UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITITES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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Commission File number 000-30654
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APROPOS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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Illinois 36-3644751
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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One Tower Lane, 28th Floor
Oakbrook Terrace, Illinois 60181
(630) 472-9600
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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Indicate by check mark whether the registrant(1)has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports),and(2)has been subject to such filing
requirements for the past 90 days. X Yes No
On April 18, 2000, approximately 15,550,124 of the Registrant's Common Shares,
$0.01 par value, were outstanding.
<PAGE>
INDEX
APROPOS TECHNOLOGY, INC.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 2000 and
December 31, 1999 3
Condensed consolidated statements of operations - three
months ended March 31, 2000 and 1999 4
Condensed consolidated statements of cash flows - three
months ended March 31, 2000 and 1999 5
Notes to condensed consolidated financial statements -
March 31, 2000 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II. Other Information 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT PER SHARE DATA
<CAPTION>
March 31, December 31,
2000 1999
Assets (Unaudited) (Note 1)
----------- --------
<S> <C> <C>
Current assets :
Cash and cash equivalents $ 70,117 $ 3,467
Accounts receivable, less allowance for doubtful accounts of
$462 in 1999 and $492 in 2000 9,498 8,942
Inventory 474 364
Prepaid and other current assets 578 371
--------- -------
Total current assets 80,667 13,144
Equipment, net 1,934 1,618
Note receivable from shareholder 57 54
Other assets 91 618
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Total assets $ 82,749 $15,434
======== ======
Liabilities and shareholders' equity (deficit)
Current liabilities :
Revolving line of credit $ - 3,216
Subordinated convertible promissory notes 28 1,474
Bridge loan - 3,485
Accounts payable 1,626 1,094
Accrued expenses 1,553 1,808
Accrued compensation and related accruals 1,227 1,292
Advance payments from customers 625 584
Deferred revenues 1,606 1,355
Current portion of capital lease obligations 121 122
Current portion of long-term debt - 186
--------- -------
Total current liabilities
6,786 14,616
Capital lease obligations 29 54
Long-term debt, less current portion - 314
Convertible preferred shares, $0.01 par value, none authorized, issued and
outstanding at March 31, 2000, 3,995,483 authorized, issued and - 16,079
outstanding at December 31 , 1999
Shareholders' equity (deficit) :
Preferred shares, $0.01 par value, 5,000,000 authorized, no shares
issued and outstanding - -
Common shares, $0.01 par value, 60,000,000 authorized, 14,025,478
issued and outstanding at March 31, 2000, 3,055,883 issued and
outstanding at December 31, 1999 140 53
Additional paid-in capital 98,736 2,932
Accumulated deficit (22,942) (18,614)
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Total shareholders' equity (deficit) 75,934 (15,629)
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Total liabilities and shareholders' equity $ 82,749 $15,434
========= =======
See notes to condensed consolidated financial statements.
</TABLE>
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APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE DATA
Three Months Ended March
31,
2000 1999
---- ----
Revenue :
Software licenses $ 3,502 $ 1,710
Services and other 2,340 1,582
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Total revenue 5,842 3,292
Costs and expenses :
Cost of software 100 36
Cost of services and other 1,896 1,219
Research and development 1,643 869
Sales and marketing 3,218 2,408
General and administrative 1,991 905
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Total costs and expenses 8,848 5,437
Loss from operations (3,006) (2,145)
Other income (expense) :
Interest income 455 22
Interest expense (1,778) (16)
------- -------
Total other income (expense) (1,323) 6
------- -------
Net loss
$(4,329) $(2,139)
Basic and diluted net loss per share $ (0.52) $ (0.72)
======= =======
Shares used in computing basic and diluted net
loss per share 8,360 2,975
======= =======
See notes to condensed consolidated financial statements.
