee. The Employee may terminate
-------------------------------------
his employment voluntarily by giving the Company sixty (60) days' advance notice
in writing, at which time the provisions of Section 8(b) shall apply. However,
if the Employee terminates his employment within three (3) months following a
Constructive Termination, the provisions of Section 7(a) shall apply.
(d) Waiver of Notice. Any waiver of notice shall be valid only if
----------------
it is made in writing and expressly refers to the applicable notice requirement
in this Section 6.
7. Payments Upon Termination of Employment.
---------------------------------------
(a) Payments Upon Termination Pursuant to Section 6(b)(i) and
----------------------------------------------------------
Constructive Termination. If, during the term of this Agreement, the Employee's
- ------------------------
employment is terminated by the Company pursuant to Section 6(b)(i) or
voluntarily by Employee within three (3) months following a Constructive
Termination, the Employee shall be entitled to receive the following:
(i) Severance Payment. (A) The Company shall continue to pay to the
-----------------
Employee his Base Compensation for six (6) months following the date of
Employee's actual termination of employment (together with amounts payable
pursuant to (B) below, the "Severance Payment"). Such Base Compensation
-3-
<PAGE>
amount shall be the Base Compensation determined as of the commencement
date of this Agreement, and as is agreed to in future years by the Board of
Directors.
(B) The Employee shall have no duty to mitigate damages by
attempting to secure new employment after termination of employment.
However, in the event that the Employee does use his best efforts to secure
equal or better employment than the employment hereunder after termination
of employment from the Company and has not secured such new employment on
the date six (6) months following Employee's termination of employment,
then the Company shall continue to pay to the Employee the Base
Compensation payable pursuant to (A) above for so long as the Employee
continues to use his best efforts to secure such new employment, up to a
maximum of an additional six (6) months. Notwithstanding anything herein or
in Employee's Noncompetition, Nondisclosure and Developments Agreement of
even date herewith to the contrary, the six-month time period set forth in
paragraph 1 of the Employee's Noncompetition, Nondisclosure and
Developments Agreement shall be extended by the amount of time that the
Employee receives such additional Severance Payment.
(ii) Method of Payment. The Severance Payment shall be made in
-----------------
monthly installments.
(iii) Payment in Lieu of Contract Damages. The Severance Payment
-----------------------------------
shall be in lieu of any further payments to the Employee and any further
accrual of benefits with respect to periods subsequent to the date of the
employment termination. Notwithstanding the preceding sentence, neither the
Severance Payment nor any other payments under this Section 7(a) shall
reduce or offset any benefits the Employee may be entitled to under the
specific terms of the benefit plans of the Company.
(b) Termination By Company for Cause or Voluntary Termination. If the
---------------------------------------------------------
Employee's employment is terminated pursuant to Section 6(b)(ii) or voluntarily
(other than within three (3) months following a Constructive Termination)
pursuant to Section 6(c), no compensation or payments will be paid or provided
to the Employee for the periods following the date when such a termination of
employment is effective. Notwithstanding the preceding sentence, the Employee's
rights under the benefit plans shall be determined under the provisions of those
plans.
(c) Termination on Death or Disability. If the Employee's employment
----------------------------------
is terminated because of Employee's Death or Disability (as defined in Section
3(d) herein), then Employee shall receive other severance and disability
payments as provided in the Company's standard benefit plans.
8. Noncompetition, Nondisclosure and Developments. As a condition of
----------------------------------------------
employment, concurrently with the execution hereof, Employee agrees to execute
the Noncompetition, Nondisclosure and Developments Agreement set forth in
Exhibit B.
-4-
<PAGE>
9. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether direct or
--------------------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume this Agreement and agree expressly to perform this Agreement in the
same manner and to the same extent as the Company would be required to perform
it in the absence of a succession. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by this Agreement by operation of law.
(b) Employee's Successors. This Agreement and all rights of the Employee
---------------------
hereunder shall be binding upon, inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, devises and legatees. Any
purported or attempted assignment or transfer by the Employee of any of the
Employee's duties, responsibilities or obligations hereunder shall be void.
10. Notice. Notices and all other communications contemplated by this
------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or three (3) days after being mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing in accordance herewith
(provided that no such change shall be effective until actually received by the
Company). In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its President.
11. Termination of this Agreement. This Agreement shall terminate upon
-----------------------------
the earlier of (i) the date that all obligations of the parties hereunder have
been satisfied, (ii) four (4) years from the date of this Agreement. A
termination of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect (A)
the payment or provision of compensation or benefits on account of a termination
of employment occurring prior to the termination of this Agreement is
contemplated herein, or (B) the rights and obligations of the parties contained
in ancillary agreements hereto or set forth in the Exhibits. No payments under
this Agreement shall be required for any termination of employment occurring
after four (4) years from the date of this Agreement.
12. Miscellaneous Provisions.
------------------------
(a) Waiver. No provision of this Agreement shall be modified, waived or
------
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by the President. No waiver by either party of
any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other condition
or provision or of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement or the Exhibits hereto have been made or entered
into by either party with respect to the subject
-5-
<PAGE>
matter hereof. This Agreement shall supersede and control in the event of any
conflict between this Agreement and any other correspondence with the Company.
(c) Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Illinois. Any claims or legal
actions by one party against the other arising out of the relationship between
the parties contemplated herein (whether or not arising under this Agreement)
shall be governed by the laws of the State of Illinois and shall be commenced
and maintained in any state or federal court located in Cook County, Illinois,
and both parties hereby submit to the jurisdiction and venue of any such court.
(d) Severability. The invalidity or unenforceability of any provision or
------------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(e) No Assignment of Benefits. To the extent permitted by law, the
-------------------------
rights of any person to payments or benefits under this Agreement shall not be
made subject to option or assignment, either by voluntary or involuntary
assignment or by operation of law, including (without limitation) bankruptcy,
garnishment, attachment or other creditor's process, and any action in violation
of this subsection (e) shall be void.
(f) Employment At Will; Limitation of Remedies. The Company and the
------------------------------------------
Employee acknowledge that the Employee's employment is at will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement.
(g) Employment Taxes. All payments made pursuant to this Agreement will
----------------
be subject to withholding of applicable taxes.
(h) Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
-6-
<PAGE>
IN WITNESS THEREOF, each of the parties has executed this Agreement, in the
case of the Company by its Vice President, as of the day and year first above
written.
"COMPANY"
TELEDATA SOLUTIONS, INC.
________________________________
Catherine R. Brady
Vice President
"EMPLOYEE"
________________________________
Patrick K. Brady
-7-
<PAGE>
LIST OF EXHIBITS
Exhibit A. 1996 Bonus Criteria
Exhibit B. Noncompetition, Nondisclosure and Developments Agreement
<PAGE>
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Agreement"), by and
between Patrick K. Brady (the "Employee") and Apropos Technology, Inc. (formerly
Teledata Solutions, Inc.), an Illinois corporation (the "Company"), is made as
of December __, 1998.
WHEREAS, the parties hereto are parties to that certain Employment
Agreement dated as of March __, 1996 (the "Original Agreement"); and
WHEREAS, the parties hereto desire to amend the Original Agreement pursuant
to the provisions hereof.
In consideration of the mutual covenants herein contained, and in
consideration of the employment of Employee by the Company, the parties agree as
follows:
1. Paragraph 1(a) of the Original Agreement is hereby amended by deleting
the existing text of paragraph 1(a) in its entirety and substituting the
following in lieu thereof:
"(a) Position. The Company agrees to employ the Employee under the
terms of this Agreement in the position of Chief Technology Officer.
Employee shall report to the President and Chief Executive Officer of the
Company."
2. Paragraph 1(c) of the Original Agreement is hereby amended by deleting
the existing text of paragraph 1(c) in its entirety and substituting the
following in lieu thereof:
"(c) Director. As long as the Employee services as Chief Technology
Officer, Employee shall be nominated to serve on the Company's Board of
Directors."
