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 SEPTEMBER 30, 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 November 3, 2000, approximately 16,293,965 of the Registrant's Common Shares,
$0.01 par value, were outstanding.
<PAGE>
INDEX
APROPOS TECHNOLOGY, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - 3
September 30, 2000 and December 31, 1999
Condensed consolidated statements of operations - 4
three and nine months ended September 30, 2000 and 1999
Condensed consolidated statements of cash flows - 5
nine months ended September 30, 2000 and 1999
Notes to condensed consolidated financial statements - 6
September 30, 2000
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
ASSETS (UNAUDITED) (NOTE 1)
----------- --------
<S> <C> <C>
CURRENT ASSETS :
CASH AND CASH EQUIVALENTS $ 1,226 $ 3,467
SHORT TERM INVESTMENTS 63,825 -
ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS OF
$473 IN 2000 AND $462 IN 1999 11,975 8,942
INVENTORY 420 364
PREPAID AND OTHER CURRENT ASSETS 646 371
----------------------------------
TOTAL CURRENT ASSETS 78,092 13,144
EQUIPMENT, NET 3,141 1,618
NOTE RECEIVABLE FROM SHAREHOLDER 57 54
OTHER ASSETS 430 618
----------------------------------
TOTAL ASSETS $ 81,720 $ 15,434
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES :
REVOLVING LINE OF CREDIT $ - $ 3,216
SUBORDINATED CONVERTIBLE PROMISSORY NOTES - 1,474
BRIDGE LOAN - 3,485
ACCOUNTS PAYABLE 624 1,094
ACCRUED EXPENSES 2,441 1,808
ACCRUED COMPENSATION AND RELATED ACCRUALS 1,955 1,292
ADVANCE PAYMENTS FROM CUSTOMERS 780 584
DEFERRED REVENUES 2,062 1,355
CURRENT PORTION OF CAPITAL LEASE OBLIGATIONS 99 122
CURRENT PORTION OF LONG-TERM DEBT - 186
----------------------------------
TOTAL CURRENT LIABILITIES 7,961 14,616
CAPITAL LEASE OBLIGATIONS - 54
LONG-TERM DEBT, LESS CURRENT PORTION - 314
CONVERTIBLE PREFERRED SHARES, $0.01 PAR VALUE, NONE AUTHORIZED, ISSUED AND
OUTSTANDING AT SEPTEMBER 30, 2000, 3,995,483 AUTHORIZED, ISSUED AND OUTSTANDING AT
DECEMBER 31 , 1999 - 16,079
SHAREHOLDERS' EQUITY (DEFICIT) :
PREFERRED SHARES, $0.01 PAR VALUE, 5,000,000 AUTHORIZED, NO SHARES
ISSUED AND OUTSTANDING - -
COMMON SHARES, $0.01 PAR VALUE, 60,000,000 AUTHORIZED, 16,264,468
ISSUED AND OUTSTANDING AT SEPTEMBER 30, 2000, 3,055,883 ISSUED AND
OUTSTANDING AT DECEMBER 31, 1999 162 53
ADDITIONAL PAID-IN CAPITAL 99,400 2,932
ACCUMULATED DEFICIT (25,803) (18,614)
----------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 73,759 (15,629)
----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 81,720 $ 15,434
==================================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
<TABLE>
APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE DATA
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE :
SOFTWARE LICENSES $ 5,403 $ 2,838 $ 12,943 $ 7,016
SERVICES AND OTHER 2,832 2,170 8,143 5,384
----------------------------------------------------------------
TOTAL REVENUE 8,235 5,008 21,086 12,400
COST OF GOODS AND SERVICES :
COST OF SOFTWARE 222 96 426 176
COST OF SERVICES AND OTHER 1,742 1,627 5,609 3,997
----------------------------------------------------------------
TOTAL COST OF GOODS AND SERVICES 1,964 1,723 6,035 4,173
----------------------------------------------------------------
GROSS MARGIN 6,271 3,285 15,051 8,227
OPERATING EXPENSES:
SALES AND MARKETING 4,022 2,283 10,583 6,984
RESEARCH AND DEVELOPMENT 1,795 1,130 5,016 2,957
GENERAL AND ADMINISTRATIVE 2,147 1,845 6,687 3,608
STOCK COMPENSATION CHARGE 254 119 762 119
