<PAGE>
As filed with the Securities and Exchange Commission on February 11, 2000
Registration No. 333-90873
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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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APROPOS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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Illinois 7372 36-3644751
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
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One Tower Lane, 28th Floor
Oakbrook Terrace, Illinois 60181
(630) 472-9600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------
Kevin G. Kerns
Chief Executive Officer and President
Apropos Technology, Inc.
One Tower Lane, 28th Floor
Oakbrook Terrace, Illinois 60181
(630) 472-9600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
John P. Tamisiea Daniel G. Kelly, Jr.
McDermott, Will & Emery Davis Polk & Wardwell
227 W. Monroe Street 450 Lexington Avenue
Chicago, IL 60606 New York, NY 10017
(312) 372-2000 (212) 450-4000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Securities and Exchange Commission acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 2000
PROSPECTUS
3,200,000 Shares
[APROPOS TECHNOLOGY, INC. LOGO]
Common Shares
This is an initial public offering of common shares by Apropos Technology,
Inc. Apropos is selling 3,200,000 common shares. The estimated initial public
offering price is between $13.00 and $15.00 per share.
--------
We have applied for listing of our common shares on the Nasdaq National
Market under the symbol APRS.
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<TABLE>
<CAPTION>
Per Share Total
---------- ------
<S> <C> <C>
Initial public offering price................................ $ $
Underwriting discounts and commissions....................... $ $
Proceeds to Apropos, before expenses......................... $ $
</TABLE>
Apropos and one of our shareholders have granted the underwriters an option
for a period of 30 days to purchase from each of them up to 240,000 additional
common shares. We will not receive any proceeds from the sale of shares by the
selling shareholder.
--------
Investing in our common shares involves a high degree of risk.
See "Risk Factors" beginning on page 4.
--------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
CHASE H&Q
SG COWEN
U.S. BANCORP PIPER JAFFRAY
, 2000
<PAGE>
[Flap 1]
[(Inside Front Cover)]
[Logo]
Multimedia interaction management for eBusiness.
[Flap 2 and 3]
[Logo]
[Graphic depiction of the components of the Apropos solution.]
Multimedia Interaction Management for eBusiness providing email, web and
voice management capabilities to enable eBusiness sales, marketing and service.
The Apropos Solution
email
web
voice
. Seamless management of all real-time customer interactions, regardless
of media
. Allows online customers access to human assistance with the click of a
mouse
. Prioritizes customer interactions based on business value or service
level
. Provides critical metrics on business performance and quality of service
across all interactions
. Gathers valuable customer and market information
Customers, Vendors & Employees
eBusiness
Sales, Marketing & Service
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 4
Forward-Looking Statements................................................ 13
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 26
Management................................................................ 39
Principal and Selling Shareholders........................................ 48
Certain Transactions...................................................... 50
Description of Capital Stock.............................................. 51
Shares Eligible for Future Sale........................................... 53
U.S. Federal Tax Considerations for Non-U.S. Holders...................... 56
Underwriting.............................................................. 60
Legal Matters............................................................. 62
Experts................................................................... 62
Where You Can Find More Information....................................... 62
Index to Consolidated Financial Statements................................ F-1
</TABLE>
"Apropos" is an unregistered trademark of Apropos. This prospectus also
includes references to registered service marks and trademarks of other
entities.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common shares. You should read the entire
prospectus carefully, including "Risk Factors" on page 4 and our consolidated
financial statements and notes to those consolidated financial statements on
page F-1, before making an investment decision.
Apropos
We develop, market and support a comprehensive solution for managing real-
time customer interactions across voice and Internet-based communications
media, including e-mail and web collaboration. Our solution provides total
interaction management capabilities that seamlessly enable the on-line customer
to communicate with the contact center. The Apropos solution offers on-line
customers the flexibility to interact with businesses over the Internet through
e-mail or web collaboration, as well as voice communications to assist in
completing a sales or service transaction.
Our solution enables clients to prioritize, route and respond to customer
interactions across multiple communications media based on a single set of
business rules. Our clients can establish business rules to manage customer
interactions based on their business value or service level. For example,
clients can, on a real-time basis, (1) route specific types of customer
interactions to an agent based on that agent's particular skills and (2) adjust
the number of interactions and agents assigned to a queue to ensure maximum
responsiveness to the customer. Clients can also monitor the status of each
interaction and the performance of each contact center agent. Our solution
provides comprehensive real-time and historical reporting on each customer
interaction and on the contact center resources necessary to manage those
interactions.
Our strategy is to become the leading provider of customer interaction
management solutions for multimedia contact centers. The key elements of our
strategy are to:
. expand our leading technology position;
. enhance our product offering;
. increase our distribution capabilities;
. further develop our strategic partnerships;
. build market and brand awareness;
. expand penetration into major international markets; and
. pursue a software business model.
We have a diverse base of over 150 clients that utilize our solution for a
variety of applications, such as sales, customer service and support, help desk
and field service. Our significant clients include ABN Amro Holding N.V.,
Artist Direct, Carlson Companies, Inc., Freightliner Corp., Pfizer, Inc.,
Seagate Software, Inc. and 3Com Corporation. No client accounted for 10% or
more of our total revenues for 1997, 1998 or 1999. See "Business--Clients" on
page 32 for more information regarding these clients.
We were incorporated in 1989 in Illinois. Our principal executive offices
are located at One Tower Lane, 28th Floor, Oakbrook Terrace, Illinois 60181,
and our telephone number at that address is (630) 472-9600. We maintain a web
site at www.apropos.com. Information contained on our web site does not
constitute part of this prospectus.
1
<PAGE>
The Offering
<TABLE>
<S> <C>
Common shares offered by Apropos. 3,200,000 shares
Common shares to be outstanding
after this offering............. 13,247,978 shares
Use of proceeds.................. For repayment of debt, research and
development, expansion of our sales channels,
increased marketing programs, capital
expenditures and working capital and other
general corporate purposes. See "Use of
Proceeds" on page 14 for more information
regarding our use of the proceeds from this
offering.
Proposed Nasdaq National Market APRS
symbol..........................
</TABLE>
--------------------
The share amounts in this table are based on shares outstanding as of
December 31, 1999. This table excludes:
. 4,600,000 common shares reserved for issuance under our 2000 omnibus
incentive plan, of which 3,352,305 shares were subject to outstanding
options at December 31, 1999, at a weighted average exercise price of
$0.46 per share;
. 547,689 common shares issued upon exercise of outstanding options
between December 31, 1999 and January 24, 2000;
. 1,000,000 common shares reserved for issuance under our employee stock
purchase plan of 2000;
. 106,274 common shares issuable upon exercise of outstanding warrants at
an exercise price of $3.97 per share; and
. 262,500 common shares issuable upon exercise of outstanding warrants at
an exercise price of $5.34 per share.
--------------------
Unless otherwise noted, the information in this prospectus:
. assumes that the underwriters' over-allotment option will not be
exercised;
. reflects a seven-for-four stock split of our common shares occurring
immediately prior to the closing of this offering; and
. gives effect to the conversion, at the closing of this offering, of all
(1) 1,242,858 outstanding Series A convertible preferred shares into
2,175,001 common shares, (2) 1,599,888 outstanding Series B convertible
preferred shares into 2,799,804 common shares and (3) 1,152,737
outstanding Series C convertible preferred shares into 2,017,289 common
shares.
2
<PAGE>
Summary Consolidated Financial Information
The table below sets forth summary financial data for the periods indicated.
The data has been derived from the audited consolidated financial statements of
Apropos for the three years ended December 31, 1999 included elsewhere in this
prospectus. It is important that you read this information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 18 and our consolidated financial statements and notes to
those consolidated financial statements on page F-1.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1997 1998 1999
------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenue............................. $ 4,093 $ 9,142 $18,166
Loss from operations...................... (3,708) (5,044) (7,150)
Net loss.................................. $(3,567) $(4,822) $(8,509)
Net loss per share--basic and diluted..... $ (1.22) $ (1.64) $ (2.85)
Shares used in calculation of basic and
diluted loss per share................... 2,923 2,947 2,983
</TABLE>
The pro forma balance sheet data summarized below gives effect to the
conversion of all of our outstanding convertible preferred shares into our
common shares at the closing of this offering.
The pro forma as adjusted balance sheet data summarized below reflects the
sale of 3,200,000 common shares in this offering at an assumed initial public
offering price of $14.00 per share after deducting underwriting discounts and
commissions and estimated offering expenses and the application of $8.0 million
of the estimated net proceeds from this offering to repay a portion of our
outstanding indebtedness.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
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(in thousands)
<S> <C> <C> <C>
Consolidated Selected Balance Sheet Data:
Cash and cash equivalents.................... $ 3,467 $ 3,467 $35,631
Working capital (deficit).................... (1,472) (1,472) 38,792
Total assets................................. 15,434 15,434 47,598
Short-term debt.............................. 8,361 8,361 361
Long-term debt............................... 314 314 314
Convertible preferred shares................. 16,079 -- --
Total shareholders' equity (deficit)......... (15,629) 450 40,614
</TABLE>
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and all other
information contained in this prospectus before making an investment decision.
If any of the following risks, as well as other risks and uncertainties that
are not yet identified or that we currently think are immaterial, actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. In that event, the trading price of our
shares could decline, and you may lose part or all of your investment.
Risks Related to Our Business
Our limited operating history makes evaluating our business difficult.
Our limited operating history makes it difficult to forecast our future
operating results. We commenced operations in January 1989 but did not begin
shipping our principal product and generating revenue from our product until
March 1995. Therefore, we have only a limited operating history upon which you
may evaluate our business. You must consider the numerous risks and
uncertainties an early stage company like ours faces in a rapidly changing
software and technology industry. These risks include our inability to:
. increase awareness of our brand and continue to build client loyalty;
. maintain our current, and develop new, strategic partnerships and
relationships;
. respond effectively to competitive pressures; and
. continue to develop and improve our technology to meet the needs of our
clients.
If we are unsuccessful in addressing these risks, sales of our products and
services, as well as our ability to maintain or increase our client base, will
be substantially diminished.
We have not been profitable since 1994 and we may not achieve profitability
again.
We have not operated profitably since 1994. We incurred net losses of $4.8
million in 1998 and $8.5 million for the year ended December 31, 1999. At
December 31, 1999, we had accumulated losses since inception of $18.6 million.
We intend to continue to make significant investments in our research and
development, marketing and sales operations. We anticipate that these expenses
could significantly precede any revenues generated by the increased spending.
As a result, we are likely to continue to experience losses and negative cash
flow from operations in future quarters. We will need to generate significant
revenue to achieve profitability and we may not be able to do so. Even if we do
achieve profitability we cannot assure you that we will be able to sustain or
increase profitability on a quarterly or annual basis in the future.
Further, we will likely have to recognize significant additional charges
relating to non-cash compensation in connection with options that we granted in
1997, 1998 and 1999 and that we expect to grant prior to the closing of this
offering. These additional charges will further decrease our ability to become
profitable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" on page 20 for more information regarding
these charges.
We have never been able to fully fund operations from cash generated by our
business, and we may not be able to do so in the future.
We have not operated profitably since 1994. We have principally financed our
operations through the private placement of our convertible preferred shares,
bank borrowings and short-term loans. If we do not generate sufficient cash
resources from our business to fund operations, our growth could be limited
unless we are able to obtain additional capital through equity or debt
financings. Our inability to grow as planned may reduce our chances of
achieving profitability, which, in turn, could have a material adverse affect
on the market price of our common shares.
4
<PAGE>
Our lengthy sales cycle has contributed and may continue to contribute to the
quarter-to-quarter variability and unpredictability of our revenue and
operating results which could adversely affect the market price of our
common shares.
We have generally experienced a lengthy product sales cycle, averaging
approximately six to nine months. We consider the life of the sales cycle to
begin on the first face-to-face meeting with the prospective client and end
when we ship the product. Our prospective clients' decisions to license our
product often require significant investment and executive level
decisionmaking, and depend on a number of factors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview" on
page 18 for a description of these factors.
The lengthy sales cycle is one of the factors that has caused, and may in
the future continue to cause, our software revenue and operating results to
vary significantly from quarter to quarter, which makes it difficult for us to
forecast software license revenue and could cause volatility in the market
price of our common shares. Excessive delay in the product sales cycle could
materially and adversely affect our business, financial condition and results
of operations.
Our future business prospects depend in part on our ability to maintain and
improve our current product and to develop new products and product
features.
We believe that our future business prospects depend in large part on our
ability to maintain and improve our current product and to develop new products
and product features on a timely basis. Our product will have to achieve market
acceptance, maintain technological competitiveness and meet an expanding range
of client requirements. As a result of the complexities inherent in our
product, major new products and product features require long development and
testing periods. We may not be successful in developing and marketing, on a
timely and cost effective basis, new products or product features that respond
to technological change, evolving industry standards or client requirements.
Significant delays in the general availability of new releases of our product
or significant problems in the installation or implementation of new releases
of our product could have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to modify our product in a timely and cost effective manner
to respond to technological change.
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
product obsolete or noncompetitive. The market for our product is characterized
by:
. rapid technological change;
. significant development costs;
. frequent new product introductions;
. changes in the requirements of our clients and their customers; and
. evolving industry standards.
Our product is designed to work in conjunction with and on a variety of
hardware and software platforms used by our clients. However, our software may
not operate correctly on evolving versions of hardware and software platforms,
programming languages, database environments and other systems that our clients
use. Also, we must constantly modify and improve our product to keep pace with
changes made to these platforms and to database systems and other applications.
This may result in uncertainty relating to
5
<PAGE>
the timing and nature of new product announcements, introductions or
modifications, which may cause confusion in the market and harm our business.
If we fail to promptly modify or improve our products in response to evolving
industry standards or client demands, our product could rapidly become
obsolete, which would materially and adversely affect our business, financial
condition and results of operations.
Competition could reduce our market share and decrease our revenue.
The market for our product is highly competitive and we expect competition
to increase significantly in the future. In addition, because our industry is
new and evolving and characterized by rapid technological change, it is
difficult for us to predict whether, when and by whom new competing
technologies or new competitors may be introduced into our markets. Currently,
our competition comes from platform providers, interaction management solution
providers and stand-alone point solution providers. See "Business--Competition"
on page 34 for a list of these competitors.
We cannot assure you that we will be able to compete successfully against
current or future competitors. In addition, increased competition or other
competitive pressures may result in price reductions, reduced profit margins or
loss of market share, each of which could have a material adverse effect on our
business, financial condition and results of operations. See "Business--
Competition" on
page 34 for more information on the competition we face.
Demand for communications and interaction management software for multimedia
contact centers may grow more slowly than we currently anticipate.
The majority of our revenue has been generated from licenses of our product
and related support and professional services, and we expect this trend to
continue for the foreseeable future. The market for our product and services is
still emerging. If the demand for communications and interaction management
software does not continue to grow as anticipated within our targeted markets,
our ability to expand our business as planned could be materially and adversely
affected.
Our existing and future clients may not order the e-mail and web-based
functionality of our product.
Currently, our clients primarily use our product to manage voice
interactions. Although new orders for our product increasingly include voice
and Internet-based functionality, such as e-mail or web, only a small number of
our clients have actually implemented our product to manage e-mail and web-
based interactions. If businesses do not implement e-mail and web strategies or
do not want an integrated approach to handling all of their customer
interactions, we may not be able to grow our business as quickly as
anticipated, if at all.
If we fail to establish and maintain strategic relationships, our ability to
increase our revenue and profitability will suffer.
We currently have strategic relationships with resellers, original equipment
manufacturers, or OEMs, system integrators and enterprise application
providers. We depend on these relationships to:
. distribute our products;
. generate sales leads;
. build brand and market awareness; and
. implement and support our solution.
We believe that our success depends, in part, on our ability to develop and
maintain strategic relationships with resellers, OEMs, system integrators and
enterprise application providers. In addition, we intend to train and certify
more strategic partners to provide the professional services required to
implement
6
<PAGE>
our solution in an effort to expand our client base. We generally do not have
long-term or exclusive agreements with these strategic partners. If any of our
strategic relationships are discontinued, sales of our product and services and
our ability to maintain or increase our client base may be substantially
diminished.
If our strategic partners fail to market our product and services effectively
or provide poor customer service, our reputation will suffer and we could
lose clients.
If our strategic partners fail to market our product and services
effectively, we could lose market share. Some of our strategic partners also
provide professional services to our clients in connection with the
implementation of our product. Additionally, if a strategic partner provides
poor customer service, the value of our brand could be diminished. Therefore,
we must maintain relationships with strategic partners throughout the world
that are capable of providing high-quality sales and service efforts. If we
lose a strategic partner in a key market, or if a current or future strategic
partner fails to adequately provide customer service, our reputation will
suffer and sales of our product and services could be substantially diminished.
We may have difficulties successfully managing our growth, which may reduce our
chances of achieving profitability.
Our revenue has increased from $665,000 in 1995 to $18.2 million in 1999,
and we intend to continue to expand our business operations significantly in
the future. We have also increased our number of employees from seven at March
31, 1996, to 154 at December 31, 1999. Our existing management, operational,
financial and human resources and management information systems and controls
may be inadequate to support our future growth. If we are not able to manage
our growth successfully, we will not grow as planned and our business could be
adversely affected.
Infringement of our proprietary rights could affect our competitive position,
harm our reputation or cost us money.
We regard our product as proprietary. In an effort to protect our
proprietary rights, we rely primarily on a combination of patent, copyright,
trademark and trade secret laws, as well as licensing and other agreements with
consultants, suppliers, strategic partners, resellers and our clients, and
employee and third-party non-disclosure agreements. These laws and agreements
provide only limited protection of our proprietary rights. In addition, we have
not signed agreements containing these types of protective provisions in every
case, and the contractual provisions that are in place and the protection they
provide vary and may not provide us with adequate protection in all
circumstances. Although we have patented or filed patent applications for some
of the inventions embodied in our software, our means of protecting our
proprietary rights may not be adequate. It may be possible for a third party to
copy or otherwise obtain and use our technology without authorization and
without our detection and without infringing our patents. A third party could
also develop similar technology independently. In addition, the laws of some
countries in which we sell our product do not protect our software and
intellectual property rights to the same extent as the laws of the United
States. Unauthorized copying, use or reverse engineering of our product could
materially adversely affect our business, financial condition and results of
operation.
Infringement claims could adversely affect us.
A third party could claim that our technology infringes its proprietary
rights. As the number of software products in our target market increases and
the functionality of these products overlap, we believe that software
developers may face infringement claims. Although we do not believe that our
product infringes any patents, if certain software and technology patents were
interpreted broadly, claims of infringement against us, if successful, could
have a material adverse effect on us.
Infringement claims, even if without merit, can be time consuming and
expensive to defend. A third party asserting infringement claims against us or
our clients with respect to our current or future products
7
<PAGE>
may require us to enter into costly royalty arrangements or litigation, or
otherwise materially and adversely affect us. Beginning in June 1999, we
received letters from Rockwell Electronic Commerce Corporation claiming that
our product utilizes technologies pioneered and patented by Rockwell. On
January 5, 2000, 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. See "Business--Legal Proceedings" on page 38 for a
description of this dispute.
We may not be able to hire and retain the personnel we need to sustain our
business.
We depend on the continued services of our executive officers and other key
personnel. The loss of services of any of our executive officers or key
personnel could have a material adverse effect on our business, financial
condition and results of operations.
We need to attract and retain highly-skilled technical and managerial
personnel for whom there is intense competition. We have had some difficulty
hiring highly skilled technical people due to the high market demand for their
services. If we are unable to attract and retain qualified technical and
managerial personnel, our results of operations could suffer and we may never
achieve profitability.
Our financial success depends to a large degree on the ability of our direct
sales force to increase sales. Therefore, our ability to increase revenue in
the future depends considerably upon our success in recruiting, training and
retaining additional direct sales personnel and the success of the direct sales
force. Also, it may take a new salesperson a number of months before he or she
becomes a productive member of our direct sales force. Our business will be
harmed if we fail to hire or retain qualified sales personnel, or if newly
hired salespeople fail to develop the necessary sales skills or develop these
skills more slowly than we anticipate.
Our international operations and expansion involve financial and operational
risks.
We intend to continue to expand our international operations and enter
additional international markets. The expansion of our international operations
will require significant management attention and financial resources to
establish additional foreign operations, hire additional personnel and recruit
additional international resellers. Revenue from international expansion may be
inadequate to cover the expenses of international expansion.
Our expansion into new international markets may take longer than anticipated
and could directly impact how quickly we increase product sales into these
markets. International markets may take additional time and resources to
penetrate successfully. Our product needs to be conformed to the language and
infrastructure requirements of other countries. In addition, the acceptance of
new technologies, such as e-mail and web-based forms of communication, may not
occur as rapidly as in North America. This could have a material adverse impact
on our business, financial condition and results of operation.
Other risks we may encounter in conducting international business activities
generally could include the following:
. economic and political instability;
. unexpected changes in foreign regulatory requirements and laws;
. tariffs and other trade barriers;
8
<PAGE>
. timing, cost and potential difficulty of adapting our product to the
local language standards in those foreign countries that do not use the
English alphabet;
. longer sales cycles and accounts receivable payment cycles;
. potentially adverse tax consequences;
. fluctuations in foreign currencies; and
. restrictions on the repatriation of funds.
Our product and third party software we sell with our product could have
defects for which we are potentially liable and that could result in loss of
revenue, increased costs, loss of our credibility or delay in acceptance of
our product in the market.
Our product, including components supplied by others, may contain errors or
defects, especially when first introduced or when new versions are released.
The portions of our product used to manage e-mail and web-based interactions
are relatively new and have not, as of yet, had significant client usage.
Despite internal product testing, we have in the past discovered software
errors in some of the versions of our product after their introduction. Errors
in new products or versions could be found after commencement of commercial
shipments, and this could result in additional development costs, diversion of
technical and other resources from our other development efforts, or the loss
of credibility with current or future clients. This could result in a loss of
revenue or delay in market acceptance of our product, which could have a
material adverse effect upon our business, financial condition and results of
operations.
In addition, we have warranted to some of our clients, resellers and OEMs
that our software is free of viruses. If a virus infects a client's computer
software, the client could assert claims against us that could be costly and
could have a material adverse effect on our business, financial condition and
results of operations.
Our license agreements with our clients typically contain provisions
designed to limit our exposure to potential product liability and some contract
claims. Our license agreements also typically limit our client's entire remedy
to either a refund of the price paid or modification of our product to satisfy
our warranty. However, not all of these agreements contain these types of
provisions and, where present, these provisions vary as to their terms and may
not be effective under the laws of some jurisdictions. We also do not have
executed license agreements with all of our clients. A product liability,
warranty, or other claim brought against us could have a material adverse
effect on our business, financial condition and results of operations.
Performance interruptions at our client's system, most of which currently do
not have back-up systems, could negatively affect demand for our products or
give rise to claims against us.
The third party software we sell with our product may also contain errors or
defects. Typically, our license agreements transfer any warranty from the
original manufacturer of third party software to our clients to the extent
permitted, but in some cases we provide warranties regarding third party
software. Product liability, warranty or other claims brought against us with
respect to such warranties could have a material adverse affect on our
business, financial condition and results of operations.
Year 2000 issues may adversely affect our business.
Many computer systems and software products are coded to understand only
dates that have two digits for the relevant year. These systems and products
need upgrading to accept four digit entries in order to distinguish 21st
century dates from 20th century dates. Without upgrading, many computer
applications could fail or create erroneous results beginning in the Year 2000.
We have tested and evaluated our product for Year 2000 compliance. Based on
this testing and evaluation, we believe that the current version of our product
is capable of adequately distinguishing 21st century dates from 20th century
dates. As of the date of this prospectus, we are not aware of any problems or
interruptions in our product or the third party software we sell with our
product related to Year 2000 problems. However, we cannot assure you that
either our product or the third party software we sell with our product does
not contain undetected errors or defects associated with the Year 2000
problems. Since we have warranted to some of our clients, resellers and OEMs
that our current product and the third party
9
<PAGE>
software we sell with our product is Year 2000 compliant, any such errors or
defects in our product or in the third party software we sell with our product
could cause our clients to assert claims against us that, if successful, could
be costly and have a material adverse effect on our business, financial
condition and results of operations.
Although we have not incurred any material costs or experienced material
disruptions in our business associated with our internal systems, we cannot
assure you that our internal systems will not experience any Year 2000 problems
in the future. The failure of our internal systems as a result of the Year 2000
problem could cause a material adverse effect on our business, financial
condition and results of operations.
In addition, the purchasing patterns of our clients and potential clients
may be affected by Year 2000 issues as businesses have expended significant
resources to correct or upgrade their current software systems for Year 2000
compliance. These expenditures may reduce the funds available to purchase the
product we offer. To the extent Year 2000 issues significantly disrupt
decisions to purchase our product or our services, our business, financial
condition and results of operations could be materially and adversely affected.
For a more detailed description of our Year 2000 assessment, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" on page 24.
We depend on Microsoft Corporation technologies and other third party software
on which our product relies.
Our software currently runs only on Microsoft Windows NT(TM) servers. A
decline in market acceptance for Microsoft technologies or the increased
acceptance of other server technologies could cause us to incur significant
development costs and could have a material adverse effect on our ability to
market our current product. Although we believe that Microsoft technologies
will continue to be widely used by businesses, we cannot assure you that
businesses will adopt these technologies as anticipated or will not in the
future migrate to other computing technologies that we do not currently
support. In addition, our products and technologies must continue to be
compatible with new developments in Microsoft technologies.
We sell third party software with our product. If one or more of these third
parties cease to sell their software, we will need to modify our product to use
an alternative supplier or eliminate the affected product function, either of
which could have a material adverse effect on our business and financial
condition.
We may not be able to obtain adequate financing to implement our growth
strategy.
Successful implementation of our growth strategy will likely require
continued access to capital. If we do not generate sufficient cash from
operations, our growth could be limited unless we are able to obtain capital
through additional debt or equity financings. We cannot assure you that debt or
equity financings will be available as required to fund growth and other needs.
Even if financing is available, it may not be on terms that are favorable to us
or sufficient for our needs. If we are unable to obtain sufficient financing,
we may be unable to fully implement our growth strategy.
If our clients do not perceive our product or services to be effective or of
high quality, our brand and name recognition would suffer.
We believe that establishing and maintaining brand and name recognition is
critical for attracting and expanding our targeted client base. We also believe
that the importance of reputation and name recognition will increase as
competition in our market increases. Promotion and enhancement of our name will
depend on the effectiveness of our marketing and advertising efforts and on our
success in continuing to provide high-quality products and services, neither of
which can be assured. If our clients do not perceive our product or services to
be effective or of high quality, our brand and name recognition would suffer
which would have a material adverse effect on our business.
The growth of our business may be impeded without increased use of the
Internet.
The use of the Internet as a commercial marketplace is at an early stage of
development. Demand and market acceptance for recently introduced products and
services available over the Internet are still
10
<PAGE>
uncertain. In addition, governmental regulation of the Internet, such as
imposing sales and other taxes, access charges, and pricing controls and
inhibiting cross-border commerce, may reduce the use of the Internet by
businesses for their electronic commerce and customer service needs. To date,
governmental regulations have not materially restricted commercial use of the
Internet. However, the legal and regulatory environment that pertains to the
Internet is uncertain and may change. New regulations could reduce the use of
the Internet by our clients and their customers. The lack of acceptance of the
Internet as a forum for conducting business could reduce growth in demand for
our product and limit the growth of our revenue.
Natural Microsystems, Inc. may become unwilling or unable to continue to supply
us with voice processing boards, requiring us to find a substitute supplier
which could prove difficult or costly.
Natural Microsystems, Inc. is currently our only supplier of the voice
processing boards that are necessary for the operation of our product. If
Natural Microsystems becomes unable or unwilling to continue to supply these
voice processing boards in the volume, at the price and with the technical
specifications we require, then we would have to adapt our product to perform
with the voice processing boards of a substitute supplier. Introducing a new
supplier of voice processing boards could result in unforeseen additional
product development or customization costs and could also introduce hardware
and software compatibility problems. These problems could affect product
shipments, be costly to correct or damage our reputation in the markets in
which we operate, and could have a material adverse affect on our business,
financial condition and results of operations.
Risks Related to this Offering
Our share price is likely to be highly volatile and could drop unexpectedly.
Following this offering, the price for our common shares could be highly
volatile and subject to wide fluctuations in response to the following factors:
. quarterly variations in our operating results due to prolonged sales
cycles and deviations between actual and expected sales;
. announcements of technical innovations, new products or services by us
or our competitors;
. changes in investor perception of us or the market for our product;
. changes in financial estimates by securities analysts; and
. changes in general economic and market conditions.
The stocks of many technology companies have experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to operating performance. Declines in the market price of our common
shares could also materially and adversely affect employee morale and
retention, our access to capital and other aspects of our business.
If our share price is volatile, we may become subject to securities litigation,
which is expensive and could divert our resources.
In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Many companies in our industry have been subject to this type of litigation. If
the market value of our common shares 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 have
determined to make available up to 320,000 of our common shares at the initial
public offering price for directors, business associates and
11
<PAGE>
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. No person
who received this e-mail should rely on it in any manner in making a decision
whether to purchase our common shares in this offering. We did not deliver a
preliminary prospectus prior to distribution of this e-mail as required by the
Securities Act of 1933. In addition, the e-mail may have constituted a non-
conforming prospectus under the Securities Act of 1933. As a result, we may
have a contingent liability under Section 5 of the Securities Act of 1933. Any
liability would depend upon the number of common shares purchased by the
recipients of the e-mail. The recipients of the e-mail who purchase common
shares in this offering may have a right for a period of one year from the
date of the purchase to obtain recovery of the consideration paid in
connection with their purchase of our common shares or, if they had already
sold the stock, sue us for damages resulting from their purchase of our common
shares. If any liability is asserted with respect to the e-mail, we will
contest the matter vigorously. However, if all of the purchasers in the
directed share program are awarded damages after an entire or substantial loss
of their investment, the damages could total up to approximately $4.5 million
plus interest based on the assumed initial public offering price of $14.00 per
share. If this occurs, our financial condition could be materially adversely
affected.
No public market has existed for our shares and an active trading market may
not develop or be sustained.
Before this offering, there has been no public market for our common
shares. We cannot assure you that an active trading market will develop or be
sustained after this offering. You may not be able to resell your shares at or
above the initial public offering price. The initial public offering price
will be determined through negotiations between the underwriters and us and
may not be indicative of the market price for our common shares after this
offering. See "Underwriting" on page 60 for the factors that were considered
in determining the initial public offering price.
Our executive officers, directors and principal shareholders control us and
may make decisions that you do not consider to be in your best interest.
Immediately after this offering, our executive officers, directors and
principal shareholders will, in the aggregate, hold approximately 75.5% of our
outstanding shares. Accordingly, these shareholders will be able to control us
through their ability to determine the outcome of the election of our
directors, amend our articles of incorporation and bylaws and take other
actions requiring the vote or consent of shareholders, including mergers,
going private transactions and other extraordinary transactions, and the terms
of any of these transactions. The ownership position of these shareholders may
have the effect of delaying, deterring or preventing a change in control or a
change in the composition of our board of directors. See "Principal and
Selling Shareholders" on page 48 for information concerning the beneficial
ownership of our common shares.
The sale of a substantial number of our common shares after this offering may
affect our share price.
The market price of our common shares could decline as a result of sales of
substantial amounts of common shares in the public market after the closing of
this offering or the perception that substantial sales could occur. These
sales also might make it difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.
After this offering, assuming no exercise of options or warrants after
January 24, 2000, we will have outstanding 13,795,667 common shares. This
includes the 3,200,000 common shares we are selling in this offering, which
may be resold in the public market immediately. 65,158 common shares may also
be resold in the public market immediately. The remaining 10,530,509 common
shares, or 76.3% of our total outstanding shares, and our common shares
subject to outstanding warrants and options are restricted from
12
<PAGE>
immediate resale under the federal securities laws and lock-up agreements
between our current security holders and the underwriters, but may be sold into
the market in the near future. These common shares will become available for
sale at various times following the expiration of the lock-up agreements which
is 180 days after the date of this prospectus, subject to volume limitations
under Rule 144 of the Securities Act of 1933. See "Shares Eligible for Future
Sale" on page 53 for more information regarding common shares that may be sold
in the market after the closing of this offering.
Investors will incur immediate dilution and may experience further dilution.
If you purchase common shares in this offering, you will experience
immediate and substantial dilution of $10.93 in pro forma net tangible book
value per share based on our book value as of December 31, 1999 and an assumed
initial public offering price of $14.00 per share. We also have outstanding a
large number of stock options and warrants to purchase common shares with
exercise prices significantly below the initial public offering price of the
common shares. To the extent these options and warrants are exercised, there
will be further dilution. We intend to continue to grant stock options to our
employees as part of our general compensation practices. See "Dilution" on page
16 for more information on the dilution our investors will incur.
We may use the proceeds from this offering in ways with which you may not
agree.
We have significant flexibility in applying the proceeds we receive in this
offering. Other than repayment of a portion of our indebtedness, including
accrued interest, we are not required to allocate the proceeds we receive in
this offering to any specific investment or transaction. Therefore, you cannot
determine the value or propriety of our use of proceeds. If we do not apply the
funds we receive effectively, our accumulated deficit will increase and we may
lose significant business opportunities. See "Use of Proceeds" on page 14 for a
more detailed description of how we intend to apply the proceeds from this
offering.
Our amended and restated articles of incorporation, our amended and restated
bylaws and Illinois law make it difficult for a third party to acquire us,
despite the possible benefits to our shareholders.
Our amended and restated articles of incorporation, our amended and restated
bylaws and Illinois law contain provisions that may inhibit changes in control
of us not approved by our board of directors. These provisions may have the
effect of delaying, deferring or preventing a change of control of us despite
possible benefits to our shareholders, may discourage bids at a premium over
the market price of our common shares and may adversely affect the market price
of our common shares, and the voting and other rights of the holders of our
common shares. See "Description of Capital Stock" on page 51 for more
information regarding these provisions.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seeks" and "estimates", and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed, implied or forecasted in the forward-looking statements. In
addition, the forward-looking events discussed in this prospectus might not
occur. These risks and uncertainties include, among others, those described in
"Risk Factors" on page 4 and elsewhere in this prospectus. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect our management's view only as of the date of this prospectus.
Except as required by law, we undertake no obligation to update any forward-
looking statement, whether as a result of new information, future events or
otherwise.
13
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $40.2 million from the sale of
3.2 million common shares at the assumed initial public offering price of
$14.00 per share after deducting underwriting commissions and discounts of $3.1
million and estimated expenses of $1.5 million. If the underwriters exercise
their over-allotment option in full, then the net proceeds will be
approximately $43.2 million. We will not receive any proceeds from the sale of
shares by the selling shareholder.
$8.0 million of the net proceeds from this offering will be used to repay
debt. Of the $8.0 million, (1) $1.5 million will be used to repay subordinated
convertible promissory notes with a stated interest rate of 10% per annum which
mature on the earlier to occur of May 12, 2000 or our initial public offering,
(2) $5.0 million will be used to repay a secured bridge loan with a stated
interest rate of 9.25% per annum which matures on March 31, 2000 and (3) the
remaining $1.5 million will be used to repay a portion of the amount
outstanding under our revolving credit facility which has a stated interest
rate of the prime rate plus 1.25% per annum and matures on March 16, 2000. See
"Certain Transactions" on page 50 and "Underwriting" on page 60 for more
information regarding the subordinated convertible promissory notes and the
secured bridge loan. After application of the net proceeds of this offering,
$2.2 million will remain outstanding under our revolving credit facility. We
currently estimate that we will use the balance of the net proceeds of this
offering as follows:
. 11% for research and development;
. 11% for expansion of our sales channels;
. 9% for increased marketing programs;
. 2% for capital expenditures; and
.67% for working capital and other general corporate purposes.
The amounts described above reflect our estimate of the use of our net
proceeds from this offering, based on our current plans for anticipated
expenditures. Our actual expenditures may vary significantly from these
estimates based upon a number of factors, including the progress or results of
our marketing programs, changing technologies, shifts in client demand and
success of our sales channels. As a result, we may find it necessary or
advisable to reallocate the net proceeds within the uses outlined above or to
use portions of the net proceeds for other purposes. Accordingly, our
management will have significant flexibility in applying the net proceeds from
this offering.
Pending any use, the net proceeds of this offering will be invested in
short-term, interest bearing investment grade securities.
DIVIDEND POLICY
We have not paid any dividends in the past and do not intend to pay cash
dividends on our capital stock for the foreseeable future. Instead, we intend
to retain all earnings for use in the operation and expansion of our business.