3. Except as expressly set forth herein, the Original Agreement shall
remain unmodified and in full force and effect. All terms used herein and not
defined shall have the meanings ascribed to them in the Original Agreement.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its President, as of the day and year first above
written.
"COMPANY"
APROPOS TECHNOLOGY, INC.
_________________________________
Kevin G. Kerns
President
"EMPLOYEE"
_________________________________
Patrick K. Brady
<PAGE>
Exhibit 10.3
April 23, 1997
Mr. Richard Brown
Hamilton Lodge
Dean Lane
Cookham Dean, Berkshire SL6 9AF
United Kingdom
Dear Richard:
Over the last several months we have spent a great deal of time evaluating our
plans to launch into the international marketplace. After careful evaluation by
the management team it has been determined that we are willing, financially
capable, and have a product that is ready with minimal entry level changes
required. Furthermore, the international market for a standards based call
center product with rich CTI functionality appears to be potentially more robust
than the US.
This immediate market opportunity has focused our attention on recruiting an
experienced, high energy individual that will be able to both plan for and
exploit this opportunity. After our initial meeting and your subsequent visit to
our corporate facility, the management team is in unanimous agreement that you
fit this profile.
I am pleased to extend this invitation to you to join Teledata Solutions, Inc.
in the capacity of Director International Operations, reporting to me.
Your objectives will include:
. Develop a plan to exploit the International marketplace. The initial focus
will be on Europe and anticipate we will move to Asia Pacific in the near
future. The plan you develop will determine the best business model which
will be primarily focused on product distribution and support strategies,
. Provide Product Marketing with focused input regarding the special product,
literature, trade show, home page, and other unique requirements of your
marketplace,
. Work with Finance in setting up the optimal business structure,
. Develop a hiring plan that brings the appropriate staff in when required to
sell and support our systems in line with the distribution methods
selected,
. Virtually any other task that is required to create a world class call
center solution company.
<PAGE>
April 23, 1997
Your compensation package will consist of an annual base salary of
(pound)67,000. In addition, a bonus package will be provided with an annualized
target of (pound)24,000 paid quarterly which will consist of a set of mutually
agreed upon MBOs. This bonus will transition to a plan based 50% on MBOs and 50%
on financial performance such as revenue, bookings, and/or margin contribution
in 1998. This will result in a targeted annual compensation of (pound)91,000. In
addition you will be granted an incentive stock option (ISO) for 20,000 shares
of Teledata stock. The ISO has a standard twelve month probation period after
which on the first anniversary date, you will vest the first twelve (12) months
and accrue 1/48 of the total option each month thereafter until the option is
fully vested at four years.
You will be provided with a benefit plan which includes health insurance for you
and your dependents, life insurance at 3 times your annual salary, annual
pension contribution of 5%, and permanent health insurance.
You will be provided with (pound)12,500 towards your own vehicle with mileage
reimbursed at 30-40 pence per mile.
You will be required to sign a statement agreeing to hold the company's
proprietary information confidential during and after your employment.
Richard, I am sincerely looking forward to working with you in building from the
ground up the best designed and performing international operation for an
American software firm in the industry. We have the foundation in place with our
current products and set of partners to aggressively launch this endeavor. The
window of opportunity is wide open for all of us to exploit this opportunity.
While the offer we are providing provides some obvious financial rewards, I
truly believe that the greater opportunity for you is to build something from
scratch that has your name on it. The entire management team at Teledata will do
whatever is necessary to make you and your efforts a success. I personally
believe in you and the opportunity and am committed to making this an exceeds
expectations situation for all involved.
This offer will remain open for 7 days from the date of this letter. Should you
decide to join Teledata, I would appreciate you signing and returning one copy
of this letter to me.
Sincerely,
James M. Nelson
Vice President Sales
- --------------------------------------------------------------------------------
Accepted, Richard David Brown Date
. Page 2
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT, by and between Joanne Wacker (the "Employee") and Apropos
Technology, Inc., an Illinois corporation (the "Company"), is made as of
January 20, 2000.
In consideration of the mutual covenants herein contained, and in
consideration of the employment of Employee by the Company, the parties agree as
follows:
1. Duties and Scope of Employment.
(a) Position. The Company agrees to employ the Employee under the
terms of this Agreement in the position of Vice President, Marketing. Employee
shall report to the President of the Company in the corporate offices in
Oakbrook Terrace, Illinois.
(b) Obligations. During the term of this Agreement, the employee
shall devote her full business efforts and time to the Company.
2. Compensation.
(a) Base Salary and Bonus. Beginning on the effective date of this
Agreement, the Employee shall be paid a base salary (the "Base Compensation) of
$148,000, per year, payable in accordance with the Company's standard payroll
policies. The Company shall review Employee's performance on at least an annual
basis and shall adjust Employee's base salary as it deems appropriate based on
such review.
(b) Bonus. Employee shall also be eligible for an annual bonus of
$40,000 based upon her performance measured against management objectives. The
bonus will be due and payable on the 15th day of February of the following year.
<PAGE>
3. Definitions. As used herein, the following definitions shall apply:
(a) "Change in Control" shall mean the occurrence of the following
event: The stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than as merger or consolidation that
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition of the
Company of all or substantially all the Company's assets.
(b) "Termination for Cause" shall mean that Employee's termination
was the result of (i) act or acts of dishonesty undertaken by Employee and
intended to result in substantial gain or personal enrichment of Employee at the
expense of the Company, (ii) persistent failure by Employee to perform the
duties and obligations of Employee's employment which are not remedied in a
reasonable period of time after receipt of written notice from the Company;
(iii) the conviction of Employee of a felony; or (iv) Employee's continued
breach of any term of this Agreement or any Exhibit to this Agreement after
written notice and a reasonable period to cure.
(c) "Constructive Termination" shall mean (i) a material reduction in
Employee's salary or benefits not agreed to by Employee (except in connection
with a decrease to be applied because the Company's performance has decreased
and which is also applied to other officers, and excluding the substitution of
substantially equivalent compensation and benefits), or (ii) a material change
in Employee's responsibilities, other than as contemplated by and consistent
with the spirit of Section 1(a), not agreed to by Employee.
(d) "Voluntary Termination of Employment" shall mean Employee
voluntarily terminates her employment with the Company, unless such termination
occurs within three (3) months following a Constructive Termination.
4. Employee Benefits. During the term of his employment under this
Agreement, the Employee shall be entitled to the full benefits for which
Employee is eligible under the employee benefit plans and including (without
limitation) pension plans, savings or profit-sharing plans, deferred
compensation plans, supplemental retirement plans, stock option, incentive or
other bonus plans, life, disability, health, accident and other insurance
programs, paid vacations and sabbatical, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the plan or
program in question and to the determination of any committee or the Board of
Directors administering such plan or program.
5. Business Expenses and Travel. During the term of her employment
under this Agreement, the Employee shall be authorized to incur necessary and
reasonable travel, entertainment, cellular phone, and other business expenses in
connection with her duties
<PAGE>
hereunder. The Company shall reimburse the Employee for such expenses upon
presentation of an itemized account and appropriate supporting documentation,
all in accordance with the Company's generally applicable policies.
6. Term, Termination, and Severance.
(a) Basic Rule. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in the employ of the Company, from
the effective date of this Agreement until the date when the Employee's
employment terminates pursuant to the provisions of this Paragraph.
(b) Termination by the Company. The Company may terminate Employee's
employment at any time, for any reason or for no reason, subject to the notice
and severance requirements contained in this Paragraph.
(i) Termination Without Cause. If the Employee's employment is
terminated during the term of this Agreement for any reason other than Voluntary
Termination of Employment or Termination for Cause the provisions of Section
6(d) shall apply.
(ii) Termination for Cause. If the Company's termination of
Employee during the term of this Agreement is a Termination for Cause, no notice
or pay in lieu of notice will be required.
(c) Voluntary Termination by the Employee. The Employee may terminate
her employment voluntarily by giving the Company fourteen (14) days' advance
notice in writing.