----------------------------------------------------------------
TOTAL OPERATING EXPENSES 8,218 5,377 23,048 13,668
----------------------------------------------------------------
LOSS FROM OPERATIONS (1,947) (2,092) (7,997) (5,441)
OTHER INCOME (EXPENSE) :
INTEREST INCOME 1,064 5 2,621 32
INTEREST EXPENSE (5) (153) (1,813) (199)
----------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) 1,059 (148) 808 (167)
----------------------------------------------------------------
NET LOSS $ (888) $ (2,240) $ (7,189) $ (5,608)
================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.06) $ (0.75) $ (0.52) $ (1.89)
================================================================
SHARES USED IN COMPUTING BASIC AND DILUTED NET
LOSS PER SHARE 16,136 2,987 13,761 2,974
================================================================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
<TABLE>
APROPOS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
NET LOSS $ (7,189) $ (5,608)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED FOR
OPERATING ACTIVITIES :
DEPRECIATION AND AMORTIZATION 587 389
PROVISION FOR DOUBTFUL ACCOUNTS 63 57
STOCK COMPENSATION CHARGE 762 119
AMORTIZATION OF DEBT DISCOUNT 1,549 44
CHANGES IN OPERATING ASSETS AND LIABILITIES :
ACCOUNTS RECEIVABLE (3,096) (4,492)
INVENTORY (56) (104)
PREPAID EXPENSES AND OTHER CURRENT ASSETS (275) (80)
OTHER ASSETS 180 (7)
NOTES RECEIVABLE FROM SHAREHOLDER (2) (2)
ACCOUNTS PAYABLE (470) 670
ACCRUED EXPENSES 632 800
ACCRUED COMPENSATION AND RELATED ACCRUALS 664 235
ADVANCED PAYMENTS FROM CUSTOMERS 196 175
DEFERRED REVENUE 707 727
-----------------------------------------------
NET CASH USED FOR OPERATING ACTIVITIES (5,748) (7,077)
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES :
PURCHASES OF EQUIPMENT (2,110) (872)
PURCHASES OF SHORT TERM INVESTMENTS (63,825) -
-----------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (65,935) (872)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES :
PAYMENT ON REVOLVING LINE OF CREDIT (3,216) -
PAYMENT ON BRIDGE LOAN (5,000) -
PAYMENT ON SUBORDINATED PROMISSORY NOTES (1,500) -
REPAYMENTS OF NOTES PAYABLE (500) -
PROCEEDS FROM REVOLVING LINE OF CREDIT - 3,216
PROCEEDS FROM NOTE PAYABLE - 405
PROCEEDS FROM SUBORDINATED DEMAND NOTES - 1,500
PRINCIPAL PAYMENTS OF CAPITAL LEASE OBLIGATIONS (76) 48
PROCEEDS FROM EXERCISE OF OPTIONS 414 11
NET PROCEEDS FROM ISSUANCE OF COMMON SHARES 79,320 -
-----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 69,442 5,180
-----------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,241) (2,769)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,467 3,170
-----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,226 $ 401
===============================================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Apropos Technology, Inc. (the "Company") is engaged in the business of
developing and selling software and implementation, maintenance, and training
services to companies in diversified industries. The Company's product enables
customer interaction management for multimedia contact centers. The Company's
core competency is its skill in developing advanced software applications and
successfully linking those applications to a number of communication systems,
networks, and databases. Principal operations of the Company commenced during
1995. The Company currently derives substantially all of its revenues from
licenses of its product and related services.