Our board of directors will make any future determination of the payment of
dividends based upon various factors then existing, including, but not limited
to, our financial condition, operating results and current and anticipated cash
needs. The payment of dividends may be limited by financing agreements that we
may enter into in the future.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to the conversion of all of our
outstanding convertible preferred shares into common shares upon the
closing of this offering on a split adjusted basis to reflect the seven-
for-four stock split of our common shares; and
. on a pro forma as adjusted basis to give effect to (1) the sale by us of
3,200,000 common shares at an assumed initial public offering price of
$14.00 per share, after deducting underwriting discounts and commissions
and estimated offering expenses and (2) the use of $8.0 million of the
estimated net proceeds to repay a portion of our outstanding
indebtedness. See "Use of Proceeds" on page 14 for more information
regarding our use of the net proceeds of this offering to repay debt.
The table reflects a seven-for-four stock split of our common shares
occurring immediately prior to the closing of this offering.
This table should be read in conjunction with the consolidated financial
statements and notes to those consolidated financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
amounts)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 3,467 $ 3,467 $ 35,631
======== ======== ========
Short-term debt................................ 8,361 8,361 361
======== ======== ========
Long-term debt................................. $ 314 $ 314 314
-------- -------- --------
Series A convertible preferred shares, par
value $0.01 per share, 1,242,858 shares
authorized, 1,242,858 shares issued and
outstanding actual, none issued or
outstanding pro forma or as adjusted........ 2,119 -- --
Series B convertible preferred shares, par
value $0.01 per share, 1,599,888 shares
authorized, 1,599,888 shares issued and
outstanding actual, none issued or
outstanding pro forma or as adjusted........ 5,974 -- --
Series C convertible preferred shares, par
value $0.01 per share, 1,152,737 shares
authorized, 1,152,737 shares issued and
outstanding actual, none issued or
outstanding pro forma or as adjusted........ 7,986 -- --
Shareholders' equity (deficit):
Preferred shares, par value $0.01 per share,
5,000,000 shares authorized, none issued or
outstanding actual, pro forma or as
adjusted.................................... -- -- --
Common shares, par value $0.01 per share,
60,000,000 shares authorized, 3,055,883,
10,047,978 and 13,247,978 shares issued and
outstanding actual, pro forma and as
adjusted, respectively...................... 53 123 155
Additional paid-in-capital................... 2,932 18,941 59,073
Accumulated deficit.......................... (18,614) (18,614) (18,614)
-------- -------- --------
Total shareholders' equity (deficit)....... (15,629) 450 40,614
-------- -------- --------
Total capitalization...................... $ 9,125 $ 9,125 $ 41,289
======== ======== ========
</TABLE>
15
<PAGE>
DILUTION
Our pro forma net tangible book value at December 31, 1999 was $450,000, or
$0.04 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets less our total liabilities, divided by the
total number of common shares outstanding after giving effect to the conversion
of all of our outstanding convertible preferred shares.
After giving effect to this offering and the receipt of $40.2 million of net
proceeds from this offering, based on an assumed initial public offering price
of $14.00 per share, the pro forma net tangible book value of the common shares
as of December 31, 1999 would have been $40.6 million, or $3.07 per share. This
amount represents an immediate increase in net tangible book value of $3.03 per
share to the existing shareholders and an immediate dilution in net tangible
book value of $10.93 per share to purchasers of common shares in this offering.
Dilution is determined by subtracting pro forma net tangible book value per
share after this offering from the amount of cash paid by a new investor for a
common share. The new investors will have paid $14.00 per share even though the
per share value of our assets after subtracting our liabilities is only $3.07.
In addition, the total consideration from new investors will be $44.8 million,
which is 73.5% of the total of $60.9 million paid for all common shares
outstanding, but new investors will own only 24.2% of our outstanding common
shares. The following table illustrates such dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $14.00
Pro forma net tangible book value per share at December 31,
1999........................................................ $0.04
Increase per share attributable to new investors............. 3.03
-----
Pro forma net tangible book value per share after this
offering...................................................... 3.07
------
Dilution per share to new investors............................ $10.93
======
</TABLE>
The following table sets forth, as of December 31, 1999, on the pro forma
basis described above, the number of common shares purchased from us, the total
consideration paid to us and the average price per share paid by existing
shareholders and by new investors who purchase common shares in this offering,
before deducting the underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 10,047,978 75.8% $16,132,000 26.5% $ 1.61
New investors............... 3,200,000 24.2 44,800,000 73.5 14.00
---------- ----- ----------- -----
Total................... 13,247,978 100.0% $60,932,000 100.0% $ 4.60
========== ===== =========== =====
</TABLE>
The share amounts in the tables above are based on shares outstanding as of
December 31, 1999. The tables exclude:
. 4,600,000 common shares reserved for issuance under our 2000 omnibus
incentive plan, of which 3,352,305 shares were subject to outstanding
options at December 31, 1999, at a weighted average exercise price of
$0.46 per share;
. 547,689 common shares issued upon exercise of outstanding options between
December 31, 1999 and January 24, 2000;
. 1,000,000 common shares reserved for issuance under our employee stock
purchase plan of 2000;
. 106,274 common shares issuable upon exercise of outstanding warrants, at
an exercise price of $3.97 per share; and
. 262,500 common shares issuable upon exercise of outstanding warrants at
an exercise price of $5.34 per share.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and notes to those
consolidated financial statements on page F-1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 18. The
consolidated statement of operations data for the years ended December 31,
1997, 1998 and 1999, and the consolidated balance sheet data as of December 31,
1998 and 1999, are derived from our audited consolidated financial statements,
which are included elsewhere in this prospectus. The consolidated statement of
operations data for the year ended December 31, 1995 and 1996 and the
consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited consolidated financial statements which are not
included in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations:
Revenue:
Software licenses... $ 417 $ 1,424 $ 2,669 $ 5,697 $ 10,300
Services and other.. 248 582 1,424 3,445 7,866
------- ------- ------- -------- --------
Total revenue..... 665 2,006 4,093 9,142 18,166
Costs and expenses:
Cost of software.... 341 10 26 31 296
Cost of service and
other.............. -- 348 1,308 3,084 5,611
Research and
development........ 65 491 1,271 2,805 4,441
Sales and marketing. 93 1,418 3,644 6,030 9,704
General and
administrative..... 745 960 1,552 2,236 5,264
------- ------- ------- -------- --------
Total costs and
expenses......... 1,244 3,227 7,801 14,186 25,316
------- ------- ------- -------- --------
Loss from operations.. (579) (1,221) (3,708) (5,044) (7,150)
Other income
(expense)............ -- 21 141 222 (1,359)
------- ------- ------- -------- --------
Net loss.............. $ (579) $(1,200) $(3,567) $(4,822) $ (8,509)
======= ======= ======= ======== ========
Net loss per share-
basic and diluted.... $(19.30) $ (0.42) $ (1.22) $ (1.64) $ (2.85)
======= ======= ======= ======== ========
Shares used to compute
net loss per share--
basic and diluted.... 30 2,868 2,923 2,947 2,983
<CAPTION>
December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Consolidated
Balance Sheet Data:
Cash and cash
equivalents.......... $ 45 $ 6,211 $ 1,984 $ 3,170 $ 3,467
Working capital
(deficit)............ (508) 6,194 2,299 4,916 (1,472)
Total assets.......... 140 7,140 4,395 8,649 15,434
Short-term debt....... -- 98 -- -- 8,361
Long-term debt........ -- 151 -- -- 314
Convertible preferred
shares............... -- 8,093 8,093 16,079 16,079
Total common
shareholders'
deficit.............. (482) (1,699) (5,261) (10,010) (15,629)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes to those consolidated financial statements
included elsewhere in this prospectus.
Overview
We develop, market and support a market leading customer interaction
management solution for multimedia contact centers. We commenced operations in
January 1989, and, from inception to early 1995, our operating activities
consisted primarily of research and development and consulting, and we derived
revenue primarily from consulting. In March 1995, we began shipping our first
software product.
Revenue. We derive revenue principally from the sale of software licenses
and from fees for implementation, technical support and training services. We
also derive revenue from the sale of certain third party hardware products such
as voice cards required to implement our solution. Revenue from the sale of
hardware constituted less than 10% of our total revenue for 1999, and is
included in revenue from services and other. We expect the hardware component
of our total revenue to decrease as a percentage of total revenue over time. We
now encourage the majority of our clients to purchase servers directly from
third party manufacturers and have discontinued paying commissions to our sales
force for the sale of third party hardware products. We expect to offer voice
cards and other hardware to our clients on a limited basis in the near term.
We market our solution to our clients primarily through our direct sales
force, value added resellers and original equipment manufacturers, or OEMs in
North America, Europe, South America, Asia, Africa and Australia. We currently
have relationships with 15 value added resellers and two OEMs. We are
aggressively expanding both our direct sales force and our reseller and OEM
relationships. Sales to our resellers and OEMs accounted for 7.0% of our total
revenue for 1998 and 22.0% of our total revenue for 1999. We expect that
revenue derived from sales to resellers and OEMs will continue to increase as a
percentage of total revenue for the foreseeable future as we expand and focus
on our international sales efforts and distribution channels.
Although we enter into general sales contracts with our clients and
resellers, none of our clients or resellers is obligated to purchase our
product or our services pursuant to these contracts. We rely on our clients and
resellers to submit purchase orders for our product and services. All of our
sales contracts contain provisions regarding the following:
. product features and pricing;
. order dates, rescheduling and cancellations;
. warranties and repair procedures; and
. marketing and/or sales support and training obligations.
Typically, these contracts provide that the exclusive remedy for breach of our
specified warranty is either a refund of the price paid or modification of our
product to satisfy our warranty.
We have generally experienced a product sales cycle of six to nine months.
We consider the life of the sales cycle to begin on the first face-to-face
meeting with the prospective client and end when we ship our product. The
length of the sales cycle for client orders depends on a number of factors
including:
. a client's awareness of the capabilities of the type of solution we sell
and the amount of client education required;
. concerns that our client may have about our limited operating history
and track record and our size compared to many of our larger
competitors;
18
<PAGE>
. a client's budgetary constraints;
. the timing of a client's budget cycles;
. concerns of our client about the introduction of new products by us or
our competitors that would render our current product noncompetitive or
obsolete; and
. downturns in general economic conditions, including reductions in demand
for contact center services.
Our OEM contracts contain additional provisions regarding product technical
specifications, labeling instructions and other instructions regarding
customization and rebranding. Our OEM contracts contain volume discounts.
Sales to clients outside the United States accounted for 6.6% of our revenue
in 1998 and 20.8% of our total revenue for 1999. We expect the portion of our
total revenue derived from sales to clients outside the United States to
increase as we expand our international sales efforts and distribution
channels.
We recognize revenue from the sale of software and hardware upon shipment.
Beginning in 1998, we recognized revenue from fees for implementation services
using the percentage of completion method. We calculate percentage of
completion based on the estimated total number of hours of service required to
complete an implementation project and the number of actual hours of service
rendered. Prior to 1998, we recognized revenue from implementation services as
those services were completed. We recognize support and maintenance services
ratably over the term of our maintenance contracts, which are typically annual
contracts. Training services are recognized as such services are completed.
Cost of revenue. Our cost of revenue consists primarily of:
. the cost of compensation for technical support, education and
professional services personnel;
. other costs related to facilities and office equipment for technical
support, education and professional services personnel;
. the cost of third party hardware we resell as part of our solution; and
. payments for third party software used with our product.
We recognize costs of software, maintenance, support and training services
and hardware as they are incurred. Prior to 1997, we recognized costs of
implementation services as they were incurred. In 1997, we began to recognize
costs of implementation services using the percentage of completion method
described above.
Other operating expenses. We generally recognize our operating expenses as
we incur them. Our sales and marketing expenses consist primarily of
compensation, commission and travel expenses along with other marketing
expenses, including trade shows, public relations, telemarketing campaigns and
other promotional expenses. Our research and development expenses consist
primarily of compensation expenses for our personnel and, to a lesser extent,
independent contractors who adapt our product for specific countries. Our
general and administrative expenses consist primarily of compensation for our
administrative, financial and information technology personnel and a number of
non-allocable costs, including professional fees, legal fees, accounting fees
and bad debts.
Interest income and expenses. Interest income is generated by the investment
of cash raised in prior rounds of equity financing. Interest expense is
generated primarily from amounts we owe under our line of credit and capital
lease lines of credit.
Income taxes. There has been no provision or benefit for income taxes for
any period since 1995 due to our operating losses. As of December 31, 1999, we
had $15.6 million of net operating loss carryforwards for federal income tax
purposes, which expire beginning 2012. Our use of these net operating losses
may be limited in future periods. See note 5 of notes to consolidated financial
statements on page F-12 regarding the use of our net operating loss
carryforwards.
19
<PAGE>
Stock compensation. In 1997, 1998 and 1999, we recorded stock compensation
charges of $0, $69,000 and $229,000, respectively. Stock compensation charges
represent the difference between the exercise price of options granted to
acquire our common shares during these periods and the deemed fair value for
financial reporting purposes of our common shares on the measurement date
which is the same as the date of grant for our options. Stock compensation is
amortized over the vesting period of the options granted, which is typically
four years. Based on the outstanding options at December 31, 1999, we will
record a stock compensation charge of $853,000, $831,000 and $784,000 in 2000,
2001 and 2002, respectively.
Results of Operations
The following table sets forth financial data for the periods indicated as
a percentage of total revenue.
<TABLE>
<CAPTION>
Percentage of
Revenue
-----------------------
Years Ended
December 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Software licenses..................................... 65.2 % 62.3 % 56.7 %
Services and other.................................... 34.8 37.7 43.3
------- ------- -------
Total revenue....................................... 100.0 100.0 100.0
------- ------- -------
Costs and expenses:
Cost of software...................................... 0.6 0.3 1.6
Cost of services and other............................ 32.0 33.7 30.9
Research and development.............................. 31.0 30.7 24.4
Sales and marketing................................... 89.0 66.0 53.4
General and administrative............................ 37.9 24.4 29.0
------- ------- -------
Total costs and expenses............................ 190.5 155.1 139.3
------- ------- -------
Operating loss.......................................... (90.5) (55.1) (39.3)
Other income (expense).................................. 3.4 2.4 (7.5)
------- ------- -------
Net loss................................................ (87.1)% (52.7)% (46.8)%
======= ======= =======
</TABLE>
Years Ended December 31, 1997, 1998 and 1999
Revenue. Our total revenue increased by 123.4% from $4.1 million in 1997 to
$9.1 million in 1998 and increased 98.7% to $18.2 million in 1999. Revenue
from international sales increased by 512.6% from $604,000 in 1998 to $3.7
million in 1999. We had no revenue from international sales prior to 1998.
Revenue from software licenses. Revenue from the sale of licenses for
software increased 113.5% from $2.7 million in 1997 to $5.7 million in 1998
and increased 80.8% to $10.3 million in 1999. The increase in software revenue
from 1997 to 1999 resulted from a growing market acceptance of our solution,
our expanded sales and marketing efforts, our entrance into international
markets and introduction of new product features.
Revenue from services and other. Revenue from fees we receive for services
and other increased 141.9% from $1.4 million in 1997 to $3.4 million in 1998
and increased 128.2% to $7.9 million in 1999. The growth in revenue from
services and other resulted primarily from the growth in our professional
services and maintenance revenue as our client base increased over this
period. The growth in revenue from services and other also resulted from sales
of hardware, which accounted for 13.8% of total revenue in 1997, 12.7% of
20
<PAGE>
total revenue in 1998 and 9.9% of total revenue in 1999. We anticipate that
hardware revenue will continue to decline as a percentage of total revenue in
the future. We now encourage the majority of our clients to purchase servers
directly from third party manufacturers and have discontinued paying
commissions to our sales force on the sale of third party hardware products. We
expect to offer voice cards and other hardware to our clients on a limited
basis in the near term.
Costs and expenses. Our total costs and expenses increased 81.8% from $7.8
million in 1997 to $14.2 million in 1998 and increased 78.5% to $25.3 million
in 1999. These increases primarily reflected increases in our research and
development and sales and marketing efforts over the three-year period. These
investments included headcount additions of 32 employees in 1998 and 60
employees in 1999. As a percentage of total revenue, our costs and expenses
were 190.6% in 1997, 155.2% in 1998 and 139.3% in 1999.
Cost of software. Cost of software increased 19.2% from $26,000 in 1997 to
$31,000 in 1998 and increased 854.8% to $296,000 in 1999. This cost represented
1.0% of software revenue in 1997, 0.5% of software revenue in 1998 and 2.9% of
software revenue in 1999. The increases in amount from 1997 to 1998 resulted
primarily from increased software sales. The increase in amount from 1998 to
1999 resulted from increased software sales and increased third party content
required for various new product features.
Cost of services and other. Cost of services and other increased 135.8% from
$1.3 million in 1997 to $3.1 million in 1998 and increased 81.9% to $5.6
million in 1999. The increases from 1997 to 1999 are due primarily to the
hiring of additional project managers, programmers, technical support and
trainers to expand our professional services organization. The increase from
1997 to 1999 also reflects the cost of third party hardware sold to our clients
during these periods.
Research and development. Research and development expenses increased 120.7%
from $1.3 million in 1997 to $2.8 million in 1998 and increased 58.3% to $4.4
million in 1999. The increases in research and development expenses from 1997
to 1999 related primarily to the increase in software developers and testing
personnel to develop and enhance our product.
Sales and marketing. Sales and marketing expenses increased 65.5% from $3.6
million in 1997 to $6.0 million in 1998 and increased 60.9% to $9.7 million in
1999. The increases in sales and marketing expenses from 1997 to 1999 resulted
primarily from our investment in sales and marketing personnel. This investment
included establishment of our European regional sales office in 1997,
additional sales channels in Europe and Asia in 1998 and 1999 and additional
North American field sales offices in 1997, 1998 and 1999. The increase in
sales and marketing expenses also reflects increased marketing activities,
including tradeshows, public relations activities and advertisements during
these periods.
General and administrative. General and administrative expenses increased
44.1% from $1.6 million in 1997 to $2.2 million in 1998 and increased 135.4% to
$5.3 million in 1999. The increases from 1997 to 1998 were primarily due to
additional personnel necessary to support our growing operations in the United
States and expenses related to the establishment of our international
subsidiary in the United Kingdom. The increases in 1999 were due to additional
personnel as well as accruals for compensation expense related to option
grants, litigation expense and state sales taxes.
Interest income and interest expense. Interest income was $210,000 in 1997,
$245,000 in 1998 and $42,000 in 1999. Interest expense was $25,000 in 1997,
$23,000 in 1998 and $1.4 million in 1999. The decrease in interest income is a
result of declining cash balances, due to cash being used to fund operations.
The increase in interest expense is primarily due to a charge for the fair
market value of the warrants that were issued in connection with our bridge
loan, as well as increases in debt payable under our line of credit and capital
leases. See notes 3 and 4 of our notes to our consolidated financial statements
on page F-10.
21
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods indicated, our consolidated
financial information for the last eight quarters expressed in dollars and as a
percentage of total revenue. We prepared this information using our unaudited
interim consolidated financial statements that, in our opinion, have been
prepared on a basis consistent with our annual consolidated financial
statements. We believe that these interim statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this information when read in conjunction with our consolidated
financial statements and notes to those consolidated financial statements. The
operating results for any quarter do not necessarily indicate the results to be
expected for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... $ 1,020 $1,270 $ 1,678 $ 1,729 $ 1,710 $ 2,468 $ 2,838 $ 3,284
Services and other..... 747 937 749 1,012 1,582 1,632 2,170 2,482
------- ------ ------- ------- ------- ------- ------- -------
Total revenue........ 1,767 2,207 2,427 2,741 3,292 4,100 5,008 5,766
Costs and expenses:
Cost of software....... 8 14 4 5 36 44 96 120
Cost of services and
other software........ 793 718 687 886 1,219 1,151 1,627 1,614
Research and
development........... 553 581 756 915 869 958 1,130 1,484
Sales and marketing.... 1,164 1,478 1,560 1,828 2,408 2,293 2,283 2,720
General and
administrative........ 517 460 508 751 905 858 1,964 1,537
------- ------ ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 3,035 3,251 3,515 4,385 5,437 5,304 7,100 7,475
------- ------ ------- ------- ------- ------- ------- -------
Operating loss.......... (1,268) (1,044) (1,088) (1,644) (2,145) (1,204) (2,092) (1,709)
Other income (expense).. 22 87 65 48 6 (25) (148) (1,192)
------- ------ ------- ------- ------- ------- ------- -------
Net loss................ $(1,246) $ (957) $(1,023) $(1,596) $(2,139) $(1,229) $(2,240) $(2,901)
======= ====== ======= ======= ======= ======= ======= =======
Net loss per share--
basic and diluted...... $ (0.43) $(0.33) $ (0.35) $ (0.54) $ (0.72) $ (0.41) $ (0.75) $ (0.97)
======= ====== ======= ======= ======= ======= ======= =======
Shares used in
calculation of basic
and diluted............ 2,929 2,935 2,941 2,947 2,975 2,977 2,987 2,983
<CAPTION>
As a Percentage of Revenue
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses...... 57.7% 57.5% 69.1% 63.1% 51.9% 60.2% 56.7% 57.0%
Services and other..... 42.3 42.5 30.9 36.9 48.1 39.8 43.3 43.0
------- ------ ------- ------- ------- ------- ------- -------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of software....... 0.5 0.6 0.2 0.2 1.1 1.1 1.9 2.1
Cost of services and
other software........ 44.9 32.5 28.3 32.3 37.0 28.1 32.5 28.0
Research and
development........... 31.3 26.3 31.1 33.4 26.4 23.4 22.6 25.7
Sales and marketing.... 65.9 67.0 64.3 66.7 73.1 55.9 45.6 47.2
General and
administrative........ 29.2 20.9 20.9 27.4 27.5 20.9 39.2 26.6
------- ------ ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 171.8 147.3 144.8 160.0 165.1 129.4 141.8 129.6
------- ------ ------- ------- ------- ------- ------- -------
Operating loss.......... (71.8) (47.3) (44.8) (60.0) (65.1) (29.4) (41.8) (29.6)
Other income (expense).. 1.2 3.9 2.7 1.8 0.1 (0.6) (2.9) (20.7)
------- ------ ------- ------- ------- ------- ------- -------
Net loss................ (70.6)% (43.4)% (42.1)% (58.2)% (65.0)% (30.0)% (44.7)% (50.3)%
======= ====== ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
Revenue. Our revenue from software licenses and our revenue from services
and other have generally increased in each of the last eight quarters due
primarily to the increased market acceptance of our solution, the growth and
increased productivity of our direct sales force and an increase in the number
of value added resellers and OEMs. We do not believe that we will achieve
similar percentage increases in future periods.
We anticipate that revenue from software licenses will continue to represent
a majority of our revenue for the foreseeable future. We also expect our
revenue from services and other to increase primarily as a result of our
growing installed client base. We also anticipate hardware revenue to decline
as a percentage of total revenue in the future. We now encourage the majority
of our clients to purchase servers directly from third party manufacturers and
have discontinued paying commissions to our sales force on the sale of third
party hardware products. We expect to offer voice cards and other hardware to
our clients on a limited basis in the near term.
Cost of revenue. Our cost of revenue has generally increased in each of the
last eight quarters. We expect our cost of software to continue to increase as
our revenue from software increases, particularly if we integrate additional
third-party applications into our product offerings. We expect our cost of
services and other to increase in the future as we continue to make investments
in our service organization to support our client base. We expect, however,
that our cost of services and other will decrease as a percentage of our total
revenue as our client base grows and as our total hardware sales decrease. We
also intend to pursue a strategy of expanding our relationships with value
added resellers, OEMs and other strategic partners that will enable us to
outsource implementation and some support services to these parties.
Operating expenses. Our total operating expenses have generally increased in
each of the last eight quarters. We have increased our spending in every
functional area of the organization since 1995. However, the percentage
increases in spending for each quarter have generally been less than the
percentage increases in our revenue for the corresponding quarter. We
anticipate that our operating expenses will increase for the foreseeable future
as we continue to:
. invest in our sales and marketing efforts to build market and brand
awareness and enlarge our United States and international client base;
. invest in research and development, which we believe will be critical to
maintaining technological leadership; and
. expand our administrative infrastructure and incur additional expenses
associated with becoming a public company.
Our investments in these activities could significantly precede any revenue
generated by the increased spending. If we do not experience significantly
increased revenue from these efforts, our business, financial condition and
results of operations could be materially and adversely affected.
Liquidity and Capital Resources
Since 1995, we have funded our operations primarily through the private
placement of our convertible preferred shares, and to a lesser extent, through
bank borrowings and capital equipment lease financing. As of December 31, 1999,
we had cash and cash equivalents of $3.5 million and no availability under our
revolving line of credit. Our operating activities resulted in net cash
outflows of $3.8 million in 1997, $5.8 million in 1998 and $8.7 million in
1999. The operating cash outflows for these periods resulted from significant
investments in research and development, sales, marketing and services, which
resulted in operating losses.
To date, our investing activities have consisted primarily of capital
expenditures for property and equipment, including $999,000 of capital
expenditures in 1999. These capital expenditures have consisted primarily of
computer hardware, software and furniture and fixtures for our growing employee
base. At December 31, 1998 and December 31, 1999, we did not have any material
commitments for future capital expenditures.
23
<PAGE>
At December 31, 1999, we had $3.2 million outstanding under our revolving
line of credit. The line of credit is secured. As of December 31, 1999, we were
not in compliance with a financial covenant set forth in our line of credit
regarding our ratio of current assets to current liabilities. We have obtained
a waiver with respect to our non-compliance. We issued warrants that will be
converted, upon completion of this offering, into warrants to purchase 30,625
common shares at an exercise price of $3.97 per share, in connection with
increasing the amount available under our revolving line of credit from $2
million to $3.5 million.
In June 1999, we also issued $1.5 million of subordinated convertible
promissory notes to some of our preferred shareholders. In connection with
these notes, we issued warrants to these shareholders that will be converted,
upon completion of this offering, into warrants to purchase 75,649 common
shares at an exercise price of $3.97 per share.
In November 1999, a $5.0 million secured bridge loan was made to us by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Chase Securities Inc., one of the managing underwriters
in this offering. Certain employees and entities associated with Chase
Securities Inc. have a $1.4 million participation in this loan and ARCH Venture
Fund III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. We granted to Access Technology Partners,
L.P. warrants that can be exercised to purchase 236,250 common shares in
connection with this loan and the employees and entities associated with Chase
Securities Inc. that are participating in this loan have the right to receive
their pro rata portion of the warrants granted. We also granted ARCH Venture
Fund III, L.P. warrants that can be exercised to purchase 26,250 common shares.
The exercise price for all of the warrants granted in connection with this loan
is initially $5.34 per share but will increase to the initial public offering
price, subject to a one-time adjustment on or before November 5, 2000, to the
20-day average market price if the average market price is less than the
initial public offering price.
It is anticipated that a portion of the proceeds of this offering will be
used to repay a portion of the revolving line of credit and all of the
subordinated convertible promissory notes and the secured bridge loan. See "Use
of Proceeds" on page 14 for more information regarding our use of proceeds from
this offering to repay a portion of our debt. We believe that the net proceeds
of this offering, together with existing cash and cash equivalents and amounts
that will become available under our existing revolving line of credit, will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months.
We may also need to raise additional funds in order to fund more rapid
expansion, including significant increases in personnel and office facilities,
to develop new or enhance existing products or respond to competitive
pressures. We cannot assure you that additional financing will be available at
all or that, if available, will be on terms favorable to us or that any
additional financing will not dilute your ownership interest in Apropos. See
"Risk Factors--We may not be able to obtain adequate financing to implement our
growth strategy" on page 10.
Year 2000 Compliance
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on or before
January 1, 2000, computer systems and software used by many companies and
organizations in a wide variety of industries will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly. Significant uncertainty exists in the software industry and other
industries concerning the scope and magnitude of problems associated with the
century change.
We have addressed or are addressing the Year 2000 issues in the following
principal areas:
. our product;
. internal management and information systems;
. key suppliers; and
. clients.
24
<PAGE>
We have not retained any independent parties to verify or validate our
evaluation of Year 2000 issues or any related cost estimates.
Our product. We have warranted to our clients that our current product is
Year 2000 compliant. We conduct periodic testing of our product for Year 2000
compliance, and as of the date of this prospectus, are not aware of any
problems with our product related to Year 2000 compliance. However, even though
we have not experienced any problems with our product or the third party
software we sell with our product since January 1, 2000, we cannot assure you
that either our product or the third party software we sell with our product,
does not contain undetected errors or defects associated with Year 2000
problems. Further, our product is sometimes integrated into enterprise systems
involving sophisticated hardware and complex software products developed by
third parties, which may themselves have a Year 2000 related problem. This may
also affect the operation of our product. Based on our assessments to date, we
believe that our product will not experience any material disruption as a
result of any Year 2000 problems with the product. However, if our product has
Year 2000 problems, the worst case scenario is that we could lose current or
potential clients, incur costs related to replacing our product or face claims
based on Year 2000 problems under our warranties, including Year 2000 problems
in third party software we sell with our product, any of which could have a
material adverse effect on our business, financial condition and results of
operations. Since we are in the business of selling software, our risk of
facing claims relating to Year 2000 issues is greater than that of companies in
some other industries.
Internal management and information systems. We use a combination of our own
software and other commercially available software for our internal operations.
These internal computer systems include our file servers and groupware systems,
desktop and laptop systems, printer and storage systems, fax machines, copiers
and security access system. We have evaluated and tested each of these internal
systems and all of them were Year 2000 compliant. At this time, we believe that
there will be no significant costs associated with the Year 2000 issue for
internal operations.
Key suppliers. We have contacted all of our key suppliers regarding Year
2000 issues and have received adequate assurance from all of these suppliers,
including our third party software vendors, that their respective products are
Year 2000 compliant. These assurances include written statements that our PBX
systems located within the corporate telecommunications infrastructure is Year
2000 compliant and that our accounting and remote access systems are Year 2000
compliant.
Clients. We believe that the purchasing patterns of current and potential
clients may continue to be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance. These expenditures may reduce the funds available to
license software products such as those we offer. To the extent Year 2000
issues significantly disrupt decisions to license our product or purchase our
services, our business, financial condition and results of operations could be
materially adversely affected.
To date, we have not deferred any other information technology projects due
to our Year 2000 efforts and we have not incurred any material costs directly
associated with our Year 2000 compliance efforts. Our costs to date primarily
consist of compensation expense associated with our employees who have devoted
some of their time to our Year 2000 assessment and remediation efforts.
Currently, we do not expect the total cost of Year 2000 problems to be material
to our business, financial condition and results of operations. Despite our
current assessment, we may not identify and correct all significant Year 2000
problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could materially
adversely affect our business, financial condition and results of operations.
We
currently have no contingency plans to address the risks associated with
unremediated Year 2000 problems. See "Risk Factors--Year 2000 issues may
adversely affect our business" on page 9 for more information on risks related
to Year 2000 issues.
25
<PAGE>
BUSINESS
Overview
We develop, market and support a comprehensive customer interaction
management solution for multimedia contact centers. Our solution combines
patented customer interaction management software with a proven delivery
methodology and high quality support services. The Apropos solution enables the
real-time management of multimedia customer interactions, including traditional
voice interactions, e-mails and web-based forms of communications.
Industry Background
Competitive global markets and the increasing acceptance of the Internet as
an important medium for business and customer interaction have led to greater
customer demands for higher levels of service, responsiveness, convenience,
personalization and quality. With the dramatic growth of Internet-based
communications and commerce, businesses must provide consistent high quality
customer care and service across a variety of communications media. Providing
an appropriate level of service in this environment is more complex than in the
past when customer interactions were primarily voice-based and businesses
provided service to their customers through traditional voice call centers. In
the future, an increasing number of customer interactions will be through
Internet-based communications, such as e-mail and web-based contacts. The
Gartner Group estimates/1/ that "by 2001, businesses will receive 25% of all
customer inquiries via e-mail and web-based forms of communication."
The Emergence of the Internet and eBusiness
The Internet is rapidly emerging as an extremely important sales, service
and communications medium that is altering the way companies manage external
and internal relationships. International Data Corporation, or IDC, estimates
that the number of users of the Internet will increase from 142 million in 1998
to 502 million in 2003. In addition, the amount spent to purchase goods and
services on the Internet is expected to increase dramatically. IDC estimates
that spending on the Internet will increase from $50.3 billion in 1998 to $1.3
trillion in 2003.
This growth in Internet-based commerce has created the need for businesses
to establish systems and infrastructure to support the growing volume of
Internet-based customer interactions. IDC estimates that in 2002, license
revenue for e-commerce customer support software applications will reach $1.6
billion. This represents a significant trend as many businesses attempt to
implement the necessary infrastructure for Internet-based sales and service
initiatives.
These "eBusiness" initiatives require the seamless integration of new
Internet-based forms of customer interaction, such as e-mail and web, with
traditional voice call centers. In many cases, customers desire to interact
with a customer service representative to close an eBusiness transaction.
Jupiter Communications, Inc. estimates that 41% of online consumers indicate
that they would be more likely to complete a transaction online if web chat or
callback were available. Accordingly, to meet customer needs, an eBusiness
infrastructure must include both voice-based and Internet-based customer
interaction capabilities.
The Need for Multimedia Customer Contact Centers
In order to provide superior service and enhance customer loyalty and
retention, businesses need to provide customers with a variety of choices in
how they interact with their business. Businesses need a multimedia solution
that can support their eBusiness initiatives while maintaining or improving the
level of service of their traditional business. As a result, businesses face
significant challenges in managing and optimizing traditional voice and new
Internet-based customer interactions. These challenges include:
. added complexity as a result of the need to receive and respond to
customer interactions across a variety of communications media;
. a need for additional skills and resources to respond to e-mail and web-
based interactions;
- ------
1 Gartner Group, Customer Service and Support: Morphing the Call Center to
the Contact Center, C. Anuso, D. Fluss, D. Hope-Ross, C. Lusher, C.
Smith, November 16, 1998.
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. heightened customer demands for high quality service regardless of the
communications media used; and
. a need for better insight into the overall performance of the contact
center due to the increased number and type of customer interactions.
We believe that in order for businesses to meet these challenges, they need
a comprehensive solution that enables them to provide high quality service
across multiple communications media. The ideal solution should:
. manage multiple types of interactions through one application;
. produce real-time information across all media types to enable real-time
allocation of resources within the contact center, or media blending;
. create consolidated reports across multiple interactions and media to
enable businesses to better understand key business metrics and trends
in order to improve the overall performance of their business;
. be completely switch and network independent to allow businesses to
preserve their investment in their existing communications
infrastructure;
. provide enterprise application independence to enable seamless
integration of traditional and eBusiness applications;
. easily expand both in functionality and capacity as business needs
change;
. enable rapid implementation to ensure solution can be deployed within
the time, resource and cost constraints of the client;
. provide maximum flexibility to configure and administer a multimedia
contact center in reaction to and in anticipation of, changing business
conditions;
. lower a business' total cost of ownership by implementing one integrated
multimedia solution versus multiple point products; and
. interoperate with and allow businesses to take advantage of new Internet
protocol, or IP-based- network technologies.
The Apropos Solution
We develop, market and support a comprehensive customer interaction
management solution for multimedia contact centers. Our solution combines
patented customer interaction management software with a proven delivery
methodology and high quality support services. The Apropos solution enables the
real-time management of multimedia customer interactions, including traditional
voice interactions, e-mails and web-based forms of communications.
Our customer interaction management software enables clients to prioritize,
route and respond to customer interactions across multiple communications media
based on a single set of business rules. Our clients can establish business
rules to manage customer interactions based on their business value or service
level. For example, clients can, on a real-time basis, (1) route specific types
of customer interactions to an agent based on that agent's particular skills
and (2) adjust the number of interactions and agents assigned to a queue to
ensure maximum responsiveness to the customer. Clients can also monitor the
status of each interaction and the performance of each contact center agent.
Our solution provides comprehensive real-time and historical reporting on each
customer interaction and on the contact center resources necessary to manage
those interactions.
Our solution provides the following benefits to our clients:
Seamless management of multiple communications media through one business
rules driven interface. Our solution is designed to allow clients to manage
customer interactions on a real-time basis
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across a variety of communications media through one business rules driven
interface. Clients can establish business rules to manage customer interactions
based on their business value or service level regardless of whether the
customer made the contact via the Internet or telephone.