4
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APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS
Three Months Ended March 31,
2000 1999
---- ----
Cash flows from operating activities :
Net loss $ (4,329) $ (2,139)
Adjustments to reconcile net loss to net cash used for
operating activities :
Depreciation and amortization 165 132
Provision for doubtful accounts 30 16
Stock compensation expense 254 --
Amortization of debt discount 1,577 --
Changes in operating assets and liabilities :
Accounts receivable (585) (240)
Inventory (110) (69)
Prepaid expenses and other current assets (207) (14)
Other assets 518 25
Notes receivable from shareholder (2) (1)
Accounts payable 532 491
Accrued expenses (256) 202
Accrued compensation and related accruals (64) (94)
Advanced payments from customers 42 275
Deferred revenue 251 20
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Net cash used for operating activities (2,184) (1,396)
-------- --------
Cash flows from investing activities :
Purchases of equipment (481) (285)
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Net cash used for investing activities (481) (285)
-------- --------
Cash flows from financing activities :
Payment on revolving line of credit (3,216) --
Payment on bridge loan (5,000) --
Payment on subordinated promissory notes (1,500) --
Repayments of notes payable (500) --
Principal payments of capital lease obligations (26) --
Proceeds from exercise of options 212 2
Net proceeds from issuance of common shares
79,345 --
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Net cash provided by financing activities
69,315 2
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Net change in cash and cash equivalents
66,650 (1,679)
Cash and cash equivalents, beginning of period
3,467 3,170
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Cash and cash equivalents, end of period $ 70,117 $ 1,491
====================
See notes to condensed consolidated financial statements
5
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APROPOS TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2000
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In our opinion,
the statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with our audited
consolidated financial statements for the year ended December 31, 1999, included
in the Company's Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on February 16, 2000. Our results of
operations for the interim periods presented are not necessarily indicative of
the results of operations to be expected for any other interim period or for the
full fiscal year.
2. LOSS PER SHARE
Basic loss per share is calculated based on the weighted-average number of
outstanding common shares. Diluted loss per share is calculated based on the
weighted-average number of outstanding common shares plus the effect of dilutive
potential common shares. The Company's calculation of diluted loss per share
excludes potential common shares as the effect would be antidilutive. Potential
common shares are composed of common shares of the Company issuable upon the
exercise of stock options. Options to purchase 1,675,836 common shares with
exercise prices of $0.10 to $64.16 per share were outstanding as of March 31,
2000 and options to purchase 2,979,004 common shares with exercise prices of
$0.10 to $0.91 per share were outstanding as of March 31, 1999.
3. SHAREHOLDERS' EQUITY
On February 23, 2000, the Company completed an initial public offering of
3,977,500 shares at an offering price of $22.00 per share. The net proceeds to
the Company from the public offering after deducting the underwriting discounts
and commissions and offering expenses payable by the Company, were approximately
$79.3 million. The Company used approximately $10.5 million to repay principal
and interest on debt. The balance of the net proceeds were predominantly held in
short-term municipal securities and commercial paper at March 31, 2000.
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4. STOCK COMPENSATION
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common shares as of the grant date for
each stock option. The Company has recorded stock compensation of $552,000 since
inception through March 31, 2000 for the difference at the grant date between
the exercise price and the fair value of the common shares underlying the
options. The Company recorded $254,000 of stock compensation for the three
months ended March 31, 2000. This amount is being amortized in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options, generally 4 years.
5. GEOGRAPHIC INFORMATION
Revenues derived from customers outside of North America accounted for
approximately 30.5% and 17.5% of the Company's total revenues for the three
months ended March 31, 2000 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.
6. 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 Company is awaiting the ruling of the damages phase by the
arbitrator. 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, Rockwell filed a complaint in the United States District Court for the
Northern District of Illinois asserting that the Company had infringed four of
its patents identified in Rockwell's previous correspondence. The complaint
seeks a permanent injunction and unspecified damages. Based upon the initial
review by its patent counsel of the claims being asserted by Rockwell, the
Company believes that it likely has meritorious defenses to such claims and it
intends to vigorously defend its position.