On June 9, 1997, the Company established a wholly owned subsidiary in the United
Kingdom, Apropos Technology, Limited. The purpose of this entity is to market
the Company's product throughout Europe.
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In management's
opinion, the statements include all adjustments necessary (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended December 31, 1999,
included with its Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on February 16, 2000. The results of
operations for the interim periods presented are not necessarily indicative of
the results of operations to be expected for any other interim period or for the
full fiscal year.
2. SHORT TERM INVESTMENTS
The Company's short-term investments consist primarily of readily marketable
debt securities. The Company considers all investments with original maturities
of less than one year from the respective balance sheet date to be short-term
investments. In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company has categorized its marketable securities as "available-for-sale."
3. LOSS PER SHARE
Basic loss per common share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding.
Diluted loss per common share includes the dilutive effect of stock options
using the treasury stock method. Diluted loss per share is not presented as the
effect is anti-dilutive. Accordingly, diluted net loss per common share is the
same as basic net loss per common share.
6
<PAGE>
The following table presents the calculation of basic and diluted net loss per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
---- ----- ----- ----
<S> <C> <C> <C> <C>
NET LOSS $ (888) $ (2,240) $ (7,189) $ (5,608)
BASIC AND DILUTED
-----------------
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET
LOSS PER SHARE : 16,136 2,987 13,761 2,974
------ ----- ------- -----
$ (0.06) $ (0.75) $ (0.52) $ (1.89)
BASIC AND DILUTED NET LOSS PER SHARE : ====== ====== ======= ======
</TABLE>
Options to purchase 1,610,864 common shares with exercise prices of $0.10 to
$23.52 per share were outstanding as of September 30, 2000 and options to
purchase 3,344,179 common shares with exercise prices of $0.10 to $1.37 per
share were outstanding as of September 30, 1999.
4. SHAREHOLDERS' EQUITY
Immediately prior to the initial public offering (the "IPO"), the Company
converted all of its issued and outstanding convertible preferred shares to
common shares and then declared a seven-for-four stock split on all 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. On February 23, 2000, the Company completed an IPO issuing 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 $10.2 million to repay principal
and interest on debt. The balance of the net proceeds is held in commercial
paper.
5. STOCK COMPENSATION
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common shares as of the grant date for
each stock option. The Company has recorded stock compensation of $254,000 and
$762,000 through the three and nine month period ended September 30, 2000. This
stock compensation expense represents the difference at the grant date between
the exercise price and the pre-IPO fair value of the common shares underlying
the options. This amount is being amortized in accordance with Financial
Accounting Standards Board (FASB) Interpretation No. 28 over the vesting period
of the individual options, generally four years.
6. GEOGRAPHIC INFORMATION
Geographic information on revenue for the three months and nine months ended
September 30, 2000 and 1999, respectively are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NORTH AMERICA 76.7% 77.6% 73.8% 81.9%
INTERNATIONAL 23.3% 22.4% 26.2% 18.1%
----- ----- ----- -----
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
The Company attributes its revenues to countries based on the country in which
the client is located. The Company's long-lived assets located outside the
United States are not considered material.
7
<PAGE>
7. CONTINGENCIES
In June 2000, an arbitration proceeding was concluded with respect to a claim,
which was previously brought by a former reseller, alleging that the Company had
breached a contract between the two companies. Under the arbitration settlement,
which releases the Company from further liability, the Company agreed to provide
monetary relief in the amount of $1,350,000. The payment was made on July 3,
2000. The Company had previously recorded an estimated liability in the amount
of $400,000 for the probable exposure. The additional charge of $950,000 was
recognized in the second quarter of 2000, and was included in "General and
administrative" expenses in the accompanying financial statements.