Comprehensive real-time information. Our solution provides real-time
information on the overall performance of the contact center. Supervisors
receive information that enables them to immediately react to changing business
conditions. For example, if one or more agents is servicing e-mail interactions
and a supervisor is notified that a queue for incoming voice calls has exceeded
pre-defined thresholds, the supervisor can reassign these e-mail agents to
handle the voice calls with a simple mouse click.
Integrated decision management reporting capabilities. Our decision
management application enables our clients to view historical reports through
an advanced web-based interface. It provides information on contact center
performance by the hour, shift, day or month. Our solution reports on critical
aspects of the contact center's operation, including agent performance,
interaction volume, interaction types and interaction disposition. It provides
"cradle to grave" reporting on each interaction, from initial customer contact
to closure, allowing clients to better understand the entire interaction cycle.
The decision management application also combines customer interaction
information across multiple communication media in a single integrated report
allowing clients to better understand and manage their business.
Interoperability. Our solution is designed to operate within the existing
infrastructure of an enterprise, including most voice systems, e-mail and web
servers. Our solution is also interoperable with most client business
applications, thereby providing the necessary integration between the incoming
interaction, business application and historical customer data. As the trend of
consolidation within industries continues, we believe that the ability of our
solution to operate with a variety of different communications systems and
applications provides a significant benefit to our clients as they integrate
new businesses.
Modularity. The modular design of our solution allows our clients to add
functionality as their needs evolve. For example, clients may initially choose
to implement our solution for their traditional call center/voice
infrastructure and then add other media types, such as e-mail and web, as they
further develop their eBusiness strategies. We believe the ability to easily
add functionality is extremely important to our clients as they transition from
traditional voice-based call centers to multimedia contact centers.
Scalability. The Apropos solution is designed to allow for maximum
scalability, providing a variety of system configurations that can complement
the deployment needs of our client base. The solution uses sophisticated
internal messaging software to enable the distribution of various system
components across wide area, local area and IP-based networks. As a client's
business grows, our solution can be configured for additional capacity. Our
solution can provide scalability for up to 600 agents.
Rapid implementation. Based on our experience in implementing multimedia
contact centers, we have developed Apropos Methods, a repeatable consulting,
design and delivery methodology that is followed by our application
consultants, professional services team and partners. Apropos Methods allows
our clients to accurately estimate the resources required to implement their
multimedia contact center solution. In addition, our software is designed with
several unique tools to insure rapid implementation and integration with our
clients' business applications. Apropos Methods also allows us to quickly and
effectively train our partners in the implementation requirements of our
solution.
Flexibility. A client can configure and administer our solution through our
web-based application interface. This approach is much easier and more cost-
effective than traditional hardware-based systems, which may require code
modification and recompilation. Clients can configure our solution over a
number of locations and can connect remote users, such as agents working from
home. For example, when a hurricane disabled a client's contact center, our
solution permitted our client to rapidly establish full service at another
geographic location.
Lower total cost of ownership. Our integrated software-based solution
results in a lower total cost of ownership in comparison to multiple point
products, which require integration and maintenance of various and disparate
hardware and software products.
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Support of converged voice and data networks. Our solution supports our
clients' desires to transition from traditional circuit-switched communications
infrastructure to IP-based infrastructures. This enables our clients to take
advantage of the benefits of high performance converged voice and data
networks.
The Apropos Strategy
Our strategy is to become the leading provider of customer interaction
management solutions for multimedia contact centers. The key elements of our
strategy are to:
Expand our leading technology position. We have significant technical
expertise in the field of customer interaction management. Our product is
designed to be interoperable with most communications systems and business
applications and scaleable through our modular architecture. We have a patented
visual queuing capability and we believe we were one of the first companies to
develop and offer a software-based, skills-based automatic call distribution
capability and an integrated multimedia customer interaction management system.
We will continue to make significant investments in research and development in
our effort to maintain our leadership position.
Enhance our product offering. We intend to enhance and broaden our product
offering with additional features and products. We plan to create additional
functionality to enhance the integration of multiple contact centers operating
on separate servers thereby allowing clients more flexibility in how they
manage each customer interaction and more timely and accurate reporting on the
real-time performance of geographically distant contact centers. In addition,
we plan to add new applications that will expand the delivery of information
about customers and suppliers across the enterprise.
Increase our distribution capabilities. We plan to expand the number of
value added resellers and original equipment manufacturers, or OEMs, in North
America, Europe, South America, Asia, Africa and Australia. We also plan to
increase our direct sales force in North America and expand selling efforts in
Europe. In addition, we plan to focus our expansion efforts on developing
strategic partnerships with system integrators. We believe these efforts will
result in increased sales and market penetration of our solution.
Further develop our strategic partnerships. We intend to forge new and
strengthen existing strategic partnerships with leading providers of marketing,
sales and service applications. This will open new market opportunities as the
Apropos solution enhances the value of our partners' applications by providing
real-time management of voice, e-mail and web-based interactions. We believe
these new and strengthened strategic partnerships will generate sales leads,
expand our client base and enhance our market and brand awareness.
Build market and brand awareness. We believe building market and brand
awareness of our company and product will be essential, as we compete against
larger traditional contact center suppliers. We currently build market and
brand awareness of our solution through seminars, trade show participation,
web-site marketing, co-marketing with strategic partners and print advertising.
We intend to devote significant resources to continue to build our market and
brand awareness by expanding our marketing efforts.
Expand penetration into major international markets. In order to further
penetrate global markets, we are developing new internationalized versions of
our software for use outside of North America. We are adapting our software to
conform to the language and infrastructure requirements of Asia, Europe and
South America. We will continue to develop and release additional language
versions of our software as our international client base grows.
Pursue a software business model. We will continue our emphasis on
developing and selling software and de-emphasize sales of hardware and services
which have significantly lower profit margins. We plan to continue to outsource
the implementation function to value added resellers, OEMs and system
integrators as we develop and expand our strategic partners.
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Product
Our solution provides a single integrated application for the seamless
management of customer interactions and resources in a multimedia contact
center. Through our solution, we provide the routing, queuing, tracking and
reporting on a variety of customer interactions such as live calls, web
requests, e-mail, voice mail and fax, through one common business-rules driven
application. Our solution's capabilities include a decision management system
that provides critical metrics needed to manage a multimedia contact center and
important information on how a client is managing its customer relationships.
[Graphic depiction of Customer Interaction Management Components]
Components. Our solution consists of Interaction Manager and Interaction
Database which operate on single or multiple servers, and the following client
software applications: Agent Desktop, Resource Manager, Decision Manager,
Administrator and Application Designer.
Interaction Manager. Interaction Manager is a high-performance Windows
NT(TM) application connecting to voice and data networks. The Interaction
Manager integrates the following telephony and Internet functions into one
comprehensive application:
. Automatic caller identification. Automatic caller identification is
achieved through a combination of advanced capabilities, such as
automatic number identification, dialed number identification service
and caller ID. These capabilities, along with integrated voice response
features, enable Interaction Manager to identify most callers upon
receipt of the call at the contact center.
. Skills-based call distribution. Interaction Manager organizes incoming
calls into queues and distributes them based on skills profile and
availability of the agent. Interaction Manager can distribute calls in
either a traditional "force" mode, meaning the call is sent to the agent
who has been idle the longest or through our patented "pull or take"
mode which allows an agent to choose a particular call or customer to
respond to from a visual queue of incoming transactions. For example,
some contact centers may wish agents to service calls from priority
customers before other calls.
. Intelligent call and message distribution. Interaction Manager supports
skills- and value-based routing of calls, e-mail and web contacts. In
addition to skill information, Interaction Manager can use current
business data--such as account status, customer profile and last agent
contact--to enable more efficient routing of customer interactions.
. Interactive voice response, or IVR. Interaction Manager allows clients
to create self-service applications that their customers can access from
touch-tone telephones. These applications can read and update
information stored in databases and mainframe systems to perform account
look-ups and other operations.
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. Web and e-mail routing. Interaction Manager can handle web and e-mail
events like any other contact center interaction. Interaction Manager
can route e-mail, web callback and web chat requests. E-mail management
also provides automatic response capabilities to acknowledge receipt of
an e-mail request and to offer customers self-servicing options. Web
callback lets customers make requests to receive a callback directly
from a corporate web site. Web chats enable customers to communicate
with agents through interactive, browser-based on-line text messaging.
. Synchronized contact and data delivery. Synchronized contact and data
delivery enables Interaction Manager to simultaneously deliver a call,
e-mail or web contact with associated data about the interaction. Based
on the type of application and the stated objectives of the client, the
data collected by Interaction Manager can be used to populate the
appropriate fields on business applications, such as Baan Company N.V.,
Remedy Corporation or Siebel Systems, Inc. in advance of the interaction
being delivered to the agent. As a result, agents have access to
valuable information about the customer before they begin their
interaction with the customer.
Interaction Database. Interaction Database serves as the data repository for
all information created and used by the Apropos solution. It serves as the
central repository for all information and is used by Decision Manager to
create reports. The database is fully redundant with back-up and recovery
capabilities. The database is traditionally housed on an independent server,
providing customers the ability to generate on-demand reports at anytime
without system degradation.
Agent Desktop. Agent Desktop runs on Windows-based personal computers in
conjunction with applications such as order entry, customer service and help
desk. Customers' names, the reasons they are calling and the types of
interactions appear in a visual queue on an agent's workstation. Agent Desktop
allows agents to view any customer interactions including queued e-mail, web
chat or web callback requests, live voice calls, faxes, and even abandoned call
information on one screen from their desktop. The agent can select a customer
based on business priorities rather than on a first-come, first-serve basis.
Agent Desktop has extensive automated follow-up capabilities. Automatic
generation of letters, faxes, or e-mails can be accomplished directly from the
agent's desktop. Agent Desktop can automate the entire process so that an
order, support call or general inquiry can be confirmed to a customer at
another time or in a matter of seconds.
Resource Manager. Resource Manager monitors real-time activity within local
and remote contact centers, tracking agent performance for each type of
interaction. A contact center supervisor is able to determine which agents are
active or ready for customers and monitor the activity level for each agent.
Resource Manager assigns agents to queues and to workgroups built on
organizational responsibilities. Resource Manager provides real-time
information on all activities in the contact center through over 60 different
charts that reflect the state of the contact center. A supervisor can set
alerts that indicate when performance thresholds have been reached and can
dynamically reassign agents as necessary.
Decision Manager. Decision Manager is a web-based application that allows
clients to create, view and publish reports from any location based on their
choice of parameters. Decision Manager provides timely and accurate information
on the overall performance of the contact center by the hour, shift, day,
month, or any time interval required. It reports on critical aspects of the
contact center's operation, including agent performance, interaction volume,
interaction types and interaction disposition. Pre-defined templates are
provided with Decision Manager. Custom reports can also be created and loaded
into the Decision Manager framework. Decision Manager provides information on
all interactions that enter the contact center. This information can be used to
understand and improve levels of service, capture customer behavior patterns
and improve contact center performance.
Administrator. Administrator is a web-based application that monitors the
number of agents, supervisors and server ports, as well as the types of
interactions, such as voice, e-mail and web chat, for all interaction types for
which our product is licensed. Administrator is used to establish and modify
the
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business rules for a particular contact center. It also provides for easy
modification of such rules through its web-based interface. Using this
application, a system administrator adds, moves and changes agent profiles,
supervisors, queues, queue groups, and workgroups. Administrator establishes
prioritization of each interaction type, based on the clients' business needs
and can also develop escalation procedures for particular interactions.
Application Designer. Application Designer is a high level code generator
that allows clients to develop a graphical object-based representation of
customer interaction workflow. The interaction workflow is automatically
generated into code that can be utilized by the Interaction Manager.
Application Designer can be run locally or remotely.
Clients
We have a diverse base of over 150 clients that utilize our solution for a
variety of applications, such as customer service and support, help desk and
field service management. Below is a list of our clients that generated the
largest portion of our revenue since our inception in each of the specified
industries. This list illustrates that we have clients in many different
industries and that we are not dependent on any specific industry or client.
Communications Consumer Products
Cable & Wireless-Omnes Carlson Companies, Inc.
GTE Corporation Danka Omnifax
Nokia Corporation Nestle USA, Inc.
3Com Corporation PepsiCo, Inc.
Technology/Software Internet
FileNet Corporation Amazon.com, Inc.
Remedy Corporation Artist Direct
Seagate Software, Inc. Flashnet Communications, Inc.
Veritas Software GoodHome, L.L.C.
Corporation
Health Care Manufacturing
AMR Corporation Freightliner Corp.
Pfizer, Inc. Siemens Electromechanical
Sterling Diagnostic Components, Inc.
Imaging, Inc. Zebra Technologies Corporation
Vision Service Plan
Financial
ABN Amro Holding N.V.
Chase Manhattan Corporation
Harris Trust & Savings Bank
Corporation
Lending Solutions, Inc.
We intend to expand our client base by, among other things, expanding the
number of our strategic partners and leveraging their distribution capabilities
to sell our product, increasing our co-marketing activities with our strategic
partners, increasing the size of our direct sales force and increasing our
market and brand awareness. No client accounted for 10% or more of our total
revenues for 1997, 1998 or 1999. Revenues from our international sales as a
percentage of total revenue were 6.6% in 1998 and 20.8% for 1999. Prior to 1998
we did not have any revenue from international sales. See note 10 of the notes
to our consolidated financial statements on page F-16 regarding international
sales.
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Currently, our clients primarily use our solution to manage voice
interactions. However, all of these clients can expand the functionality of our
solution to include e-mail and web-based communications. New orders for our
product increasingly include voice and Internet-based functionality, such as e-
mail or web. See "Risk Factors--Our existing and future clients may not order
the e-mail and web-based functionality of our product" on page 6 for more
information on this risk.
Professional Services and Support Services
Professional Services. We believe the professional services used to
implement our product are paramount to client satisfaction. We offer a wide
variety of services for implementation and design, including application
development, project management and support. Our methodology for consultation,
design and delivery of our product, Apropos Methods, is used by us and our
strategic partners for each client.
Apropos Methods. We have developed a design and implementation methodology,
termed Apropos Methods, that is focused on delivering high quality solutions to
our clients. Through the use of Apropos Methods, experience and structure are
brought into each project in a consistent and repeatable manner. This
methodology helps manage the risk of project overruns, budget overages and the
delivery of a solution that does not meet our client's expectations.
Support Services. We provide hotline support for our solution as well as
support for our client's tailored applications and solutions. Our customer
service professionals can be reached via phone, fax, e-mail or web-based
communications. The center is staffed with trained professionals who have
experience in the software and communications industries. We use our solution
to manage our multimedia contact center, so we understand our client's needs
from a user's perspective.
Training. We offer an extensive training curriculum to our clients and
alliance partners.
Client Training. We offer complete system administration, technical and user
training to our clients. System administration and technical training takes
place at our corporate headquarters and provides instruction on the
implementation, maintenance and administration of our solution. User training
takes place at the client's location and is tailored for their needs. Ongoing
training is made available to our clients as they add features and
functionality.
Strategic Partner Training. We educate our alliance partners on all facets
of selling and implementing our solution. Courses are available in both the
pre-sale and post-sale processes. Specific courses are also available on the
implementation of our product. A certification process on Apropos Methods is
offered to any partner who wants to implement our solution.
Sales and Marketing
Sales
Direct Sales Force. We have a direct sales force in the United States which
consists of regional sales managers and application consultants. Regional sales
managers have direct responsibility for selling and account management, while
application consultants provide analysis and design of the solution to ensure
the sales proposal covers all aspects of the clients' needs. Application
consultants also provide the foundation for the implementation and delivery of
the solution to ensure client satisfaction.
We have regional sales managers in Arizona, Northern California, Southern
California, Florida, Illinois, Maryland, Massachusetts, New Jersey, New York,
Ohio and Texas. We have application consultants located in these regions as
well. Our international direct sales are managed from our office in Windsor,
United Kingdom. Our international sales force includes two sales managers and
two application consultants. We have designated channel managers in both the
United States and the United Kingdom to support the sales efforts of our value
added resellers around the world.
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Resellers. We have a network of 15 resellers that distribute and implement
our solution around the globe. Our value added resellers are an extension of
our direct sales force and have taken our solution into their portfolio. They
have extensive experience in the contact center market and customer
relationship management industry. We have resellers in the following countries:
Australia, Canada, Chile, China, Finland, Germany, Japan, Mexico, the
Netherlands, South Africa and the United States.
OEMs. We have two partners who brand our solution under their corporate
name. Mitel Corporation sells and markets our solution under the name Mitel
Call Center Commander. Baan Development B.V. also sells and markets our
solution under the Baan name.
Marketing
Our marketing efforts are focused on developing and executing sales lead
generation programs that result in qualified client leads, developing market
awareness of our products and services, building our corporate image and
developing marketing programs that support our strategic partners.
We have developed several programs to accomplish these goals including:
. a co-marketing program through the Apropos Global Alliance Program;
. a global seminar series;
. tradeshow participation and speaking opportunities, directly and with
our strategic partners;
. direct mail programs;
. public relations activities;
. traditional print and online advertising;
. web site marketing; and
. editorial placements.
Apropos Global Alliance Program.
Our Global Alliance Program provides a wide array of opportunities to expand
and enhance the product and service offerings of our strategic partners. We
target enterprise application companies as well as platform providers and
system integrators to participate in the program. In some cases, we participate
in similar programs sponsored by these partners. The programs provide for joint
marketing opportunities to generate sales leads and referrals. Our application
partners consist of enterprise software providers, such as Remedy Corporation,
Baan Company N.V., Peregrine Systems, Inc., Onyx Software Corporation, Siebel
Systems, Inc. and Point Information Systems, Inc. Services partners consist of
system integrators that provide outsourcing capabilities to implement our
solution, as well as, participate in co-marketing activities. These services
partners include AnswerThink Consulting Group, Inc. and Cap Gemini S.A.
Competition
The market for our product is highly competitive and we expect competition
to increase significantly in the future. We cannot assure you that we will be
able to compete successfully against current and future competitors. Our
competition currently comes from several different market segments including:
. platform providers such as Aspect Telecommunications Corporation, Cisco
Systems, Inc., Lucent Technologies, Inc., Nortel Networks Corporation,
Rockwell International Corporation and Siemens Corporation;
. interaction management solution providers such as Genesys
Telecommunications Laboratories, Inc., which has agreed to be acquired
by Alcatel SA, and Interactive Intelligence, Inc.; and
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. stand-alone point solution providers such as Acuity Corporation, which
has been acquired by Quintus Corporation, eGain Communications
Corporation, Kana Communications, Inc. and Webline Communications
Corporation, which has been acquired by Cisco Systems, Inc.
We believe that the principle competitive factors in our market include
product performance and features, quality of client support and service, time
to implement, product scalability, sales and distribution capabilities and
overall cost of ownership. Although we believe that our solution currently
competes favorably with respect to these factors, our market is relatively new
and evolving rapidly. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support and technical resources.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition and a larger installed
base of customers than we do. Recently, a number of our current and potential
competitors have been acquired by large, well-capitalized companies. As a
result, these competitors may be able (1) to respond to new or emerging
technologies and changes in client requirements faster and more effectively
than we can, and (2) to devote greater resources to the development, promotion
and sale of products than we can. Current competitors have merged with or
acquired other competitors or established cooperative relationships with other
competitors to increase the ability of their products to address the needs of
our current or prospective clients. If these competitors were to acquire
additional market share, it could have a material adverse effect on our
business, financial condition and results of operations.
Technology and Research and Development
Technology
Our software is based on our proprietary distributed component-based
architecture. The architecture of our software relies upon industry standards
and employs several leading technologies, such as the following programming
languages: Java, C++, Microsoft Foundation Class, or MFC, and Active Server
Pages, or ASP. Our architecture provides a unified method for managing incoming
and outgoing multimedia interactions. The technologies providing this
capability include:
. Multimedia integration technologies. We have developed an integration
technology that allows our solution to receive and process all types of
interactions that enter a system, regardless of media type. This
technology enables our solution to connect to and communicate with
external systems and applications used by our clients. The external
systems include e-mail, Internet and telephone systems. Our integration
technology provides compatibility with most e-mail servers, web servers
and telephone switches, allowing our clients to maintain their existing
technological infrastructure.
. Interaction distribution engine. We have developed an interaction
distribution engine that prioritizes, routes and manages all customer
interactions that enter a system. This allows our clients to manage
their business according to their specific business needs, because it
determines which interaction types and/or customers need to be handled
first. Our interaction distribution engine ensures all interactions that
enter into the system are placed in a unified queue and then presented
to the agents based on the pre-determined business rules of the client.
Our engine ensures that various media types including voice, e-mail and
web, are managed in a consistent manner and are tied to the clients'
corporate data for screen-pops.
. Messaging software. We have developed messaging software that allows
different portions of our product to communicate with each other using
the standard Internet communication protocol, TCP/IP. The messaging
software was developed using a publish and subscribe methodology, which
ensures that messages that flow through our system are sent to the
correct software components or processes. This allows us to build fault
tolerant and scalable software because processes are distributed across
multiple servers. It also makes it easy to add new functionality across
this distributed architecture.
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. Business application integration software. We have developed integration
software that allows our solution to integrate with other business
software, such as application software for sales, marketing and customer
service. This enhances the value of our product as it allows our clients
to use their existing desktop business applications. We have built
fault-tolerant, scalable integration software and used common
programming techniques and technologies in this integration software.
These technologies include open database connectivity, or ODBC,
component object model, or COM, dynamic link library, or DLL, and
dynamic data exchange, or DDE.
. Comprehensive decision management reporting software. We have developed
our decision management reporting software using a uniform database for
all interactions. This allows our clients to receive information about
their customers and the performance of their contact center in a single
integrated report for various media types. The reporting software
captures all information that passes through the system and publishes
the information through a standard web-based interface. This software
uses a comprehensive scheduling process to gather and report information
that allows clients to schedule the creation of their reports and to
publish both real-time and historical reports.
. Real-time resource management software. We have developed a monitoring
technology that presents real-time information to the client on
interactions in their contact center. The software presents information
such as hold time, number of e-mails in queue and number of agents
active, and provides the information in a dashboard like presentation.
Through this monitoring software, clients become aware of trends and
operational problems that are occurring and make instant modifications
and changes to the system to rectify the problems. This technology
allows supervisors to make these instant changes using basic drag and
drop techniques.
. Administration technology. We have developed an administration
capability for our product that allows clients to use one uniform
administration function across all Windows NT servers in their
configuration. This capability allows clients to administer and modify
changes across the solution in one place using a web-based interface.
This provides for ease of use and also provides for the scalability and
fault tolerance of our solution.
We sell third party software which is included with our product. This
software includes:
. Crystal Reports, which is an off the shelf software package used to
create report templates;
. PC Anywhere, which is an off the shelf communication package used for
remote troubleshooting; and
. Sybase Enterprise Data Studio Programs, a database management
application.
We purchase Crystal Reports and PC Anywhere from third party resellers. We
have a commercial agreement with Sybase, Inc. for the purchase and distribution
of its software. If one or more of these third parties cease to sell their
software, we will need to modify our product to use an alternative supplier or
eliminate the affected product function, either of which could have a material
adverse effect on our business, financial condition and results of operations.
Research and Development
We believe that our product development capabilities are essential to our
strategy of expanding our leading technology position. Our product development
team consists of 37 engineers and software developers with experience in voice
communications, eBusiness, e-mail and web technology. We believe the
combination of diverse technical and communications expertise contributes to
the highly integrated functionality of our product. We spent $1.3 million, $2.8
million and $4.4 million in 1997, 1998 and 1999, respectively, on research and
development.
We have invested significant time and resources in creating a structured
process for undertaking all product development. A formal product introduction
process is used as a framework for defining, developing and delivering products
to the market.
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Intellectual Property and Other Proprietary Rights
To protect our proprietary rights, we rely primarily on a combination of:
. patent, copyright, trade secret and trademark laws;
. confidentiality agreements with employees and third parties; and
. protective contractual provisions such as those contained in license and
other agreements with consultants, suppliers, strategic partners,
resellers and clients.
We have not signed agreements containing protective contractual provisions
in every case and the contractual provisions that are in place and the
protection they provide vary and may not provide us with adequate protection in
all circumstances. Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our products and obtain and use
information that we regard as proprietary. Other parties may breach
confidentiality agreements and other protective contracts we have entered into,
and we may not become aware of these breaches or have adequate remedies for
them.
We generally require our employees to enter into confidentiality agreements
containing non-disclosure, non-competition and non-solicitation provisions.
When they begin employment, our employees also generally sign offer letters
specifying the basic terms and conditions of their employment.
We currently have five patents granted in the United States and one patent
granted in each of Ireland, the Netherlands and the United Kingdom. These
patents cover a system and method for:
. distributing and routing calls as electronic interactions and allowing
agents to select calls from a visible queue at their desktop;
. collecting and grouping caller identifications and associating them with
third party databases; and
. recording calls along with information related to the calls which is
used to retrieve the recorded calls.
We also have four pending U.S. patent applications, three of which relate to
the system and method described above and one of which relates to blending
electronic interactions, such as voice mail, outbound calls, e-mail, web-based
communications and fax, for queuing and distribution to agents. None of our
patents expire before June 2012.
We have several pending U.S. trademark applications, including Apropos.
See "--Legal Proceedings" on page 38 for a description of a claim received
by us from a large, well capitalized competitor claiming that our product
utilizes technologies pioneered and patented by it.
Employees
As of December 31, 1999, we had 154 employees worldwide, including 48 in
research and development, 45 in service and support, 46 in sales and marketing
and 15 in finance and administration. Our future performance depends in
significant part upon the continued service of our key technical, sales and
marketing, and senior management personnel. The loss of the services of one or
more of our key employees could harm our business.
Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense. Due to the limited number of people
available with the necessary technical skills we can give no assurance that we
can retain or attract key personnel in the future. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
37
<PAGE>
Facilities
We lease approximately 31,000 square feet of office space in our
headquarters building in Oakbrook Terrace, Illinois. As of December 31, 1999,
the lease required payments of approximately $2.9 million over the remaining
term of the lease, which expires in November 2003. We lease space for our
European headquarters in Windsor, United Kingdom, which consists of
approximately 2,500 square feet. The lease for that facility ends in June 2000.
We also lease space for our various sales offices located in Tempe, Arizona;
San Ramon, California; Atlanta, Georgia; Brunswick, Maine; Caldwell, New
Jersey; Tarrytown, New York; and Dallas, Texas. The majority of these leases
are short-term leases.
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
Legal Proceedings
As of the date of this prospectus, we are not engaged in any legal
proceeding that we expect to have a material adverse effect on our business,
financial condition and results of operations.
Beginning in June 1999, we received letters from Rockwell Electronic
Commerce Corporation claiming that our product utilizes technologies pioneered
and patented by Rockwell and suggesting that we discuss the terms of a
potential license of their technologies. These patented technologies relate to
a variety of call management systems or functions. On January 5, 2000, 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. However, it is not possible at this time
to definitively anticipate the final results of this dispute. If a negotiated
resolution of this matter is required, it could involve payment of license fees
which would increase our expenses. We cannot assure you that the terms of any
licensing arrangement would be favorable to us. A resolution could also require
a redesign of our product or the removal of some of our product features. If a
negotiated resolution is not achieved, we will vigorously defend this action.
If we do not prevail, damages could be awarded and an injunction could be
issued requiring us to cease certain activities. If infringement is deemed to
be willful, a court may triple the awarded damages. Any of these activities
could have a material adverse effect on our business, financial condition and
results of operations. Regardless of outcome, litigation may result in
substantial expense and significant diversion of our management and technical
personnel.
38
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following persons are our executive officers and directors as of January
20, 2000:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Kevin G. Kerns.......... 41 Director, Chief Executive Officer and President
Michael J. Profita...... 44 Chief Financial Officer, Vice President, Finance, Treasurer and Secretary
Patrick K. Brady........ 44 Director and Chief Technology Officer
Jody P. Wacker.......... 43 Vice President, Marketing
James M. Nelson......... 47 Vice President, Sales
William W. Bach......... 38 Vice President, Technology
Brian C. Derr........... 39 Vice President, Business Development and Professional Services
Richard D. Brown........ 36 Vice President, International Operations
Paul L. Conti........... 54 Vice President, Human Resources
Keith L. Crandell....... 39 Director
Ian M. Larkin........... 33 Director
Maurice A. Cox, Jr. .... 49 Director
George B. Koch.......... 53 Director
Catherine R. Brady...... 40 Director
</TABLE>
Kevin G. Kerns joined Apropos in January 1996 as President and Chief
Operating Officer. He was appointed as a director of Apropos in 1996. In 1998,
Mr. Kerns was named Chief Executive Officer. From 1989 through 1995, Mr. Kerns
established and led a strategic software consulting firm, Mandalay Associates,
based in Dallas, Texas. From 1983 through 1989, Mr. Kerns held a number of
executive management positions with a computer-aided-engineering software
company, CASE Technology, Inc. He was elected Chief Executive Officer and
President of CASE Technology, Inc. in 1985 and remained in that position until
the business was acquired by Teradyne, Inc. in 1987. Mr. Kerns holds a B.S. in
General Engineering from the University of Illinois at Urbana-Champaign.
Michael J. Profita joined Apropos in September 1996 as Chief Financial
Officer and Vice President, Finance. Prior to joining Apropos, from September
1989 to September 1996, Mr. Profita worked at Mentor Graphics, an electronic
design automation software company, where his most recent assignment was Chief
Financial Officer of MicroTec Research Inc., a subsidiary of Mentor Graphics
which focused on embedded software. Mr. Profita also served as Controller for
Mentor Graphics Corporation, Latin America. Prior to joining Mentor Graphics,
Mr. Profita held several financial management positions at CIMLINC,
Incorporated, a mechanical CAD software company, and various financial
positions with Rockwell Switching Systems and Abbott Laboratories. Mr. Profita
holds a M.B.A. from the University of Chicago and a B.S. in Finance and
Economics from Marquette University.
Patrick K. Brady co-founded Apropos in March 1989. Mr. Brady served as Chief
Executive Officer and Chief Technology Officer until December 1998. Since then,
he has served as our Chief Technology Officer. He has also served as a director
of Apropos since 1989. From 1990 to 1992, Mr. Brady was an independent
technical consultant to Motorola, Inc.'s Domestic, GSM and International
Cellular divisions. From 1980 to December 1989, Mr. Brady held various
technical positions with AT&T Bell Laboratories, the most recent as Senior
Technical Associate. From 1987 to 1989, Mr. Brady worked at AT&T Bell
Laboratories in feature and architecture of central office switching as a
member of the Technical Staff. Mr. Brady serves as Chairman of the Computer
Telephony Integration Futures committee of the Multi-Media Telecommunications
Association and holds 16 U.S. and foreign patents. Mr. Brady holds a M.A. in
Electrical Engineering from Northwestern University and a B.S. in Astronomy
from the University of Illinois at Urbana-Champaign. Mr. Brady is the spouse of
one of our directors, Catherine R. Brady.
39
<PAGE>
Jody P. Wacker joined Apropos in August 1997 as Vice President, Marketing.
From October 1982 to August 1997, Ms. Wacker worked at AT&T Corporation, most
recently as Global Marketing Director for AT&T Call Center Solutions. From 1988
to 1997, Ms. Wacker held various marketing positions in the areas of product
management, marketing communications and business development. From 1982 to
1988, Ms. Wacker served as a programmer, analyst and architect of several
network systems. Ms. Wacker holds a M.B.A. from Fairleigh Dickinson University,
an Advanced Management Certificate from the University of North Carolina at
Chapel Hill, and a B.S. in Mathematics from Montclair State University.
James M. Nelson joined Apropos in May 1996 as Vice President, Sales. Mr.
Nelson oversees all direct sales in North America, Latin America and Asia.
Prior to joining Apropos in May 1996, Mr. Nelson spent eight years in a variety
of senior management positions at Aspect Telecommunications Corporation, a
communications hardware provider. He was responsible for national accounts,
distribution and federal government sales. Prior to Aspect, Mr. Nelson held
several sales and sales management positions with ROLM Corporation, a
communications hardware provider, and IBM Corporation, Data Processing
Division. Mr. Nelson holds a M.B.A from Northern Illinois University and a
B.B.A from St. Norbert College.
William W. Bach joined Apropos full-time in 1995 as Vice President,
Engineering, after providing two years of assistance to Mr. Brady with respect
to product research, design and development. In March 1999, Mr. Bach was
appointed Vice President, Technology. Prior to joining Apropos, Mr. Bach worked
at Technisource, Inc. as a consultant to Motorola, Inc.'s Cellular
Infrastructure Group working with cellular switching products. From 1987 to
1990, Mr. Bach was a senior software engineer for Software Productivity
Solutions, a "think-tank" operation specializing in development of advanced
software development practices and tools for the defense industry. Mr. Bach
holds a M.S. in Computer Science from the Florida Institute of Technology and a
B.S. in Computer Science from the University of Wisconsin at LaCrosse.
Brian C. Derr joined Apropos in 1996 as Vice President, Professional
Services. In January 1999, Mr. Derr was named Vice President, Business
Development and Professional Services. Mr. Derr was Vice President, Business
Development of AllTank, a software company, from 1995 to 1996. From 1990 to
1995, Mr. Derr was founder and Chief Executive Officer of BPSI, Inc., a
software product and professional services organization for the wireless
industry. BPSI and Mr. Derr, who had personally guaranteed obligations of BPSI,
declared bankruptcy in 1995. Prior to BPSI, Mr. Derr held the position of Vice
President for Whitman-Hart, Inc., a systems consulting firm headquartered in
Chicago, Illinois.
Richard D. Brown joined Apropos in June 1997 as Vice President,
International Operations. Prior to joining Apropos, Mr. Brown worked at Aspect
Telecommunications Corporation from 1989 to 1997, where his most recent
assignment was Director of International Marketing. Other positions held at
Aspect included UK Channel Marketing Manager, Worldwide Channel Support Manager
and various positions within the sales organization. From 1987 to 1989, Mr.
Brown served in sales management for Mitel Corporation, a telecommunications
hardware provider, in the United Kingdom. Mr. Brown holds a B.A. in Business
and Marketing from Coventry University and is a member of the Chartered
Institute of Marketing.
Paul L. Conti joined Apropos in September 1999 as Vice President, Human
Resources. Prior to joining Apropos, from 1997 to 1999, Mr. Conti served as the
Senior Vice President for Aon Enterprise Insurance Services with responsibility
for Human Resources and Information Technology. From 1993 to 1996, Mr. Conti
served as Vice President, Operations of Alexander & Alexander, Inc., an
insurance brokerage. From 1987 to 1993, Mr. Conti served as a Regional Director
of Ernst & Young, LLP. Mr. Conti holds a M.B.A. and a B.A. from Southern
Illinois University.
Keith L. Crandell has served as a director of Apropos since March 1996. Mr.
Crandell serves as a senior principal of ARCH Venture Partners, a venture
capital firm. He has acted in this capacity from July 1994 to present and
during this time has acted as senior principal of various venture capital funds
associated with ARCH. From January 1988 to July 1994, Mr. Crandell served as
Senior Manager at ARCH Development
40
<PAGE>
Corporation, a company affiliated with the University of Chicago, where he was
responsible for new company formation. Mr. Crandell holds a B.S. from St
Lawrence University, a M.S. from the University of Texas at Arlington and an
M.B.A. from the University of Chicago.
Ian M. Larkin has served as a director of Apropos since March 1996. Mr.
Larkin is a managing director in William Blair & Co., L.L.C., a global venture
capital firm based in Chicago, Illinois. Mr. Larkin joined William Blair as an
associate in 1992 following two years as a financial analyst in the firm's
corporate finance department. Previously, he was an analyst in Dean Witter's
principal business, DWR Capital, focusing on leveraged buyouts. Mr. Larkin
serves as a director of several portfolio companies, including Morton Grove
Pharmaceuticals, Inc., Pink Dot, Smith, Bucklin & Associates and Sweetwater
Sound, Inc. Mr. Larkin holds a B.B.A. from the University of Notre Dame. Mr.
Larkin has informed us that he intends to step down as a director shortly
following completion of this offering.
Maurice A. Cox, Jr. has served as a director of Apropos since March 1998.
Mr. Cox founded The Ohio Partners, a venture capital fund, in July 1995 and
serves as President and Chief Executive Officer. From 1979 to 1995, Mr. Cox
worked for CompuServe Corporation, an information and communications services
provider, in various positions within sales, marketing, product management and
general management before being named president in December 1990. Prior to
CompuServe, Mr. Cox worked in sales for Service Bureau Corporation. Mr. Cox
serves on the board of directors of Huntington National Bank in Columbus, Ohio;
Guidant Corporation, Indianapolis, Indiana; and the boards of various private
companies in which The Ohio Partners has invested. Mr. Cox holds a B.S. from
Purdue University.