(d) Payment Upon Termination of Employment. If, during the term of
this Agreement, the Employee's employment is terminated by the Company pursuant
to Section 6(b)(i) or voluntarily by Employee within three (3) months following
a Constructive Termination or within six (6) months of a Change of Control, the
Company shall continue to pay to the Employee her base compensation for six (6)
months following the date of Employee's actual termination of employment (the
"Severance Payment"). Such base compensation amount shall be the base salary
determined as of the commencement date of this Agreement, and as is agreed to in
future years by the Company. The Severance Payment shall be made in six equal
monthly installments.
(e) Payment in Lieu of Contract Damages. Any payments made under this
section shall be in lieu of any further payments to the Employee and any further
accrual of benefits with respect to periods subsequent to the date of the
employment termination. Notwithstanding the preceding sentence, no payments
under this section shall reduce or offset any benefits the Employee may be
entitled to under the specific terms of the benefit plans of the Company.
<PAGE>
7. Noncompetition, Nondisclosure and Developments. As a condition of
employment, concurrently with the execution hereof, Employee agrees to execute
the Noncompetition, Nondisclosure and Developments Agreement set forth in
Exhibit A.
8. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume this Agreement and agree expressly to perform this
Agreement in the same manner and to the same extent as the Company would be
required to perform it in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by this Agreement by
operation of law.
(b) Employee's Successors. This Agreement and all rights of the
Employee hereunder shall be binding upon, inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, devises and
legatees. Any purported or attempted assignment or transfer by the Employee of
any of the Employee's duties, responsibilities or obligations hereunder shall be
void.
9. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or three (3) days after being mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing in accordance herewith
(provided that no such change shall be effective until actually received by the
Company). In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its President.
10. Miscellaneous Provisions.
(a) Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by the President. No waiver by either
party of any breach of, or of compliance with, any condition or provision of
this Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement or the Exhibits hereto have been made or entered
into by either party with respect to the subject matter hereof. This Agreement
shall supersede and control in the event of any conflict between this Agreement
and any other correspondence with the Company.
<PAGE>
(c) Choice of Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Illinois. Any claims or
legal actions by one party against the other arising out of the relationship
between the parties contemplated herein (whether or not arising under this
Agreement) shall be governed by the laws of the State of Illinois and shall be
commenced and maintained in any state or federal court located in Cook County,
Illinois, and both parties hereby submit to the jurisdiction and venue of any
such court.
(d) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(e) No Assignment of Benefits. To the extent permitted by law, the
rights of any person to payments or benefits under this Agreement shall not be
made subject to option or assignment, either by voluntary or involuntary
assignment or by operation of law, including (without limitation) bankruptcy,
garnishment, attachment or other creditor's process, and any action in violation
of this subsection (e) shall be void.
(f) Limitation of Remedies. If the Employee's employment terminates
for any reason, the Employee shall not be entitled to any payments, benefits,
damages, awards, or compensation other than as provided by this Agreement.
(g) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable taxes.
(h) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
<PAGE>
IN WITNESS THEREOF, each of the parties has executed this Agreement as
of the day and year written below.
- ------------------- Apropos Technology, Inc.
Joanne P. Wacker
By:
--------------------------
Date: -------------- Title:
--------------------------
Date:
--------------------------
<PAGE>
EXHIBIT A
NONCOMPETITION, NONDISCLOSURE AND DEVELOPMENTS AGREEMENT
See attached.
<PAGE>
Exhibit 10.5
APROPOS TECHNOLOGY, INC.
2000 OMNIBUS INCENTIVE PLAN, AS AMENDED AND RESTATED
1. Purposes. The purposes of the Apropos Technology, Inc. 2000 Omnibus
--------
Incentive Plan, as Amended and Restated (the "Plan") are (i) to encourage
outstanding individuals to accept or continue employment with Apropos
Technology, Inc. (the "Company") and its subsidiaries or to serve as directors
of or consultants to the Company, and (ii) to furnish maximum incentive to those
persons to improve operations and increase profits and to strengthen the
mutuality of interest between those persons and the Company's shareholders by
providing them stock options and other stock and cash incentives.
2. Administration. The Plan will be administered by a Committee (the
--------------
"Committee") of the Board of Directors of the Company consisting of two or more
directors as the Board may designate from time to time, each of whom shall
qualify as a "Nonemployee Director" within the meaning set forth in Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Committee shall have the authority to construe and interpret the
Plan and any benefits granted thereunder, to establish and amend rules for Plan
administration, to change the terms and conditions of options and other benefits
at or after grant, and to make all other determinations which it deems necessary
or advisable for the administration of the Plan. The determinations of the
Committee shall be made in accordance with their judgment as to the best
interests of the Company and its shareholders and in accordance with the
purposes of the Plan. A majority of the members of the Committee shall
constitute a quorum, and all determinations of the Committee shall be made by a
majority of its members. Any determination of the Committee under the Plan may
be made without notice or meeting of the Committee, in writing signed by all the
Committee members. The Committee
<PAGE>
may delegate the administration of the Plan, in whole or in part, on such terms
and conditions as it may impose, to such other person or persons as it may
determine in its discretion, except with respect to benefits to officers subject
to Section 16 of the Exchange Act or officers who are or may be "covered
employees" within the meaning of Section 162(m) of the Internal Revenue Code.
3. Participants. Participants will consist of all Nonemployee Directors
------------
of the Company, consultants to the Company and all employees of the Company and
its subsidiaries. Designation of a participant in any year shall not require
the Committee to designate that person to receive a benefit in any other year or
to receive the same type or amount of benefit as granted to the participant in
any other year or as granted to any other participant in any year. The
Committee shall consider all factors which it deems relevant in selecting
participants and in determining the type and amount of their respective
benefits.
4. Shares Reserved Under the Plan. There is hereby reserved for issuance
------------------------------
under the Plan an aggregate of 4,600,000 common shares of the Company, which may
be newly issued or treasury shares. If there is a lapse, expiration,
termination or cancellation of any stock option granted under the Plan or under
the 1995 Stock Option Plan prior to the issuance of shares thereunder, of if
shares are issued under the Plan and thereafter are reacquired by the Company,
those shares may again be used for new benefits under the Plan. In addition,
any common shares exchanged by an optionee as full or partial payment of the
exercise price under any stock option exercised under the Plan, any shares
retained by the Company pursuant to a participant's tax withholding election,
and any shares covered by a benefit which is settled in cash shall be added to
the shares available for benefits under the Plan. All of the shares may, but
need not be issued
-2-
<PAGE>
pursuant to the exercise of Incentive Stock Options during the term of the Plan.
The maximum number of shares which may be subject to an option or other award
under the Plan to any participant during any fiscal year during the term of the
Plan is 600,000 shares. The maximum number of common shares which may be granted
in the form of Restricted Stock during the term of the Plan shall be 2,000,000
shares.
5. Types of Benefits. Benefits under the Plan shall consist of Stock
-----------------
Options, Stock Appreciation Rights, Restricted Stock, Performance Stock,
Performance Units and Other Stock or Cash Awards.
6. Stock Options. Subject to the terms of the Plan, Stock Options may be
-------------
granted to participants, at any time as determined by the Committee. The
Committee shall determine the number of shares subject to each option and
whether the option is an Incentive Stock Option within the meaning of Section
422 of the Internal Revenue Code. The option price for each option shall be
determined by the Committee but shall not be less than 100% of the fair market
value of the Company's common shares for any Incentive Stock Option on the date
the option is granted. Each option shall expire at such time as the Committee
shall determine at the time of grant; provided, however, that no Incentive Stock
Option shall be exercisable later than the tenth anniversary of its grant.
Options shall be exercisable at such time and subject to such terms and
conditions as the Committee shall determine. The option price, upon exercise of
any option, shall be payable to the Company in full by (a) cash payment or its
equivalent, (b) promissory note, (c) tendering previously acquired shares having
a fair market value at the time of exercise equal to the option price and, in
the case of stock obtained upon exercise of an option, held for more than six
months, and (d) such other methods of payment as the Committee, at its
discretion,
-3-
<PAGE>
deems appropriate, subject in each case to the specific terms of the option. The
Committee may provide, either at the time of grant or subsequently, that a Stock
Option include the right to acquire a replacement option upon exercise of the
original option through the payment of the exercise price in common shares. The
terms and conditions of each replacement option shall be determined by the
Committee, in its sole discretion.