In June 1999 and August 2000, 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
continuing 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 IPO, the Company and its underwriters made available up
to 370,000 common shares at the IPO 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 IPO 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 IPO price of $22.00 per share. Although there can be no
assurance as to the ultimate disposition of this matter, it is the opinion of
the Company's management, based upon the information available at this time,
that the expected outcome of this matter will not have a material adverse effect
on the results of operations and financial condition of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information, the matters discussed below are forward
looking statements made pursuant to the safe harbor provisions for
forward-looking statements described in the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on the Company's current
expectations and are subject to a number of risks, uncertainties and assumptions
relating to the Company's operations, financial condition and results of
operations. Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may differ
significantly from results expressed or implied in any forward-looking
statements made by the Company in this Quarterly Report. These and other risks
are detailed in documents filed by the Company with the Securities and Exchange
Commission, including, but not limited to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 2000 and the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission in
connection with the Company's IPO. The Company does not undertake any obligation
to revise these forward-looking statements to reflect future events or
circumstances.
8
<PAGE>
OVERVIEW
The Company develops, markets and supports a market leading customer interaction
management solution for multimedia contact centers. The Company's operations
commenced in January 1989, and, from inception to early 1995, operating
activities consisted primarily of research and development and consulting. In
March 1995, the first software product was shipped. In February 2000, the
Company completed its initial public offering.
Revenue. Revenue is derived principally from the sale of software licenses and
from fees for implementation, technical support and training services. Revenue
is also derived from the sale of certain third party hardware products such as
voice cards required to implement the Company's solution.
Revenue is recognized from the sale of software and hardware upon shipment.
Revenue from fees for implementation services is recognized using the percentage
of completion method. Percentage of completion is calculated based on the
estimated total number of hours of service required to complete an
implementation project and the number of actual hours of service rendered.
Support and maintenance services are recognized ratably over the term of the
maintenance contract, which are typically annual contracts. Training services
are recognized as such services are completed.
Cost of goods and services. Cost of goods and services 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 the Company resells as part of its
solution; and
o payments for third party software used with the Company's product.
Costs of software, maintenance, support and training services and hardware are
recognized as they are incurred.
Operating expenses. Operating expenses are recognized as incurred. Sales and
marketing expenses consist primarily of compensation, commission and travel
expenses along with other marketing expenses, including trade shows, public
relations, telemarketing campaigns and other promotional expenses. Research and
development expenses consist primarily of compensation expenses for personnel
and, to a lesser extent, independent contractors who adapt product for specific
countries. General and administrative expenses consist primarily of compensation
for administrative, financial and information technology personnel and a number
of non-allocable costs, including professional fees, legal fees, accounting fees
and bad debts.
Interest income and expenses. Interest income is generated by the investment of
cash raised in prior rounds of equity financing. Interest expense is generated
primarily from charges for amounts owed under the Company's line of credit and
capital lease lines of credit.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth financial data for the periods indicated as a
percentage of total revenue. Percentages are calculated from actual results and
may not equal calculations from the numbers in this Quarterly Report, which are
rounded to the nearest thousand.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PERCENTAGE OF REVENUE PERCENTAGE OF REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------------------------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUE :
SOFTWARE LICENSES 65.6% 56.7% 61.4% 56.6%
SERVICES AND OTHER 34.4 43.3 38.6 43.4
------------------------------------------------------
TOTAL REVENUE 100.0 100.0 100.0 100.0
------------------------------------------------------
COSTS OF GOODS AND SERVICES:
COST OF SOFTWARE 2.7 1.9 2.0 1.4
COST OF SERVICES AND OTHER 21.1 32.5 26.6 32.3
------------------------------------------------------
TOTAL COSTS OF GOODS AND SERVICES 23.8 34.4 28.6 33.7
------------------------------------------------------
GROSS MARGIN 76.2 65.6 71.4 66.3
OPERATING EXPENSES :
SALES AND MARKETING 48.8 45.6 50.2 56.3
RESEARCH AND DEVELOPMENT 21.8 22.6 23.8 23.8
GENERAL AND ADMINISTRATIVE 26.1 36.7 31.7 29.1
STOCK COMPENSATION CHARGE 3.1 2.4 3.6 1.0
------------------------------------------------------
TOTAL OPERATING EXPENSES 99.8 107.3 109.3 110.2
------------------------------------------------------
OPERATING LOSS (23.6) (41.7) (37.9) (43.9)
OTHER INCOME (EXPENSE) : 12.8 (3.0) 3.8 (1.3)
------------------------------------------------------
NET LOSS (10.8)% (44.7)% (34.1)% (45.2)%
======================================================
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue. Revenue increased by 64.4% to $8.2 million for the three months ended
September 30, 2000 from $5.0 million for the three months ended September 30,
1999. Revenue from international sales increased by $0.8 million to $1.9 million
for the three months ended September 30, 2000 from $1.1 million for the three
months ended September 30, 1999.