George B. Koch has served as a director of Apropos since September 1998. Mr.
Koch has significant experience in the software industry, most recently as
Senior Vice President of Worldwide Applications at Oracle Corporation, from
which he retired in 1994, to enter the ministry. He has been the Pastor of the
Church of the Resurrection in West Chicago, Illinois since 1994 to the present.
Prior to Oracle, Mr. Koch was Director of the Advanced Technologies division of
Software Alliance, a Teknekron Company. Prior to Teknekron, he was President
and CEO of Koch Systems Corporation, a developer of Oracle-based financial
applications. Mr. Koch received his B.A. in Physics from Elmhurst College in
1968, and in 1992 a M.Div. from Church Divinity School of the Pacific, an
Episcopalian seminary, in Berkeley, California.
Catherine R. Brady has served as a director of Apropos since 1989. Since
1996, Ms. Brady has served as an executive and as a consultant to various early
stage technology companies in Illinois. Ms. Brady co-founded Apropos and from
1989 to 1996, Ms. Brady worked at Apropos in various capacities focusing
primarily on strategic marketing and corporate communications. From March 1997
to October 1998, Ms. Brady served as a project director for ARCH Development
Corporation, a company affiliated with the University of Chicago. From 1979 to
1989, Ms. Brady served as an independent interest rate and equity futures and
options trader. During this period she also taught investments and finance at
Elmhurst College and Keller Graduate School. Ms. Brady holds a M.A. in Finance
from Northern Illinois University and a B.S. in economics from Benedictine
University. Ms. Brady is the spouse of Patrick K. Brady, who is our Chief
Technology Officer and a director. Immediately prior to completion of this
offering, Ms. Brady will resign as one of our directors.
Board of Directors and Committees of the Board
Our articles of incorporation, as amended and restated, provide that the
number of members of our board of directors shall be not less than six and not
more than nine. The number of directors is currently seven, but will be six
upon Ms. Brady's resignation from our board of directors immediately prior to
completion of this offering. Our board of directors has been divided into three
classes, and each class will be kept as nearly equal in number as possible. At
each annual meeting of shareholders, the successors to the class of directors
whose term expires at that time will be elected to hold office for a term of
three years and until their respective successors are elected and qualified.
Directors whose terms expire in 2001 are Maurice A. Cox, Jr. and Ian M. Larkin;
directors whose terms expire in 2002 are Keith L. Crandell and Patrick K. Brady
and directors whose terms expire in 2003 are Kevin G. Kerns and George B. Koch.
All of the
41
<PAGE>
officers identified above serve at the discretion of our board of directors.
The first annual meeting of shareholders following completion of this offering
will be held in 2001.
We have an executive committee, audit committee and a compensation
committee. The members of the executive committee are Patrick K. Brady, Maurice
A. Cox, Jr., Keith L. Crandell and Kevin G. Kerns. The members of the
compensation and audit committees are Maurice A. Cox, Jr., George B. Koch and
Keith L. Crandell.
The executive committee has the authority of the Board of Directors to
manage our business, subject to the restrictions of Illinois law.
The compensation committee reviews and approves the compensation of our
executive officers, including payment of salaries, bonuses and incentive
compensation, determines our compensation policies and programs and administers
our stock option and stock purchase plans.
The audit committee oversees the retention, performance and compensation of
our independent public accountants, and the establishment and oversight of our
internal accounting and auditing control systems.
The board of directors does not have a nominating committee. However, the
board of directors will consider nomination recommendations from shareholders,
which should be addressed to our corporate secretary at our principal executive
offices.
Executive Compensation
The following table identifies all compensation paid by us to our chief
executive officer and our four other most highly compensated executive officers
in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------------------- -------------------
Securities
Underlying
Other Annual Options/
Year Salary Bonus Compensation SARs
---- -------- ------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Kevin G. Kerns.......... 1999 $150,000 $46,750 -- 52,500
Chief Executive Officer
and President
James M. Nelson......... 1999 199,132(1) 18,000 -- --
Vice President, Sales
Jody P. Wacker.......... 1999 141,750 36,000 -- --
Vice President,
Marketing
Richard D. Brown........ 1999 140,997(2) 16,000 $20,000(3) 35,000
Vice President,
International
Operations
Patrick K. Brady........ 1999 137,500 32,000 -- --
Chief Technology Officer
</TABLE>
---------------------
(1)Includes $79,132 in sales commissions.
(2)Includes $19,261 in sales commissions.
(3)Includes $20,000 car allowance.
42
<PAGE>
Option Grants in 1999
The following table contains information concerning our grant of stock
options to our chief executive officer and our four other most highly
compensated executive officers in 1999. Potential realizable value is presented
net of the option exercise price, but before any Federal or state income taxes
associated with exercise, and is calculated assuming that the fair market value
on the date of the grant appreciates at the indicated annual rates, compounded
annually, for the ten-year term of the option. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the SEC and do not represent our
estimate or projection of future increases in the price of our common shares.
Actual gains will depend on the future performance of our common shares and the
option holder's continued employment throughout the vesting period. The amounts
reflected in the following table may not be achieved.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Number of Percent of Price
Shares Total Options Per Share Appreciation for
Underlying Granted to Exercise Option Term(1)
Options Employees in or Base Expiration ---------------------
Granted Fiscal Year Price Date 5% 10%
---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kevin G. Kerns.......... 52,500 7.7% $0.91 1/09 $1,140,226 $1,733,092
James M. Nelson......... -- -- -- -- -- --
Jody P. Wacker.......... -- -- -- -- -- --
Richard D. Brown........ 35,000 5.0 0.91 1/09 760,151 1,155,394
Patrick K. Brady........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Assumes that the fair market value of each grant on the date of grant was
equal to the assumed initial public offering price of $14.00 per share.
1999 Option Values
The following table contains information regarding unexercised options held
by our chief executive officer and our four other most highly compensated
executive offices at December 31, 1999. None of these individuals exercised any
options during 1999 except Richard D. Brown who exercised options for 37,917 of
our common shares. The value of "in-the-money" options represents the
difference between the exercise price of an option and the assumed initial
public offering price of $14.00 per share.
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1999 December 31, 1999
Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------- -------------------------
<S> <C> <C>
Kevin G. Kerns............ 730,078/83,672 $10,221,092/$1,171,408
James M. Nelson........... 188,125/21,875 2,633,750/306,250
Jody P. Wacker............ 128,333/99,167 1,796,662/1,388,338
Richard D. Brown.......... 8,749/58,334 122,486/816,676
Patrick K. Brady.......... 47,214/14,036 660/996/196,504
</TABLE>
Compensation of Directors
Except with respect to our nonemployee directors who receive an annual grant
of options to purchase 10,000 of our common shares (other than Mr. Koch who
receives an annual grant of options to purchase 14,000 of our common shares),
our directors do not receive compensation for serving as directors or attending
board of directors or committee meetings except reimbursement for out-of-pocket
expenses.
Employment Agreements
On January 1, 2000, we entered into an employment agreement with Kevin G.
Kerns, our Chief Executive Officer and President, which expires on January 1,
2004. Mr. Kerns currently receives an annual
43
<PAGE>
base salary of $150,000 and is entitled to receive an annual bonus of up to
$60,000 based on criteria set by the board of directors. If Mr. Kerns is
terminated by us without cause, or Mr. Kerns terminates the employment
agreement within six months of a change of control or within three months of a
material reduction in his salary or benefits or a material change in his
responsibilities, then Mr. Kerns will receive severance pay equal to six months
base salary.
On January 20, 2000, we entered into an employment agreement with Jody P.
Wacker, our Vice President, Marketing. Ms. Wacker currently receives an annual
base salary of $148,000 and is entitled to receive an annual bonus at the
discretion of our Board of Directors based on Ms. Wacker's performance. If Ms.
Wacker is terminated by us without cause or Ms. Wacker terminates the
employment agreement within six months of a change of control or within three
months of a material reduction in her salary or benefits or a material change
in her responsibilities, Ms. Wacker will receive severance pay equal to six
months base salary.
We have an employment agreement with Richard D. Brown, our Vice President,
International Operations, entered into on April 23, 1997. Mr. Brown receives an
annual base salary of $119,955 and is entitled to receive an annual bonus at
the discretion of our Board of Directors based on our financial results and Mr.
Brown's performance. In addition, we granted Mr. Brown an option to purchase
35,000 of our common shares at an exercise price of $0.21 per share in
connection with this employment agreement. Mr. Brown is also entitled to an
annual car allowance of $20,000.
We also entered into an employment agreement with Patrick K. Brady, our
Chief Technology Officer, on March 19, 1996, as amended in December 1998, which
expires on March 19, 2000. Mr. Brady receives an annual base salary of $140,000
and is entitled to receive an annual bonus at the discretion of the
compensation committee, which bonus could be up to $40,000. If Mr. Brady is
terminated by us without cause, or Mr. Brady terminates employment within three
months of a material reduction in his salary or benefits or a change in his
responsibilities, then Mr. Brady will receive severance pay equal to six months
base salary. Mr. Brady is entitled to be one of our directors until the
expiration of his employment agreement.
In connection with their respective employment agreements, each of the
officers entered into a noncompetition, nondisclosure and developments
agreement with us. The nondisclosure provisions in these agreements continue
indefinitely after termination of employment. The noncompete provisions
continue during their period of employment and for a period of six months after
termination of employment for any reason and the nonsolicitation provisions
continue for two years after termination of employment. Each agreement also
provides that the officer assigns to us any and all right to any intellectual
property designed or developed by the officer during his or her period of
employment except in specified circumstances.
None of the other named executive officers is party to an employment
agreement with us.
2000 Omnibus Incentive Plan
Our 2000 omnibus incentive plan was approved by our board of directors on
January 20, 2000 and is expected to be adopted by our shareholders prior to the
offering. Under this plan, our officers, directors, employees and consultants,
are eligible to receive awards of stock options, stock appreciation rights,
performance stock, performance units, restricted stock and other stock and cash
awards. Options granted under the plan may be incentive stock options or
nonqualified stock options. Stock appreciation rights may be granted by our
compensation committee at any time either in tandem with an option or on a
free-standing basis. A total of 4,600,000 common shares have been authorized to
date for issuance under the plan, 3,352,305 of which were outstanding at
December 31, 1999. The outstanding options have a weighted average exercise
price of $0.46 per share. The plan amends and restates our 1995 stock option
plan.
44
<PAGE>
The 2000 omnibus incentive plan is administered by the compensation
committee of our board. Subject to the provisions of the plan, the compensation
committee will determine the type of award, when and to whom awards will be
granted, the number of shares or amount of cash covered by each award and the
terms and kind of consideration payable with respect to awards. The
compensation committee may interpret the plan and may at any time adopt the
rules and regulations for the plan as it deems advisable. In determining the
persons to whom awards shall be granted and the number of shares or amount of
cash covered by each award, the compensation committee may take into account
any factors it deems relevant.
Stock Options. The compensation committee may grant both incentive stock
options and non-qualified stock options. An option may be granted on the terms
and conditions as the compensation committee may approve except that no
incentive stock option may be exercised more than ten years from the date of
grant. Incentive stock options will be granted with an exercise price equal to
the fair market value on the date of grant. The compensation committee may
authorize loans to individuals to finance their exercise of vested options.
Options granted under the 2000 omnibus incentive plan will become exercisable
at those times and under the conditions determined by the compensation
committee. To date, the options that have been granted to our executive
officers and employees will generally vest automatically in the event that we
are consolidated with or acquired by another entity in a merger or other
reorganization or in the event of a sale of all or substantially all of our
assets. Future option grants will generally vest upon a change of control.
Stock Appreciation Rights. Our 2000 omnibus incentive plan also permits the
compensation committee to grant stock appreciation rights either in tandem with
a stock option or on a free-standing basis. Generally, stock appreciation
rights may be exercised upon such terms and conditions as the compensation
committee determines except that the term shall not exceed the option term in
the case of a tandem stock appreciation right or ten years in the case of a
free-standing stock appreciation right. Upon exercise of a stock appreciation
right, a grantee will receive for each share for which a stock appreciation
right is exercised, an amount in cash or common shares, as determined by the
compensation committee, equal to the excess of the fair market value of a
common share on the date the stock appreciation right is exercised over the
grant price per share to which the stock appreciation right relates.
Restricted Stock. The 2000 omnibus incentive plan further provides for the
granting of restricted stock awards, which are awards of common shares that may
not be disposed of for a period of time determined by the compensation
committee and which vest during a specified period of employment.
Performance Stock and Performance Units. The 2000 omnibus incentive plan
further provides that the compensation committee may grant performance stock or
performance units which may be earned upon the attainment of performance goals
specified by the compensation committee. The compensation committee may make a
cash payment equal to the fair market value of the common shares otherwise
required to be issued to a participant pursuant to a performance stock award.
Performance units entitle the participant to a payment in cash equal to the
fair market value of a designated number of common shares upon the attainment
of specified performance goals. The compensation committee may substitute
common shares for the cash payment otherwise required to be made pursuant to a
performance unit award.
Our board of directors may amend or terminate the 2000 omnibus incentive
plan. However, no change shall be effective without the approval of our
shareholders if shareholder approval is required by any law, regulation or
stock exchange rule. In addition, no change may adversely affect an award
previously granted, except with the written consent of the grantee.
No awards may be granted under the 2000 omnibus incentive plan after the
tenth anniversary of its initial adoption.
Options and Awards Under the 2000 Omnibus Incentive Plan. We cannot now
determine the number of options or awards to be granted in the future under the
2000 omnibus incentive plan to our officers, directors, employees and
consultants.
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<PAGE>
Employee Stock Purchase Plan of 2000
Introduction. Our employee stock purchase plan of 2000 was approved by our
board of directors on January 20, 2000 and is expected to be adopted by our
shareholders prior to completion of this offering. The plan will become
effective immediately upon the date of the consummation of this offering. The
plan is designed to allow our eligible employees to purchase our common shares,
at semi-annual intervals after the initial offering period through voluntary
automatic payroll deductions at a discount.
Share Reserve. We have initially reserved 1,000,000 common shares.
Offering Periods. The plan will be implemented by consecutive offering
periods. The initial offering period will commence on the date of this offering
and will continue until December 31, 2000. Thereafter, new offering periods
will commence on the first trading day on or after January 1 and July 1 of each
year, or on such other dates the compensation committee shall determine and
continuing until the last trading day of the respective six-month period or
such other date as the compensation committee shall determine.
Eligible Employees. All of our regular employees may participate in our
employee stock purchase plan of 2000 other than, in the discretion of the
compensation committee, employees whose customary employment is 20 hours or
less a week, employees whose customary employment is for not more than five
months per year and employees who have not been employed by us for at least one
year as of the first day of any offering period.
Payroll Deductions. A participant may contribute up to 10% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be no less than the lesser of 85% of the closing
price per share at the beginning of the offering period or on the last trading
day of such offering period. No participant's rights to purchase shares shall
accrue at a rate in excess of $25,000 of the fair market value of such shares
for each calendar year in which the right is outstanding at any time.
The board may at any time amend, suspend or discontinue the plan, subject to
any required shareholder approval to comply with the requirements of the
Securities and Exchange Commission and the Internal Revenue Code.
Limitation of Liability and Indemnification Matters
We are incorporated under the laws of the state of Illinois. Our amended and
restated articles of incorporation provide that our directors shall not be
personally liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director to the fullest extent permitted under the Illinois
Business Corporation Act except for:
. any breach of the director's duty of loyalty to us;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 8.65 of the Illinois Business Corporation Act, as it
currently exists or may in the future be amended; or
. any transaction from which the director derived an improper benefit.
Our amended and restated bylaws provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Illinois law, subject to very limited exceptions;
46
<PAGE>
. we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors, unless otherwise required by
law, our amended and restated articles of incorporation, our amended and
restated bylaws or other agreements; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with legal proceedings to the fullest extent
permitted by Illinois law, subject to very limited exceptions.
In addition, we intend to obtain directors' and officers' insurance
providing indemnification for our directors and officers for certain
liabilities, including liabilities under the Securities Act of 1933. We have
also entered into indemnity agreements with our directors and some of our
executive officers providing for the indemnification described above.
These provisions may discourage shareholders from bringing a lawsuit against
our directors for breach of their fiduciary duty. These provisions may also
have the effect of reducing the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise benefit us and our shareholders. Furthermore, a shareholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions. We believe that these provisions, the insurance and
agreements are necessary to attract and retain talented experienced directors
and officers.
The underwriting agreement also provides for indemnification by the
underwriters of our officers and directors for specified liabilities under the
Securities Act of 1933.
At present, there is no pending litigation or proceeding involving any of
our directors or officers where indemnification will be required or permitted.
We are not aware of any threatened litigation or proceeding that might result
in a claim for such indemnification.
Compensation Committee Interlocks and Insider Participation
Our compensation committee currently consists of Maurice A. Cox, Jr., George
B. Koch and Keith L. Crandell. None of the members of the compensation
committee has been an officer or employee of Apropos at any time. None of our
executive officers serves as a member of the board of directors or compensation
committee of any other company that has one or more executive officers serving
as a member of our board of directors or compensation committee. Mr. Crandell
is a senior principal of ARCH Venture Partners, some affiliates of which are
our preferred shareholders and noteholders. Mr. Cox is a principal of The Ohio
Partners, Ltd. which is one of our preferred shareholders and noteholders. In
June 1999, we issued a subordinated convertible promissory note to ARCH Venture
Fund III, L.P. for $523,277.90 and to The Ohio Partners, Ltd. for $427,444.20.
In connection with these notes, we also issued warrants to purchase 15,455 of
our Series C convertible preferred shares to ARCH Venture Fund III, L.P. and
warrants to purchase 12,318 of our Series C convertible preferred shares to The
Ohio Partners, Ltd. These warrants automatically convert to warrants to
purchase 27,046 of our common shares and 21,557 of our common shares,
respectively, at an exercise price of $3.97 per share upon completion of this
offering. In November 1999, ARCH Venture Fund III, L.P. also participated in
$500,000 of a $5.0 million secured bridge loan made to us. We issued warrants
to purchase 26,250 of our common shares at an exercise price of $5.34 per share
to ARCH Venture Fund III, L.P. in connection with this loan. See "Certain
Transactions" on page 50 for information regarding transactions between The
Ohio Partners, Ltd. and us, and between ARCH Venture Fund III, L.P. and us.
401(k) Plan
Effective January 1, 1997, we implemented a 401(k) profit-sharing plan
covering substantially all employees who meet defined service requirements. The
plan provides for deferred salary contributions by the plan participants and a
contribution from us. Our contributions, if any, are at the discretion of the
board of directors and are not to exceed the amount deductible under applicable
income tax laws. We have not made contributions since inception of the plan.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding common shares as of December 31, 1999 by:
. each person who is the beneficial owner of more than 5% of our common
shares;
. each of our directors;
. each of our named executive officers; and
. all of our executive officers and directors as a group.
Catherine R. Brady has granted the underwriters an option to purchase an
additional 240,000 common shares to cover over-allotments.
The following table assumes the conversion of all of our issued and
outstanding convertible preferred shares and the seven-for-four stock split of
our common shares which will occur immediately prior to the completion of this
offering. Applicable percentage ownership is based on 10,047,978 common shares
outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficially Owned Beneficially Owned
--------------------- ---------------------
Prior to After Prior to After
Name Offering Offering Offering Offering
- ---- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Five Percent Shareholders:
The Ohio Partners, Ltd.(1)........ 778,041 778,041 7.7% 5.9%
62 East Broad Street, 3rd Floor
Columbus, OH 43215
William Blair Capital Partners V,
L.P.(2).......................... 2,552,136 2,552,136 25.4% 19.3%
222 W. Adams Street
Chicago, IL 60606
ARCH Venture Fund III, L.P.(3).... 2,578,387 2,578,387 25.7% 19.5%
8725 W. Higgins Road, Suite 290
Chicago, IL 60631
Allstate Insurance Company........ 1,185,429 1,185,429 11.8% 8.9%
2775 Sanders Road, Suite A3
Northbrook, IL 60062
William W. Bach(4)................ 720,155 720,155 6.9% 5.3%
One Tower Lane, 18th Floor
Oakbrook Terrace, IL 60181
Directors and Officers:
Kevin G. Kerns(5)................. 761,432 761,432 7.0% 5.4%
Jody P. Wacker(6)................. 137,813 137,813 1.4% 1.0%
Richard D. Brown(7)............... 52,500 52,500 * *
Patrick K. Brady(8)............... 2,571,786 2,571,786 25.5% 19.3%
James M. Nelson(9)................ 196,875 196,875 1.9% 1.5%
Catherine R. Brady(10)............ 2,571,786 2,571,786 25.5% 19.3%
Keith L. Crandell(11)............. 2,578,387 2,578,387 25.7% 19.5%
Ian M. Larkin(12)................. 2,552,136 2,552,136 25.4% 19.3%
Maurice A. Cox, Jr.(13)........... 778,041 778,041 7.7% 5.9%
George B. Koch(14)................ 20,125 20,125 * *
All Executive Officers and
Directors as a Group
(14 people)(11)(12)(13)(15)...... 10,652,802 10,652,802 91.8% 71.9%
</TABLE>
48
<PAGE>
- ---------------------
* Less than 1%
(1) Includes warrants to purchase 21,557 of our common shares.
(2) Includes warrants to purchase 27,046 of our common shares.
(3) Includes 1,412,133 of our common shares owned by ARCH Venture Fund II,
L.P., 142,002 of our common shares owned by ARCH II Parallel Fund, L.P.
and warrants to purchase 53,296 of our common shares.
(4) Includes 382,002 shares subject to stock options exercisable within 60
days after December 31, 1999.
(5) Represents 761,432 shares subject to stock options exercisable within 60
days after December 31, 1999.
(6) Represents 137,813 shares subject to stock options exercisable within 60
days after December 31, 1999.
(7) Includes 14,583 shares subject to stock options exercisable within 60 days
after December 31, 1999.
(8) Includes 49,766 shares subject to stock options exercisable within 60 days
after December 31, 1999. Includes 1,173,510 shares owned by Catherine R.
Brady, Mr. Brady's spouse. Mr. Brady disclaims beneficial ownership of
these shares.
(9) Represents 196,875 shares subject to stock options exercisable within 60
days after December 31, 1999.
(10) Includes 1,348,510 of our common shares and 49,766 of our common shares
subject to stock options exercisable within 60 days after December 31,
1999, owned by Patrick K. Brady, Ms. Brady's spouse. Ms. Brady disclaims
beneficial ownership of these shares.
(11) Includes 2,525,091 of our common shares and warrants to purchase 53,296 of
our common shares owned by ARCH Venture Fund II, L.P. and its affiliates,
of which Mr. Crandell is a principal. Mr. Crandell disclaims beneficial
ownership of these shares.
(12) Includes 2,525,090 of our common shares and warrants to purchase 27,046 of
our common shares owned by William Blair Capital Partners V, L.P., of
which Mr. Larkin is a managing director. Mr. Larkin disclaims beneficial
ownership of these shares.
(13) Includes 756,484 of our common shares and warrants to purchase 21,557 of
our common shares owned by The Ohio Partners, Ltd., of which Mr. Cox is a
principal. Mr. Cox disclaims beneficial ownership of these shares.
(14) Includes 20,125 shares subject to stock options exercisable within 60 days
after December 31, 1999.
(15) Includes 1,562,596 shares subject to stock options exercisable within 60
days after December 31, 1999.
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<PAGE>
CERTAIN TRANSACTIONS
Since our inception, we have issued convertible preferred shares in private
placement transactions as follows:
. 1,242,858 Series A convertible preferred shares at $1.75 per share on
March 19, 1996, which are convertible into 2,175,001 common shares;
. 1,599,888 Series B convertible preferred shares at $3.75 per share on
December 20, 1996, which are convertible into 2,799,804 common shares;
and
. 1,152,737 Series C convertible preferred shares at $6.94 per share on
March 11, 1998, which are convertible into 2,017,289 common shares.
Each series of our convertible preferred shares will automatically convert
to our common shares after giving effect to the seven-for-four stock split of
our common shares which will occur immediately prior to the completion of this
offering,
The following table summarizes the convertible preferred shares purchased by
our 5% shareholders in private placement transactions:
<TABLE>
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible
Investor Preferred Shares Preferred Shares Preferred Shares
- -------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
The Ohio Partners, Ltd...... -- -- 432,277
William Blair Capital
Partners V, L.P............ 621,429 533,296 288,184
ARCH Venture Fund III, L.P.. -- 266,648 288,184
ARCH Venture Fund II, L.P... 570,416 236,517 --
ARCH II Parallel Fund, L.P.. 51,013 30,131 --
Allstate Insurance Company.. -- 533,296 144,092
</TABLE>
In addition, in June 1999, we issued subordinated convertible promissory
notes in the aggregate principal amount of $1.5 million to William Blair
Capital Partners V, L.P., ARCH Venture Fund III, L.P. and The Ohio Partners,
Ltd. In connection with these notes, we issued warrants to purchase 43,228 of
our Series C convertible preferred shares to these investors at an exercise
price of $6.94 per share. The warrants to purchase our Series C convertible
preferred shares automatically convert to warrants to purchase 75,649 of our
common shares at an exercise price of $3.97 per share upon completion of this
offering. We plan on using a portion of the net proceeds of this offering to
repay these notes.
In November 1999, a $5.0 million secured bridge loan was made to us by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
in this offering. Certain employees and entities associated with Hambrecht &
Quist LLC have a $1.4 million participation in this loan and ARCH Venture Fund
III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. We granted to Access Technology Partners,
L.P. warrants that can be exercised to purchase 236,250 common shares in
connection with this loan and the employees and entities associated with
Hambrecht & Quist LLC that are participating in this loan have the right to
receive their pro rata portion of the warrants granted. We also granted ARCH
Venture Fund III, L.P. warrants that can be exercised to purchase 26,250 common
shares. The exercise price of the warrants is initially $5.34 per share but
will increase to the initial public offering price subject to a one-time
adjustment on or before November 5, 2000, to the 20-day average market price if
the average market price is less than the initial public offering price.
On March 19, 1996, we entered into an employment agreement with William W.
Bach, our Vice President, Technology and one of our 5% shareholders, which
expires on March 19, 2000. Mr. Bach receives an annual base salary of $120,000
and is entitled to receive an annual bonus at the discretion of our
compensation committee, which bonus could be up to $25,000. If Mr. Bach is
terminated by us without cause, or Mr. Bach terminates the employment agreement
within three months of a material reduction in his
50
<PAGE>
salary or benefits or a material change in his responsibilities, then Mr. Bach
will receive severance pay equal to six months base salary. In connection with
his employment agreement, Mr. Bach also entered into a noncompetition,
nondisclosure and developments agreement with us.
We have granted options to our executive officers and one of our directors.
See "Management--Executive Compensation" on page 42 for more information
regarding these option grants.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 65,000,000 shares, of which
60,000,000 shares are common shares, par value $0.01 per share, and 5,000,000
shares are preferred shares, par value $0.01 per share. At January 24, 2000,
there were 10,595,667 common shares outstanding, held of record by 39
shareholders, and no preferred shares were outstanding. There will be
13,795,667 common shares outstanding, assuming no exercise of outstanding
options or warrants, after giving effect to this offering. Because this is a
summary description, it does not contain every term of our capital stock
contained in our amended and restated articles of incorporation and in our
amended and restated bylaws, and we refer you to the exhibits to our
registration statement filed with the SEC on November 12, 1999, as amended,
which you can access through the SEC's website at http://www.sec.gov and to
Illinois law.
Common Shares
Our issued and outstanding common shares have been validly issued and are
fully paid and nonassessable. The common shares to be issued upon completion of
this offering will also be fully paid and nonassessable. Subject to the right
of holders of preferred shares that may come into existence, the holders of
outstanding common shares are entitled to receive dividends out of assets
legally available therefore at the times and in the amounts as our board of
directors may from time to time determine. See "Dividend Policy" on page 14 for
information regarding our dividend policy. The common shares are neither
redeemable nor convertible, and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. There is no sinking fund
provision applicable to the common shares. Upon our liquidation, dissolution or
winding up, the holders of common shares are entitled to receive pro rata, our
assets that are legally available for distribution, after payment of all debts
and other liabilities and subject to the prior rights of any holders of
preferred shares then outstanding. Each outstanding common share is entitled to
one vote on all matters submitted to a vote of shareholders. There is no
cumulative voting in the election of directors.
Preferred Shares
Our amended and restated articles of incorporation authorize our board of
directors to issue preferred shares in series and to establish the rights and
preferences of any series with respect to the rate of dividends, the price and
terms and conditions on which shares may be redeemed, the terms and conditions
on which shares may be converted, voting rights and other terms. We may issue,
without approval of the holders of common shares, preferred shares that have
voting, dividend or liquidation rights superior to the common shares and that
may adversely affect the rights of holders of common shares. The issuance of
preferred shares, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the voting
power of the holders of common shares and could have the effect of
discouraging, delaying, deferring or preventing a change in control. We have no
present plan to issue any preferred shares.
Certain Statutory Provisions
We are subject to Section 7.85 of the Business Corporation Act of Illinois.
Section 7.85 prohibits a publicly held Illinois corporation from engaging in a
business combination with an interested shareholder, unless the proposed
business combination
. receives the affirmative vote of the holders of at least 80% of the
combined voting power of the then outstanding shares of all classes and
series of the corporation entitled to vote generally in the election
51
<PAGE>
of directors voting together as a single class, and the affirmative vote
of a majority of these shares held by disinterested shareholders,
. is approved by at least two-thirds of the disinterested directors, or
. provides for consideration offered to shareholders that meets specified
fair price standards and satisfies specified procedural requirements.
These fair price standards require that the fair market value per share of such
consideration be equal to or greater than the higher of
. the highest price paid by the interested shareholder during the two-year
period immediately prior to the first public announcement of the proposed
business combination or in the transaction by which the interested
shareholder became such, and
. the higher of the fair market value per common share on the first trading
date after the date the first public announcement of the proposed
business combination or after the date of the first public announcement
that the interested shareholder has become such.
For purposes of Section 7.85, disinterested director means any member of the
board of directors of the corporation who
. is neither the interested shareholder nor an affiliate or associate
thereof,
. was a member of the board of directors prior to the time that the
interested shareholder became such or was a director of the corporation
before January 1, 1997 or was recommended to succeed a disinterested
director by a majority of the disinterested directors then in office, and
. was not nominated for election as a director by the interested
shareholder of any affiliate or associate thereof.
For purposes of Section 7.85 and Section 11.75 described below, a business
combination includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested shareholder, and an interested shareholder
is a person who, together with affiliates and associates, owns, or within the
prior three years, did own, 15% or more of the combined voting power of the
outstanding shares entitled to vote, subject to specified exceptions.
Further, we are subject to Section 11.75 of the Business Corporation Act of
Illinois which prohibits business combinations with interested shareholders for
a period of three years following the date that such shareholder became an
interested shareholder, unless
. prior to such time, our board of directors approved either the business
combination or the transaction which resulted in the shareholder becoming
an interested shareholder, or
. upon consummation of the transaction which resulted in the shareholder
becoming an interested shareholder, the interested shareholder owned at
least 85% of the voting shares outstanding at the time such transaction
commenced, excluding shares owned by directors who are also officers and
shares reserved under an employee stock plan, or
. at or subsequent to such time, the business combination is approved by
our board of directors and authorized at a meeting of the shareholders by
66 2/3% of the outstanding voting shares not owned by the interested
shareholder.
Although Illinois law generally requires the affirmative votes of at least
two-thirds of the votes of our shares entitled to vote to approve or authorize
an amendment of our amended and restated articles of incorporation, we have
elected, as permitted by Illinois law, to require only majority vote for the
approval or authorization of an amendment if the majority of our board of
directors recommends the adoption of an amendment to our shareholders. The
substitution of the majority voting requirement may have the effect of
permitting an amendment to our amended and restated articles of incorporation
not favored by a shareholder or group of shareholders holding a substantial
minority of the outstanding voting stock.
52
<PAGE>
Charter and Bylaw Provisions
Our amended and restated articles of incorporation and our amended and
restated bylaws contain provisions that may inhibit a change in control not
approved by our board of directors. These provisions include (1) the division
of our board of directors into three classes serving staggered three year
terms, (2) a requirement that special meetings of shareholders be called only
by our board of directors, chief executive officer or president unless
otherwise required by law, (3) advance notice requirements for shareholder
proposals and nominations and (4) the authority of our board of directors to
issue, without shareholder approval, preferred shares with such terms as our
board of directors may determine.
Our amended and restated articles of incorporation eliminate the liability
of our directors to us or our shareholders for monetary damages resulting from
breaches of their fiduciary duties as directors. Directors remain liable for
breaches of their duty of loyalty to us or our shareholders, as well as for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law and transactions from which a director derives
improper personal benefit. Our amended and restated articles of incorporation
also do not absolve directors of liability under Section 8.65 of the Business
Corporation Act of Illinois, which makes directors personally liable for:
. unlawful dividends or unlawful stock repurchases or redemptions if the
director did not act in good faith,
. the barring of known claims against the corporation after dissolution,
and
. debts incurred by a dissolved corporation in carrying on its business.
The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their
fiduciary duty of care, including any such actions involving gross negligence.
We believe that this provision does not eliminate the liability of our
directors to us or our shareholders for monetary damages under the federal
securities laws. Our bylaws also provide indemnification for the benefit of our
directors and officers to the fullest extent permitted by Illinois law,
including most circumstances under which indemnification otherwise would be
discretionary.
Transfer Agent and Registrar
The transfer agent and registrar for the common shares is Harris Trust &
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common shares and
we cannot make any predictions as to the effect, if any, that market sales of
shares or the availability of our common shares for future sale will have on
the market price of the common shares from time to time. Sales of substantial
amounts of our common shares in the public market following this offering could
adversely affect the market price of our common shares and our ability to raise
additional capital.
Upon completion of this offering, we will have 13,795,667 common shares
outstanding assuming that the underwriters do not exercise their over-allotment
options and that no participants exercise their outstanding options under our
stock option plan or warrants after January 24, 2000. Our common shares sold in
this offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, except for any of those shares
that are beneficially owned at any time by our affiliates, as defined in Rule
144 under the Securities Act of 1933, which sales will be subject to the
timing, volume and manner of sale limitations of Rule 144. The remaining
10,595,667 common shares outstanding after this offering held by those who were
shareholders prior to this offering will be restricted securities, as defined
in Rule 144. These restricted securities may be sold in the public market if
they are registered under the Securities Act of
53
<PAGE>
1933 or they are exempted by an exemption from registration, such as the
exemptions provided by Rule 144 and 701 under the Securities Act of 1933. As a
result of the 180 day lock-up described below and the provisions of Rule 144
and 701, the following table shows approximately when the restricted shares
will be available for sale in the public market:
Eligibility of Restricted Shares for Sale in the Public Market
<TABLE>
<S> <C>
At the date of this prospectus.................................. 65,158
180 days after the date of this prospectus...................... 9,941,250
Thereafter upon expiration of one year holding periods.......... 589,259
</TABLE>
Most of the restricted shares that will become available for sale in the
public market starting 180 days after the date of this prospectus will be
subject to volume and other resale restrictions under Rule 144 because the
holders are our affiliates.
Rule 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year will be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the then outstanding
common shares, or the average weekly trading volume of our common shares during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain provisions regarding the manner of sale, notice requirements
and the availability of current public information about us. If two years have
elapsed since the date of acquisition of restricted common shares from us or
any of our affiliates and the holder is not deemed to have been an affiliate of
ours for at least three months prior to a proposed transaction, such person
would be entitled to sell such shares under Rule 144 without regard to the
limitations described above.
Rule 701
In general, under Rule 701 of the Securities Act, any of our employees,
consultants or advisors who purchased common shares from us under a stock
option plan or other written agreement can resell those shares 90 days after
the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions contained in Rule 144, including the
holding period.
Stock Options
At December 31, 1999, we had outstanding options to purchase 3,352,305
common shares pursuant to our 2000 omnibus incentive plan, and an additional
1,247,695 common shares are available for grant of future options thereunder.