7. Stock Appreciation Rights. Subject to the terms of the Plan, Stock
-------------------------
Appreciation Rights ("SARs") may be granted to participants at any time as
determined by the Committee. An SAR may be granted in tandem with a Stock
Option granted under this Plan or on a free-standing basis. The grant price of
a tandem SAR shall be equal to the option price of the related option. The
grant price of a free-standing SAR shall be equal to the fair market value of
the Company's common shares on the date of its grant. An SAR may be exercised
upon such terms and conditions and for the term as the Committee in its sole
discretion determines; provided, however, that the term shall not exceed the
option term in the case of a tandem SAR or ten years in the case of a free-
standing SAR. Upon exercise of an SAR, the participant shall be entitled to
receive payment from the Company, in cash or in stock at the discretion of the
Committee, in an amount determined by multiplying the excess of the fair market
value of a share of common shares on the date of exercise over the grant price
of the SAR by the number of shares with respect to which the SAR is exercised.
8. Restricted Stock. Subject to the terms of the Plan, Restricted Stock
----------------
may be awarded or sold to participants under such terms and conditions as shall
be established by the Committee. Restricted Stock shall be subject to such
restrictions as the Committee determines, including, without limitation, any of
the following:
-4-
<PAGE>
(a) A prohibition against sale, assignment, transfer, pledge,
hypothecation or other encumbrance of the shares of Restricted
Stock for a specified period;
(b) A requirement that the holder of Restricted Stock forfeit (or in
the case of shares sold to the participant resell to the Company
at cost) such shares in the event of termination of employment
during the period of restriction.
All restrictions shall expire at such times as the Committee shall specify.
9. Performance Stock. Subject to the terms of the Plan, the Committee
-----------------
shall designate the participants to whom Performance Stock is to be awarded and
determine the number of shares and terms and conditions of each such award.
Each award of Performance Stock shall entitle the participant to a payment in
the form of common shares upon the attainment of performance goals and other
terms and conditions specified by the Committee. The Committee may, in its
discretion, make a cash payment equal to the fair market value of common shares
otherwise required to be issued to a participant pursuant to a Performance Stock
award.
10. Performance Units. Subject to the terms of the Plan, the Committee
-----------------
shall designate the participants to whom Performance Units are to be awarded and
determine the number of units and the terms and conditions of each such award.
Each Performance Unit award shall 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 performance goals and other terms and conditions specified by the
Committee. The Committee may, in its discretion, substitute actual
-5-
<PAGE>
common shares for the cash payment otherwise required to be made to a
participant pursuant to a Performance Unit award.
11. Other Stock or Cash Awards. In addition to the incentives described
--------------------------
in Sections 6 through 10 above, and subject to the terms of the Plan, the
Committee may grant other incentives payable in cash or in common shares under
the Plan as it determines to be in the best interests of the Company and subject
to such other terms and conditions as it deems appropriate.
12. Performance Goals. Awards of Restricted Stock, Performance Stock,
-----------------
Performance Units and other incentives under the Plan may be made subject to the
attainment of performance goals relating to one or more business criteria within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended,
including, but not limited to, earnings per share, return on assets or equity,
economic value added, market share, cash flow, operating costs, and stock price,
as determined by the Committee from time to time. However, the Committee may
not in any event increase the amount of any such award payable to a "covered
employee" within the meaning of Section 162(m) of the Code upon the attainment
of a performance goal, and the maximum amount earned by a covered employee in
any calendar year may not exceed $2,000,000.
13. Change in Control. Except as otherwise determined by the Committee at
-----------------
the time of grant of an award, upon a change in control of the Company, all
outstanding Stock Options and SARs shall become exercisable; all performance
goals shall be deemed fully achieved and all other terms and conditions met; and
all Performance Stock delivered, all Performance Units paid out, and all Other
Stock or Cash Awards delivered or paid. A "Change in Control" shall be deemed
to have occurred on the first date on which either:
-6-
<PAGE>
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the beneficial owner (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Company representing at least 20 percent of the
combined voting power of the Company's then outstanding
securities, or
(b) a majority of the individuals comprising the Company's Board of
Directors are not Continuing Directors, or
(c) the Company is involved in any merger, consolidation, share
exchange or any other transaction if, after the consummation
thereof, the holders of the voting securities of the Company
immediately prior thereto do not own at least a majority of the
combined voting power of the surviving or resulting Company, or
(d) all or substantially all of the assets of the Company are sold or
otherwise transferred.
A "Continuing Director" means an individual who was a member of the
Board of Directors of the Company immediately prior to the transaction or
election or other event which resulted in a change of control or who was
designated (before his initial election or appointment as a director) as a
Continuing Director by a majority of the whole Board of Directors but only if
the majority of the whole Board of Directors then consisted of Continuing
Directors or, if a majority of the whole Board of Directors shall not then
consist of Continuing Directors, by a majority of the then Continuing Directors.
-7-
<PAGE>
14. Adjustment Provisions.
---------------------
(a) If the Company shall at any time change the number of issued
common shares without new consideration to the Company (such as
by stock dividend or stock split), the total number of shares
reserved for issuance under the Plan, the maximum number of
shares which may be made subject to Incentive Stock Options
during the term of the Plan, the maximum number of shares which
may be made subject to an award in any 12 months during the term
of the Plan, the maximum number of shares that may be issued as
Restricted Stock during the term of the Plan, and the number of
shares covered by each outstanding award shall be equitably
adjusted and the aggregate consideration payable to the Company,
if any, shall not be changed.
(b) Notwithstanding any other provision of this Plan, without
affecting the number of shares reserved or available hereunder,
the Board of Directors may authorize the issuance or assumption
of benefits in connection with any merger, consolidation,
acquisition of property or stock, or reorganization upon such
terms and conditions as it may deem appropriate.
(c) In the event of any merger, consolidation or reorganization of
the Company with or into another Company other than a merger,
consolidation or reorganization in which the Company is the
continuing Company and which does not result in the outstanding
common shares
-8-
<PAGE>
being converted into or exchanged for different securities, cash
or other property, or any combination thereof, there shall be
substituted, on an equitable basis as determined by the
Committee, for each common share than subject to a benefit
granted under the Plan, the number and kind of shares of stock,
other securities, cash or other property to which holders of
common shares of the Company will be entitled pursuant to the
transaction.
15. Nontransferability. Each benefit granted under the Plan shall not be
------------------
transferable otherwise than by will or the laws of descent and distribution and
each Stock Option and SAR shall be exercisable during the participant's lifetime
only by the participant or, in the event of disability, by the participant's
personal representative. In the event of the death of a participant, exercise
of any benefit or payment with respect to any benefit shall be made only by or
to the executor or administrator of the estate of the deceased participant or
the person or persons to whom the deceased participant's rights under the
benefit shall pass by will or the laws of descent and distribution.
Notwithstanding the foregoing, at the discretion of the Committee, a grant of a
Stock Option may permit the transfer of the option by the participant solely to
members of the participant's immediate family or trusts or family partnerships
for the benefit of such persons, subject to such terms and conditions as may be
established by the Committee.
16. Taxes. The Company shall be entitled to withhold the amount of any
-----
tax attributable to any amounts payable or shares deliverable under the Plan,
after giving the person entitled to receive such payment or delivery notice as
far in advance as practicable and the Company may defer making payment or
delivery as to any award, if any such tax is payable until
-9-
<PAGE>
indemnified to its satisfaction. The Committee may, in its discretion, subject
to such rules as it may adopt, permit a participant to pay all or a portion of
any withholding taxes arising in connection with the exercise of a Stock Option
or SAR or the receipt or vesting of shares hereunder by electing to have the
Company withhold common shares, having a fair market value equal to the amount
to be withheld.