Revenue from software licenses increased 90.4% to $5.4 million for the three
months ended September 30, 2000 from $2.8 million for the three months ended
September 30, 1999. The increase in software revenue resulted from a growing
market acceptance of the Company's integrated multimedia solution, its expanded
sales and marketing efforts and the introduction of new products. New product
offerings in the third quarter were eVangelist, targeted at the small rapidly
growing informal contact center market, and an OEM product for the voice-based
customer that needs a voice management application.
Revenue from services and other, consisting of professional services, customer
support and hardware, increased 30.5% to $2.8 million for the three months ended
September 30, 2000 from $2.2 million for the three months ended September 30,
1999. The growth in revenue from services and other resulted primarily from
growth in professional services and maintenance revenue as the Company's client
base increased over this period. Hardware sales in the current quarter of $0.2
million decreased 58% from $0.5 million for the three months ended September 30,
1999. Management made a decision in late 1999 to de-emphasize direct sales of
hardware and instead outsource these requirements to certified systems
integrators. As a percentage of revenue, hardware sales decreased to 3% of total
revenue in the three months ended September 30, 2000 from 10% of total revenue
in the three months ended September 30, 1999.
10
<PAGE>
Gross margin. Gross margins improved to 76.2% of total revenue for the three
months ended September 30, 2000 from 65.6% of total revenue for the three months
ended September 30, 1999. This improvement resulted from a higher level of
revenue from software licenses, 65.6% of total revenue in the three months ended
September 30, 2000 compared to 56.7% of total revenue in the three months ended
September 30, 1999, higher staff utilization for professional services and lower
hardware sales.
Gross margins from software licenses represented 96.0% of software revenue for
the three months ended September 30, 2000 and 96.6% of software revenue for the
three months ended September 30, 1999. Product costs consist primarily of third
party software used in conjunction with the Company's software.
Gross margin from services and other represented 38.3% of services and other
revenue for the three months ended September 30, 2000 and 25.0% of services and
other revenue for the three months ended September 30, 1999. This improvement is
due primarily to higher staff utilization in professional services and lower
hardware sales, which has the lowest profit contribution.
Operating expenses. Operating expenses increased 52.8% to $8.2 million for the
three months ended September 30, 2000 from $5.4 million for the three months
ended September 30, 1999. These increases primarily reflect increases in the
Company's sales and marketing efforts and general and administrative expenses.
The continued investment in staffing resulted in headcount additions increasing
total headcount by 61.0% to 219 employees at September 30, 2000 from 136
employees at September 30, 1999. As a percentage of total revenue, operating
expenses were 99.8% for the three months ended September 30, 2000 and 107.4% for
the three months ended September 30, 1999.
Sales and marketing expenses increased 76.2% to $4.0 million for the three
months ended September 30, 2000 from $2.3 million for the three months ended
September 30, 1999. The increases in sales and marketing expenses resulted
primarily from a continued investment in sales and marketing personnel, an
increase in sales commissions associated with increased revenues, and increased
marketing activities, including tradeshows, public relations activities and
advertisements.
Research and development expenses increased 58.9% to $1.8 million for the three
months ended September 30, 2000 from $1.1 million for the three months ended
September 30, 1999. The increases in research and development expenses related
primarily to the increase in software developers and testing personnel to
develop and enhance product.