As part of the Company's initial public offering of common shares, the Company
and its underwriters made available up to 370,000 common shares at the initial
public offering price for directors, business associates and related persons
associated with the Company (the "directed share program"). On November 24,
1999, prior to effectiveness of the Company's registration statement, the
Company sent an electronic mail message with respect to the proposed directed
share program to all of the Company's 147 employees setting forth procedural
aspects of the directed share program and informing the recipients that their
immediate families might have an opportunity to participate in the proposed
directed share program. The Company did not deliver a preliminary prospectus
prior to distribution of this electronic mail as required by the Securities Act
of 1933. In addition, the electronic mail message may have constituted a
non-conforming prospectus under the Securities Act of 1933. As a result, the
Company may have a contingent liability under Section 5 of the Securities Act of
1933. Any liability would depend upon the number of common shares purchased by
the recipients of the electronic mail. The recipients of the electronic mail
message who purchased common shares in the initial public offering may have a
right for a period of one year from the date of the purchase to obtain recovery
of the consideration paid in connection with their purchase of common shares or,
if they had already sold the shares, file a claim against the Company for
damages resulting from their purchase of the common shares. If any liability is
asserted with respect to the electronic mail message, the Company will contest
the matter vigorously. However, if all of the purchasers in the directed share
program are awarded damages after an entire or substantial loss of their
investment, the damages could total up to approximately $8.1 million plus
interest based on the initial public offering price of $22.00 per share.
Although there can be no assurance as to the ultimate disposition of this
matter, it is the opinion of the Company's management, based upon the
information available at
7
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this time, that the expected outcome of this matter will not have a material
adverse effect on the results of operations and financial condition of the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained in this section, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Apropos' actual results could differ significantly from those
discussed herein. Factors that could cause or contribute to these differences
include, but are not limited to, those discussed herein with this quarterly
report on Form 10-Q and in the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission in connection with the
Company's initial public offering. Any forward-looking statements speak only as
of the date such statements are made.
OVERVIEW
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. In February 2000, we completed our initial public offering.
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.
We recognize revenue from the sale of software and hardware upon shipment. We
recognize 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. 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:
o the cost of compensation for technical support, education and
professional services personnel;
o other costs related to facilities and office equipment for technical
support, education and professional services personnel;
o the cost of third party hardware we resell as part of our solution;
and
o 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.
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 charges for amounts owed under our line of credit and capital
lease lines of credit.
8
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RESULTS OF OPERATIONS
The following table sets forth financial data for the periods indicated as a
percentage of total revenue.
PERCENTAGE OF
-------------
REVENUE
-------
THREE MONTHS ENDED
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MARCH 31,
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2000 1999
---- ----
Revenue:
Software licenses................ 59.9 % 51.9 %
Services and other.............. 40.1 48.1
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Total revenue............... 100.0 100.0
------ -----
Costs and expenses:
Cost of software................. 1.7 1.1
Cost of services and other....... 32.5 37.0
Research and development......... 28.1 26.4
Sales and marketing.............. 55.1 73.1
General and administrative....... 34.1 27.5
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Total costs and expenses.... 151.5 165.1
------ ------
Operating loss........................ (51.5) (65.1)
Other income (expense)................ (22.7) 0.1
------ ------
Net loss (74.2)% (65.0)%
======= =======
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenue. Our total revenue increased by 77.5% to $5.8 million for the three
months ended March 31, 2000 from $3.3 million for the three months ended March
31, 1999. Revenue from international sales increased by 187.6% to $1.6 million
for the three months ended March 31, 2000 from $574,000 for the three months
ended March 31, 1999.
Revenue from software licenses. Revenue from the sale of licenses for software
increased 104.8% to $3.5 million for the three months ended March 31, 2000 from
$1.7 million for the three months ended March 31, 1999. The increase in software
revenue resulted from a growing market acceptance of our solution, our expanded
sales and marketing efforts and introduction of new product features.