17. Duration, Amendment and Termination. No Stock Option or other benefit
-----------------------------------
shall be granted more than ten years after the date of adoption of this Plan;
provided, however, that the terms and conditions applicable to any benefit
granted on or before such date may thereafter be amended or modified by mutual
agreement between the Company and the participant, or such other person as may
then have an interest therein. The Board of Directors may amend the Plan from
time to time or terminate the Plan at any time. However, no such action shall
reduce the amount of any existing award or change the terms and conditions
thereof without the participant's consent. No amendment of the Plan shall be
made without shareholder approval if shareholder approval of such amendment is
required by law, regulation, or stock exchange rule.
18. Fair Market Value. The fair market value of the Company's common
-----------------
shares at any time shall be determined in such manner as the Committee may deem
equitable, or as required by applicable law or regulation.
19. Other Provisions.
----------------
(a) The award of any benefit under the Plan may also be subject to
other provisions (whether or not applicable to the benefit
awarded to any other Participant) as the Committee determines
appropriate, including
-10-
<PAGE>
provisions intended to comply with federal or state securities
laws and stock exchange requirements, understandings or
conditions as to the participant's employment, requirements or
inducements for continued ownership of common shares after
exercise or vesting of benefits, or forfeiture of awards in the
event of termination of employment shortly after exercise or
vesting, or breach of noncompetition or confidentiality
agreements following termination of employment.
(b) In the event any benefit under this Plan is granted to an
employee or consultant who is employed or providing services
outside the United States, or is a foreign national, the
Committee may, in its sole discretion, modify the provisions of
the Plan as they pertain to any such individual to comply with
applicable law, regulation or accounting rules.
20. Restatement. This Plan is an amendment and complete restatement of
-----------
the Company's 1995 Stock Option Plan (the "1995 Plan"). The defined terms set
forth in the 1995 Plan which have been deleted in the restatement shall continue
in effect for purposes of administering and interpreting the terms and
conditions of stock options which were granted prior to the effective date of
the restatement of the 1995 Plan and which remain outstanding.
21. Shareholder Approval. The Plan was adopted by the Board of Directors
--------------------
on January 20, 2000, subject to shareholder approval. The Plan and any benefits
granted thereunder shall be null and void if shareholder approval is not
obtained at or before the next annual meeting of shareholders.
-11-
<PAGE>
Exhibit 10.6
APROPOS TECHNOLOGY, INC.
EMPLOYEE STOCK PURCHASE PLAN OF 2000
1. Purpose. Apropos Technology, Inc., an Illinois corporation (the
-------
"Company"), hereby adopts the Apropos Technology, Inc. Employee Stock Purchase
Plan of 2000 (the "Plan"). The purpose of the Plan is to provide an opportunity
for the employees of the Company and any designated subsidiaries to purchase
Common Shares of the Company at a discount through voluntary automatic payroll
deductions, thereby attracting, retaining and rewarding such persons and
strengthening the mutuality of interest between such persons and the Company's
shareholders.
2. Shares Subject to Plan. An aggregate of 1,000,000 Common Shares
----------------------
(the "Shares") may be sold pursuant to the Plan. Such Shares may be authorized
but unissued Common Shares, treasury shares or Common Shares purchased in the
open market. If there is any change in the outstanding shares of Common Shares
by reason of a stock dividend or distribution, stock split-up, recapitalization,
combination or exchange of shares, or by reason of any merger, consolidation or
other corporate reorganization in which the Company is the surviving
corporation, the number of Shares available for sale shall be equitably adjusted
by the Committee appointed to administer the Plan to give proper effect to such
change.
3. Administration. The Plan shall be administered by a committee
--------------
(the "Committee") which shall be the Compensation Committee of the Board of
Directors or another committee consisting of not less than two directors of the
Company appointed by the Board of Directors, all of whom shall qualify as non-
employee directors within the meaning of Securities and Exchange Commission
Regulation (S) 240.16b-3 or any successor regulation. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make such determinations and interpretations and to take such action in
connection with the Plan and any Benefits granted hereunder as it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all participants and their legal
representatives. No member of the Board, no member of the Committee and no
employee of the Company shall be liable for any act or failure to act hereunder,
by any other member or employee or by any agent to whom duties in connection
with the administration of this Plan have been delegated or, except in
circumstances involving his or her bad faith, gross negligence or fraud, for any
act or failure to act by the member or employee.
4. Eligibility. All regular employees of the Company, and of each
-----------
qualified subsidiary of the Company which may be so designated by the Committee,
other than, in the discretion of the Committee:
(a) employees whose customary employment is 20 hours or less per
week;
(b) employees whose customary employment is for not more than 5
months per year; and
<PAGE>
(c) employees who have not been employed for at least one year as of
any Enrollment Date (as defined in paragraph 5);
shall be eligible to participate in the Plan. For the purposes of this Plan,
the term "employee" means any individual in an employee-employer relationship
with the Company or a qualified subsidiary of the Company, but shall exclude (a)
any independent contractor; (b) any consultant, (c) any individual performing
services for the Company or a qualified subsidiary who has entered into an
independent contractor or consultant agreement with the Company or a qualified
subsidiary; (d) any individual performing services for the Company or a
qualified subsidiary under an independent contractor or consultant agreement, a
purchase order, a supplier agreement or any other agreement that the Company or
a qualified subsidiary enters into for services; (e) any "leased employee" as
defined in Section 414(n) of the Internal Revenue Code; and (f) any individual
whose terms and conditions of employment are governed by a collective bargaining
agreement resulting from good faith collective bargaining where benefits of the
type being offered under the Plan were the subject of such bargaining, unless
such agreement specifies that such individuals are eligible for the Plan. The
term "qualified subsidiary" means any corporation or other entity in which a
fifty percent (50%) or greater interest is, at the time, directly or indirectly
owned by the Company or by one or more subsidiaries or by the Company and one or
more subsidiary which is designated for participation by the Committee.
5. Participation. An eligible employee may elect to participate in
-------------
the Plan as of any "Enrollment Date". Enrollment Dates shall occur on the first
day of an Offering Period (as defined in paragraph 8). Any such election shall
be made by completing and forwarding an enrollment and payroll deduction
authorization form to the Secretary of the Company prior to such Enrollment
Date, authorizing payroll deductions in an amount not exceeding 10% of the
employee's gross pay for the payroll period to which the deduction applies. A
participating employee may increase or decrease payroll deductions as of any
subsequent Enrollment Date by completing and forwarding a revised payroll
deduction authorization form to the Secretary of the Company; provided, that
changes in payroll deductions shall not be permitted to the extent that they
would result in total payroll deductions exceeding 10% of the employee's gross
pay. An eligible employee may not initiate, increase or decrease payroll
deductions as of any date other than an Enrollment Date. For purposes of this
Plan, the term "gross pay" means the gross amount of pay an employee would
receive at each regular pay period date before any deduction for required
federal or state withholding and any other amounts which may be withheld.
6. Payroll Deduction Accounts. The Company shall establish a
--------------------------
"Payroll Deduction Account" for each participating employee, and shall credit
all payroll deductions made on behalf of each employee pursuant to paragraph 5
to his or her Payroll Deduction Account. No interest shall be credited to any
Payroll Deduction Account.
7. Withdrawals. An employee may withdraw from an Offering Period at
-----------
any time by completing and forwarding a written notice to the Secretary of the
Company. Upon receipt of such notice, payroll deductions on behalf of the
employee shall be discontinued commencing with the immediately following payroll
period, and such employee may not again
-2-
<PAGE>
be eligible to participate in the Plan until the next Enrollment Date. Amounts
credited to the Payroll Deduction Account of any employee who withdraws shall
remain in the account and be used to purchase Shares in accordance with
paragraph 9 hereof, subject to the limitations in paragraph 8 hereof.