See "Management--2000 Omnibus Incentive Plan" on page 44 for more information
on this plan. We have also granted warrants to purchase 368,774 of our common
shares. See "Certain Transactions" on page 50 and "Underwriting" on page 60 for
more information regarding these warrants. In addition, if we do not repay the
portion of the outstanding amount under our revolving line of credit that is in
excess of our borrowing base, by March 16, 2000, we will be required to issue
an additional warrant to purchase 30,625 common shares to our lender. We intend
to file a registration statement on Form S-8 as soon as practicable after the
date of this prospectus to register our common shares that are (1) issuable
upon the exercise of stock options either outstanding or available for grant
pursuant to our 2000 omnibus incentive plan and (2) reserved for issuance under
our employee stock purchase plan of 2000. Following effectiveness, shares
covered by the registration statement on Form S-8 will be eligible for sale in
the public markets, subject to Rule 144 limitations applicable to affiliates,
as well as to the limitations on sale and vesting described above.
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<PAGE>
Lock-Up Agreements
We, our directors and executive officers and most of our shareholders, have
agreed or will agree prior to completion of this offering, for a period of 180
days after the date of this prospectus not to directly or indirectly, sell,
offer, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
transfer the economic risk of ownership in, make any short sale, pledge, lend
or otherwise dispose of or transfer, directly or indirectly, any of our common
shares or any securities convertible into or exchangeable or exercisable for or
any other rights to purchase or acquire our common shares without the prior
written consent of Hambrecht & Quist LLC on behalf of the underwriters.
However, these restrictions will not apply to:
. this offering, including the common shares which may be sold by the
selling shareholder;
. the issuance by us of any of our common shares upon the exercise of an
outstanding option or warrant;
. the issuance by us of any of our common shares or the grant by us of
options to purchase our common shares or other awards pursuant to our
2000 omnibus incentive plan; or
. the issuance by us of any of our common shares pursuant to our employee
stock purchase plan of 2000.
Registration Rights
Demand Rights. Our existing shareholders have the right to demand
registration of 6,992,095 of the common shares they hold.
At any time at least six months after this offering, our shareholders that
previously held our convertible preferred shares prior to this offering are
entitled to one demand registration upon initiation by holders of at least 40%
of the common shares then outstanding which were convertible preferred shares
prior to this offering. Thereafter, a second demand registration may be
initiated under the same conditions.
If these shareholders request us to register less than all of their common
shares held at that time, then we are only required to effect a registration if
at least 20% of the common shares that were convertible preferred shares prior
to this offering are to be sold in the demand offering or a lesser percentage
if the anticipated aggregate offering price of such demand registration exceeds
$5,000,000. These holders will be entitled to sell all of the shares requested
to be registered. Shareholders with registration rights may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations.
Piggyback Rights. Our existing shareholders and some of our warrant holders
have piggyback registration rights for an aggregate of 8,458,729 shares
covering future offerings by us.
Our shareholders that previously held our convertible preferred shares prior
to this offering have waived their piggyback registration rights with respect
to this offering. In a subsequent public offering, these holders are entitled
to piggyback registration rights, subject to reduction in the underwriters'
discretion.
In May 1999, we granted a warrant to Silicon Valley Bank to purchase 17,500
of our Series C preferred shares which will convert to a warrant to purchase
30,625 of our common shares upon completion of this offering. In November 1999,
we granted warrants to purchase 262,500 of our common shares in connection with
a $5.0 million secured bridge loan. If at any time after this offering we
register any of our common shares for our own account or for the account of any
of our shareholders, other than a registration on Form S-1, S-4 or S-8, we will
have to register the common shares underlying all of these warrants.
In a subsequent public offering, Catherine R. Brady is entitled to piggyback
registration rights after each former preferred shareholder has (1) received an
amount of net proceeds which is in the same proportion to each such holder's
then current market value of their common shares as the net proceeds received
by Ms. Brady in this offering bears to the market value of her common shares at
the initial public offering price or (2) waived their registration rights with
respect to the subsequent public offering.
55
<PAGE>
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of common shares
by a beneficial owner that is a non-U.S. holder. As used in this prospectus, a
non-U.S. holder is defined as a holder that for U.S. federal income tax
purposes is an individual or entity other than:
. a citizen or individual resident of the United States;
. a corporation or partnership created or organized in or under the laws
of the United States or of any political subdivision thereof, other than
a partnership treated as foreign under U.S. Treasury regulations;
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
. a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
This discussion does not address all aspects of U.S. federal income and
estate taxes that:
. may be relevant to non-U.S. holders in light of their personal
circumstances, including the fact that in the case of a non-U.S. holder
that is a partnership, the U.S. tax consequences of holding and disposing
of common shares may be affected by determinations made at the partner
level, or
. may be relevant to non-U.S. holders which may be subject to special
treatment under U.S. federal income tax laws such as insurance companies,
tax-exempt organizations, financial institutions, dealers in securities
and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction."
This discussion also does not address any tax consequences arising under the
laws of any state, local or foreign jurisdiction. Furthermore, this discussion
is based on provisions of the Internal Revenue Code of 1986, as amended,
existing and proposed regulations promulgated thereunder and administrative and
judicial interpretations thereof, all as of the date hereof, and all of which
are subject to change, possibly with retroactive effect. The following summary
is included herein for general information. Accordingly, investors are urged to
consult their tax advisers regarding the U.S. federal, state, local and non-
U.S. income and other tax consequences of acquiring, holding and disposing of
common shares.
Dividends
We do not anticipate paying cash dividends on our common shares in the
foreseeable future. In the event, however, that dividends are paid on our
common shares, dividends paid to a non-U.S. holder of common shares generally
will be subject to withholding of U.S. federal income tax at a 30% rate, or
such lower rate as may be provided by an applicable income tax treaty. Non-U.S.
holders should consult their tax advisors regarding their entitlement to
benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax if the non-U.S.
holder files the appropriate U.S. Internal Revenue Service form with the payor.
This form under U.S. Treasury regulations generally requires the non-U.S.
holder to provide a U.S. taxpayer identification number. Any such U.S. trade or
business income received by a non-U.S. holder that is a corporation may also be
subject to an additional "branch profits tax" at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.
Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability
of a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000, however, a
56
<PAGE>
non-U.S. holder of our common shares who wishes to claim the benefit of an
applicable treaty rate generally will be required to satisfy applicable
certification and other requirements. In addition, under these regulations, in
the case of our common shares held by a foreign partnership or other pass-
through entity, the certification requirement will generally be applied to the
partners of the partnership and the partnership will be required to provide
specified information, including a U.S. taxpayer identification number. The
regulations generally effective for payments made after December 31, 2000 also
provide look-through rules for tiered partnerships. Further, the Internal
Revenue Service intends to issue regulations under which a foreign trustee or
foreign executor of a U.S. or foreign trust or estate, depending on the
circumstances, will be required to furnish the appropriate withholding
certificate on behalf of the beneficiaries, trust or estate, as the case may
be.
A non-U.S. holder of our common shares that is eligible for a reduced rate
of U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, income tax treaty benefits are denied to
foreigners receiving income derived through a partnership, or otherwise
fiscally transparent entity, in certain circumstances. Prospective investors
should consult with their own tax advisers concerning the effect, if any, of
these new Treasury regulations and this recent legislation on an investment in
our common shares.
Gain on Disposition of Common Shares
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain realized on a disposition of our common shares unless:
. the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S.
holder;
. the non-U.S. holder is an individual who holds our common shares as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for 183 or more days in the
taxable year of the disposition and meets other requirements;
. the non-U.S. holder is subject to tax under the provisions of the U.S.
tax law applicable to certain United States expatriates; or
. we are or have been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the five-
year period preceding such disposition or the period that the non-U.S.
holder held our common shares.
We believe that we have not been, are not currently, and do not anticipate
becoming, a "U.S. real property holding corporation" for U.S. federal income
tax purposes.
If a non-U.S. holder who is an individual is subject to tax on gain which is
U.S. trade or business income, such individual generally will be taxed on the
net gain derived from a sale of common shares under regular graduated U.S.
federal income tax rates. If an individual non-U.S. holder is subject to tax
because such individual holds our common shares as a capital asset, is present
in the United States for 183 or more days in the taxable year of the
disposition and meets other requirements, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale. This gain may be
offset by U.S. capital losses, notwithstanding the fact that the individual is
not considered a resident alien of the United States. Thus, individual non-U.S.
holders who have spent, or expect to spend, more than a de minimis period of
time in the United States in the taxable year in which they contemplate a sale
of common shares are urged to consult their tax advisers prior to the sale
concerning the U.S. tax consequences of such sale.
57
<PAGE>
If a non-U.S. holder that is a foreign corporation is subject to tax on gain
which is U.S. trade or business income, it generally will be taxed on its net
gain under regular graduated U.S. federal income tax rates and, in addition,
will be subject to the branch profits tax equal to 30% of its "effectively
connected earnings and profits," within the meaning of the Internal Revenue
Code for the taxable year, as adjusted for specific items, unless it qualifies
for a lower rate under an applicable tax treaty.
Federal Estate Tax
Common shares owned or treated as owned by an individual who is neither a
U.S. citizen nor a U.S. resident, as defined for U.S. federal estate tax
purposes, at the time of death will be included in the individual's gross
estate for U.S. federal estate tax purposes and may be subject to U.S. federal
estate tax, unless an applicable estate tax or other treaty provides otherwise.
Information Reporting and Backup Withholding Tax
Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to
these holders, the name and address of the recipient and the tax withheld with
respect to such dividends. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the non-U.S. holder is a resident under the provisions of
an applicable income tax treaty or agreement.
Currently, U.S. backup withholding, which generally is a withholding tax
imposed at the rate of 31% on payments to persons that fail to furnish
specified information under the U.S. information reporting requirements,
generally will not apply:
. to dividends paid to non-U.S. holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or
. before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual
knowledge that the payee is a U.S. person.
Backup withholding and information reporting generally will apply to dividends
paid to addresses inside the United States on our common shares to beneficial
owners that are not "exempt recipients" and that fail to provide identifying
information in the manner required.
The payment of the proceeds of the disposition of our common shares by a
holder to or through the U.S. office of a broker or through a non-U.S. branch
of a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common shares to or through a non-U.S. office of a non-U.S. broker will not
be subject to backup withholding or information reporting unless the non-U.S.
broker has particular types of U.S. relationships. In the case of the payment
of proceeds from the disposition of our common shares effected by a foreign
office of a broker that is a U.S. person or a U.S. related person, existing
regulations require information reporting on the payment unless the broker
maintains documentary evidence that the holder is a non-U.S. holder and that
certain conditions are met. For this purpose, a U.S. related person is defined
as:
. a "controlled foreign corporation" for U.S. federal income tax purposes;
or
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business.
58
<PAGE>
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided:
. directly by the non-U.S. holder;
. in the case of a non-U.S. holder that is treated as a partnership, trust
or estate, or by the partners or beneficiaries of such entity; or
. by qualified financial institutions or other qualified entities on
behalf of the non-U.S. holder.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a non-U.S. holder will be refunded,
or credited against the holder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the Internal Revenue
Service.
59
<PAGE>
UNDERWRITING
Chase Securities Inc., SG Cowen Securities Corporation and U.S. Bancorp
Piper Jaffray Inc. are the representatives of the underwriters. Subject to the
terms and conditions of the underwriting agreement, the underwriters named
below, through their representatives, have severally agreed to purchase from us
the following respective numbers of common shares:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Chase Securities Inc............................................
SG Cowen Securities Corporation.................................
U.S. Bancorp Piper Jaffray Inc..................................
---------
Total........................................................... 3,200,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the common shares
offered by us if they purchase any shares.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.
Underwriting Discounts and Commissions
<TABLE>
<CAPTION>
Without With
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per Share................................... $ $
Total....................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1.5 million.
The underwriters propose to offer the common shares directly to the public
at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may re-allow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The representatives have advised us
that the underwriters do not intend to confirm discretionary sales in excess of
5% of the common shares offered in this offering.
We have granted to the underwriters a 30-day option to purchase up to
240,000 additional common shares and Catherine R. Brady, the selling
shareholder, has granted to the underwriters a 30-day option to purchase up to
an aggregate of 240,000 common shares owned by her, at the initial public
offering price, less the underwriting discount set forth on the cover page of
this prospectus. To the extent that the underwriters
60
<PAGE>
exercise these options, each of the underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of common
shares to be purchased by it shown in the above table bears to the total number
of common shares offered hereby. We and the selling shareholder will be
obligated, pursuant to these options, to sell shares to the underwriters to the
extent the options are exercised. The underwriters may exercise these options
only to cover over-allotments made in connection with the sale of common shares
offered by us.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of these liabilities.
Substantially all of our securityholders and all of our executive officers
and directors have agreed or will agree prior to completion of this offering,
that they will not, without the prior written consent of Chase Securities Inc.,
offer, sell or otherwise dispose of any shares of capital stock, options or
warrants to acquire shares of capital stock or securities exchangeable for or
convertible into shares of capital stock owned by them for a period of 180 days
following the date of this prospectus. We have agreed that we will not, without
the prior written consent of Chase Securities Inc., offer, sell or otherwise
dispose of any shares of capital stock, options or warrants to acquire shares
of capital stock or securities exchangeable for or convertible into shares of
capital stock for a period of 180 days following the date of this prospectus,
except that we may issue shares upon the exercise of options and warrants
granted prior to the date hereof and in connection with our employee stock
purchase plan of 2000. We may also grant additional options or other awards
under our 2000 omnibus incentive plan. Without the prior written consent of
Chase Securities Inc., any additional options granted shall not be exercisable
during this 180-day period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common shares at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid or effecting of any purchase, for
the purpose of pegging, fixing or maintaining the price of the common shares. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from
a syndicate member in connection with the offering when common shares sold by
the syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for our common
shares. The initial public offering price for the common shares will be
determined by negotiations among us and the representatives. Among the factors
to be considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenue and earnings, market
valuations of other companies engaged in activities similar to our business
operations and our management. The estimated initial public offering price
range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.
In addition, at our request, the underwriters have reserved up to 320,000
common shares for sale at the initial public offering price to our business
associates and related persons. The number of common shares available for sale
to the general public will be reduced if such persons purchase the reserved
shares. Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered hereby.
61
<PAGE>
In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common shares on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
In November 1999, a $5.0 million secured bridge loan was made to us by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Chase Securities Inc., one of the managing underwriters
in this offering. Certain employees and entities associated with Chase
Securities Inc. have a $1.4 million participation in this loan and ARCH Venture
Fund III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. We granted to Access Technology Partners,
L.P. warrants that can be exercised to purchase 236,250 common shares in
connection with this loan and the employees and entities associated with Chase
Securities Inc. that are participating in this loan have the right to receive
their pro rata portion of the warrants granted. We also granted ARCH Venture
Fund III, L.P. warrants that can be exercised to purchase 26,250 common shares.
The exercise price of the warrants is initially $5.34 per share but will
increase to the initial public offering price subject to a one-time adjustment
on or before November 5, 2000, to the 20-day average market price if the
average market price is less than the initial public offering price.
We have applied for listing of our common shares on the Nasdaq National
Market under the symbol APRS.
LEGAL MATTERS
McDermott, Will & Emery, Chicago, Illinois, will pass upon the validity of
the common shares offered hereby. Legal matters relating to this offering will
be passed upon for the underwriters by Davis Polk & Wardwell, Menlo Park,
California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999, as set forth in their
reports. We have included our consolidated financial statements and schedule in
this prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common shares offered hereby. This prospectus does not contain all of the
information set forth in the registration statement, certain portions of which
are omitted as permitted by the rules and regulations of the Securities and
Exchange Commission. For further information pertaining to us and the common
shares to be sold in this offering, reference is made to the registration
statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
registration statement or such other document, each such statement being
qualified in all respects by such reference.
62
<PAGE>
On the closing of the offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will file reports,
proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information, as well as
the registration statement and the exhibits and schedules thereto, may be
inspected, without charge, at the public reference facility maintained by the
Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Seven World Trade Center, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain
information on the operation of the SEC public reference room in Washington,
D.C. by calling the SEC at 1-800-SEC-0330. Such materials can also be inspected
on the Securities and Exchange Commission's web site at www.sec.gov.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated Statements of Common Shareholders' Deficit for the years
ended December 31, 1997, 1998 and 1999................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Apropos Technology, Inc.
We have audited the accompanying consolidated balance sheets of Apropos
Technology, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of operations, common shareholders' deficit, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Apropos
Technology, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
January 13, 2000
F-2
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, Pro forma
------------------ December 31,
1998 1999 1999
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................. $ 3,170 $ 3,467 $ 3,467
Accounts receivable, less allowance for
doubtful accounts of $151 in 1998 and $462
in 1999................................... 3,818 8,942 8,942
Inventory.................................. 283 364 364
Prepaid expenses and other current assets.. 225 371 371
-------- -------- --------
Total current assets..................... 7,496 13,144 13,144
Equipment, net............................... 1,021 1,618 1,618
Note receivable from shareholder............. 51 54 54
Other assets................................. 81 618 618
-------- -------- --------
Total assets............................. $ 8,649 $ 15,434 $ 15,434
======== ======== ========
Liabilities and common shareholders' equity
(deficit)
Current liabilities:
Revolving line of credit................... $ -- $ 3,216 $ 3,216
Subordinated convertible promissory notes.. -- 1,474 1,474
Bridge loan................................ -- 3,485 3,485
Accounts payable........................... 661 1,094 1,094
Accrued expenses........................... 194 1,808 1,808
Accrued compensation and related accruals.. 698 1,292 1,292
Advance payments from customers............ 393 584 584
Deferred revenue........................... 478 1,355 1,355
Current portion of capital lease
obligations............................... 156 122 122
Current portion of long-term debt.......... -- 186 186
-------- -------- --------
Total current liabilities................ 2,580 14,616 14,616
Capital lease obligations.................... -- 54 54
Long-term debt, less current portion......... -- 314 314
Convertible preferred shares, $.01 par value,
authorized, issued, and outstanding
3,995,483 shares (liquidation value of
$16,112 at December 31, 1999)............... 16,079 16,079 --
Common shareholders' equity (deficit):
Common shares, no par value, authorized
7,694,384 shares, 2,948,124 issued and
outstanding at December 31, 1998, and
3,055,883 issued and outstanding at
December 31, 1999 and 10,047,978 shares
issued and outstanding at pro forma
December 31, 1999......................... 26 53 123
Additional paid-in capital................. 69 2,932 18,941
Accumulated deficit........................ (10,105) (18,614) (18,614)
-------- -------- --------
Total common shareholders' equity
(deficit)............................... (10,010) (15,629) 450
-------- -------- --------
Total liabilities and common
shareholders' equity (deficit).......... $ 8,649 $ 15,434 $ 15,434
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Software licenses................................. $ 2,669 $ 5,697 $10,300
Services and other................................ 1,424 3,445 7,866
------- ------- -------
Total revenue................................... 4,093 9,142 18,166
Costs and expenses:
Cost of software.................................. 26 31 296
Cost of services and other........................ 1,308 3,084 5,611
Research and development.......................... 1,271 2,805 4,441
Sales and marketing............................... 3,644 6,030 9,704
General and administrative........................ 1,552 2,236 5,264
------- ------- -------
Total costs and expenses........................ 7,801 14,186 25,316
------- ------- -------
Loss from operations................................ (3,708) (5,044) (7,150)
Other income (expense):
Interest income................................... 210 245 42
Interest expense.................................. (25) (23) (1,414)
Miscellaneous expense............................. (44) -- 13
------- ------- -------
Total other income (expense).................... 141 222 (1,359)
------- ------- -------
Net loss............................................ $(3,567) $(4,822) $(8,509)
======= ======= =======
Net loss per share--basic and diluted............... $ (1.22) $ (1.64) $ (2.85)
Shares used to compute net loss per share--
basic and diluted................................. 2,923 2,947 2,983
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Common Shares
---------------- Additional
Number of Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997... 2,860,172 $17 $ -- $ (1,716) $ (1,699)
Exercise of stock options.... 68,110 5 -- -- 5
Net loss..................... -- -- -- (3,567) (3,567)
--------- --- ------ -------- --------
Balance at December 31, 1997. 2,928,282 22 -- (5,283) (5,261)
Exercise of stock options.... 19,842 4 -- -- 4
Compensation expense related
to stock options............ -- -- 69 -- 69
Net loss..................... -- -- -- (4,822) (4,822)
--------- --- ------ -------- --------
Balance at December 31, 1998. 2,948,124 26 69 (10,105) (10,010)
Exercise of stock options.... 107,759 27 -- -- 11
Compensation expense related
to stock options............ -- -- 229 -- 229
Value of warrants issued with
debt........................ -- -- 2,634 -- 2,634
Net loss..................... -- -- -- (8,509) (8,509)
--------- --- ------ -------- --------
Balance at December 31, 1999. 3,055,883 $53 $2,932 $(18,614) $(15,629)
========= === ====== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
APROPOS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss............................................ $(3,567) $(4,822) $(8,509)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization..................... 173 363 640
Amortization of debt discount..................... -- -- 1,084
Loss (gain) on sale of equipment.................. 44 -- (13)
Provision for doubtful accounts................... 46 101 311
Stock compensation expense........................ -- 69 229
Changes in operating assets and liabilities:
Accounts receivable............................. (1,028) (2,399) (5,435)
Inventory....................................... (80) (203) (81)
Prepaid expenses and other current assets....... (95) (103) (137)
Other assets.................................... (13) (55) (537)
Note receivable from shareholder................ -- (51) (3)
Accounts payable................................ 230 351 433
Accrued expenses................................ (92) 67 1,614
Accrued compensation and related accruals....... 261 251 594
Advance payments from customers................. -- 342 191
Deferred revenue................................ 273 244 877
------- ------- -------
Net cash used for operating activities.............. (3,848) (5,845) (8,742)
Cash flows from investing activities
Purchases of equipment.............................. (235) (721) (999)
------- ------- -------
Net cash used for investing activities.............. (235) (721) (999)
Cash flows from financing activities
Net proceeds from line of credit.................... -- -- 3,216
Net proceeds from subordinated convertible
promissory notes and detachable warrants........... -- -- 1,500
Proceeds from long-term debt........................ -- -- 500
Net proceeds from issuance of convertible preferred
shares............................................. -- 7,986 --
Proceeds from exercise of stock options............. 5 4 27
Principal payments of capital lease obligations..... (149) (238) (205)
Proceeds from bridge loan and detachable warrants... -- -- 5,000
------- ------- -------
Net cash provided by (used for) financing
activities......................................... (144) 7,752 10,038
------- ------- -------
Net change in cash and cash equivalents............. (4,227) 1,186 297
Cash and cash equivalents, beginning of period...... 6,211 1,984 3,170
------- ------- -------
Cash and cash equivalents, end of period............ $ 1,984 $ 3,170 $ 3,467
======= ======= =======
Supplemental disclosures of cash flow information:
Borrowings under capital lease obligations........ $ 294 $ -- $ 225
Non-cash deferred financing costs................. $ -- $ -- $ 2,634
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Apropos Technology, Inc. (the Company) is engaged in the business of
developing and selling software, implementation, maintenance, and training
services to companies in diversified industries. The Company's product enables
customer interaction management for multimedia contact centers. The Company's
core competency is its skill in developing advanced software applications and
successfully linking those applications to a number of telephone systems,
networks, and databases. Principal operations of the Company commenced during
1995. The Company currently derives substantially all of its revenues from
licenses of its product and related services.
On June 9, 1997, the Company established a wholly owned subsidiary in the
United Kingdom, Apropos Technology, Limited. The purpose of this entity is to
market the Company's product throughout Europe.
2. Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Apropos Technology, Limited. All significant
intercompany balances and transactions have been eliminated.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. The Company classifies its
marketable securities as available-for-sale and states them at amortized cost
plus accrued interest, which approximates fair market value.
Inventory
Inventories are stated at the lower of cost (first in, first out method) or
market.
Income Taxes
The Company provides for income taxes under the liability method, which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under this method, a valuation allowance
is required against net deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
Management evaluates the recoverability of the deferred tax assets and the
level of the valuation allowance. At such time as it is determined that it is
more likely than not that deferred tax assets are realizable, the valuation
allowance will be appropriately reduced.
F-7
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment
Equipment is stated at cost. The Company provides for depreciation and
amortization using the straight-line method over their estimated useful lives
as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
-------------------- ----------------------
<S> <C>
Computer equipment................................ 3 years
Software.......................................... 3 years
Office equipment.................................. 5 years
Furniture and fixtures............................ 7 years
Furniture and fixtures for trade shows............ 2 years
Leasehold improvements (capital leases with a Estimated useful
bargain purchase option)..........................life.or life of lease
(whichever is shorter)
</TABLE>
Repairs and maintenance are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is included in the results of
operations.
Revenue Recognition
The Company generates software revenues from licensing the right to use its
software products and also generates service revenues from implementation and
installation services, ongoing maintenance (post-contract technical support and
product upgrades), training services, and professional services performed for
resellers and clients. The Company provides a warranty for 90 days on all
software licenses. The Company's policy is to not allow returns of software
licenses. The Company issues product upgrades on a when and if available basis.
Revenue from software license agreements is recognized upon shipment of the
software if:
. persuasive evidence of an arrangement exists;
. sufficient vendor-specific objective evidence exists to support
allocating the total fee to all elements of the arrangement;
. the fee is fixed or determinable; and
. collection is probable.
Shipment is further defined in certain contracts as delivery of the product
master or first copy for noncancelable product licensing arrangements under
which the reseller has certain software distribution rights. Software licenses
are shipped to resellers upon receipt of a purchase order from an end customer.
The Company recognizes revenue from the sale of software licenses placed
through a reseller upon shipment of the license to the reseller or the end
customer. The reseller is the Company's customer and is obligated to pay for
the software license upon shipment. As a result, the reseller assumes any
credit risk from the reseller's end customer and any risk that the end customer
declines receipt of the software license.
Revenue from ongoing client maintenance is recognized ratably over the
postcontract support term, which is 12 months. Revenue from training services
and professional services is recognized when the services are completed. Prior
to 1998 the Company recognized revenue from implementation and installation
services when the services were completed. Beginning in 1998, the Company
recognized revenue from implementation and installation services using the
percentage of completion method. The Company
F-8
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
calculates percentage of completion based on the estimated total number of
hours of service required to complete an implementation project and the number
of actual hours of service rendered. Implementation and installation services
are completed within 120 days. The cumulative impact of this change in
accounting principle was not material to the results of operations. Amounts
received prior to revenue recognition and for prepaid maintenance revenue are
classified as deferred revenue.
The Company provides a master copy of its software license to original
equipment manufacturers (OEM). The Company recognizes revenue from an OEM upon
notification from the OEM that delivery of the software license to an end
customer has occurred.
Advertising
Advertising costs are generally expensed as incurred. Advertising expenses
were $65,905, $158,209 and $180,629 for the years ended December 31, 1997, 1998
and 1999, respectively.
Use of Accounting Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company's foreign operations is the local
currency. Accordingly, all assets and liabilities are translated into U.S.
dollars using year-end exchange rates, and all revenues and expenses are
translated using weighted-average exchange rates during the year. The amount of
foreign currency translation is not material to the results of operations and
the financial position of the Company.
Financial Instruments and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
trade accounts receivable, and short- and long-term debt (capital lease
obligation), which had fair values that approximate their carrying amounts. The
Company invests its excess cash primarily in investment-grade commercial paper.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed,
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have not been significant. Through December 31, 1999, all software development
costs have been expensed.
F-9
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), the Company uses the
intrinsic value method to account for stock options as set forth in Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees (APB 25).
Loss Per Share
Basic loss per share is calculated based on the weighted-average number of
outstanding common shares. Diluted loss per share is calculated based on the
weighted-average number of outstanding common shares plus the effect of
dilutive potential common shares. The Company's calculation of diluted net loss
per share excludes potential common shares as the effect would be antidilutive.
Potential common shares include stock options, warrants, and redeemable
convertible preferred stock. The weighted average number of options and
warrants to purchase common stock using the treasury stock method for 1997,
1998 and 1999 were 877,361, 1,986,722 and 2,589,733 shares, respectively. The
weighted average number of shares of redeemable convertible preferred stock
using the if-converted method for 1997, 1998 and 1999 were 4,974,806, 6,992,095
and 6,992,095 shares, respectively.
Pro Forma Presentation (Unaudited)
The pro forma balance sheet at December 31, 1999 gives effect to conversion
of the convertible preferred shares into common shares which will take place
upon the closing of the proposed public offering of common shares and the
change in the par value of the common shares, both as described in Note 6.
3. Equipment
Equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Computer equipment....................................... $ 742 $ 1,339
Office equipment......................................... 49 101
Furniture and fixtures................................... 576 1,070
Software................................................. 170 256
Leasehold improvements................................... 102 97
------ -------
Gross equipment........................................ 1,639 2,863
Less: Accumulated depreciation and amortization.......... (618) (1,245)
------ -------
Equipment, net........................................... $1,021 $ 1,618
====== =======
</TABLE>
4. Debt
Revolving Line of Credit
During 1998, the Company entered into a credit agreement (the Agreement)
with a bank that provided for a secured line-of-credit facility of $400,000.
Borrowings under the Agreement are secured by the assets of the Company and
bear interest at the prime rate (8.50% at December 31, 1999) plus 1%.
On August 5, 1999, the Company amended the Agreement (the Amended
Agreement). Under the Amended Agreement, the revolving credit facility was
increased to $3,500,000 (including letters of credit of
F-10
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
up to $300,000) with a maturity of the earlier to occur of March 16, 2000 or
completion of the Company's initial public offering. At December 31, 1999,
borrowings under the Amended Agreement were $3,216,000 and outstanding letters
of credit were $284,000. The Amended Agreement also provides for equipment
advances of not more than $500,000, bearing interest at the prime rate (8.50%
at December 31, 1999) plus 1.25%. At December 31, 1999, equipment advances
aggregated $500,000 and are due June 2002. As of December 31, 1999 the Company
was not in compliance with certain covenants set forth in the Amended
Agreement. The Company obtained a waiver for the covenant violation.
In accordance with the Amended Agreement, the Company issued detachable
warrants to the bank which permit the bank to purchase 17,500 Series C
preferred shares for $6.94 per share. The warrants to purchase the Series C
convertible preferred shares automatically convert to warrants to purchase
30,625 of common shares at an exercise price of $3.97 per share upon the
completion of an initial public offering. If the Company does not repay the
portion of the outstanding amount under its revolving line of credit that is in
excess of the borrowing base (amount could be up to $1.5 million) by March 16,
2000, the lender would be entitled to an additional warrant to purchase 17,500
Series C preferred shares for $6.94 per share, which would automatically
convert to a warrant to purchase 30,625 common shares at an exercise price of
$3.97 per share upon completion of an initial public offering. The fair value
of these warrants, as calculated using the Black-Scholes method, has been
estimated at $32,000 at the time of issuance of these notes. This fair value
has been reflected as deferred financing costs in other assets and is being
amortized over the term of the line of credit.
Subordinated Convertible Promissory Notes
During 1999, the Company issued subordinated convertible promissory notes
with a face value of $1,500,000 and a stated interest rate of 10%, together
with warrants, to certain preferred shareholders. The notes are due on the
earlier of May 12, 2000 or completion of the Company's initial public offering.
Borrowings under the subordinated convertible promissory notes are subordinated
to the revolving line of credit. The subordinated convertible promissory notes
are required to be repaid upon the completion of an initial public offering.
These warrants, which became exercisable upon the issuance of the notes,
allow the note holders to purchase 43,228 shares of Series C Preferred Shares
for $6.94 per share. The warrants to purchase the Series C convertible
preferred shares automatically convert to warrants to purchase 75,649 of the
common shares at an exercise price of $3.97 per share upon completion of the
initial public offering. The fair value of these warrants, as calculated using
the Black-Scholes method, was estimated at $77,000 at the time of issuance of
the notes. No warrants have been exercised at December 31, 1999. This fair
value has been reflected as a reduction of the carrying amount of the
subordinated convertible promissory notes increasing the effective interest
rate on the subordinated convertible promissory notes to 15%.
Bridge Loan
In November 1999, a $5,000,000 secured bridge loan was made to the Company
by Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
of the Company's anticipated initial public offering. Certain employees and
entities associated with Hambrecht & Quist LLC have a $1.4 million
participation in this loan and ARCH Venture Fund III, LP, a preferred
shareholder, has a $500,000 participation in this loan. This loan and interest
of 9.25% are due on March 31, 2000. If any principal balance is not paid in
full on the due date, such overdue principal amount shall bear interest at 15%
and will be payable on demand. If a sale event, as defined, does not occur the
Company will pay a commitment fee of $50,000 on the date the loan is due.
F-11
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company granted to Access Technology Partners, L.P. and other
participants warrants to purchase 236,250 common shares in connection with
this loan. The Company also granted ARCH Venture Fund III, LP warrants that
can be exercised to purchase 26,250 common shares. The exercise price of the
warrants is initially $5.34 per share but will increase to the initial public
offering price, subject to a one-time adjustment on or before November 5,
2000, to the 20-day average market price if the average market price is less
than the initial public offering price. The fair value of these warrants as
calculated using the Black-Scholes method, was estimated at $2,525,250 at the
time of issuance of the loan. No warrants have been exercised at December 31,
1999. This fair value has been reflected as a reduction of the carrying amount
of the loan increasing the effective interest rate on the loan to 121%.
In applying the Black-Scholes method, the Company has used an expected
dividend yield of zero, a risk-free interest rate of 5%, a volatility factor
of 136% and a fair value of the underlying common shares of $4.32 for warrants
issued with the line of credit and the subordinated convertible promissory
notes and $14.00 for warrants issued with the bridge loan. The lives used to
value each of the warrants was based on the term of each warrant as described
above.
During 1999, the Company granted 60,728 warrants to purchase Series C
Preferred Shares with a weighted average exercise price of $6.94 per share and
262,500 warrants to purchase common shares with a weighted average exercise
price of $5.34 per share. No warrants had been exercised at December 31, 1999.
Annual maturities of the Company's long-term debt at December 31, 1999, are
$204,493 in 2001 and $109,938 in 2002.
5. Income Taxes
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 34% is due to net operating losses not being benefited. Accordingly, there
is no provision for income taxes for the years ended December 31, 1997, 1998
and 1999.
At December 31, 1999, the Company has net operating loss carryforwards
aggregating approximately $15,614,000, which begin to expire in 2012. Based on
Internal Revenue Code regulations relating to changes in ownership of the
Company, utilization of the net operating loss carryforwards may be subject to
annual limitations. For financial reporting purposes, the entire amount of
deferred tax assets related principally to the net operating loss
carryforwards has been offset by a valuation allowance due to uncertainty
regarding realization of the asset.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 3,185 $6,090
Amounts to adjust from accrual method to the cash
method of accounting used for tax purposes........... (650) --
Research and development tax credit carryforwards..... -- 333
Other................................................. 15 118
------- ------
Total deferred tax assets............................... 2,550 6,541
Valuation allowance for deferred tax assets............. (2,550) (6,541)
------- ------
$ -- $ --
======= ======
</TABLE>
F-12
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Deficit
Authorization of Common and Convertible Preferred Shares
Effective May 14, 1997, the Company's Board of Directors adopted and the
shareholders approved an increase in the number of authorized capital shares
from 8,442,634 to 11,689,867, of which 7,694,384 shares were designated as
common shares and 3,995,483 shares were designated as convertible preferred
shares. The Company's Board of Directors has the authority, without shareholder
approval, to issue one or more series of preferred shares and to establish the
rights and preferences of such preferred shares.
Convertible Preferred Shares
The following table reflects the various convertible preferred shares issued
through December 31, 1999:
<TABLE>
<CAPTION>
Amount (Net of
Shares Issuance Costs)
--------- --------------
(in thousands)
<S> <C> <C>
Series A, issued March 1997.................... 1,242,858 $ 2,119
Series B, issued December 1997................. 1,599,888 5,974
Series C, issued March 1998.................... 1,152,737 7,986
--------- -------
Balance at December 31, 1999................... 3,995,483 $16,079
========= =======
</TABLE>
Convertible preferred shares are subject to the following rights and
privileges.
Conversion and Redemption
The holders of preferred shares have the right, at anytime, to convert the
preferred shares into common shares. In addition, effective upon the closing of
an initial public offering of the Company's common shares, which results in
proceeds of at least $20,000,000 and a per share price of at least $11.25, each
preferred share will automatically convert into 1.75 common shares.
If the Company has not effected a liquidation, merger, consolidation, or
other disposition of all or substantially all of its assets, or completed a
qualified public offering (as defined), prior to March 19, 2001, the holders of
the convertible preferred shares, upon approval of holders of 66 2/3% of the
shares, have the right to require the Company to redeem 33 1/3%, 50%, and 100%
of the shares on March 19, 2001, March 19, 2002, and March 19, 2003,
respectively.