Revenue from services and other. Revenue from fees we receive for services and
other increased 47.9% to $2.3 million for the three months ended March 31, 2000
from $1.6 million for the three months ended March 31, 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. This growth was partially offset by a decrease in sales of
hardware, which accounted for 6.2% of total revenue for the three months ended
March 31, 2000 and 16.1% of total revenue for the three months ended March 31,
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 62.7% to $8.8 million
for the three months ended March 31, 2000 from $5.4 million for the three months
ended March 31, 1999. These increases primarily reflect increases in our
research and development and sales and marketing efforts. These investments
included headcount additions increasing our total headcount by 55.0% to 169
employees at March 31, 2000 from 109 employees at March 31, 1999. As a
percentage of total revenue, our costs and expenses were 151.5% for the three
months ended March 31, 2000 and 165.1% for the three months ended March 31,
1999.
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Cost of software. Cost of software increased 177.8% to $100,000 for the three
months ended March 31, 2000 from $36,000 for the three months ended March 31,
1999. This cost represented 2.9% of software revenue for the three months ended
March 31, 2000 and 2.1% of software revenue for the three months ended March 31,
1999. These increases resulted from increased software sales and increased third
party content required for various new product features.
Cost of services and other. Cost of services and other increased 55.5% to $1.9
million for the three months ended March 31, 2000 from $1.2 million for the
three months ended March 31, 1999. This cost represented 81.0% of services and
other revenue for the three months ended March 31, 2000 and 77.1% of services
and other revenue for the three months ended March 31, 1999. These increases are
due primarily to the hiring of additional project managers, programmers,
technical support and trainers to expand our professional services organization.
These increases also reflect the cost of third party hardware sold to our
clients during these periods.
Research and development. Research and development expenses increased 89.1% to
$1.6 million for the three months ended March 31, 2000 from $869,000 for the
three months ended March 31, 1999. The increases in research and development
expenses 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 33.6% to $3.2
million for the three months ended March 31, 2000 from $2.4 million for the
three months ended March 31, 1999. The increases in sales and marketing expenses
resulted primarily from our investment in sales and marketing personnel, an
increase in sales commissions associated with increased revenues, and increased
marketing activities, including tradeshows, public relations activities and
advertisements.
General and administrative. General and administrative expenses increased 120.0%
to $2.0 million for the three months ended March 31, 2000 from $905,000 for the
three months ended March 31, 1999. The increases in general and administrative
expenses were primarily due to additional personnel necessary to support our
growing operations in the United States and our international subsidiary in the
United Kingdom, as well as accruals for compensation expense related to option
grants, litigation expense and other general corporate expenses.
Other income and expense. Interest income increased to $455,000 for the three
months ended March 31, 2000 from $22,000 for the three months ended March 31,
1999. Interest expense increased to $1.8 million for the three months ended
March 31, 2000 from $16,000 for the three months ended March 31, 1999. The
increase in interest income is a result of higher cash balances primarily from
the net proceeds from our initial public offering. The increase in interest
expense is primarily due to a charge of $1.6 million for the fair market value
of warrants issued in connection with our bridge loan, which was repaid on
February 29, 2000, and to a lesser extent increases in debt payable under our
line of credit and capital leases.
Income Taxes. There has been no provision or benefit for income taxes for any
period since 1995 due to our operating losses. As of March 31, 2000, we had
$19.9 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.
Liquidity and Capital Resources
In February 2000, we sold 3,977,500 common shares in our initial public offering
and realized net proceeds of approximately $79.3 million. Prior to the offering,
we had financed our operations primarily from private sales of convertible
preferred shares totaling approximately $16.0 million, bank debt, and to a
lesser extent, from lease financing.
Our operating activities used $2.2 million of cash for the three months ended
March 31, 2000, which is primarily attributable to net losses experienced during
this period as we invested in the development of our products, expanded our
sales force and expanded our infrastructure to support our growth. The cash used
in operations was offset by amortization of stock-based compensation and the
amortization of debt discount. Our operating activities used $1.4 million of
cash for the three months ended March 31, 1999, which was primarily attributable
to net losses experienced during that period.