General and administrative expenses increased 16.4% to $2.1 million for the
three months ended September 30, 2000 from $1.8 million for the three months
ended September 30, 1999. The increases in general and administrative expenses
were primarily due to additional personnel necessary to support the Company's
growing operations in the United States and its international subsidiary in the
United Kingdom, as well as other general corporate expenses.
Stock compensation charge was $254,000 for the three months ended September 30,
2000. This stock compensation charge represents the difference at the grant date
between the exercise price and the pre-IPO fair value of the common shares
underlying the options. This amount is being amortized in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options, generally four years. This non-cash
expense has resulted in a corresponding increase of shareholders' equity. Stock
compensation charge for the three months ended September 30, 1999 was $119,000.
Other income and expense. Interest income increased to $1.1 million for the
three months ended September 30, 2000 from $5,000 for the three months ended
September 30, 1999. The increase in interest income is a result of higher cash
balances and short term investments primarily from the net proceeds from the
Company's initial public offering.
Income taxes. There has been no provision or benefit for income taxes for any
period since 1995 due to operating losses. As of September 30, 2000, the Company
had approximately $22.8 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning 2012. The use of these net operating
losses may be limited in future periods.
Net loss per share: Net loss per share decreased 92% to $0.06 for the three
months ended September 30, 2000 from $0.75 for the three months ended September
30, 1999. This decrease in the loss per share is the result for higher revenue,
improved gross margins, investment income as a result of funds raised from the
Company's initial public offering and an increased number of outstanding shares.
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The number of shares used to compute net loss per share increased 440.2% to 16.1
million for the three months ended September 30, 2000 from 3.0 million for the
three months ended September 30, 1999. This increase was principally the result
of the pre-IPO conversion of the Company's convertible preferred shares to 7.0
million common shares and issuance of approximately 4.0 million shares in the
Company's initial public offering. Additional shares are the result of exercises
of stock options.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue. Revenue increased by 70.1% to $21.1 million for the nine months ended
September 30, 2000 from $12.4 million for the nine months ended September 30,
1999. Revenue from international sales increased by $3.3 to $5.5 million for the
nine months ended September 30, 2000 from $2.2 million for the nine months ended
September 30, 1999.
Revenue from software licenses increased 84.5% to $12.9 million for the nine
months ended September 30, 2000 from $7.0 million for the nine months ended
September 30, 1999. The increase in software revenue resulted from a growing
market acceptance of the Company's integrated multimedia solution, its expanded
sales and marketing efforts and the introduction of new products.
Revenue from services and other, consisting of professional services, customer
support and hardware, increased 51.2% to $8.1 million for the nine months ended
September 30, 2000 from $5.4 million for the nine months ended September 30,
1999. The growth in revenue from services and other resulted primarily from
growth in professional services and maintenance revenue as the Company's client
base increased over this period. Hardware sales in the nine months ended
September 30, 2000 of $1.1 million decreased 21% from $1.4 million for the nine
months ended September 30, 1999. Management made a decision in late 1999 to
de-emphasize direct sales of hardware and instead outsource these requirements
to certified systems integrators. As a percentage of revenue, hardware sales
decreased to 5% of total revenue in the nine months ended September 30, 2000
from 11% of total revenue in the nine months ended September 30, 1999.
Gross margin. Gross margins improved to 71.4% of total revenue for the nine
months ended September 30, 2000 from 66.3% of total revenue for the nine months
ended September 30, 1999. This increase resulted principally from a higher level
of revenue from software licenses, 61.4% of total revenue in the nine months
ended September 30, 2000 compared to 56.6% of total revenue in the nine months
ended September 30, 1999, and lower hardware sales.
Gross margins from software licenses represented 96.8% of software revenue for
the nine months ended September 30, 2000 and 97.5% of software revenue for the
nine months ended September 30, 1999. Product costs consist primarily of third
party software used in conjunction with the Company's software.