Dividends
Preferred shareholders shall be entitled to receive dividends at the same
rate as dividends are paid with respect to the common shares. Such preferred
dividends will be determined by the number of common shares into which each
preferred share could then be converted, as defined.
Liquidation
In certain events, including liquidation, dissolution, or winding up of the
Company as defined, the holders of the Series C Preferred Shares shall be
entitled, before any distribution or payment is made upon any shares with
liquidation preferences junior to the Series C Preferred Shares, to be paid
$6.94 per share (as adjusted for share split, share dividends, and the like)
plus any dividends declared but unpaid thereon. Further, upon any such
liquidation, dissolution, or winding up of the Company, after the holders of
Series C
F-13
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Shares are paid in full the amounts to which they are entitled, the
holders of the Series B Preferred Shares are entitled, before any distribution
or payment is made upon any shares with liquidation preferences junior to the
Series B Preferred Shares, to be paid $3.75 per share plus (as adjusted for
share split, share dividends, and the like), any dividends declared but unpaid
thereon. Further, upon any such liquidation, dissolution, or winding up of the
Company, after the holders of Series C and B Preferred Shares are paid in full
the amounts to which they are entitled, the holders of the Series A Preferred
Shares are entitled, before any distribution or payment is made upon any shares
with liquidation preferences junior to the Series A Preferred Shares, to be
paid $1.70 per share plus (as adjusted for share split, share dividends, and
the like) any dividends declared but unpaid theron.
Voting
Preferred shareholders are entitled to votes equal to the number of shares
of common shares which may be obtained upon conversion.
Stock Split
The Board of Directors has declared a seven-for-four stock split effective
immediately prior to the closing of an initial public offering of the Company's
common shares. All common share and per share amounts and information
concerning stock option plans have been adjusted retroactively to give effect
to this stock split.
Stock Option Plan
Utilizing the intrinsic value method of APB 25, the Company recognized $0,
$69,000 and $229,000 of stock compensation expense during the years ended
December 31, 1997, 1998 and 1999, respectively.
The Company's 1995 stock option plan (the Plan) provides for the issuance of
incentive stock options and nonqualified stock options to eligible employees
and officers of the Company. The options can be granted for periods of up to
ten years and generally vest ratably over a four-year period with initial
vesting occurring on the first anniversary from the grant date and monthly
thereafter.
Had stock options been accounted for under the fair value method recommended
by SFAS 123, the Company's net loss as follows would have been on a pro forma
basis (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net loss--as reported............................... $3,567 $4,822 $8,509
Net loss--pro forma................................. $3,592 $4,884 $8,723
Pro forma loss per share............................ $ 1.23 $ 1.66 $ 2.92
</TABLE>
The fair value of stock options used to compute pro forma net loss is the
estimated present value at the grant date using the minimum value option-
pricing model with the following assumptions: dividend yield of 0%; risk-free
interest rates of 5.00% for 1999, 4.65% for 1998 and 5.71% for 1997; and a
weighted-average expected option life of four years.
F-14
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information related to the Plan is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... 1,840,875 $.100 2,337,069 $.131 2,912,382 $ .202
Options granted......... 651,436 .214 698,249 .454 684,600 1.533
Options exercised....... (68,110) .100 (19,842) .109 (107,759) .256
Options canceled........ (87,132) .100 (103,094) .237 (136,918) .894
Options outstanding, end
of period.............. 2,337,069 .131 2,912,382 .202 3,352,305 .457
Option price range at
end of period.......... $.100-$.214 $.100-$.628 $.100-$5.94
Weighted-average fair
value of options
granted during the
period................. $.342 $.805 $5.883
Options available for
grant at period end.... 570,662 565,552 17,870
Exercisable at December
31, 1999............... 2,083,836 .209
</TABLE>
The outstanding options at December 31, 1999, have a weighted-average
remaining contractual life of 7.70 years.
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Exercisable Average
Range of Number of Contractual Exercise Options as Exercise
Exercise Prices Shares Life (in years) Price of 12/31/99 Price
--------------- --------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.100 1,645,237 6.42 $0.100 1,504,578 $0.100
$0.214 675,938 7.72 $0.214 367,712 $0.214
$0.400 252,173 8.84 $0.400 90,384 $0.400
$0.629-$0.914 307,857 9.21 $0.761 81,451 $0.761
$1.371 425,600 9.73 $1.371 38,870 $1.371
$5.943 45,500 9.99 $5.943 841 $5.943
--------- ---- ------ --------- ------
$0.100-$5.943 3,352,305 7.70 $0.457 2,083,836 $0.209
========= ==== ====== ========= ======
</TABLE>
7. Lease Commitments
At December 31, 1999, the Company was obligated for future minimum lease
payments under capital and operating leases that have initial or remaining
noncancelable terms in excess of one year, as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
December 2000........................................... $122 $ 850
December 2001........................................... 72 678
December 2002........................................... -- 622
December 2003........................................... -- 593
---- ------
194 $2,743
======
Less: Amounts representing interest..................... 18
----
Obligations under capital leases........................ 176
Less: Obligations due within one year................... 122
----
Long-term obligation under capital leases............... $ 54
====
</TABLE>
F-15
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for operating leases was $157,496, $374,165 and $879,337 for
the years ended December 31, 1997, 1998, and 1999, respectively.
Assets recorded under capitalized lease agreements included in equipment at
December 31, 1999, consist of the following (in thousands):
<TABLE>
<S> <C>
Computer equipment.................................................. $100
Furniture and fixtures.............................................. 200
----
300
Accumulated depreciation and amortization........................... (121)
----
$179
====
</TABLE>
8. Related Party Transactions
The Company has a note receivable in the amount of $50,000 from one of its
employee/shareholders. The note bears interest at 5.77%, payable quarterly in
arrears, and is due in full on the earlier of: (1) March 31, 2003; (2) the date
of termination of employment for any reason; (3) the date of the sale of all or
substantially all of the Company's assets; (4) the sale of any portion of
securities owned by the employee/shareholder or any successor to the Company;
or (5) the earliest date on which the employee/shareholder would be able to
sell any portion of securities owned by the employee/shareholder as a result of
such securities being registered under the Securities Act of 1933. The
outstanding balance of the note plus accrued interest receivable ($54,363 at
December 31, 1999) has been classified as noncurrent in the balance sheet.
9. 401(k) Profit-Sharing Plan
Effective January 1, 1997, the Company implemented a 401(k) profit-sharing
plan covering substantially all employees who meet defined service
requirements. The plan provides for deferred salary contributions by the plan
participants and a Company contribution. Company contributions, if any, are at
the discretion of the Board of Directors and are not to exceed the amount
deductible under applicable income tax laws. No Company contributions have been
made since inception of the plan.
10. Geographic Information
Revenues derived from customers outside of North America accounted for
approximately 0%, 6.6% and 20.8% of the Company's total revenues in 1997, 1998
and 1999, respectively.
The Company attributes its revenues to countries based on the country in
which the client is located. The Company's long-lived assets located outside
the United States are not considered material.
11. Contingencies
The Company had a dispute with a former reseller in which the reseller
alleged that the Company had breached a contract between the two companies. The
dispute was submitted to a binding resolution by an arbitrator. On September
15, 1999, the arbitrator ruled that the Company had breached its contract with
a former reseller. The damages phase of the arbitration proceedings is
scheduled to be held in January 2000. The Company has recorded a provision for
the settlement of this arbitration. Management believes this amount is not
material. Management does not believe this arbitration will have a material
adverse affect on the Company's financial condition.
F-16
<PAGE>
APROPOS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 have determined to make available up to 320,000
common shares at the initial public offering price for business associates and
related persons associated with the Company (the "directed share program"). On
November 24, 1999, prior to effectiveness of the Company's registration
statement, the Company sent an electronic mail message with respect to the
proposed directed share program to all of the Company's 147 employees setting
forth procedural aspects of the directed share program and informing the
recipients that their immediate families might have an opportunity to
participate in the proposed directed share program. The Company did not deliver
a preliminary prospectus prior to distribution of this electronic mail as
required by the Securities Act of 1933. In addition, the electronic mail
message may have constituted a non-conforming prospectus under the Securities
Act of 1933. As a result, the Company may have a contingent liability under
Section 5 of the Securities Act of 1933. Any liability would depend upon the
number of common shares purchased by the recipients of the electronic mail. The
recipients of the electronic mail message who purchase common shares in the
initial public offering may have a right for a period of one year from the date
of the purchase to obtain recovery of the consideration paid in connection with
their purchase of common shares or, if they had already sold the stock, file a
claim against the Company for damages resulting from their purchase of the
common shares. If any liability is asserted with respect to the electronic mail
message, the Company will contest the matter vigorously. However, if all of the
purchasers in the directed share program are awarded damages after an entire or
substantial loss of their investment, the damages could total up to
approximately $4.5 million plus interest based on the assumed initial public
offering price of $14.00 per share. Although there can be no assurance as to
the ultimate disposition of this matter, it is the opinion of the Company's
management, based upon the information available at this time, that the
expected outcome of this matter will not have a material adverse effect on the
results of operations and financial condition of the Company.
F-17
<PAGE>
[Flap 4]
[(Inside Back Cover)]
[Graphic depiction of the Apropos logo.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,200,000 Shares
[APROPOS TECHNOLOGY, INC. LOGO]
Common Shares
----------------
PROSPECTUS
----------------
CHASE H&Q
SG COWEN
U.S. BANCORP PIPER JAFFRAY
----------------
, 2000
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, common shares only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this prospectus or
of any sale of our common shares.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common shares or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until , 2000, all dealers that buy, sell or trade in our common
shares, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by us, will be
substantially as set forth below. All amounts are estimated except the
Securities and Exchange Commission registration fee, the National Association
of Securities Dealers filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Item Amount
---- ----------
<S> <C>
Securities and Exchange Commission registration fee.............. $ 15,346
NASD filing fee.................................................. 6,020
Nasdaq National Market listing fee............................... 87,000
Accounting fees and expenses..................................... 300,000
Legal fees and expenses.......................................... 350,000
Transfer agent fees and expenses................................. 25,000
Printing and engraving expenses.................................. 250,000
Directors and officers insurance premiums........................ 450,000
Miscellaneous expenses........................................... 16,634
----------
Total.......................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitation of Liability and Indemnification Matters
We are incorporated under the laws of the State of Illinois. Section 8.75 of
the Illinois Business Corporation Act provides generally that an Illinois
corporation may indemnify its directors and officers against (1) expenses,
including attorneys' fees, in the case of actions by or in the right of the
corporation or (2) against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement in all other cases, actually and
reasonably incurred by them in connection with any action, suit, or proceeding
if, in connection with the matters in issue, they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interests
of the corporation and, in connection with any criminal suit or proceeding, if
in connection with the matters in issue, they had no reasonable cause to
believe their conduct was unlawful. Section 8.75 further permits an Illinois
corporation to grant to its directors and officers additional rights of
indemnification through bylaw provisions, agreements, votes of shareholders or
disinterested directors, or otherwise. An Illinois corporation may also
purchase indemnity insurance on behalf of such indemnifiable persons and to
advance to such indemnifiable persons expenses incurred in defending a suit or
proceeding upon receipt of an undertaking by such persons to repay such amount
if it is ultimately determined that such person is not entitled to be
indemnified by us in accordance with Section 8.75.
Our amended and restated articles of incorporation provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for breach of fiduciary duty as a director, except for (1) for any
breach of the director's duty of loyalty to us, (2) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) under Section 8.65 of the Illinois Business Corporation Act, as the
same exists or hereafter may be amended or (4) for any transaction from which
the director derived an improper benefit. Our amended and restated articles of
incorporation also provide that if the Illinois Business Corporation Act is
amended to authorize the further elimination or limitation of the liability of
directors, then the liability of our directors shall be eliminated or limited
to the full extent authorized by the Illinois Business Corporation Act as
amended.
Our amended and restated bylaws provide that we shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of the
II-1
<PAGE>
corporation, by reason of the fact that he is or was one of our directors or
officers, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in and not opposed to our best interests, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Such person is also entitled to indemnification in
connection with an action or suit by or in the right of us against expenses,
including attorneys' fees actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, if such
person acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, our best interests provided that no such indemnification
may be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to us unless and only to the extent that
the court in which such action or suit was brought shall determine that,
despite the adjudication of liability but in consideration of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. In addition, all
of our directors and officers are expected to be covered by insurance policies
maintained by us against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act.
The underwriting agreement also provides for indemnification by the
underwriters of our officers and directors for specified liabilities under the
Securities Act of 1933.
We have entered into agreements to indemnify our directors and some of our
executive officers, in addition to the indemnification provided for in our
amended and restated bylaws. These agreements, among other things, will
indemnify our directors and such executive officers for all direct and indirect
expenses and costs including, without limitation, all reasonable attorneys'
fees and related disbursements, other out of pocket costs and reasonable
compensation for time spent by such persons for which they are not otherwise
compensated by us or any third person, and liabilities of any type whatsoever,
including, but not limited to, judgments, fines and settlement fees, actually
and reasonably incurred by such person in connection with either the
investigation, defense, settlement or appeal of any threatened, pending or
completed action, suit or other proceeding, including any action by or in the
right of the corporation, arising out of such person's services as a director
or officer or as a director, officer, employee or other agent of any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request if such director or officer acted in good faith and in
a manner he or she reasonably believed to be in, or not opposed to, our best
interests and, with respect to any criminal action or proceeding, if he or she
had no reasonable cause to believe his or her conduct was unlawful. We believe
that these provisions and agreements are necessary to attract and retain
talented and experienced directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information reflects our recent sales of unregistered
securities:
On or about March 19, 1996, we issued 1,242,858 shares of Series A
convertible preferred shares to three investors consisting of partnerships for
an aggregate consideration of $2,175,000.
On or about December 20, 1996, we issued 1,599,888 shares of Series B
convertible preferred shares to five investors consisting of partnerships and a
corporation for an aggregate consideration of $6,000,000.
On or about March 11, 1998, we issued 1,152,737 shares of our Series C
convertible preferred shares to four investors consisting of partnerships and a
corporation for an aggregate consideration of $8,000,000.
In June 1999, we issued subordinated convertible promissory notes with a
face value of $1.5 million and a stated interest rate of 10% per annum. In
connection with these notes, we issued warrants to purchase 43,228 shares of
our Series C convertible preferred shares to these holders at an exercise price
of $6.94 per
II-2
<PAGE>
share. The warrants to purchase our Series C convertible preferred shares
automatically convert to warrants to purchase 75,649 of our common shares at an
exercise price of $3.97 per share upon completion of this offering.
In May 1999, we also issued a warrant to purchase 17,500 shares of our
Series C convertible preferred shares at an exercise price of $6.94 per share
to Silicon Valley Bank. This warrant will automatically convert to a warrant to
purchase 30,625 of our common shares at an exercise price of $3.97 per share
upon completion of this offering. Silicon Valley Bank is also entitled to an
additional identical warrant if we do not repay the portion of the outstanding
amount under our revolving line of credit that is in excess of the borrowing
base, which amount could be up to $1.5 million, by March 16, 2000.
In November 1999, a $5.0 million secured bridge loan was made to Apropos by
Access Technology Partners, L.P., a fund of investors that is managed by an
entity associated with Hambrecht & Quist LLC, one of the managing underwriters
in this offering. Certain employees and entities associated with Hambrecht &
Quist LLC have a $1.4 million participation in this loan and ARCH Venture Fund
III, L.P., one of the investors in our convertible preferred shares, has a
$500,000 participation in this loan. Apropos granted to Access Technology
Partners, L.P. warrants that can be exercised to purchase 236,250 common shares
in connection with this loan and the employees and entities associated with
Hambrecht & Quist LLC that are participating in this loan have the right to
receive their pro rata portion of the warrants granted. Apropos also granted
ARCH Venture Fund III, L.P. warrants that can be exercised to purchase 26,250
common shares. The exercise price of the warrants is initially $5.34 per share
but is subject to adjustment.
No underwriters were involved in any of the transactions described above. We
issued all of the securities in the foregoing transactions in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act,
including Regulation D promulgated thereunder, as transactions by an issuer not
involving any public offering and the transactions involved the issuance and
sale of our securities to financially sophisticated entities or individuals who
represented that they were aware of our activities and business and financial
condition, and who took these securities for investment purposes and understood
the ramifications of their actions. Each security holder represented that they
acquired such securities for investment for their own account and not for
distribution. All certificates representing the stock issued have a legend
imprinted on them stating that the shares have not been registered under the
Securities Act and cannot be transferred until properly registered under the
Securities Act or an exemption applies.
Between January 1, 1997 and January 1, 2000 we issued options to purchase
1,874,600 common shares at exercise prices ranging from $0.214 to $5.94 to
employees.
Between January 1, 1997 and January 1, 2000, an aggregate of 347,445 common
shares were issued upon exercise of options under our stock option plan
No underwriters were involved in any of the transactions relating to options
that are described above. We issued all of the securities in the foregoing
transactions in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Rule 701 promulgated thereunder,
as transactions by an issuer not involving any public offering and pursuant to
a written compensatory benefit plan.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Articles of Incorporation.
3.2 Form of Amended and Restated Bylaws.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
4.1* Specimen Common Share Certificate of the Registrant.
5.1* Opinion of McDermott, Will & Emery.
10.1* Employment Agreement dated January 1, 2000 between the Registrant and
Kevin G. Kerns.
10.2* Employment Agreement dated March 19, 1996 between the Registrant and
Patrick K. Brady, as amended.
10.3 Employment Agreement dated April 23, 1997 between the Registrant and
Richard D. Brown.
10.4* Employment Agreement dated January 19, 2000 between the Registrant and
Jody P. Wacker.
10.5* 2000 Omnibus Incentive Plan.
10.6 Employee Stock Purchase Plan of 2000.
10.7* Form of Indemnity Agreement.
10.8 Registration Rights Agreement dated March 19, 1996, between the
Registrant and the persons listed on the signature pages thereto, as
amended.
10.9* Amended and Restated Registration Right Agreement dated November 5,
1999, by and among Silicon Valley Bank, Access Technology Partners,
L.P., ARCH Venture Fund III, L.P. and the Registrant.
21* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of McDermott, Will & Emery (incorporated by reference into
Exhibit 5.1).
24.1* Power of Attorney (set forth on the signature page to this registration
statement).
27.1* Financial Data Schedule.
</TABLE>
---------------------
* Previously filed.
Financial Statements and Schedule:
Financial Statements:
Consolidated financial statements filed as a part of this registration
statement are listed in the Index to consolidated financial statements on page
F-1.
Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing of the offering specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Oakbrook Terrace, State of Illinois, on February 10, 2000.
Apropos Technology, Inc.
/s/ Michael J. Profita
By: _________________________________
Michael J. Profita
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed on February 10, 2000, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Name and Signatures Title
------------------- -----
<S> <C>
/s/ Kevin G. Kerns* Director, Chief Executive Officer and
___________________________________________ President
Kevin G. Kerns
/s/ Michael J. Profita Chief Financial Officer (Principal
___________________________________________ Financial and Accounting Officer)
Michael J. Profita
/s/ Patrick K. Brady* Director
___________________________________________
Patrick K. Brady
/s/ Catherine R. Brady* Director
___________________________________________
Catherine R. Brady
/s/ Keith L. Crandell* Director
___________________________________________
Keith L. Crandell
/s/ Ian Larkin* Director
___________________________________________
Ian Larkin
/s/ Maurice A. Cox, Jr.* Director
___________________________________________
Maurice A. Cox, Jr.
/s/ George B. Koch* Director
___________________________________________
</TABLE> George B. Koch
/s/ Michael J. Profita
*By: ________________________________
Michael J. Profita
Attorney-in-fact
II-6
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
APROPOS TECHNOLOGY, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Additions
-------------------
Charged Charged to Balance
Balance at to Costs Other at End
Beginning and Accounts-- Deductions-- of
Description of Period Expenses Describe Describe Period
- ----------- ---------- -------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $ -- 65,000 -- 3,000 (1) $ 62,000
Year ended December 31,
1997
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $ 62,000 46,000 -- 58,000 (1) $ 50,000
Year ended December 31,
1998
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $ 50,000 101,000 -- $151,000
Year ended December 31,
1999
Reserves and allowances
deducted from asset
accounts:
Allowance for
doubtful accounts... $151,000 311,000 -- -- $462,000
</TABLE>
- ---------------------
(1) Uncollectible accounts written off, net of recoveries.
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of Apropos
Technology, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1999, and have issued our report
thereon dated January 13, 2000 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
January 13, 2000
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Articles of Incorporation.
3.2 Form of Amended and Restated Bylaws.
4.1* Specimen Common Share Certificate of the Registrant.
5.1* Opinion of McDermott, Will & Emery.
10.1* Employment Agreement dated January 1, 2000 between the Registrant and
Kevin G. Kerns.
10.2* Employment Agreement dated March 19, 1996 between the Registrant and
Patrick K. Brady, as amended.
10.3 Employment Agreement dated April 23, 1997 between the Registrant and
Richard D. Brown.
10.4* Employment Agreement dated January 19, 2000 between the Registrant and
Jody P. Wacker.
10.5* 2000 Omnibus Incentive Plan.
10.6 Employee Stock Purchase Plan of 2000.
10.7* Form of Indemnity Agreement.
10.8 Registration Rights Agreement dated March 19, 1996, between the
Registrant and the persons listed on the signature pages thereto, as
amended.
10.9* Amended and Restated Registration Right Agreement dated November 5,
1999, by and among Silicon Valley Bank, Access Technology Partners,
L.P., ARCH Venture Fund III, L.P. and the Registrant.
21* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of McDermott, Will & Emery (incorporated by reference into
Exhibit 5.1).
24.1* Power of Attorney (set forth on the signature page to this
registration statement).
27.1* Financial Data Schedule.
</TABLE>
- ---------------------
* Previously filed.
<PAGE>
Exhibit 1.1
APROPOS TECHNOLOGY, INC.
3,200,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 2000
CHASE SECURITIES INC.
SG COWEN SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY INC.
c/o Chase Securities Inc.
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Apropos Technology, Inc., an Illinois corporation (herein called the
Company), proposes to issue and sell 3,200,000 shares of its authorized but
unissued Common Shares, $0.01 par value (herein called the Common Stock), (said
3,200,000 shares of Common Stock being herein called the Underwritten Stock).
The Company proposes to grant to the Underwriters (as hereinafter defined) an
option to purchase up to 240,000 additional shares of Common Stock (herein
called the Company Option Stock) and the shareholder of the Company named in
Schedule II hereto (herein called the Selling Securityholder) proposes to grant
to the Underwriters an option to purchase up to 240,000 additional shares of
Common Stock (herein called the Selling Securityholder Option Stock, together
with the Company Option Stock, herein collectively called the Option Stock and
the Option Stock, together with the Underwritten Stock, herein collectively
called the Stock). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned. Chase Securities Inc.
(herein called Chase) has agreed to reserve a portion of the Underwritten Stock
to be purchased by it under this Agreement for sale to the Company's directors,
officers, employees and business associates and other parties related to the
Company (herein collectively called Participants), as set forth in the
Prospectus under the heading "Underwriting" (such program herein called the
Directed Share Program). The Shares to be sold by Chase pursuant to the Directed
Share Program are referred to hereinafter as the Directed Shares. Any Directed
Shares not orally confirmed for purchase by any Participants by the
- ----------------
/1/ Plus an option to purchase from the Company up to 240,000 additional
shares and from the Selling Securityholder up to 240,000 additional shares to
cover over-allotments.
<PAGE>
end of the business day on which this Agreement is executed will be offered to
the public by the Underwriters as set forth in the Prospectus.
The Company and the Selling Securityholder severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and
warrant that you have been authorized by each of the other Underwriters to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
1. Registration Statement. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration statement
on Form S-1 (No. 333-90873), including the related preliminary prospectus, for
the registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. Representations and Warranties of the Company and the Selling
Securityholder.
<PAGE>
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property
owned or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified
would not have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole).
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been a
Material Adverse Change (as defined below), other than as set forth in
the Registration Statement and the Prospectus, and since such dates,
except in the ordinary course of business, neither the Company nor any of
its subsidiaries has entered into any material transaction not referred
to in the Registration Statement and the Prospectus. As used herein,
Material Adverse Change shall mean a materially adverse change in the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business.
(iii) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and
warranties in this subparagraph (iii) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in
reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters
for use in the Registration Statement or the Prospectus.
Each of the Registration Statement and any Rule 462(b) registration
statement has become effective under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) registration statement has been issued under the Securities Act
and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of the Company, are contemplated by the Commission,
and
<PAGE>
any request on the part of the Commission for additional information has
been complied with.
(iv) The Stock is duly and validly authorized, is (or, in the case of
shares of the Stock to be sold by the Company, will be, when issued and
sold to, and paid for by, the Underwriters as provided herein) duly and
validly issued, fully paid and nonassessable and conforms to the
description thereof in the Prospectus. No further approval or authority
of the shareholders or the Board of Directors of the Company will be
required for the transfer and sale of the Stock to be sold by the Selling
Securityholder or the issuance and sale of the Stock as contemplated
herein.
(v) Prior to the Closing Date the Stock to be issued and sold by the
Company and the Stock to be sold by the Selling Securityholder will be
authorized for listing by the Nasdaq National Market upon official notice
of issuance.
(vi) Ernst & Young LLP, the accountants who certified the consolidated
financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the Securities Act and the rules and regulations promulgated thereunder.
(vii) The consolidated financial statements included in the
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly, in all material respects, the
financial position of the Company at the dates indicated and the results
of its operations and its cash flows for the periods specified. Such
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (herein called GAAP) applied on
a consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected consolidated financial data and the summary consolidated
financial data included in the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with that of
the audited consolidated financial statements included in the
Registration Statement.
(viii) Each subsidiary of the Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Change; except as otherwise disclosed in
the Registration Statement, all of the issued and outstanding capital
stock of each such subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the Company,
directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; none of
the outstanding shares of capital stock of any subsidiary was issued in
violation of the preemptive or similar rights of any
<PAGE>
securityholder of such subsidiary. The only subsidiaries of the Company are
the subsidiaries listed on Exhibit 21 to the Registration Statement.
(ix) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct in all material respects. All of the Stock
conforms in all material respects to the description thereof contained in the
Registration Statement. The form of certificates for the Stock conforms to the
legal requirements of the State of Illinois.
(x) This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement of the Company, enforceable in
accordance with its terms except insofar as indemnification and contribution
provisions may be limited by applicable law or equitable principles and except
as enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(xi) Neither the Company nor any of its subsidiaries is in violation of its
Articles of Incorporation or By-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any subsidiary is
subject (herein called the Agreements and Instruments) except for such
defaults that would not result in a Material Adverse Change; and the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated in this Agreement and in the Registration
Statement (including the issuance and sale of the Stock and the use of the
proceeds from the sale of the Stock as described in the Prospectus under the
caption "Use of Proceeds") and compliance by the Company with its obligations
under this Agreement have been duly authorized by all necessary corporate
action and do not and will not, whether with or without the giving of notice
or passage of time or both, conflict with or constitute a breach of, or
default or, except as set forth in the Registration Statement, Repayment Event
(as defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that would
not result in a Material Adverse Change), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary or any applicable law, statute, rule, regulation, judgment, order,
writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any subsidiary or
any of their assets, properties or operations. As used herein, a Repayment
Event means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or repayment
of all or a portion of such indebtedness by the Company or any subsidiary.
<PAGE>
(xii) No material labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent, and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its or any subsidiary's principal suppliers,
manufacturers, customers or contractors, which, in either case, may reasonably
be expected to result in a Material Adverse Change.
(xiii) There is no action, suit, proceeding, inquiry or investigation before
or brought by any court or governmental agency or body, domestic or foreign,
now pending, or, to the knowledge of the Company, threatened, against or
affecting the Company or any subsidiary, which is required to be disclosed in
the Registration Statement (other than as disclosed therein), or which might
reasonably be expected to result in a Material Adverse Change, or which might
reasonably be expected to materially and adversely affect the consummation of
the transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any subsidiary is a party or
of which any of their respective property or assets is the subject which are
not described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Change.
(xiv) There are no contracts or documents which are required to be described
in the Registration Statement or the Prospectus or to be filed as exhibits
thereto which have not been so described and filed as required.
(xv) To its knowledge and except as described in the Registration Statement or
the Prospectus, the Company together with its subsidiaries owns and possesses
all right, title and interest in and to, or has duly licensed from third
parties a valid, enforceable right to use, all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names (herein called Patent
and Proprietary Rights) currently or proposed to be employed by it in
connection with its business. Except as described in the Registration
Statement or the Prospectus, neither the Company nor any of its subsidiaries
has received any notice of or has any knowledge of any infringement or
misappropriation of or conflict with asserted rights of others with respect to
any Patent or Proprietary Rights, or of any facts which would render any
Patent or Proprietary Rights invalid or inadequate to protect the interest of
the Company or its subsidiaries therein, and which infringement,
misappropriation or conflict or invalidity or inadequacy, individually or in
the aggregate, would reasonably be expected to result in a Material Adverse
Change.
(xvi) No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental authority
or agency is necessary or required for the performance by the Company of its
obligations under this Agreement, in connection with the offering, issuance or
sale of the Stock hereunder or the consummation of the transactions
contemplated by this Agreement, except such as have
<PAGE>
been already obtained or as may be required under the Securities Act, or
the rules and regulations promulgated thereunder, or state or foreign
securities laws or pursuant to the regulations of the National
Association of Securities Dealers, Inc. (the NASD).
(xvii) The Company and its subsidiaries possess all material permits,
licenses, approvals, consents and other authorizations (herein called
Governmental Licenses) issued by the appropriate federal, state, local or
foreign regulatory agencies or bodies necessary to conduct the business
now operated by them; the Company and its subsidiaries are in compliance
with the terms and conditions of all such Governmental Licenses, except
where the failure so to comply would not, singly or in the aggregate,
result in Material Adverse Change; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect would not result in a Material Adverse Change;
and neither the Company nor any of its subsidiaries has received any
notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Change.
(xviii) Neither the Company nor its subsidiaries owns any real property.
The Company and its subsidiaries have good and marketable title to all
other properties and assets owned by them and reflected in the financial
statements, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectus (b) are reflected
in the financial statements included in the Prospectus, or (c) do not,
singly or in the aggregate, materially and adversely affect the value of
such property and do not interfere with the use made and proposed to be
made of such property by the Company or any of its subsidiaries; and all
of the leases and subleases material to the business of the Company and
its subsidiaries, considered as one enterprise, and under which the
Company or any of its subsidiaries holds properties described in the
Prospectus, are in full force and effect, and neither the Company nor any
subsidiary has any notice of any material claim of any sort that has been
asserted by anyone adverse to the rights of the Company or any subsidiary
under any of the leases or subleases mentioned above, or affecting or
questioning the rights of the Company or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xix) Except as described in the Registration Statement and except as
would not, singly or in the aggregate, result in a Material Adverse
Change, (A) neither the Company nor any of its subsidiaries is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial
or administrative interpretation thereof currently in effect, including
any judicial or administrative order, consent decree or judgment,
relating to pollution or protection of human health, the environment
(including, without limitation, ambient air, surface water, groundwater,
land surface or
<PAGE>
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (herein called Hazardous Materials) or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (herein called
Environmental Laws), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or, to the knowledge of the Company, threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against
the Company or any of its subsidiaries and (D) to the knowledge of the
Company, there are no events or circumstances that might reasonably be
expected to form the basis of an order for clean-up or remediation, or an
action, suit or proceeding by any private party or governmental body or
agency, against or affecting the Company or any of its subsidiaries
relating to Hazardous Materials or any Environmental Laws.
(xx) Except with respect to the registration rights of the holders of the
Company's Series A Preferred Shares, Series B Preferred Shares and Series
C Preferred Shares and the warrant holders as described in the
Registration Statement, which registration rights have been waived by
such holders, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the
Registration Statement or, except as disclosed in the Prospectus,
otherwise registered by the Company under the Securities Act.
(xxi) The Company and each of its subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and other
tax returns (after giving effect to extensions) and have paid all taxes
shown as due thereon or with respect to any of its properties, and there
is no tax deficiency that has been, or to the knowledge of the Company is
likely to be, asserted against the Company, any of its subsidiaries or
any of their properties or assets that would result in a Material Adverse
Change.
(xxii) The Company and each of its subsidiaries is insured by insurers of
national recognition against such losses and risks and in such amounts as
the Company believes is customary for companies engaged in the Company's
business.
(xxiii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (C)
access to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded accountability
for assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
<PAGE>
(xxiv) To the best of the Company's knowledge, neither the Company nor
any employee or agent of the Company has made any payment of funds of the
Company or received or retained any funds in violation of any law, rule
or regulation, including, without limitation, the Foreign Corrupt
Practices Act.
(xxv) To the best of the Company's knowledge, the Company has paid all
material tariff, custom, import, export and other duties required to be
paid by it (if any) in connection with the exportation of products from
the country of manufacture, the importation of products into the United
States, the exportation of products from the United States and the
importation of products into another country and has provided all
appropriate authorities with the requisite information, all of which, to
the best of the Company's knowledge, is true and correct, necessary for
the proper determination of the foregoing.
(xxvi) The Company and each member of its Control Group (as defined
below) is in compliance in all material respects with all presently
applicable provisions of the U.S. Employee Retirement Income Security Act
of 1974, as amended (herein called ERISA), and the regulations and
published interpretations thereunder; no "reportable event" (as defined
in ERISA and the regulations and published interpretations thereunder)
has occurred with respect to any material "pension plan" (as defined in
ERISA and the regulations and published interpretations thereunder)
established or maintained by the Company or any member of its Control
Group; neither the Company nor any member of its Control Group has
incurred nor expects to incur any material liability under (i) Title IV
of ERISA with respect to termination of, or withdrawal from, any "pension
plan" or (ii) Section 412 or 4971 of the U.S. Internal Revenue Code of
1986, as amended (hereinafter called the Code); and each material
"pension plan" established or maintained by the Company that is intended
to be qualified under Section 401(a) of the Code is so qualified in all
material respects and has received a favorable determination letter as to
its qualification and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification. For purposes of
this subsection, "Control Group" is defined to include any entity which
is part of a group which includes the Company and is treated as a single
employer under Section 414 of the Code.
(xxvii) The Stock has been approved for listing on the Nasdaq National
Market.
(xxviii) The Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions contemplated
hereby.
(xxix) The Registration Statement, the Prospectus and any Preliminary
Prospectus comply, and any amendments or supplements thereto will comply,
with any applicable laws or regulations of foreign jurisdictions in which
the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, is distributed by the Company in connection with the
Directed Share Program.
(xxx) No consent, approval, authorization or order of, or
<PAGE>
qualification with, any governmental body or agency, other than those
already obtained, is required in connection with the offering of the
Directed Shares in any jurisdiction where the Directed Shares are being
offered by the Company.
(xxxi) The Company has not offered, or caused Chase to offer, Stock to
any person pursuant to the Directed Share Program with the intent to
unlawfully influence (i) a customer or supplier of the Company to alter
the customer's or supplier's level or type of business with the Company,
or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.
(b) The Selling Securityholder hereby represents and warrants as
follows:
(i) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and
warranties in this subparagraph (i) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in
reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters
for use in the Registration Statement or the Prospectus.
(ii) Such Selling Securityholder has good and marketable title to all the
shares of Stock to be sold by such Selling Securityholder hereunder, free
and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of such Selling Securityholder, to the
rights of [ ], as Custodian (herein called the Custodian), and that upon
the delivery of and payment for such shares of the Stock hereunder, the
several Underwriters will receive good and marketable title thereto, free
and clear of all liens, encumbrances, equities, security interests and
claims whatsoever.
(iii) Certificates in negotiable form for the shares of the Stock to be
sold by such Selling Securityholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters
and the Company, that the arrangements made by such Selling
Securityholder
<PAGE>
for such custody, including the Power of Attorney provided for in such
Custody Agreement, are to that extent irrevocable, and that the obligations
of such Selling Securityholder shall not be terminated by any act of such
Selling Securityholder or by operation of law, whether by the death or
incapacity of such Selling Securityholder or the occurrence of any other
event; if any such death, incapacity or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity or other event had not occurred, regardless of whether the
Custodian shall have received notice of such death, incapacity or other
event.