Our investing activities, consisting primarily of purchases of computer
hardware, software and furniture and fixtures and leasehold improvements to
support our growing number of employees, used $481,000 of cash for the three
months ended March 31, 2000. Our investing activities used $285,000 of cash for
the three months ended March 31, 1999, which was primarily due to purchases of
computer hardware, software and furniture and fixtures, and leasehold
improvements.
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Our financing activities generated $69.3 million in cash for the three months
ended March 31, 2000, primarily from the net proceeds of our initial public
offering offset by repayment of debt.
We expect to devote substantial resources to continue our research and
development efforts, expand our sales channels, increase our marketing programs,
fund capital expenditures, provide for working capital and other general
corporate purposes. We believe that the net proceeds from the sale of the common
shares in our initial public offering will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
However, 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.
Additional funding may not be available on favorable terms or at all.
RISK FACTORS ASSOCIATED WITH APROPOS' BUSINESS AND FUTURE OPERATING RESULTS
Apropos' future operating results may vary substantially from period to period.
The price of our common shares has and will fluctuate in the future, and an
investment in our common shares is subject to a variety of risks, including but
not limited to the specific risks identified below. Inevitably, some investors
in our securities will experience gains while others will experience losses
depending on the prices at which they purchase and sell securities. Prospective
and existing investors are strongly urged to carefully consider the various
cautionary statements and risks set forth in this report.
This report contains forward-looking statements that are not historical facts
but rather are based on current expectations, estimates and projections about
our business and industry, our beliefs and assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks", "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 or forecasted in the
forward-looking statements. These risks and uncertainties include those
described in this "Risk Factors Associated with Apropos' Business and Future
Operating Results" and elsewhere in this report. Forward-looking statements that
were true at the time made may ultimately prove to be incorrect or false.
Readers are cautioned not to place undue reliance on forward-looking statement,
which reflect our management's view only as of the date of this report. Except
as required by law, we undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
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;
11
<PAGE>
. 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 product 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.
For the quarter ended March 31, 2000 we incurred a net loss of $4.3 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.
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, short-term loans and most recently through our initial public
offering. 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.
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 decision
making, and depend on a number of 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
12
<PAGE>
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 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
13
<PAGE>
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.
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.
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 webbased
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 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
14
<PAGE>
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.
Revenues increased $2.5 million, or 77.5%, to $5.8 million for the first quarter
2000 from $3.3 million for the first quarter 1999. We intend to continue to
expand our business operations significantly in the future. We have also
increased our number of employees from 109 at March 31, 1999, to 169 at March
31, 2000. 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.
15
<PAGE>
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 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, Rockwell
filed 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.
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.
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<PAGE>
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;
. 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
17
<PAGE>
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.
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.
18
<PAGE>
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 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.
OTHER RISKS
OUR SHARE PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE AND COULD DROP
UNEXPECTEDLY.
19
<PAGE>
The price for our common shares has been and may continue to 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 shares 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 CONTINUES TO BE 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 experiences 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 made available
up to 370,000 of our common shares at the initial public offering price for
directors, business associates and related persons 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. 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 purchased common shares in the initial public offering may have a right for
a period of one year from the date of the purchase to obtain recovery of the
consideration paid in connection with their purchase of our common shares or, if
they had already sold the shares, 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 $8.1
million plus interest based on the initial public
20
<PAGE>
offering price of $22.00 per share. If this occurs, our financial condition
could be materially adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell these products in North
America, Europe, South America, Asia, Africa, and Australia. As a result, our
financial results could be affected by various factors, including changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
As sales are generally made in U.S. dollars or British pound sterling, a
strengthening of the dollar or pound could make our products less competitive in
foreign markets.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Company's unaudited condensed consolidated financial
statements in Item 1 - Part I, of this quarterly report on Form 10-Q, which is
hereby incorporated by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) - (c) Not applicable.
Use of Proceeds from Sales of Registered Securities.