Gross margin from services and other represented 31.0% of services and other
revenue for the nine months ended September 30, 2000 and 25.8% of services and
other revenue for the nine months ended September 30, 1999. These increases are
due primarily to higher staff utilization of project managers and technical
support. Lower hardware sales, which has the lowest profit contributor, led to a
more favorable margin mix.
Operating expenses: Operating expenses increased 68.6% to $23.0 million for the
nine months ended September 30, 2000 from $13.7 million for the nine months
ended September 30, 1999. These increases primarily reflect increases in the
Company's sales and marketing efforts and general and administrative expenses.
As a percentage of total revenue, operating expenses were 109.3% for the nine
months ended September 30, 2000 and 110.2% for the nine months ended September
30, 1999.
Sales and marketing expenses increased 51.5% to $10.6 million for the nine
months ended September 30, 2000 from $7.0 million for the nine months ended
September 30, 1999. The increases in sales and marketing expenses resulted
primarily from a continued investment in sales and marketing personnel, an
increase in sales commissions associated with increased revenues, and increased
marketing activities, including tradeshows, public relations activities and
advertisements.
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Research and development expenses increased 70.0% to $5.0 million for the nine
months ended September 30, 2000 from $3.0 million for the nine months ended
September 30, 1999. The increases in research and development expenses related
primarily to the increase in software developers and testing personnel to
develop and enhance product.
General and administrative expenses increased 85.3% to $6.7 million for the nine
months ended September 30, 2000 from $3.6 million for the nine months ended
September 30, 1999. The increases in general and administrative expenses were
primarily due to additional personnel necessary to support the Company's growing
operations in the United States and its international subsidiary in the United
Kingdom, as well as other general corporate expenses. In addition, $950,000 was
recorded in the second quarter of 2000 for an arbitration settlement related to
a dispute with a former reseller.
Stock compensation charge was $762,000 for the nine months ended September 30,
2000. This stock compensation charge represents the difference at the grant date
between the exercise price and the pre-IPO fair value of the common shares
underlying the options. This amount is being amortized in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options, generally four years. This non-cash
expense has resulted in a corresponding increase of shareholders' equity. Stock
compensation charge for the nine months ended September 30, 1999 was $119,000.
Other income and expense. Interest income increased to $2.6 million for the nine
months ended September 30, 2000 from $32,000 for the nine months ended September
30, 1999. Interest expense increased to $1.8 million for the nine months ended
September 30, 2000 from $199,000 for the nine months ended September 30, 1999.
The increase in interest income is a result of higher cash balances and short
term investments primarily from the net proceeds from the Company's initial
public offering. The increase in interest expense is primarily due to a charge
of $1.6 million for the fair market value of warrants issued in connection with
a bridge loan, which was repaid on February 29, 2000, and to a lesser extent
increases in debt payable under the Company's line of credit and capital leases.
Income Taxes. There has been no provision or benefit for income taxes for any
period since 1995 due to operating losses. As of September 30, 2000, the Company
had approximately $22.8 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning 2012. The use of these net operating
losses may be limited in future periods.
Net loss per share: Net loss per share decreased 72.5% to $0.52 for the nine
months ended September 30, 2000 from $1.89 for the nine months ended September
30, 1999. This decrease in the loss per share is the result for higher revenue,
improved gross margins, investment income as a result of funds raised from the
Company's initial public offering and an increased number of outstanding shares.
The number of shares used to compute net loss per share increased 362.7% to 13.8
million for the nine months ended September 30, 2000 from 3.0 million for the
nine months ended September 30, 1999. This increase was principally the result
of the pre-IPO conversion of the Company's convertible preferred shares to 7.0
million common shares and issuance of approximately 4.0 million shares in the
Company's initial public offering. Additional shares are the result of exercises
of stock options.
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, the Company sold 3,977,500 common shares in its initial public
offering and realized net proceeds of approximately $79.3 million. Prior to the
offering, the Company had financed its operations primarily from the private
sales of convertible preferred shares totaling approximately $16.0 million, bank
debt, and to a lesser extent, from lease financing.