3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
3,200,000 shares of the Underwritten Stock to the several Underwriters, and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $[ ] per
share. The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by the Company and pursuant to this Agreement as the number of
shares of the Underwritten Stock set forth opposite the name of such Underwriter
in Schedule I hereto represents of the total number of shares of the
Underwritten Stock to be purchased by all Underwriters pursuant to this
Agreement, as adjusted by you in such manner as you deem advisable to avoid
fractional shares. In making this Agreement, each Underwriter is contracting
severally and not jointly; except as provided in paragraphs (b) and (c) of this
Section 3, the agreement of each Underwriter is to purchase only the respective
number of shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-
defaulting Underwriters fail so to make such arrangements with respect to all
such shares, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the shares which the
defaulting Underwriter or Underwriters agreed to purchase; provided, however,
that the non-defaulting Underwriters shall not be
<PAGE>
obligated to purchase the shares which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares on the terms herein set forth.
In any such case, either you or the Company shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
said Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made. If
neither the non-defaulting Underwriters nor the Company shall make arrangements
within the 24-hour periods stated above for the purchase of all the shares of
the Stock which the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company or the Selling Securityholder
to any non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company or the Selling Securityholder. Nothing
in this paragraph (b), and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to 240,000 shares in the aggregate of the Company Option Stock from
the Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock, and the Selling Securityholder grants an option to the
several Underwriters to purchase, severally and not jointly, up to 240,000
shares in the aggregate of the Selling Securityholder Option Stock from the
Selling Securityholder at the same price per share as the Underwriters shall pay
for the Underwritten Stock. Said option may be exercised only to cover over-
allotments in the sale of the Underwritten Stock by the Underwriters and may be
exercised in whole or in part at any time (but not more than once) on or before
the thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option. If
the underwriters exercise the option for less than all of the shares of Option
Stock, the Underwriters shall purchase from each of the Company and the Selling
Securityholder an equal number of shares of Option Stock. Delivery of
certificates for the shares of Option Stock, and payment therefor, shall be made
as provided in Section 5 hereof. The number of shares of the Option Stock to be
purchased by each Underwriter shall be the same percentage of the total number
of shares of the Option Stock to be purchased by the several Underwriters as
such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in
such manner as you deem advisable to avoid fractional shares.
<PAGE>
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth under "Underwriting" in the Registration
Statement, any Preliminary Prospectus and the Prospectus relating to the Stock
filed by the Company (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 a.m., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of McDermott, Will & Emery, 227 W. Monroe Street, Chicago,
Illinois 60606, at 8:00 a.m., Chicago time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of McDermott, Will & Emery, 227 W.
Monroe Street, Chicago, Illinois 60606, at 8:00 a.m., Chicago time, on the third
business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order, and payment for any Stock purchased from the Selling
Securityholder shall be made to the Custodian, for the account of the Selling
Securityholder, in each case by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
<PAGE>
and the Selling Securityholder for Stock to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter. Any
such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. Further Agreements of the Company and the Selling Securityholder.
Each of the Company and the Selling Securityholder respectively covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the
<PAGE>
Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to
<PAGE>
shareholders of the Company and of all information, documents and reports filed
with the Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. (herein
called the NASD) of the Registration Statement, any Preliminary Prospectus and
the Prospectus, (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus and of the several documents required by paragraph (c) of
this Section 6 to be so furnished, (iii) the printing of this Agreement and
related documents delivered to the Underwriters, (iv) the preparation, printing
and filing of all supplements and amendments to the Prospectus referred to in
paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters
of the reports and information referred to in paragraph (g) of this Section 6
and (vi) the printing and issuance of stock certificates, including the transfer
agent's fees. The Selling Securityholder will pay any transfer taxes incident to
the transfer to the Underwriters of the shares the Stock being sold by such
Selling Securityholder.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
Stock under state securities or blue sky laws and in the review of the offering
by the NASD; provided, however, that such reimbursement shall not exceed $20,000
in the aggregate.
(k) The Company agrees to pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.
(l) The provisions of paragraphs (i), (j) and (k) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholder hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholder may
make, or may have made, for the sharing of any such expenses and costs.
(m) The Company and the Selling Securityholder hereby irrevocably agree
that neither the Company nor such Selling Securityholder, as the case may be,
will, directly or indirectly, sell, offer, contract to sell, sell any option,
right or warrant to purchase, transfer the economic risk or ownership in, make
any short sale, pledge, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock, or any
<PAGE>
securities convertible into or exchangeable or exercisable for or any
other rights to purchase or acquire Common Stock, without the prior
written consent of Chase Securities Inc., acting alone, or of each of the
Representatives of the Underwriters, acting jointly, for a period of 180
days following the effective date of the Registration Statement. The
foregoing sentence shall not apply to (A) the Stock to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock
issued by the Company upon the exercise of options granted under the
stock option plans and stock purchase plan of the Company (the "Option
Plans") or upon the exercise of warrants outstanding as of the date
hereof, all as described in "Capitalization" in the Preliminary
Prospectus, and (C) options to purchase Common Stock granted under the
Option Plans.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to
or affecting the Company shall occur as a result of which in your opinion
the market price for the Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect
set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event, unless in the opinion of counsel for the
Company, the dissemination of such press release or other public
statement would violate applicable securities laws.
(o) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company
was not and will not be an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder.
(p) The Company will place stop transfer orders on any Directed Shares
that have been sold to Participants subject to the three month
restriction on sale, transfer, assignment, pledge or hypothecation
imposed by the NASD under its Interpretative Material 2110-1(d).
(q) The Company will comply with all applicable securities and other
applicable laws, rules and regulations in each jurisdiction in which the
Directed Shares are offered in connection with the Directed Share
Program.
7. Indemnification and Contribution.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholder jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and
<PAGE>
the Company and the Selling Securityholder jointly and severally agree to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholder contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof, and (3) the Selling
Securityholder shall only be liable under this paragraph with respect to (A)
information pertaining to such Selling Securityholder furnished by or on behalf
of such Selling Securityholder expressly for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof. The indemnity agreements of the Company and the Selling
Securityholder contained in this paragraph (a) and the representations and
warranties of the Company and the Selling Securityholder contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
<PAGE>
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholder from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provisions of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties
<PAGE>
from any liability which it or they may have to the indemnified party for
contribution or otherwise than on account of such indemnity agreement, except as
specifically provided in paragraph (d) of this Section. Any indemnifying party
shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(herein called the Notice of Defense) to the indemnified party, to assume (alone
or in conjunction with any other indemnifying party or parties) the entire
defense of such action, suit, investigation, inquiry or proceeding, in which
event such defense shall be conducted, at the expense of the indemnifying party
or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. It is
understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all such
indemnified parties and that all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by Chase, in the
case of parties indemnified pursuant to paragraph (a) of this Section 7, and by
the Company, in the case of parties indemnified pursuant to paragraph (b) of
this Section 7. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding, except that
(A) the indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in clause
(i) of the proviso to the preceding sentence and (B) the indemnifying party or
parties shall bear such other expenses as it or they have authorized to be
incurred by the indemnified party or parties. If, within a reasonable time after
receipt of the Notice, no Notice of Defense has been given, the indemnifying
party or parties shall be responsible for any legal or other expenses incurred
by the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or (b)
of
<PAGE>
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Securityholder on the one hand and the Underwriters on the other shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Stock received by the Company and the Selling
Securityholder and the total underwriting discount received by the Underwriters,
as set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by each indemnifying party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a summons
or other initial legal process upon it in any action instituted against it in
respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought. No contribution provided for hereunder shall be available to any party
who shall fail to give such written notice if the party to whom such notice was
not given was unaware of the legal proceeding to which the notice would have
related and was
<PAGE>
prejudiced by the failure to give notice, but the omission so to notify such
party or parties of any such service shall not relieve such party or parties
from whom contribution may be sought from any liability which it or they may
have to each party entitled to contribution or otherwise (except as specifically
provided in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholder will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of the Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraph (b) of
Section 2 hereof and under the indemnity and reimbursement agreements contained
in the provisions of this Section 7 and Section 12 hereof shall be limited to an
amount equal to the initial public offering price of the Stock sold by such
Selling Securityholder to the Underwriters. The Company and the Selling
Securityholder may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
8. Directed Share Program Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless Chase and each
person, if any, who controls Chase within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act (herein called the Chase
Entities), from and against any and all losses, claims, damages or liabilities
(i) caused by any untrue statement or alleged untrue statement of a material
fact contained in any material prepared by or with the consent of the Company
for distribution to Participants in connection with the Directed Share Program,
or caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; (ii) caused by the failure of any Participant to pay for and accept
delivery of Directed Shares that the Participant has agreed to purchase; or
(iii) related to, arising out of, or in connection with the Directed Share
Program, including those arising out of any violation or alleged violation of
the Act or out of any rescission right of any person in respect thereof, other
than losses, claims, damages or liabilities (or expenses relating thereto) that
are finally judicially determined to have resulted from the bad faith or gross
negligence of Chase Entities.
(b) Upon the service of a summons or other initial legal process upon
any Chase Entity in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought pursuant
to
<PAGE>
Section 8(a), the Chase Entity seeking indemnity will promptly give Notice of
such service or notification to the Company. No indemnification provided for in
Section 8(a) shall be available to any Chase Entity who shall fail so to give
the Notice to the Company if the Company was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
the Company of any such service or notification shall not relieve the Company
from any liability shich it may have to any such Chase Entity for contribution
or otherwise than on account of such indemnity agreement in Section 8(a) (except
as specifically provided in paragraph (c) of this Section 8). Any Chase Entity
shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, such Chase
Entity. The Company shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving a Notice of Defense to any such Chase
Entity, to assume the entire defense of such action, suit, investigation,
inquiry or proceeding, in which event such defense shall be conducted, at the
expense of the Company, by counsel chosen by the Company and reasonably
satisfactory to such Chase Entity; provided, however, that (i) if any such Chase
Entity reasonably determines that there may be a conflict between the positions
of the Company and of any such Chase Entity in conducting the defense of such
action, suit, investigation, inquiry or proceeding or that there may be legal
defenses available to such Chase Entity different from or in addition to those
available to the Company, then counsel for such Chase Entity shall be entitled
to conduct the defense to the extent reasonably determined by such counsel to be
necessary to protect the interests of such Chase Entity and (ii) in any event,
the Chase Entity shall be entitled to have counsel chosen by such Chase Entity
participate in, but not conduct, the defense. It is understood that the Company
shall not, in respect of the legal expenses of any such Chase Entity in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such Chase Entities and that all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be designated
in writing by such Chase Entity. If, within a reasonable time after receipt of
the Notice, the Company gives a Notice of Defense in connection with this
Section 8 and the counsel chosen by the Company is reasonably satisfactory to
the Chase Entity, the Company will not be liable under this Section 8 for any
legal or other expenses subsequently incurred by any such Chase Entity in
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the Company shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in clause
(i) of the proviso to the preceding sentence and (B) the Company shall bear such
other expenses as it or they have authorized to be incurred by any such Chase
Entity. If, within a reasonable time after receipt of the Notice, no Notice of
Defense has been given, the Company shall be responsible for any legal or other
expenses incurred by any such Chase Entity in connection with the defense of the
action, suit, investigation, inquiry or proceeding.
(c) If the indemnification provided for in Section 8(a) is unavailable or
insufficient to hold harmless a Chase Entity under Section 8(a), then the
Company, in lieu of indemnifying the Chase Entity, shall contribute to the
amount
<PAGE>
paid or payable by the Chase Entity as a result of the losses, claims, damages
or liabilities referred to in Section 8(a) (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Chase Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Chase Entities on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and of the Chase Entities on the other hand in
connection with the offering of the Directed Shares shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
Directed Shares (before deducting expenses) and the total underwriting discounts
and commissions received by the Chase Entities for the Directed Shares, bear to
the aggregate public offering price of the Directed Shares. Relative fault of
the Company on the one hand and the Chase Entities on the other hand shall be
determined by reference to, among other things, whether the statement, act or
omission that resulted in losses, claims, damages or liabilities relates to
statements, acts or omissions by the Company or by the Chase Entities and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statements, acts or omissions.
(d) The Company and the Chase Entities agree that it would not be just
and equitable if contributions pursuant to this Section 8 were determined by pro
rata allocation (even if the Chase Entities were treated as one entity for such
purpose) or by any other method of allocation which does not take account the
equitable considerations referred to in Section 8(c). The amount paid by the
Chase Entities as a result of the losses, claims, damages or liabilities, or
actions in respect thereof, referred to in the immediately preceding paragraph
shall be deemed to include any legal or other expenses reasonably incurred by
the Chase Entities in connection with investigating, preparing to defend or
defending against any action or claim which is the subject of Section 8(c).
Notwithstanding the provisions of this Section 8, no Chase Entity shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Directed Shares distributed to the public. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
Each party entitled to contribution agrees that upon the service of a summons
or other initial legal process upon it in any action instituted against it in
respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought. No contribution provided for hereunder shall be available to any party
who shall fail to give such written notice if the party to whom such notice was
not given was unaware of the legal proceeding to which the notice would have
related and was prejudiced by the failure to give notice, but the omission so to
notify such party or parties of any such service shall not relieve such party or
parties from whom contribution may be sought from any liability which it or they
may have to each
<PAGE>
party entitled to contribution or otherwise (except as specifically provided in
this Section 8).
(e) The indemnity and contribution provisions contained in this Section
8 shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Chase Entity or the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Directed Shares.
9. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholder if after the date of this Agreement trading in the Common
Stock shall have been suspended, or if there shall have occurred (a) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (b) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (c) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (d) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (e)
declaration of a banking moratorium by either federal or New York State
authorities or (f) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 9, there shall be no liability of the Company or the Selling
Securityholder to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholder; provided, however, that in the event of
any such termination the Company and the Selling Securityholder agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholder under this Agreement, including all costs and expenses referred
to in paragraphs (i), (j) and (k) of Section 6.
10. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholder of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and
<PAGE>
to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except
as to the financial statements contained therein), shall have been
approved at or prior to the Closing Date by Davis Polk & Wardwell,
counsel for the Underwriters.
(c) You shall have received from McDermott, Will & Emery, counsel for the
Company, Gordon & Glickson LLC, counsel for the Selling Securityholder,
and from Crowell & Moring LLP, patent counsel for the Company, opinions,
addressed to the Underwriters and dated the Closing Date, covering the
matters set forth in Annex A-1, Annex A-2 and Annex B hereto,
respectively, and if Option Stock is purchased at any date after the
Closing Date, additional opinions from each such counsel, addressed to
the Underwriters and dated such later date, confirming that the
statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were
true and correct and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein,
respectively, not misleading, (ii) since the Effective Date, no event has
occurred which should have been set forth in a supplement or amendment to
the Prospectus which has not been set forth in such a supplement or
amendment, (iii) since the respective dates as of which information is
given in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, there has not been
any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties,
financial condition or results of operations of the Company, whether or
not arising from transactions in the ordinary course of business, and,
since such dates, except in the ordinary course of business, the Company
has not entered into any material transaction not referred to in the
Registration Statement in the form in which it originally became
effective and the Prospectus contained therein, (iv) the Company does not
have any material contingent obligations which are not disclosed in the
Registration Statement and the Prospectus, (v) there are not any pending
or known threatened legal proceedings to which the Company or any of its
subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not
disclosed in the Registration Statement and the Prospectus, (vi) there
are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have
not been filed as required, (vii) the representations and warranties of
the Company
<PAGE>
herein are true and correct in all material respects as of the Closing
Date or any later date on which Option Stock is to be purchased, as the
case may be, and (viii) there has not been any material change in the
market for securities in general or in political, financial or economic
conditions from those reasonably foreseeable as to render it
impracticable in your reasonable judgment to make a public offering of
the Stock, or a material adverse change in market levels for securities
in general (or those of companies in particular) or financial or economic
conditions which render it inadvisable in your reasonable judgment to
proceed.
(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective
signers of said certificate have carefully examined the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein and any supplements or amendments thereto,
and that the statements included in clauses (i) through (vii) of
paragraph (d) of this Section 9 are true and correct.
(f) You shall have received from Ernst & Young LLP, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are
independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this Agreement
(herein called the Original Letter), but carried out to a date not more
than three business days prior to the Closing Date or such later date on
which Option Stock is purchased (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date or such later date, as the case may be,
and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to
reflect any changes in the facts described in the Original Letter since
the date of the Original Letter or to reflect the availability of more
recent financial statements, data or information. The letters shall not
disclose any change, or any development involving a prospective change,
in or affecting the business or properties of the Company which, in your
sole judgment, makes it impractical or inadvisable to proceed with the
public offering of the Stock or the purchase of the Option Stock as
contemplated by the Prospectus.
(g) You shall have received from Ernst & Young LLP a letter stating that
their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as at [ , 2000],
did not disclose any weakness in internal controls that they considered
to be material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the
qualification
<PAGE>
referred to in paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 1% of the
outstanding Common Stock and all other securityholders of the Company
agreements, in form reasonably satisfactory to Chase, stating that such
party hereby irrevocably agrees that it will not, directly or indirectly,
sell, offer, contract to sell, sell any option, right or warrant to
purchase, transfer the economic risk or ownership in, make any short
sale, pledge, lend or otherwise transfer or dispose of directly or
indirectly, any shares of Common Stock, or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase
or acquire Common Stock, without the prior written consent of Chase,
acting alone, or of each of the Representatives of the Underwriters,
acting jointly, for a period of 180 days following the effective date of
the Registration Statement. The foregoing sentence shall not apply to (A)
the Stock to be sold to the Underwriters pursuant to this Agreement, (B)
shares of Common Stock issued by the Company upon the exercise of options
granted under the stock option plans and stock purchase plan of the
Company (the Option Plans) or upon the exercise of warrants outstanding
as of the date hereof, all as described in the Preliminary Prospectus,
and (C) options to purchase Common Stock granted under the Option Plans.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Davis Polk & Wardwell, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholder. Any such termination shall be
without liability of the Company or the Selling Securityholder to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholder; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholder agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholder
under this Agreement, including all costs and expenses referred to in paragraphs
(i), (j) and (k) of Section 6 hereof, and (ii) if this Agreement is terminated
by you because of any refusal, inability or failure on the part of the Company
or the Selling Securityholder to perform any agreement herein, to fulfill any of
the conditions herein, or to comply with any provision hereof other than by
reason of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
<PAGE>
11. Conditions of the Obligation of the Company and the Selling
Securityholder. The obligation of the Company and the Selling Securityholder to
deliver the Stock shall be subject to the conditions that (a) the Registration
Statement shall have become effective and (b) no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission.
In case either of the conditions specified in this Section 11 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company and the
Selling Securityholder to the Underwriters and without liability of the
Underwriters to the Company or the Selling Securityholder; provided, however,
that in the event of any such termination the Company and the Selling
Securityholder jointly and severally agree to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholder under this Agreement,
including all costs and expenses referred to in paragraphs (i), (j) and (k) of
Section 6 hereof.
12. Reimbursement of Certain Expenses. In addition to their other
obligations under Sections 7 and 8 of this Agreement (and subject, in the case
of the Selling Securityholder, to the provisions of paragraph (f) of Section 7),
the Company and the Selling Securityholder hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Sections 7 and 8 of this Agreement, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
obligations under this Section 12 and the possibility that such payments might
later be held to be improper; provided, however, that (i) to the extent any such
payment is ultimately held to be improper, the persons receiving such payments
shall promptly refund them to the Company or the Selling Securityholder, as the
case may be, and (ii) such persons shall provide to the Company or the Selling
Securityholder, as the case may be, upon request, reasonable assurances of their
ability to effect any refund, when and if due.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of the Company, the Selling Securityholder and the several
Underwriters and, with respect to the provisions of Sections 7 and 8 hereof, the
several parties (in addition to the Company, the Selling Securityholder and the
several Underwriters) indemnified under the provisions of said Sections 7 and 8,
and their respective personal representatives, successors and assigns. Nothing
in this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
14. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be
<PAGE>
mailed, telegraphed or delivered to Chase Securities Inc., One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, One Tower Lane, 28/th/ Floor,
Oakbrook Terrace, Illinois, Attention: Kevin G. Kerns, with a copy to McDermott,
Will & Emery, 227 W. Monroe Street, Chicago, Illinois 60606, Attention: Grant A.
Bagan, P.C. and John P. Tamisiea; and if to the Selling Securityholder, shall be
mailed, telegraphed or delivered to the Selling Securityholder in care of
Catherine Rawson Brady at [ ], with a copy to Gordon
& Glickson LLC, Suite 3600, 444 N. Michigan Avenue, Chicago, Illinois 60611,
Attention: Scott L. Glickson. All notices given by telegraph shall be promptly
confirmed by letter.
15. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholder or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (m) and (n) of Section 6 hereof shall be of
no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
<PAGE>
Please sign and return to the Company and to the Selling Securityholder
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholder and the several Underwriters in accordance with its terms.
Very truly yours,
APROPOS TECHNOLOGY, INC.
By
------------------------
Name: Kevin G. Kerns
Title: President
SELLING SECURITYHOLDER:
Catherine Rawson Brady
By
------------------------
Name:
Title:
as Attorney-in-Fact acting on behalf
of the Selling Securityholder named
in Schedule II hereto.
<PAGE>
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
CHASE SECURITIES INC.
SG COWEN SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY INC.
By Chase Securities Inc.
By
---------------------------
Name: Mark Zanoli
Title: Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Shares
to be
Underwriters Purchased
- ------------ ---------
<S> <C>
Chase Securities Inc.
SG Cowen Securities Corporation
U.S. Bancorp Piper Jaffray Inc.
Total
</TABLE>
<PAGE>
SCHEDULE II
SELLERS OF OPTION STOCK
<TABLE>
<CAPTION>
Maximum
Number of
Shares
Name to be Sold
- ---- ----------
<S> <C>
Apropos Technology, Inc.
One Tower Lane, 28/th/ Floor
Oakbrook Terrace, IL 60181
Catherine Rawson Brady
[Address ]
Total
</TABLE>
<PAGE>
ANNEX A-1
Matters to be Covered in the Opinion of McDermott, Will & Emery
Counsel for the Company
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole), and has full corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding capital
stock of each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the Company
free and clear of all liens, encumbrances and security interests, and to the
best of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding (it being understood that the opinion set forth in
this subsection (i) regarding the Company's subsidiary may be delivered by the
Company's English counsel, which must be satisfactory in the reasonable judgment
of the Underwriters);
(ii) the authorized capital stock of the Company consists of [ ]
Preferred Shares, of which there are outstanding [ ] shares,
and [ ] Common Shares, $0.01 par value, of which there are
outstanding [ ] shares (including the Underwritten Stock plus the
number of shares of Option Stock issued on the date hereof) [and such additional
number of shares, if any, as may have been issued after [ ] and
prior to the Closing Date, pursuant to [ ]]; proper corporate
proceedings have been taken validly to authorize such authorized capital stock;
all of the outstanding shares of such capital stock (including the Underwritten
Stock and the shares of Option Stock issued, if any) have been duly and validly
issued and are fully paid and nonassessable; any Option Stock purchased after
the Closing Date, when issued and delivered to and paid for by the Underwriters
as provided in the Underwriting Agreement, will have been duly and validly
issued and be fully paid and nonassessable; and no preemptive rights of, or
rights of refusal in favor of, shareholders exist with respect to the Stock, or
the issue and sale thereof, pursuant to the Articles of Incorporation or Bylaws
of the Company and, to the knowledge of such counsel, there are no contractual
preemptive rights that have not been waived, rights of first refusal or rights
of co-sale which exist with respect to the Stock being sold by the Selling
Securityholder or the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
<PAGE>
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) nothing has come to such counsel's attention that would cause such
counsel to believe that the Registration Statement (except as to the financial
statements and schedules and other financial data contained or incorporated by
reference therein, as to which such counsel need not express any opinion or
belief) at the Effective Date contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or that the Prospectus (except as
to the financial statements and schedules and other financial data contained or
incorporated by reference therein, as to which such counsel need not express any
opinion or belief) as of its date or at the Closing Date (or any later date on
which Option Stock is purchased), contained or contains any untrue statement of
a material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) (except that any proceeding being handled by other counsel may be
addressed in a separate opinion of such counsel) of Form S-1 is to the best of
such counsel's knowledge accurately and adequately set forth therein in all
material respects or no response is required with respect to such Items, and, to
the best of such counsel's knowledge, the description of the Company's stock
option plans and the options granted and which may be granted thereunder and the
options granted otherwise than under such plans set forth in the Prospectus
accurately and fairly presents in all material respects the information required
to be shown with respect to said plans and options to the extent required by the
Securities Act and the rules and regulations of the Commission thereunder;
(vi) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(vi) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(ix) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of the Articles of Incorporation or Bylaws of the
Company or any of its subsidiaries, or a breach of any agreement or instrument
known to such counsel which are listed on an attached schedule and which have
been identified to such counsel as all of the agreements and instruments which
are material to the business or financial condition of the Company or any of its
subsidiaries, to which the Company or any of its subsidiaries is a party, which
breach would be material to the Company and its subsidiaries taken as a whole,
or any applicable law or regulation, or so far as is known to such counsel, any
order, writ, injunction or
<PAGE>
decree, of any jurisdiction, court or governmental instrumentality;
(x) all holders of securities of the Company having rights under the
agreements set forth on an attached schedule of the Company certifying that such
schedule includes all such agreements, to the registration of shares of Common
Stock, or other securities, because of the filing of the Registration Statement
by the Company have waived such rights or such rights have expired by reason of
lapse of time following notification of the Company's intent to file the
Registration Statement;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters;
(xii) the Stock issued and sold by the Company and the Stock sold by the
Selling Securityholder has been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance.
<PAGE>
ANNEX A-2
Matters to be Covered in the Opinion of Gordon & Glickson LLC
Counsel for the Selling Securityholder
(i) the Underwriting Agreement has been duly executed and delivered by
or on behalf of the Selling Securityholder and the Custody Agreement between the
Selling Securityholder and [ ], as Custodian, and the
Power of Attorney referred to in such Custody Agreement have been duly executed
and delivered by the several Selling Securityholder;
(ii) good and marketable title to the shares of Stock sold by the
Selling Securityholder under the Underwriting Agreement, free and clear of all
liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this opinion
that the Underwriters purchased the same in good faith without notice of any
adverse claims;
<PAGE>
ANNEX B
Matters to be Covered in the Opinion of Crowell & Moring LLP
Patent Counsel for the Company
Such counsel represents and has represented the Company in connection with
patent preparation and procurement matters and other patent-related counseling
matters. In connection with such representations, we have become familiar with
certain technology used by the Company in its business and the manner of its use
and have read the portions of the Registration Statement and the Prospectus
referring to patents, trade secrets, trademarks, service marks or other
proprietary information or materials and:
(i) The statements in the Registration Statement and the Prospectus under
the captions "Risk Factors -- Infringement of our proprietary rights could
affect our competitive position, harm our reputation or cost us money", "Risk
Factors -- Infringement claims could adversely affect us", "Business --
Intellectual Property and Other Proprietary Rights" and "Business -- Legal
Proceedings", to the best of such counsel's knowledge and belief, are accurate
and complete statements or summaries of the matters therein set forth and
nothing has come to such counsel's attention that causes such counsel to believe
that the above-described portions of the Registration Statement and the
Prospectus contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(ii) to the best of such counsel's knowledge and except as set forth in
the Prospectus under the caption "Risk Factors -- Infringement claims could
adversely affect us", there are no legal or governmental proceedings pending
relating to patent rights, trade secrets, trademarks, service marks or other
proprietary information or materials of the Company, and to the best of such
counsel's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or others;
(iii) such counsel do not know of any contracts or other documents,
relating to governmental regulation affecting the Company or the Company's
patents, trade secrets, trademarks, service marks or other proprietary
information or materials of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the Registration
Statement or the Prospectus that are not filed or described as required;
(iv) except as set forth in the Prospectus, to the best of such counsel's
knowledge, the Company is not infringing or otherwise violating any patents,
trade secrets, trademarks, service marks or other proprietary information or
materials, of others, and to the best of such counsel's knowledge there are no
infringements by others of any of the Company's patents, trade secrets,
trademarks, service marks or other proprietary information or materials which in
the judgment of such counsel could affect materially the use thereof by the
<PAGE>
Company; and
(v) to the best of such counsel's knowledge, the Company owns or possesses
sufficient licenses or other rights to use all patents, trade secrets,
trademarks, service marks or other proprietary information or materials
necessary to conduct the business now being or proposed to be conducted by the
Company as described in the Prospectus.
In addition, Crowell & Moring LLP shall deliver to counsel for the
Underwriters legal opinions in the form previously agreed covering various
matters relating to the Company's proprietary technology.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
APROPOS TECHNOLOGY, INC.
The original Articles of Incorporation of Apropos Technology, Inc.
were filed with the Secretary of State of Illinois on April 17, 1989. The name
of the Corporation under which it was originally incorporated was Teledata
Solutions, Inc. The original Articles of Incorporation were amended on June 13,
1997 to change the Corporation's name to Apropos Technology, Inc. This Amended
and Restated Articles of Incorporation not only restates and integrates the
original Articles of Incorporation and all amendments thereto, but also includes
amendments adopted by the shareholders of Apropos Technology, Inc. on the date
hereof. This Amended and Restated Articles of Incorporation was duly adopted in
accordance with the applicable provisions of Sections 10.20 and 7.10 of the
Illinois Business Corporation Act of 1983, as amended and shall become effective
upon filing with the Secretary of State of the State of Illinois. Each of the
Articles contained in this Amended and Restated Articles of Incorporation,
except the First, have been both amended and restated.
FIRST: The name of the Corporation is Apropos Technology, Inc.
SECOND: The Corporation's registered office in the State of Illinois
is located at 208 S. LaSalle Street, Chicago, Illinois, 60604 in the County of
Cook and CT Corporation System is the Corporation's registered agent at such
address.
THIRD: The duration of the Corporation is perpetual.
FOURTH: The purpose for which the Corporation is organized is to
carry on and to engage in any lawful act or activity for which corporations may
be organized under the Illinois Business Corporation Act of 1983, as amended.
FIFTH: Paragraph 1: The aggregate number of shares which the
Corporation is authorized to issue is 65,000,000 divided into two classes. The
designations of each class, the number of shares of each class and the par
value, if any, of the shares of each class, or a statement that the shares of
any class are without par value, are as follows:
<TABLE>
<CAPTION>
Par value per share or
Class Series (if any) No. of Shares statement that shares
are without par value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common None 60,000,000 $.01
- --------------------------------------------------------------------------------
Preferred Issuable in series as 5,000,000 $.01
determined by Board of
Directors
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
No holder of Preferred Shares or Common Shares of the Corporation shall be
entitled to cumulate votes in any matter brought to a vote of the shareholders
including the election of directors.
Paragraph 2: The preferences, qualifications, limitations, restrictions and
the special or relative rights in respect of the shares of each class are:
PREFERRED SHARES
----------------
1. Authority is hereby vested in the Board of Directors (by adoption of a
resolution and filing and recording of a statement in accordance with the laws
of the State of Illinois) to divide any or all of the authorized Preferred
Shares into series and, within the limitations provided by law, to fix and
determine:
(a) The rate per annum, if any, at which the holders of shares of any
series shall be entitled to receive dividends out of any funds of the
Corporation at that time legally available for dividends and as declared by the
Board of Directors;
(b) The price or prices and other terms and conditions, if any, on
which shares of any series of Preferred Shares shall be redeemed;
(c) The amount or amounts per share payable on the Preferred Shares in
the event of any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation;
(d) Sinking fund provisions, if any, for the redemption or purchase of
shares of any such series;
(e) The terms and conditions on which shares of any series may be
converted into shares of another class, if the shares of any series are issued
with the privilege of conversion; and
(f) The limitation or denial of voting rights, or the grant of special
voting rights for any series.
2. The Board of Directors may increase the number of shares designated for
any existing series by a resolution adding to such series authorized and
unissued Preferred Shares not designated for any other series.
COMMON SHARES
-------------
1. The holders of Common Shares shall be entitled to vote as provided by
law.
2. The holders of Common Shares are entitled to receive dividends when and
as declared by the Board of Directors, and after provision for all dividends on
the Preferred
-2-
<PAGE>
Shares as hereinabove set forth, provided no dividend shall be declared or paid
hereunder unless it is declared and paid at the same time and in the same manner
on all outstanding Common Shares.
3. None of the Common Shares of the Corporation shall be subject to
mandatory redemption.
PREEMPTIVE RIGHTS
-----------------
Except for the conversion of Preferred Shares as may be determined by the
Board of Directors, no holder of shares of any class of the Corporation shall
have any preemptive right to subscribe for or acquire additional shares of the
Corporation of the same or any other class, or any other securities convertible
into or evidencing or accompanied by any right to subscribe for, purchase or
acquire shares of stock of any class of the Corporation, whether such shares be
hereby or hereafter authorized; all additional shares may be sold for the
consideration, at the time, and to the person or persons as the Board of
Directors may from time to time determine, subject to the limitations
hereinabove set forth.
STOCK SPLIT
-----------
Notwithstanding anything in these Amended and Restated Articles of
Incorporation to the contrary, each Common Share of the Corporation issued and
outstanding immediately prior to the effective date of these Amended and
Restated Articles of Incorporation shall be automatically converted, without
further action, into 1.75 Common Shares authorized herein. On such effective
date, outstanding certificates representing Common Shares shall thereafter
automatically be deemed to represent certificates for the number of Common
Shares determined as set forth in the preceding sentence; provided, however,
that the holders thereof shall be entitled to present such certificates to the
Corporation for replacement with certificates reflecting the number of Common
Shares into which the shares have been converted.
SIXTH: The number of Directors shall be fixed in the manner provided
by the By-laws. The By-laws may establish a variable range for the size of the
Board of Directors by prescribing a minimum and maximum number of directors. If
the Board of Directors is to consist of six or more members, the Directors of
the Corporation shall be divided into three classes: Class I, Class II and Class
III. Each class shall consist, as nearly as may be possible, of one-third of the
whole number of the Board of Directors. If the Board of Directors is not evenly
divisible by three, the Board of Directors shall determine the number of
Directors to be elected to each class. The initial members of Class I shall be
Maurice A. Cox, Jr. and Ian M. Larkin and they shall hold office for a term to
expire at the annual meeting of the shareholders to be held in 2001; the initial
members of Class II shall be Patrick K. Brady and Keith L. Crandell and they
shall hold office for a term to expire at the annual meeting of the shareholders
to be held in 2002; and the initial members of Class III shall be Kevin G. Kerns
and George B. Koch and they shall hold office for a term to expire at the annual
meeting of the shareholders to be held in 2003, and in the case of each class,
until their respective successors are duly elected and qualified. At each annual
election held commencing with the annual election in 2001, the Directors elected
to succeed those whose terms expire shall be identified as being of the same
class as the Directors
-3-
<PAGE>
they succeed and shall be elected to hold office for a term to expire at the
third annual meeting of the shareholders after their election and until their
respective successors are duly elected and qualified.
SEVENTH: Special meetings of the shareholders, for any purpose or
purposes (except to the extent otherwise provided by law or these Amended and
Restated Articles of Incorporation), may only be called by the President or the
Board of Directors.
EIGHTH: In the event the Board of Directors of the Corporation shall,
by resolution adopted by a majority of the Directors then in office, recommend
to the shareholders the adoption of an amendment to these Amended and Restated
Articles of Incorporation, the shareholders of record holding a majority of the
total voting power of all then outstanding shares entitled to vote in the
election of Directors of the Corporation, voting as a single class (unless
otherwise required by law), may so amend these Articles of Incorporation.
NINTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Illinois, the Board of Directors is expressly
authorized and empowered to make, alter, amend and repeal the By-laws of the
Corporation in any respect not inconsistent with the laws of the State of
Illinois or with these Amended and Restated Articles of Incorporation.
TENTH: The books of the Corporation may be kept at such place within
or without the State of Illinois as the By-laws of the Corporation may provide
or as may be designated from time to time by the Board of Directors of the
Corporation.
ELEVENTH: A Director of the Corporation shall not be personally liable
to the Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 8.65 of the Illinois Business
Corporation Act, as the same exists or hereafter may be amended, or (iv) for any
transaction from which the Director derived an improper personal benefit.
If the Illinois Business Corporation Act hereafter is amended to
authorize the further elimination or limitation of the liability of Directors,
then the liability of the Corporation's Directors shall be eliminated or limited
to the full extent authorized by the Illinois Business Corporation Act, as so
amended.
Any repeal or modification of this Article shall not adversely affect
any right or protection of a Director of the Corporation existing at the time of
such repeal or modification.
TWELVTH: As of the date of adoption of these Amended and Restated
Articles of Incorporation, __________ Common Shares of the Corporation are
outstanding, 1,242,858 Shares of Series A convertible preferred stock are
outstanding, 1,599,888 shares of Series B convertible preferred stock are
outstanding, 1,152,737 shares of Series C convertible preferred stock are
outstanding and the Corporation's paid-in-capital is $__________.