8. Offering Periods. The first Offering Period hereunder shall
----------------
commence on the consummation of the Company's initial public offering and shall
continue until April 1, 2001, Thereafter, the Plan shall be implemented by
consecutive Offering Periods with a new Offering Period commencing on the first
trading day on or after April 1 and October 1 of each year, or on such other
date as the Committee shall determine, and continuing thereafter to the last
trading day of the respective six-month period or until terminated in accordance
with paragraph 17 hereof. "Trading day" shall mean a day on which the Nasdaq
National Market System is open for trading. The Committee shall have the power
to change the duration of Offering Periods (including the commencement dates
thereof) with respect to future offerings. The last trading day of each Offering
Period prior to the termination of the Plan (or such other trading date as the
Committee shall determine) shall constitute the purchase dates (the "Share
Purchase Dates") on which each employee for whom a Payroll Deduction Account has
been maintained shall purchase the number of Shares determined under paragraph
9(a). Notwithstanding the foregoing, the Company shall not permit the exercise
of any right to purchase Shares
(a) to an employee who, immediately after the right is granted, would
own shares possessing 5% or more of the total combined voting power or value of
all classes of stock of the Company or any subsidiary; or
(b) which would permit an employee's rights to purchase shares under
this Plan, or under any other qualified employee stock purchase plan maintained
by the Company or any subsidiary, to accrue at a rate in excess of $25,000 of
the fair market value of such shares (determined at the time such rights are
granted) for each calendar year in which the right is outstanding at any time.
For the purposes of subparagraph (a), the provisions of Section 424(d) of the
Internal Revenue Code shall apply in determining the stock ownership of an
employee, and the shares which an employee may purchase under outstanding rights
or options shall be treated as shares owned by the employee.
9. Purchase of Shares.
------------------
(a) Subject to the limitations set forth in paragraphs 7 and 8, each
employee participating in an offering shall have the right to purchase as many
whole Shares as may be purchased with the amounts credited to his or her Payroll
Deduction Account as of the payroll date coinciding with or immediately
preceding the last Wednesday of the month (or such other date as the Committee
shall determine) in which occurs the applicable Share Purchase Date (the "Cutoff
Date"). Fractional shares may not be purchased under the Plan. Any amount
remaining in the Payroll Deduction Account of a participant after the Share
Purchase Date shall be retained
-3-
<PAGE>
in the account for the purchase of additional Shares in subsequent Offering
Periods. Employees may purchase Shares only through payroll deductions, and cash
contributions shall not be permitted.
(b) The "Purchase Price" for Shares purchased under the Plan shall be
not less than the lesser of an amount equal to 85% of the closing price of
Common Shares (i) at the beginning of the Offering Period or (ii) on the Share
Purchase Date. For these purposes, the closing price shall be as reported on the
NASDAQ National Market System list as reported in the Wall Street Journal,
-------------------
Midwest Edition. The Committee shall have the authority to establish a
different Purchase Price as long as any such Purchase Price complies with the
provisions of Section 423 of the Internal Revenue Code.
(c) On each Share Purchase Date, the amount credited to each
participating employee's Payroll Deduction Account as of the immediately
preceding Cutoff Date shall be applied to purchase as many whole Shares as may
be purchased with such amount at the applicable Purchase Price. Any amount
remaining in an employee's Payroll Deduction Account as of the relevant Share
Purchase Date in excess of the amount that may properly be applied to the
purchase of Shares as a result of the application of the limitations set forth
in paragraph 8 hereof shall be refunded to the employee as soon as practicable.
10. Brokerage Accounts or Plan Share Accounts. By enrolling in the
-----------------------------------------
Plan, each participating employee shall be deemed to have authorized the
establishment of a brokerage account on his or her behalf at a securities
brokerage firm selected by the Committee. Alternatively, the Committee may
provide for Plan share accounts for each participating employee to be
established by the Company or by an outside entity selected by the Committee
which is not a brokerage firm. Shares purchased by an employee pursuant to the
Plan shall be held in the employee's brokerage or Plan share account ("Plan
Share Account") in his or her name, or if the employee so indicates on his or
her payroll deduction authorization form, in the employee's name jointly with a
member of the employee's family, with right of survivorship. An employee who is
a resident of a jurisdiction which does not recognize such a joint tenancy may
request that such Shares be held in his or her name as tenant in common with a
member of the employee's family, without right of survivorship.
11. Rights as Shareholder. An employee shall have no rights as a
---------------------
shareholder with respect to Shares subject to any rights granted under this Plan
until payment for such Shares has been completed at the close of business on the
relevant Share Purchase Date.
12. Certificates. Certificates for Shares purchased under the Plan
------------
will not be issued automatically. However, certificates for whole Shares
purchased shall be issued as soon as practicable following an employee's written
request. The Company may make a reasonable charge for the issuance of such
certificates.
13. Termination of Employment. If a participating employee's
-------------------------
employment is terminated for any reason, including death, if an employee is
granted a leave of absence of more
-4-
<PAGE>
than 90 days duration or if an employee otherwise ceases to be eligible to
participate in the Plan, payroll deductions on behalf of the employee shall be
discontinued and any amounts then credited to the employee's Payroll Deduction
Account shall remain in the account and be used to purchase Shares in accordance
with paragraph 9 hereof, subject to the limitations in paragraph 8 hereof. Any
amount remaining in the Payroll Deduction Account after the final Share Purchase
Date shall be refunded to the employee as soon as practicable.
14. Rights Not Transferable. Rights granted under this Plan are not
-----------------------
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during an employee's lifetime only
by the employee.
15. Employment Rights. Neither participation in the Plan, nor the
-----------------
exercise of any right granted under the Plan, shall be made a condition of
employment, or of continued employment with the Company or any subsidiary.
16. Application of Funds. All funds received by the Company for
--------------------
Shares sold by the Company on any Share Purchase Date pursuant to this Plan may
be used for any corporate purpose.
17. Amendments and Termination. The Board of Directors may amend the
--------------------------
Plan at any time, provided that no such amendment shall be effective unless
approved within 12 months after the date of the adoption of such amendment by
the affirmative vote of shareholders holding Common Shares entitled to a
majority of the votes represented by all outstanding Common Shares entitled to
vote if such shareholder approval is required for the Plan to continue to comply
with the requirements of Securities and Exchange Commission Regulation (S)
240.16b-3 and Section 423 of the Internal Revenue Code. The Board of Directors
may suspend the Plan or discontinue the Plan at any time. Upon termination of
the Plan, all payroll deductions shall cease and all amounts then credited to
the participating employees' Payroll Deduction Accounts shall be equitably
applied to the purchase of whole Shares then available for sale, and any
remaining amounts shall be promptly refunded to the participating employees.
18. Applicable Laws. This Plan, and all rights granted hereunder,
---------------
are intended to meet the requirements of an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code, as from time to time amended, and the
Plan shall be construed and interpreted to accomplish this intent. Sales of
Shares under the Plan are subject to, and shall be accomplished only in
accordance with, the requirements of all applicable securities and other laws.
19. Expenses. Except to the extent provided in paragraph 12, all
--------
expenses of administering the Plan, including expenses incurred in connection
with the purchase of Shares for sale to participating employees, shall be borne
by the Company and its subsidiaries.
20. Shareholder Approval. The Plan was adopted by the Board of
--------------------
Directors on January 20, 2000, subject to shareholder approval. The Plan and
any action taken hereunder
-5-
<PAGE>
shall be null and void if shareholder approval is not obtained at or before the
next annual meeting of shareholders.
-6-
<PAGE>
EXHIBIT 10.7
INDEMNITY AGREEMENT
-------------------
This Indemnity Agreement, dated as of ____________, 2000 is made by
and between Apropos Technology, Inc., an Illinois corporation (the "Company")
and __________________, (the "Indemnitee").