Operating activities used $5.7 million of cash for the nine months ended
September 30, 2000, which is primarily attributable to net losses experienced
during the period as the Company continues to invest in product development,
expansion of its sales force and infrastructure to support growth. The cash used
in operations was offset by amortization of stock-based compensation and the
amortization of debt discount. Operating activities used $7.1 million of cash
for the nine months ended September 30, 1999, which was primarily attributable
to net losses experienced during that period.
Investing activities for the nine months ended September 30, 2000 consisted of
$2.1 million for capital infrastructure to support the Company's growing number
of employees and $63.8 million of funds remaining from the Company's initial
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public offering. Investing activities used $872,000 of cash for the nine months
ended September 30, 1999, which was primarily due to purchases of computer
hardware, software and furniture and fixtures, and leasehold improvements.
Financing activities generated $69.4 million in cash for the nine months ended
September 30, 2000, primarily from the net proceeds of the Company's initial
public offering offset by repayment of debt. Financing activities generated $5.2
million in cash for the nine months ended September 30, 1999, primarily from
proceeds from the Company's revolving line of credit and a bridge loan.
The Company expects to devote substantial resources to continue research and
development efforts, expand sales channels, increase marketing programs, fund
capital expenditures, and provide for working capital and other general
corporate purposes. Management believes that the net proceeds from the sale of
the common shares in the Company's initial public offering will be sufficient to
meet the working capital and capital expenditure requirements for at least the
next 12 months. However, the Company may also need to raise additional funds in
order to fund more rapid expansion, including significant increases in personnel
and office facilities, to develop new or enhance existing products or respond to
competitive pressures. Additional funding may not be available on favorable
terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company develops products in the United States and sells these products in
North America, Europe, South America, Asia, Africa, and Australia. As a result,
its financial results could be affected by various factors, including changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
As sales are generally made in U.S. dollars or British pound sterling, a
strengthening of the dollar or pound could make the Company's products less
competitive in foreign markets.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 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 IPO of its Common Shares,
$0.01 par value. The Common Shares sold in the offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(Reg. No. 333-90873) that was declared effective by the SEC on February 16,
2000.
The net offering proceeds to Apropos, after deducting expenses, were
approximately $79.3 million. From the effective date of such Registration
Statement to September 30, 2000, approximately $10.2 million of the net proceeds
were used for the repayment of debt and approximately $5.3 million were used for
general corporate purposes including operating losses, working capital and
capital expenditures.
The balance of the net proceeds is held in commercial paper at September 30,
2000.
None of the Company's expenses or use of proceeds described above were direct or
indirect payments to directors, officers, general partners of the Company or its
associates, persons owning 10% or more of any class of equity securities of the
Company or affiliates of the Company.
ITEM 5. OTHER INFORMATION
2001 Annual Meeting - Shareholder Proposals
-------------------------------------------
In connection with the Company's annual meeting of shareholders to take
place in 2001, any proper proposal which a shareholder wishes to have included
in the Company's proxy statement and form of proxy for the 2001 Annual Meeting
must be received by the Secretary of the Company no later than December 10,
2000. Such proposals must meet the requirements set forth in the rules and
regulations of the SEC and the Company's By-laws in order to be eligible for
inclusion in the proxy statement for the 2001 Annual Meeting. Any shareholder
who wishes to submit a proposal to be acted upon at the 2001 Annual Meeting (but
not included in the proxy statement) or who wishes to nominate a candidate for
election as director at the annual meeting must deliver written notice of such
shareholder's intent not earlier than January 20, 2001 and not later than
February 9, 2001, and otherwise comply with the Company's By-laws.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(27) Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 2000.
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SIGNATURES
APROPOS TECHNOLOGY, INC.
------------------------
(REGISTRANT)
Date : 11/10/2000 By : /s/ Francis J. Leonard
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Francis J. Leonard
Chief Financial Officer
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