(d) On February 23, 2000, Apropos consummated its initial public offering of its
Common Shares, $0.01 par value. The managing underwriters in the offering were
Chase Securities Inc., SG Cowen Securities Corporation and U.S. Bancorp Piper
Jaffray Inc. The Common Shares sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(Reg. No. 333-90873) that was declared effective by the SEC on February 16,
2000. All 4,255,000 Common Shares registered under the Registration Statement
were sold at a price to the public of $22.00 per share. Of the 4,255,000 Common
Shares registered and sold in the offering, 3,977,500 were sold by the Company
and 277,500 were sold by a selling shareholder. The aggregate offering amount
registered was $80,845,000, of which $5,272,500 was registered on behalf of a
selling shareholder. An aggregate of $93,610,000 of our Common Shares was sold
in the offering, of which $6,105,000 was sold by a selling shareholder. In
connection with the offering, Apropos paid an aggregate of $6,125,350 in
underwriting discounts and commissions and incurred approximately $2.0 million
in other expenses.
The net offering proceeds to Apropos, after deducting out expenses, were
approximately $79.3 million. We used approximately $10.5 million of the net
offering proceeds for the following purposes:
- To repay a secured bridge loan of approximately $5.2 million,
including accrued interest;
- To repay subordinated convertible promissory notes of approximately
$1.6 million, including accrued interest; and
21
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- To repay amounts outstanding under our revolving credit facility of
approximately $3.7 million, including accrued interest.
The balance of the net proceeds were predominantly held in short-term municipal
securities and commercial paper at March 31, 2000.
None of our expenses or use of proceeds described above were direct or indirect
payments to directors , officers, general partners of the Company or its
associates, persons owning 10% or more of any class of equity securities of the
Company or affiliates of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent dated February 7, 2000, the shareholders of the Company
approved an amendment to the Company's Articles of Incorporation, a new stock
option plan, an employee stock purchase plan, indemnity agreements for the Board
of Directors and certain officers and the election of the following directors :
Catherine R. Brady, Patrick K. Brady, Maurice A. Cox, Jr., Keith L. Crandell,
Kevin G. Kerns, George B. Koch, Ian M. Larkin.
39 Shareholders of the Company consented to the aforementioned actions and 5
shareholders did not consent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)The following exhibits are included herein :
(11) Statement Regarding Computation of Per Share Earnings
(27) Financial Data Schedule
(b)The Company did not file any reports on Form 8-K during the three
months ended March 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APROPOS TECHNOLOGY, INC.
(REGISTRANT)
Date : May 15, 2000 By : /s/ Michael J. Profita
-------------------------
Michael J. Profita
Chief Financial Officer
EXHIBIT (11) STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED
------------------
MARCH 31
--------
2000 1999
----- ----
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
NET LOSS $(4,329) $(2,139)
BASIC AND DILUTED
-----------------
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS PER
SHARE : 8,360 2,975
------- -------
BASIC AND DILUTED NET LOSS PER SHARE : $ (0.52) $ (0.72)
======= =======
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT (27) FINANCIAL DATA SCHEDULE
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Registrant Company
Condensed Consolidated Balance Sheet (Unaudited) for March 31, 2000 and
Condensed Consolidated Statement of Income (Unaudited) for the Three Months
ended March 31, 2000 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 70,117
<SECURITIES> 0
<RECEIVABLES> 9,990
<ALLOWANCES> (492)
<INVENTORY> 474
<CURRENT-ASSETS> 578
<PP&E> 3,133
<DEPRECIATION> (1,199)
<TOTAL-ASSETS> 82,749
<CURRENT-LIABILITIES> 6,786
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 75,794
<TOTAL-LIABILITY-AND-EQUITY> 82,749
<SALES> 3,502
<TOTAL-REVENUES> 5,842
<CGS> 100
<TOTAL-COSTS> 1,996
<OTHER-EXPENSES> 6,852
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 1,778
<INCOME-PRETAX> (4,329)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,329)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,329)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