RECITALS
--------
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors or officers of corporations unless
they are protected by adequate indemnification, due to increased exposure to
litigation costs and risk resulting from their service to such corporations, and
due to the fact that the exposure frequently bears no reasonable relationship to
the compensation of such directors and officers;
B. The statutes and judicial decisions regarding the duties of
directors and officers are often difficult to apply, ambiguous, or conflicting,
and therefore fail to provide such directors and officers with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take;
C. Plaintiffs often seek damages in such large amounts and the costs
of litigation may be so great (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is usually beyond the personal
resources of directors and officers;
D. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as officers and directors of the
Company and its "subsidiaries" (as defined in Section 1 below) and to encourage
such individuals to take the business risks necessary for the success of the
Company and its subsidiaries, it is necessary for the Company to contractually
indemnify its directors and certain of its officers, and the directors and
certain of the officers of its subsidiaries, and to assume for itself maximum
liability for expenses and damages in connection with claims against such
officers, and directors in connection with their service to the Company and its
subsidiaries, and has further concluded that the failure to provide such
contractual indemnification could result in great harm to the Company and its
subsidiaries and the Company's shareholders;
E. Section 8.75 of the Illinois Business Corporation Act ("Section
8.75"), which is applicable to the Company, empowers the Company to indemnify by
agreement its officers, directors, employees and agents, and persons who serve
at the request of the Company as the directors, officers, employees or agents of
other corporations, partnerships, joint ventures, trusts or enterprises, and
expressly provides that the indemnification provided by Section 8.75 is not
exclusive; and
<PAGE>
F. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director or officer of the Company and/or one or more of
its subsidiaries free from undue concern for claims for damages arising out of
or related to such services to the Company and/or one or more of its
subsidiaries.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions. For the purposes of this Agreement, the following
-----------
terms shall have the meanings set forth below:
(a) Agent. "agent" means any person who (i) is or was a
-----
director, officer, employee, or other agent of the Company or a
subsidiary of the Company, or (ii) is or was serving at the request
of, for the convenience of, or to represent the "interest of the
Company" or a subsidiary of the Company as a director, officer,
employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise.
(b) Controlled. "controlled" means subject to the power to
----------
exercise a controlling influence over the management or policies of a
corporation, partnership, joint venture, trust or other entity.
(c) Expenses. "expenses" includes all direct and indirect costs
--------
of any type or nature whatsoever (including, without limitation, all
reasonable attorneys' fees and related disbursements, other out-of-
pocket costs and reasonable compensation for time spent by the
Indemnitee for which he is not otherwise compensated by the Company or
any third party) actually and reasonably incurred by the Indemnitee in
connection with either the investigation, defense, settlement or
appeal of, or otherwise related to a proceeding or establishing or
enforcing a right to indemnification under this Agreement, Section
8.75 or otherwise.
(d) Proceeding. "proceeding" means any threatened, pending, or
----------
completed action, suit or other proceeding, whether civil, criminal,
administrative, investigative or any other type whatsoever.
(e) Subsidiary. "subsidiary" means (i) any corporation of which
----------
50% or more of the outstanding voting securities are owned directly or
indirectly by the Company, or which is otherwise controlled by the
Company, and (ii) any partnership, joint venture, trust or other
entity of which 50% or more of the equity interest is owned directly
or indirectly by the Company, or which is otherwise controlled by the
Company.
2. Agreement to Serve. The Indemnitee agrees to serve and/or
------------------
continue to serve as an agent of the Company, at its will (or under separate
agreement, if
2
<PAGE>
such agreement exists), in the capacity Indemnitee currently serves as an agent
of the Company; provided, however, that nothing contained in this Agreement is
intended to or shall (i) restrict the ability of the Indemnitee to resign at any
time and for any reason from its current position, (ii) create any right to
continued employment of the Indemnitee in its current or any other position, or
(iii) restrict the ability of the Company to terminate the employment or agency
of Indemnitee at any time and for any reason.
3. Indemnification as Agent.
------------------------
a. Third Party Actions. If the Indemnitee was or is a party or
-------------------
is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that
he is or was an agent of the Company, or by reason of anything done or
not done by him in any such capacity or otherwise at the request of
the Company or any of its officers, directors, or shareholders, the
Company shall indemnify the Indemnitee against any and all expenses
and liabilities of any type whatsoever (including, but not limited to,
judgments, fines, excise taxes, penalties and amounts paid in
settlement) actually and reasonably incurred by him in connection with
the investigation, defense, settlement or appeal of, or otherwise
related to such proceeding, if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests
of the Company, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was
unlawful.
b. Derivative Actions. If the Indemnitee was or is a party or
------------------
is threatened to be made a party to any proceeding by or in the right
of the Company to procure a judgment in its favor by reason of the
fact that he is or was an agent of the Company, or by reason of
anything done or not done by him in any such capacity, the Company
shall indemnify the Indemnitee against any amounts paid in settlement
of any such proceeding and any and all expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the
investigation, defense, settlement, or appeal of, or otherwise related
to such proceeding, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Company; except that no indemnification under this subsection
------
shall be made with respect to any claim, issue or matter as to which
such person has been finally adjudged to have been liable to the
Company, unless and only to the extent that the court in which such
proceeding was brought shall determine upon application that, despite
the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity
for such expenses as the court shall deem proper.
c. Other Actions and Amendments. In addition to the
----------------------------
indemnification provided above, the Company shall indemnify Indemnitee
to the fullest extent now or hereafter permitted by law, with respect
to any
3
<PAGE>
expenses and liabilities of any type whatsoever arising because the
Indemnitee was or is a party or is threatened to be made a party to
any proceeding by reason of the fact that he is or was an agent of the
Company, or by reason of anything done or not done by him in any such
capacity or otherwise at the request of the Company or any of its
officers, directors, or shareholders. If the Illinois Business
Corporation Act (the "Act") is amended after the date hereof to permit
the Company to indemnify Indemnitee for expenses or liabilities, or to
indemnify Indemnitee with respect to any action or proceeding, not
contemplated by this Agreement, then this Agreement (without any
further action be either party hereto) shall automatically be deemed
to be amended to require that the Company indemnify Indemnitee to the
fullest extent permitted by the Act.
4. Indemnification as Witness. Notwithstanding any other provision
--------------------------
of this Agreement, to the extent the Indemnitee is, by reason of the fact that
he is or was an agent of the Company, a witness in any proceeding, the
Indemnitee shall be indemnified against any and all expenses actually and
reasonably incurred by or for him in connection therewith.
5. Advancement of Expenses. Subject to Section 8(a) below, the
-----------------------
Company shall advance all expenses actually and reasonably incurred by the
Indemnitee in connection with the investigation, defense, settlement or appeal
of, or otherwise related to any proceeding to which the Indemnitee is a party or
is threatened to be made a party by reason of the fact that the Indemnitee is or
was an agent of the Company. Indemnitee hereby agrees to repay such amounts
advanced, without interest, only if, and to the extent that, it shall ultimately
be determined pursuant to Section 7 below that the Indemnitee is not entitled to
be indemnified by the Company. The advances to be made hereunder shall be paid
by the Company to the Indemnitee within ten (10) days following delivery of a
written request therefor by the Indemnitee to the Company.
6. Indemnification Procedures.
--------------------------
(a) Notice by Indemnitee. Promptly after receipt by the Indemnitee
--------------------
of notice of the commencement of or the threat of commencement of any
proceeding, the Indemnitee shall, if the Indemnitee believes that
indemnification with respect thereto may be sought from the Company under
this Agreement, notify the Company of the commencement or threat of
commencement thereof; provided that the failure to give such notice shall
not impair Indemnitee's rights under this Agreement.
(b) Notice to Insurer. If, at the time of the receipt of a notice of
-----------------
the commencement of a proceeding pursuant to Section 6(a) above, the
Company has in effect an insurance policy or policies providing directors'
and officers' liability insurance, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable
4
<PAGE>
action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms
of such policies.
(c) Assumption of Defense. In the event the Company shall be
---------------------
obligated to pay the expenses of the Indemnitee with respect to any
proceeding, the Company shall be entitled to assume the defense of such
proceeding, with counsel of its choosing, upon the delivery to the
Indemnitee of written notice of its election so to do. After delivery of
such notice, the Company will not be liable to the Indemnitee under this
Agreement for any fees and expenses of counsel which are subsequently
incurred by the Indemnitee with respect to the same proceeding; provided,
however, that the Indemnitee shall have the right to employ his counsel in
any such proceeding at the Indemnitee's expense; and provided further, that
if (i) the employment of counsel by the Indemnitee has been previously
authorized by the Company, or (ii) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
the Indemnitee in the conduct of any such defense, or (iii) the Company
shall not, in fact, have employed counsel to assume the defense of such
proceeding, then, in any such case, the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
(d) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee. Indemnitee shall execute all
documents required and shall do everything that may be necessary to secure
such rights, including the execution of such documents necessary to enable
the Company to effectively bring suit to enforce such rights.
7. Determination of Right to Indemnification.
-----------------------------------------
(a) Successful Proceeding. To the extent the Indemnitee has been
---------------------
successful, on the merits or otherwise, in the defense of any proceeding
referred to in Section 3 above, the Company shall indemnify the Indemnitee
against any and all expenses actually and reasonably incurred by him in
connection therewith. If Indemnitee is not wholly successful in such
proceeding but is successful, on the merits or otherwise, as to one or more
but less than all claims, issues or matters in such proceeding, the Company
shall indemnify Indemnitee against any and all expenses actually and
reasonably incurred by or for him in connection with each successfully
resolved claim, issue or matter. For purposes of this Section 7(a), the
termination of any proceeding, or any claim, issue or matter in such a
proceeding, by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such proceeding, claim, issue or matter, so long
as there has been no finding (either adjudicated or pursuant to Section
7(c) below) that Indemnitee (i) did not act in good faith, or (ii) did not
act in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, or (iii) with respect to any criminal proceeding,
had reasonable grounds to believe his conduct was unlawful.
5
<PAGE>
(b) Other Proceeding. In the event that Section 7(a) above is
----------------
inapplicable, or applicable only in part, the Company shall nevertheless
indemnify the Indemnitee unless, and only to the extent that, the Company
shall prove by clear and convincing evidence to a forum listed in Section
7(c) below that the Indemnitee has not met the applicable standard of
conduct set forth in Section 3 above, if any, which entitles Indemnitee to
such indemnification.
(c) Forum in Event of Dispute. The Indemnitee shall be entitled to
-------------------------
select the forum in which the validity of the Company's claim under Section
7(b) hereof that the Indemnitee is not entitled to indemnification will be
heard, from among the following:
(1) a quorum of the Board consisting of directors who are not
parties to the proceeding for which indemnification is being sought;
(2) if a quorum of the Board is not obtainable (or, even if
obtainable, if a quorum of the Board described in clause (i) above
concurs), legal counsel (with no prior relationship to Indemnitee)
selected by the Indemnitee, and reasonably approved by the Board,
which counsel shall make such determination in a written opinion; or
(3) the shareholders of the Company.
(d) Submission of Company's Claim. As soon as practicable, and in no
-----------------------------
event later than thirty (30) days after written notice of the Indemnitee's
choice of forum pursuant to Section 7(c) above, the Company shall, at its
own expense, submit to the selected forum in such manner as the Indemnitee
or the Indemnitee's counsel may reasonably request, its claim that the
Indemnitee is not entitled to indemnification; and the Company shall act in
the utmost good faith to assure the Indemnitee a complete opportunity to
defend against such claim.
(e) Appeal to Court. Notwithstanding a determination by any forum
---------------
listed in Section 7(c) above that Indemnitee is not entitled to
indemnification with respect to a specific proceeding, the Indemnitee shall
have the right to apply to the court in which that proceeding is or was
pending or any other court of competent jurisdiction, for the purpose of
enforcing the Indemnitee's right to indemnification pursuant to this
Agreement.
(f) Indemnity for Expenses in Enforcement of Agreement.
--------------------------------------------------
Notwithstanding any other provision in this Agreement to the contrary, the
Company shall indemnify the Indemnitee against all expenses incurred by the
Indemnitee in connection with any hearing or proceeding under this Section
7 involving the Indemnitee and against all expenses incurred by the
Indemnitee in connection with any other proceeding between the Company and
the Indemnitee involving the interpretation or enforcement of the rights of
the Indemnitee under this Agreement unless a court of competent
jurisdiction finds that each of the
6
<PAGE>
claims and/or defenses of the Indemnitee in any such proceeding was
frivolous or made in bad faith.
8. Exceptions.
----------
(a) Claims Initiated by Indemnitee. Any other provision herein to
------------------------------
the contrary notwithstanding, the Company shall not be obligated pursuant
to the terms of this Agreement to indemnify or advance expenses to the
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or
otherwise as required under Section 8.75, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if
the Board finds it to be appropriate.
(b) Lack of Good Faith. Any other provision herein to the contrary
------------------
notwithstanding, the Company shall not be obligated pursuant to the terms
of this Agreement to indemnify the Indemnitee for any expenses incurred by
the Indemnitee with respect to any proceeding instituted by the Indemnitee
to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was frivolous or made in bad faith.
(c) Unauthorized Settlements. Any other provision herein to the
------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to
the terms of this Agreement to indemnify the Indemnitee for any amount paid
in settlement of a proceeding effected without the prior written consent of
the Company. The Company agrees not to unreasonably withhold its consent
to any settlement.
(d) No Duplicative Payment. The Company shall not be liable under
----------------------
this Agreement to make any payment of amounts otherwise indemnifiable
hereunder if and to the extent that Indemnitee has otherwise actually
received such payment under any insurance policy, contract, agreement or
otherwise.
9. Non-exclusivity. The provisions for indemnification and
---------------
advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which the Indemnitee may have under any provision
of law, the Company's Amended and Restated Articles of Incorporation or Amended
and Restated By-laws, the vote of the Company's shareholders or disinterested
directors, other agreements, or otherwise, both as to action in his official
capacity and as to action in another capacity while occupying a position as an
agent of the Company.
10. Interpretation of Agreement; Scope. It is understood that the
----------------------------------
parties hereto intend this Agreement to be interpreted and enforced so as to
provide indemnification to the Indemnitee to the fullest extent now or hereafter
permitted by law.
7
<PAGE>
The benefits of this Agreement shall inure to the Indemnitee both with respect
to acts done or not done by him both before and after this date.
11. Burden of Proof. In making a determination with respect to
---------------
entitlement to indemnification hereunder, the person or persons or entity making
such determination shall presume that Indemnitee is entitled to indemnification
under this Agreement, and the Company shall have the burden of proof to overcome
that presumption in connection with the making by any person, persons or entity
of any determination contrary to that presumption.
12. Severability. If any provision or provisions of this Agreement
------------
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the
Agreement (including, without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 10 hereof.
13. Modification and Waiver. Except as contemplated by Section 3(c),
-----------------------
no supplement, modification or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provisions hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.
14. Survival, Successors and Assigns. The Indemnitee's rights under
--------------------------------
this Agreement shall continue after the Indemnitee has ceased acting as an agent
of the Company. The terms of this Agreement shall be binding on and inure to
the benefit of the Company and its successors and assigns and shall be binding
on and inure to the benefit of Indemnitee and Indemnitee's heirs, executors and
administrators.
15. Gender. The masculine, feminine or neuter pronouns used herein
------
shall be interpreted without regard to gender, and the use of the singular or
plural shall be deemed to include the other whenever the context so requires.
16. Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
8
<PAGE>
17. Governing Law. This Agreement shall be governed exclusively by
-------------
and construed according to the laws of the State of Illinois, as applied to
contracts between Illinois residents entered into and to be performed entirely
within Illinois.
18. Consent to Jurisdiction. The Company and the Indemnitee each
-----------------------
hereby irrevocably consent to the jurisdiction of the courts of the State of
Illinois for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be brought only in the state courts of the State of
Illinois.
The parties hereto have entered into this Indemnity Agreement
effective as of the date first above written.
Apropos Technology, Inc.
By:_____________________________
Its:____________________________
Address: One Tower Lane
Oakbrook Terrace, IL 60181
INDEMNITEE:
________________________________
Address:________________________
________________________
9
<PAGE>
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 January 13, 2000, in the Registration Statement, as
amended, (Form S-1 No. 333-90873) and related Prospectus of Apropos Technology,
Inc. dated January 24, 2000.
/s/ Ernst & Young LLP
Chicago, Illinois
January 21, 2000