-4-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Articles of Incorporation to be signed by its duly authorized officers this ___
day of _____________, 2000.
Attest: APROPOS TECHNOLOGY, INC.
- -------------------------------- By:
Secretary --------------------------------
Its:
--------------------------------
-5-
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
APROPOS TECHNOLOGY, INC.
(AN ILLINOIS CORPORATION)
(adopted on January 20, 2000)
<PAGE>
TABLE OF CONTENTS
Page
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 1 OFFICES......................................................... 1
Section 1.1 PRINCIPAL OFFICE........................................ 1
Section 1.2 REGISTERED OFFICE....................................... 1
ARTICLE 2 MEETINGS OF SHAREHOLDERS........................................ 1
Section 2.1 PLACE OF MEETINGS....................................... 1
Section 2.2 ANNUAL MEETINGS......................................... 1
Section 2.3 SPECIAL MEETINGS........................................ 1
Section 2.4 NOTICE OF MEETINGS...................................... 1
Section 2.5 WAIVER OF NOTICE........................................ 2
Section 2.6 CLOSING OF TRANSFER BOOKS AND FIXING OF RECORD DATE..... 2
Section 2.7 VOTING LISTS............................................ 2
Section 2.8 QUORUM.................................................. 3
Section 2.9 MANNER OF ACTING........................................ 3
Section 2.10 PROXIES................................................. 3
Section 2.11 VOTING OF SHARES BY CERTAIN HOLDERS..................... 3
Section 2.12 NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS.......... 4
Section 2.13 INSPECTORS OF ELECTION.................................. 6
ARTICLE 3 DIRECTORS...................................................... 6
Section 3.1 GENERAL POWERS.......................................... 6
Section 3.2 NUMBER, TENURE AND QUALIFICATIONS....................... 6
Section 3.3 REGULAR MEETINGS........................................ 6
Section 3.4 SPECIAL MEETINGS........................................ 6
Section 3.5 NOTICE.................................................. 7
Section 3.6 QUORUM.................................................. 7
Section 3.7 MANNER OF ACTING........................................ 7
Section 3.8 VACANCIES............................................... 7
Section 3.9 RESIGNATION............................................. 8
Section 3.10 COMPENSATION............................................ 8
Section 3.11 PRESUMPTION OF ASSENT................................... 8
Section 3.12 COMMITTEES.............................................. 8
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Section 3.13 REMOVAL OF DIRECTORS.................................... 9
Section 3.14 INFORMAL ACTION BY DIRECTORS............................ 9
Section 3.15 RELIANCE ON BOOKS....................................... 10
ARTICLE 4 OFFICERS........................................................ 10
Section 4.1 NUMBER.................................................. 10
Section 4.2 ELECTION AND TERM OF OFFICE............................. 10
Section 4.3 REMOVAL................................................. 10
Section 4.4 VACANCIES............................................... 10
Section 4.5 CHAIRMAN OF THE BOARD OF DIRECTORS...................... 10
Section 4.6 THE CHIEF EXECUTIVE OFFICER............................. 10
Section 4.7. PRESIDENT............................................... 11
Section 4.8 CHIEF FINANCIAL OFFICER................................. 11
Section 4.9 VICE PRESIDENTS......................................... 11
Section 4.10 TREASURER............................................... 11
Section 4.11 SECRETARY............................................... 11
Section 4.12 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES.......... 12
Section 4.13 SALARIES................................................ 12
ARTICLE 5 SHARES, CERTIFICATES FOR SHARES AND TRANSFER OF SHARES.......... 12
Section 5.1 REGULATION.............................................. 12
Section 5.2 CERTIFICATES FOR SHARES................................. 12
Section 5.3 CANCELLATION OF CERTIFICATES............................ 13
Section 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES.................. 13
Section 5.5 TRANSFER OF SHARES...................................... 13
Section 5.6 FACSIMILE SIGNATURE..................................... 13
ARTICLE 6 CONTRACTS....................................................... 13
ARTICLE 7 FISCAL YEAR..................................................... 14
ARTICLE 8 DIVIDENDS....................................................... 14
ARTICLE 9 SEAL............................................................ 14
ARTICLE 10 INDEMNIFICATION................................................ 14
Section 10.1 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION 14
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Section 10.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION........... 14
Section 10.3 AUTHORIZATION OF INDEMNIFICATION........................ 15
Section 10.4 PAYMENT OF EXPENSES IN ADVANCE.......................... 15
Section 10.5 SUCCESSFUL DEFENSES..................................... 15
Section 10.6 PROVISIONS NOT EXCLUSIVE................................ 15
Section 10.7 INSURANCE............................................... 16
Section 10.8 NOTICE TO SHAREHOLDERS.................................. 16
Section 10.9 DEFINITIONS............................................. 16
Section 10.11 CONTINUATION OF RIGHTS.................................. 16
Section 10.12 PAYMENTS A BUSINESS EXPENSE............................. 16
ARTICLE 11 AMENDMENTS..................................................... 17
ARTICLE 12 VOTING SHARES OF INTERESTS IN OTHER CORPORATIONS............... 17
</TABLE>
-iii-
<PAGE>
AMENDED AND RESTATED BY-LAWS
----------------------------
OF
--
APROPOS TECHNOLOGY, INC.
------------------------
ARTICLE 1
OFFICES
Section 1.1 PRINCIPAL OFFICE. The principal office of the
corporation shall be located at One Tower Lane, Oakbrook Terrace, Illinois, and
the corporation may have and maintain such other business office or offices,
either within or without the State of Illinois, as it may require from time to
time.
Section 1.2 REGISTERED OFFICE. The registered office of the
corporation required by The Business Corporation Act of Illinois, as amended
(the "Act") to be maintained in the State of Illinois may be, but need not be,
identical with the principal office in the State of Illinois, and the address of
the registered office may be changed from time to time by the Board of
Directors.
ARTICLE 2
MEETINGS OF SHAREHOLDERS
Section 2.1 PLACE OF MEETINGS. All meetings of the shareholders may
be held at such place as shall be designated from time to time by the Board of
Directors and stated in the notice of meeting or in a duly executed waiver of
notice thereof. If no designation is made, the place of meeting shall be the
principal office of the corporation.
Section 2.2 ANNUAL MEETINGS. An annual meeting of the shareholders,
commencing in 2001, shall be held each year within 180 days after the close of
the immediately preceding fiscal year of the corporation, at such time and place
as shall be designated by the Board of Directors.
Section 2.3 SPECIAL MEETINGS. Special meetings of the shareholders,
for any purpose or purposes, unless otherwise prescribed by the Act, the Amended
and Restated Articles of Incorporation (the "Articles of Incorporation") or
these Amended and Restated By-laws (the "By-laws"), may only be called by the
President, the Chief Executive Officer or the Board of Directors. Such request
shall state the purpose or purposes of the proposed special meeting. Business
transacted at any special meeting of shareholders shall be limited to the
purpose or purposes stated in the notice to the shareholders of the meeting and
to matters incidental or germane thereto.
Section 2.4 NOTICE OF MEETINGS. Written notice stating the place,
day and hour of the meeting of shareholders and, in case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered not
less than ten days (or in a case
<PAGE>
involving a merger, consolidation, share exchange, dissolution or sale, lease or
exchange of assets, not less than twenty days) nor more than sixty days before
the date of the meeting, either personally or by mail, by or at the direction of
the Chairman of the Board, Chief Executive Officer, President, the Secretary or
the officer or persons calling the meeting, to each shareholder of record
entitled to vote at the meeting. If mailed, the notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the shareholder
at his or her address as it appears on the records of the corporation, with
postage thereon prepaid.
Section 2.5 WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of these By-laws or under the provisions of the
Articles of Incorporation or under the provisions of the Act or otherwise, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Attendance at any meeting shall
constitute waiver of notice thereof unless the person at the meeting objects to
the holding of the meeting because proper notice was not given.
Section 2.6 CLOSING OF TRANSFER BOOKS AND FIXING OF RECORD DATE. For
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors of the corporation may provide that the
share transfer books shall be closed for a stated period, but not to exceed, in
any case, sixty days. If the share transfer books shall be closed for the
purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least ten days (or in
a case involving a merger, consolidation, share exchange, dissolution or sale,
lease or exchange of assets, at least twenty days) immediately preceding the
meeting. In lieu of closing the share transfer books, the Board of Directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than sixty days and, in case
of a meeting of shareholders, not less than ten days (or in a case involving a
merger, consolidation, share exchange, dissolution or sale, lease or exchange of
assets, not less than twenty days) immediately preceding such meeting. If the
share transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment of the meeting.
Section 2.7 VOTING LISTS. The officer or agent having charge of the
transfer books for shares of the corporation shall make, within twenty days
after the record date for a meeting of shareholders, or ten days before each
such meeting, whichever is earlier, a complete list of shareholders entitled to
vote at such meeting, arranged in alphabetical order, with the address of and
the number of shares held by each, which list, for a period of ten days prior to
such meeting, shall be kept on file at the registered office of the corporation
and shall be subject to inspection by any shareholder, and to copying at the
shareholder's expense, at any time during usual business hours. Such list shall
also be produced and kept open at the time and place of meeting and shall be
subject to the inspection of any shareholder during the whole time
2
<PAGE>
of the meeting. The original share ledger or transfer book, or a duplicate
thereof kept in the State of Illinois, shall be prima facie evidence as to who
are the shareholders entitled to examine such list or share ledger or transfer
book or to vote at any meeting of shareholders. Failure to comply with the
requirements of this section shall not affect the validity of any action taken
at such meeting.
Section 2.8 QUORUM. Unless otherwise provided in the Act or Articles
of Incorporation, a majority of votes of the shares, entitled to vote on a
matter, represented in person or by proxy, shall constitute a quorum for
consideration of such matter at a meeting of shareholders, but in no event shall
a quorum consist of less than one-third of the votes of the shares entitled so
to vote. If, however, such quorum shall not be present or represented by proxy
at any meeting of the shareholders, the shareholders entitled to vote thereat,
present in person or represented by proxy, the Chairman of the Board, the Chief
Executive Officer or the President, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, except as
hereinafter provided, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the original
meeting. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
Section 2.9 MANNER OF ACTING. If a quorum is present, the
affirmative vote of a majority of the votes of the shares represented at the
meeting and entitled to vote on a matter shall be the act of the shareholders,
unless the vote of a greater number or voting by classes is required by the Act
or the Articles of Incorporation.
Section 2.10 PROXIES. A shareholder may appoint a proxy to vote or
otherwise act for the shareholder by delivering a valid appointment form to the
person so appointed or to a proxy solicitation firm, proxy support service
organization, or like agent duly authorized by the shareholder to receive the
transmission. Without limiting the manner in which a shareholder may appoint
such a proxy pursuant to these Bylaws, the following shall constitute valid
means by which a shareholder may make such an appointment:
(1) A shareholder may sign a proxy appointment form. The
shareholder's signature may be affixed by any reasonable means,
including, but not limited to, by facsimile signature.
(2) A shareholder may transmit or authorize the transmission of a
telegram, cablegram, or other means of electronic transmission;
provided that any such transmission must either set forth or be
submitted with information from which it can be determined that
the telegram, cablegram, or other electronic transmission was
authorized by the shareholder. If it is determined that the
telegram, cablegram, or other electronic transmission is valid,
the inspectors or, if there are no inspectors, such other persons
making that determination shall specify the information upon
which they relied.
3
<PAGE>
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission may be substituted or used in lieu of the original
writing or transmission for any and all purposes for which the original writing
or transmission could be used, provided, that the copy, facsimile
telecommunication, or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
No proxy shall be valid after the expiration of eleven months from the date
thereof, unless otherwise provided in the proxy. Each proxy continues in full
force and effect until revoked by the person executing it prior to the vote
pursuant thereto, except as otherwise provided by law. Such revocation may be
effected by a writing delivered to the Corporation stating that the proxy is
revoked or by a subsequent proxy executed by, or by attendance at the meeting
and voting in person by, the person executing the proxy. The dates contained on
the forms of proxy presumptively determine the order of execution, regardless of
the postmark dates on the envelopes in which they are mailed.
Section 2.11 VOTING OF SHARES BY CERTAIN HOLDERS. (a) Shares
registered in the name of another corporation, domestic or foreign, may be voted
by such officer, agent, proxy or other legal representative authorized to vote
such shares under the law of incorporation of such corporation. The corporation
may treat the president or other person holding the position of chief executive
officer of such other corporation as authorized to vote such shares, together
with any other person indicated and any other holder of an office indicated by
the corporate shareholder to the corporation as a person or as an officer
authorized to vote such shares. Such persons and officers indicated shall be
registered by the corporation on the transfer books for shares and included in
any voting list prepared in accordance with Section 2.7.
(b) Shares registered in the name of a deceased person, a minor ward
or person under legal disability may be voted by his or her administrator,
executor, or court-appointed guardian, either in person or by proxy, without a
transfer of such shares into the name of such administrator, executor, or court-
appointed guardian. Shares registered in the name of a trustee may be voted by
him or her, either in person or by proxy.
(c) Shares registered in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his or her name, if authority to
do so is contained in an appropriate order of the court by which such receiver
was appointed.
(d) A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so transferred.
(e) Shares of its own stock belonging to this corporation shall not be
voted, directly or indirectly, at any meeting and shall not be counted in
determining the total number of outstanding shares at any given time, but shares
of its own stock held by it in a fiduciary capacity may be voted and shall be
counted in determining the total number of outstanding shares entitled to vote
at any given time.
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Section 2.12 NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS.
(a) Annual Meetings of Shareholders. (1) Nominations of persons for
election to the Board of Directors of the corporation and the proposal of
business to be considered by the shareholders may be made at an annual meeting
of shareholders (A) by or at the direction of the Board of Directors of (B) by
any shareholder of the corporation who was a shareholder of record at the time
of giving of notice provided for in this By-Law, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (B) of paragraph (a)(1) of
this By-Law, the shareholder must have given timely notice thereof in writing to
the Secretary of the corporation and such other business must otherwise be a
proper matter for shareholder action. To be timely, a shareholder's notice
shall be delivered to the Secretary at the principal executive offices of the
corporation not later than the close of business on the 90th day, nor earlier
than the close of business on the 110th day, prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the shareholder to be timely must be so
delivered not later than the 10th day following the day on which public
announcement (as hereinafter defined) of the date of such meeting is first made
by the corporation. In no event shall the public announcement of an adjournment
of an annual meeting commence a new time period for the giving of a
shareholder's notice as described above. Such shareholder's notice shall set
forth (A) as to each person whom the shareholder proposes to nominate for
election or re-election as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the shareholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the shareholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
shareholder, as they appear on the corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the corporation which are owned
beneficially and of record by such shareholder and such beneficial owner.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of shareholders at which directors are to be elected pursuant to the
corporation's notice of meeting (A) by or at the direction of the Board of
Directors or (B) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any shareholder of the
corporation who is a shareholder of record at the time of giving of notice
provided for in this By-Law, who shall be entitled to vote at the
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meeting and who complies with the notice procedures set forth in this By-Law. In
the event the corporation calls a special meeting of shareholders for the
purpose of electing one or more directors to the Board of Directors, any such
shareholder may nominate a person or persons (as the case may be), for election
of such position(s) as specified in the corporation's notice of meeting, if the
shareholder's notice required by paragraph (a)(2) of this By-Law shall be
delivered to the Secretary at the principal executive offices of the corporation
not earlier than the close of business on the 110th day prior to such special
meeting and not later than the close of business on the later of the 90th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a shareholder's notice as described
above.
(c) General. (1) Only such persons who are nominated in accordance
with the procedures set forth in this By-Law shall be eligible to serve as
directors and only such business shall be conducted at a meeting of shareholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this By-Law. Except as otherwise provided by law, the Chairman of
the meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made or proposed, as
the case may be, in accordance with the procedures set forth in this By-Law and,
if any proposed nomination or business is not in compliance with this By-Law, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. Nothing in this By-Law shall be deemed to affect any
rights (i) of shareholders to request inclusion of proposals in the
corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of preferred stock to elect directors under
specified circumstances.
Section 2.13 INSPECTORS OF ELECTION. The Board of Directors, in
advance of any meeting of shareholders, may appoint one or more persons as
inspectors to act at such meeting or any adjournment thereof. If inspectors of
election are not so appointed, the person acting as chairman at any such meeting
may, and on the request of any shareholder shall, make such appointment. In
case any person appointed as inspector shall fail to appear or to act, the
vacancy may be filled by appointment made by the Board of Directors in advance
of the meeting or at the meeting by the officer or person acting as chairman.
The inspectors shall ascertain and report the number of shares
represented at the meeting, based upon their determination of the validity and
effect of proxies; count all votes and report the results; and do such other
acts as are proper to conduct the election and voting with impartiality and
fairness to all the shareholders.
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Each report of an inspector shall be in writing and signed by him or
her or by a majority of them if there be more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall be
the report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
ARTICLE 3
DIRECTORS
Section 3.1 GENERAL POWERS. The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors.
Section 3.2 NUMBER, TENURE AND QUALIFICATIONS. The number of
directors which shall constitute the whole Board of the corporation shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by the Board of Directors but in no event shall the number of
Directors of the corporation be less than 6 nor more than 9. Directors need not
be residents of the State of Illinois nor shareholders of the corporation.
The Board of Directors shall be divided into three classes in the
manner provided by the Articles of Incorporation.
Section 3.3 REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without other notice than this By-law, immediately
after, and at the same place as, the annual meeting of shareholders. The Board
of Directors may provide, by resolution, the time and place, either within or
without the State of Illinois, for the holding of additional regular meetings in
which case no other notice need be given.
Section 3.4 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the Chairman of the Board, the
Chief Executive Officer, the President or any three directors. The person or
persons authorized to call special meetings of the Board of Directors may fix
any place, either within or without the State of Illinois, as the place for
holding any special meeting of the Board of Directors.
Section 3.5 NOTICE. Written notice of any special meeting of
directors shall be given as follows:
(a) By mail to each director at his business address at least three
days prior to the meeting; or
(b) By personal delivery, telegram or facsimile to each director at
his business address at least 24 hours prior to the meeting, or in the event
such notice is given on a Saturday, Sunday or holiday, to each director at his
residence address at least 24 hours prior to the meeting.
(c) If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail so addressed, with postage thereon prepaid.
If notice is given by telegram, such notice shall be deemed to be delivered when
the telegram is delivered to the telegraph
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company. If notice is given by facsimile, such notice shall be deemed given when
sent with confirmation of receipt.
(d) Any director may waive notice of any meeting. The attendance of a
director at any meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
Section 3.6 QUORUM. A majority of the number of the Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors. If less than a majority of such directors
are present at said meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice until a quorum shall be
present.
Unless specifically prohibited by the Articles of Incorporation,
members of the Board of Directors or of any committee of the Board of Directors
may participate in and act at any meeting of such Board of Directors or
committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in such a meeting shall constitute attendance at the
meeting of the person or persons so participating.
Section 3.7 MANNER OF ACTING. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors unless a greater number is required by the Articles of
Incorporation.
Section 3.8 VACANCIES. Any vacancy occurring in the Board of
Directors and any directorship to be filled by reason of an increase in the
number of directors may be filled by election at any annual meeting or at a
special meeting of the shareholders called for that purpose. In addition, any
vacancy occurring in the Board of Directors arising between meetings of
shareholders by reason of an increase in the number of directors or otherwise
may be filled by the affirmative vote of at least a majority of the remaining
directors in office. If the number of directors changes, any increase or
decrease in directors shall be apportioned among the classes so as to maintain
all classes as equal in number as possible, and any additional director elected
to any class shall hold office for a term which shall coincide with the terms of
the other directors in such class and until his successor is duly elected and
qualified.
Section 3.9 RESIGNATION. A director may resign at any time by giving
written notice to the Board of Directors, its chairman, or to the president or
secretary of the corporation. A resignation is effective when the notice is
given unless the notice specifies a future date. The pending vacancy may be
filled before the effective date, but the successor shall not take office until
the effective date.
Section 3.10 COMPENSATION. The Board of Directors, irrespective of
any personal interest of any of the members, shall have the authority to fix the
compensation of Directors. The Directors may be paid their expenses, if any, of
attendance at each meeting of the
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Board of Directors and may be paid a fixed sum for attendance at meetings or a
stated salary as Directors. These payments shall not preclude any Director from
serving the corporation in any other capacity and receiving compensation
therefor. Member of special or standing committees may be allowed like
compensation.
Section 3.11 PRESUMPTION OF ASSENT. A director of the corporation
who is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be conclusively presumed to have assented to the
action taken unless his dissent is entered in the minutes of the meeting or
unless he files his written dissent to such action with the person acting as the
secretary of the meeting before the adjournment of the meeting or forwards such
dissent by registered mail to the Secretary of the corporation immediately after
the adjournment of the meeting. Such right to dissent does not apply to a
director who voted in favor of such action.
Section 3.12 COMMITTEES. The Board of Directors, by resolution,
adopted by a majority of directors, may create one or more committees and
appoint members of the Board to serve on the committee or committees. Each
committee shall have two or more members, who serve at the pleasure of the
Board.
Unless the appointment by the Board of Directors requires a greater
number, a majority of any committee shall constitute a quorum and a majority of
a quorum is necessary for committee action. A committee may act by unanimous
consent in writing without a meeting and, subject to the provisions of these By-
laws or action by the Board of Directors, the committee by majority vote of its
members shall determine the time and place of meetings and the notice required
therefor.
To the extent specified by the Board of Directors or in the Articles
of Incorporation or these By-laws, each committee may exercise the authority of
the Board of Directors under the Act; provided, however, a committee may not:
(a) authorize distributions, except for dividends to be paid with
respect to shares of any preferred or special classes or any series
thereof;
(b) approve or recommend to shareholders any act which the Act
requires to be approved by shareholders;
(c) fill vacancies on the Board or on any of its committees;
(d) elect or remove officers or fix the compensation of any member of
the committee;
(e) adopt, amend or repeal these By-laws;
(f) approve a plan of merger not requiring shareholder approval;
(g) authorize or approve reacquisition of shares, except according to
a general formula or method prescribed by the Board;
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(h) authorize or approve the issuance or sale, or contract for sale,
of shares, except that the Board may direct a committee (I) to fix the
specific terms of the issuance or sale or contract for sale including
without limitation the pricing terms or the designation and relative
rights, preferences and limitations of a series of shares if the Board of
Directors has approved the maximum number of shares to be issued pursuant
to such delegated authority or (II) to fix the price and the number of
shares to be allocated to particular employees under an employee benefit
plan; or
(i) amend, alter, repeal, or take action inconsistent with any
resolution or action of the Board of Directors when the resolution or
action of the Board of Directors provides by its terms that it shall not be
amended, altered or repealed by action of a committee.
Section 3.13 REMOVAL OF DIRECTORS. One or more directors may be
removed, with or without cause, at a meeting of shareholders by the affirmative
vote of the holders of a majority of the outstanding shares then entitled to
vote in the election of directors of the corporation, except as follows:
(a) No director shall be removed at a meeting of shareholders unless
the notice of such meeting shall state that a purpose of the meeting is to
vote upon the removal of one or more directors named in the notice. Only
the named director or directors may be removed at such meeting.
(b) If a director is elected by a class or series of shares, he or she
may be removed only by the shareholders of that class or series.
Section 3.14 INFORMAL ACTION BY DIRECTORS. Any action required to be
taken at a meeting of the Board of Directors, or any other action which may be
taken at a meeting of the Board of Directors or a committee thereof, may be
taken without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the directors entitled to vote with respect to
the subject matter thereof or by all the members of such committee, as the case
may be.
Section 3.15 RELIANCE ON BOOKS. A member of the Board of Directors
or a member of any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith upon the
books of account or reports made to the corporation by any of its officers, or
by an independent certified public accountant, or by an appraiser selected with
reasonable care by the Board of Directors or by any committee, or in relying in
good faith upon other records of the corporation.
ARTICLE 4
OFFICERS
Section 4.1 NUMBER. The Board of Directors shall have full
discretion to appoint officers for the corporation. These officers may include
a Chairman of the Board of
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Directors, a President, a Chief Financial Officer, one or more Vice Presidents,
a Treasurer and a Secretary, each of whom shall be elected by the Board of
Directors. The Board of Directors may appoint other officers if deemed necessary
who shall have such authority and shall perform such duties as from time to time
may be prescribed by the Board of Directors. Any two or more offices may be held
by the same person.
Section 4.2 ELECTION AND TERM OF OFFICE. The officers of the
corporation shall be elected by the Board of Directors. Vacancies may be filled
or new offices filled at any meeting of the Board of Directors. Each officer
shall hold office until his successor shall have been duly elected and shall
have qualified or until his death or until he shall resign or shall have been
removed in the manner hereinafter provided.
Section 4.3 REMOVAL. Any officer or agent of the corporation may be
removed by the Board of Directors whenever in its judgment the best interests of
the corporation will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election or
appointment of an officer or agent shall not of itself create contract rights.
Section 4.4 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors.
Section 4.5 CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board shall preside at all meetings of the Board of Directors and shareholders.
Section 4.6 THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall be the chief executive officer of the corporation. The Chief Executive
Officer shall have executive authority to see that all orders and resolutions of
the Board of Directors are carried into effect and, subject to the control
vested in the Board of Directors by statute, by the Articles of Incorporation or
by these By-Laws, shall administer and be responsible for the overall management
of the business and affairs of the corporation. The Chief Executive Officer
shall perform all duties incident to the office of the Chief Executive Officer
and such other duties as from time to time may be assigned to him by the Board
of Directors.
Section 4.7. PRESIDENT. The President shall perform such duties as
from time to time may be assigned to him by the Chief Executive Officer and the
Board of Directors.
Section 4.8 CHIEF FINANCIAL OFFICER. The Chief Financial Officer (if
any) shall act in an executive financial capacity. He shall assist the Chief
Executive Officer and the President in the general supervision of the
corporation's financial policies and affairs.
Section 4.9 VICE PRESIDENTS. Any one or more of the Vice Presidents
may be designated by the Board of Directors as an Executive Vice President,
Senior Vice President or such other designation as the Board of Directors may
deem appropriate. In the absence of the President or in the event of his
inability or refusal to act, the Executive Vice President shall perform the
duties and exercise the functions of the President. If there is no Executive
Vice President, or if there is more than one, the Board of Directors may
determine which one or more of the Vice Presidents shall perform any of such
duties or exercise any of
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such functions; if such determination is not made by the Board of Directors, the
Chief Executive Officer may make such determination. Any Vice President may
sign, with the Secretary or an Assistant Secretary, certificates for shares of
the corporation; and shall perform those other duties which from time to time
may be assigned to him by the Board of Directors or by the Chief Executive
Officer or the President.
Section 4.10 TREASURER. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the corporation;
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever and deposit all such moneys in the name of the corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of Article V of these By-laws; and (b) in
general, perform all duties incident to the office of Treasurer and all other
duties as from time to time may be assigned to him by the Board of Directors or
the chief executive officer. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties in the sum
and with a surety or sureties as the Board of Directors shall determine.
Section 4.11 SECRETARY. The Secretary shall: (a) keep the minutes of
the shareholders' and of the Board of Directors' meetings in one or more books
provided for that purpose; (b) see that all notices are duly given in accordance
with the provisions of these By-laws or as required by law; (c) be custodian of
the corporate records and, if the corporation has a corporate seal, of the seal
of the corporation and see that the seal of the corporation is affixed to all
certificates for shares prior to the issue thereof and to all documents, the
execution of which on behalf of the corporation under its seal is duly
authorized in accordance with the provisions of these By-laws; (d) keep a
register of the post office address of each shareholder which shall be furnished
to the Secretary by such shareholder; (e) sign, with the Chief Executive
Officer, the President or a Vice President, certificates for shares of the
corporation, the issue of which shall have been authorized by resolution of the
Board of Directors; (f) have general charge of the share transfer books of the
corporation; and (g) in general, perform all duties incident to the office of
Secretary and all other duties as from time to time may be assigned to him by
the Board of Directors, the Chief Executive Officer or the President.
Section 4.12 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The
Assistant Secretaries as thereunto authorized by the Board of Directors may sign
with the Chief Executive Officer, the President or a Vice President certificates
for shares of the corporation, the issue of which shall have been authorized by
a resolution of the Board of Directors. The Assistant Treasurers and Assistant
Secretaries, in general, shall perform such duties as shall be assigned to them
by the Treasurer or the Secretary, respectively, or by the Board of Directors or
the President. The Assistant Treasurers shall, respectively, if required by the
Board of Directors, give bonds for the faithful discharge of their duties in
sums and with sureties as the Board of Directors shall determine.
Section 4.13 SALARIES. The salaries of the officers shall be fixed
from time to time by the Board of Directors or a committee thereof, and no
officer shall be prevented from receiving such salary by reason of the fact that
he is also a Director of the corporation.
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ARTICLE 5
SHARES, CERTIFICATES FOR SHARES AND TRANSFER OF SHARES
Section 5.1 REGULATION. The Board of Directors may make such rules
and regulations as it may deem expedient concerning the issuance, transfer and
registration of certificates for shares of the corporation, including the
appointment of transfer agents and registrars.
Section 5.2 CERTIFICATES FOR SHARES. The shares of the corporation
shall be represented by certificates which shall be signed by the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Financial
Officer or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, shall be numbered serially for each
class of shares, or series thereof, as they are issued and may be sealed with
the seal, or a facsimile of the seal, of the corporation. If a certificate is
countersigned by a transfer agent or registrar, other than the corporation
itself or its employee, any other signatures or countersignatures on the
certificate may be facsimiles. If the corporation shall be authorized to issue
shares of more than one class, every certificate representing shares issued by
the corporation shall set forth upon the face or back of the certificate a full
or summary statement of all of the designations, preferences, qualifications,
limitations, restrictions and special or relative rights of the shares of each
class authorized to be issued and, if the corporation shall be authorized to
issue any preferred or special class in series, the variations in the relative
rights and preferences between the shares of each such series so far as the same
have been fixed and determined and the authority of the Board of Directors to
fix and determine the relative rights and preferences of subsequent series. This
statement may be omitted from the certificate if it shall be set forth upon the
face or back of the certificate that such statement, in full, will be furnished
by the corporation to any shareholder upon request and without charge.
Each certificate representing shares shall also state the name of the
corporation, the date of issue, that the corporation is organized under the laws
of the State of Illinois, the name of the person to whom it is issued, the
number and class of shares and the designation of the series, if any, which the
certificate represents. Each certificate shall be otherwise in such form as may
be prescribed by the Board of Directors and as shall conform to the rules of any
Stock Exchange on which the shares may be listed.
Section 5.3 CANCELLATION OF CERTIFICATES. All certificates
surrendered to the corporation for transfer shall be canceled and no new
certificates shall be issued in lieu thereof until the former certificate for a
like number of shares shall have been surrendered and canceled, except as herein
provided with respect to lost, stolen or destroyed certificates.
Section 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES. Any shareholder
claiming that his certificate for shares is lost, stolen or destroyed may make
an affidavit or affirmation of that fact and lodge the same with the Secretary
of the corporation, accompanied by a signed application for a new certificate.
Thereupon, and unless otherwise directed by the Board of Directors, upon the
giving of a satisfactory bond of indemnity to the
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corporation, a new certificate may be issued representing the same number, class
and series of shares as were represented by the certificate alleged to be lost,
stolen or destroyed.
Section 5.5 TRANSFER OF SHARES. The corporation may from time to
time enter into an agreement or agreements with one or more of its shareholders
restricting the transferability of its shares in accordance with the general
corporate purpose to have its shares owned by persons actively engaged in the
corporate business. Subject to the terms of any such agreement, shares of the
corporation shall be transferable on the books of the corporation by the holder
thereof, in person or by his duly authorized attorney, upon the surrender and
cancellation of a certificate or certificates for a like number of shares. Upon
presentation and surrender of a certificate for shares properly endorsed and
payment of all required taxes, if any, the transferee shall be entitled to a new
certificate or certificates in lieu thereof. As against the corporation, a
transfer of shares can be made only on the books of the corporation and in the
manner hereinabove provided, and the corporation shall be entitled to treat the
holder of record of any share as the owner thereof and shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, whether or not it shall have express or other notice
thereof, except as expressly provided by the statutes of the State of Illinois.
Section 5.6 FACSIMILE SIGNATURE. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
ARTICLE 6
CONTRACTS
Except as otherwise required by law, the Articles of Incorporation or
these By-laws, any contracts or other instruments may be executed and delivered
in the name and on behalf of the corporation by such officer or officers of the
corporation as the Board of Directors may from time to time direct. Such
authority may be general or confined to specific instances as the Board may
determine.
ARTICLE 7
FISCAL YEAR
The fiscal year of the corporation shall end on the 31st day of
December in each calendar year.
ARTICLE 8
DIVIDENDS
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The Board of Directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and the Articles of Incorporation.
ARTICLE 9
SEAL
The Board of Directors may provide a corporate seal which shall be in
the form of a circle and shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Illinois."
ARTICLE 10
INDEMNIFICATION
Section 10.1 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The corporation shall indemnify any person who was or is a party,
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was a director or officer of the
corporation, or who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such person acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the corporation or, with respect to
any criminal action or proceeding, that the person had reasonable cause to
believe that his or her conduct was unlawful.
Section 10.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
corporation shall indemnify any person who was or is a party, or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that such person is or was a director or officer of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, if such person acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of the
corporation, provided that no indemnification shall be made with respect to any
claim, issue, or matter as to which such person has been adjudged to have been
liable to the corporation, unless, and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, but in view of all the
15
<PAGE>
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper.
Section 10.3 AUTHORIZATION OF INDEMNIFICATION. Any indemnification
under Sections 10.1 and 10.2 of this Article (unless ordered by a court) shall
be made by the corporation only as authorized in the specific case, upon a
determination that indemnification of the director or officer is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in Sections 10.1. and 10.2. of this Article. Such determination shall be
made (1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable or, even if obtainable, a quorum of
disinterested directors so directs, by advice of independent legal counsel, or
(3) by the shareholders. In any determination denying indemnification, the
burden of proof shall be on the corporation to prove by clear and convincing
evidence that indemnification should not be allowed.
Section 10.4 PAYMENT OF EXPENSES IN ADVANCE. Notwithstanding any other
provisions of this Article 10, expenses incurred in defending a civil or
criminal action, suit or proceeding shall, unless the Board of Directors
determines otherwise, be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director or officer to repay such amount, if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
corporation as authorized in this Article 10.
Section 10.5 SUCCESSFUL DEFENSES. Notwithstanding any other provisions
of this Article 10, to the extent that a director or officer of the corporation
has been successful, on the merits or otherwise, in the defense of any action,
suit or proceeding referred to in Sections 10.1 and 10.2 of this Article or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.
Section 10.6 PROVISIONS NOT EXCLUSIVE. The indemnification and
advancement of expenses provided by or granted under the other Sections of this
Article 10 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any by-
law, agreement, vote of shareholders or disinterested directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office.
Section 10.7 INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of his
or her status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of this
Article 10.
Section 10.8 NOTICE TO SHAREHOLDERS. If the corporation has paid
indemnity or has advanced expenses to a director, officer, employee or agent,
the corporation
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shall report the indemnification or advance in writing to the shareholders with
or before the notice of the next shareholders meeting.
Section 10.9 DEFINITIONS. For purposes of this Article 10, references
to "the corporation" shall include, in addition to the surviving corporation,
any merging corporation (including any corporation having merged with a merging
corporation) absorbed in a merger which, if its separate existence had
continued, would have had the power and authority to indemnify its directors,
officers, and employees or agents, so that any person who was a director,
officer, employee or agent of such merging corporation, or was serving at the
request of such merging corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article 10 with
respect to the surviving corporation as such person would have with respect to
such merging corporation if its separate existence had continued.
For purposes of this Article 10, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries. A person who acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" as referred to in
this Article 10.
Section 10.11 CONTINUATION OF RIGHTS. The indemnification and
advancement of expenses provided by or granted under this Article 10 shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of that person.
Section 10.12 PAYMENTS A BUSINESS EXPENSE. Any payments made to any
indemnified party under these By-Laws or under any other right to
indemnification shall be deemed to be an ordinary and necessary business expense
of the corporation, and payment thereof shall not subject any person responsible
for the payment, or the Board of Directors, to any action for corporate waste or
to any similar action.
ARTICLE 11
AMENDMENTS
Unless the power to make, alter, amend or repeal these By-laws is
reserved to the shareholders by the Articles of Incorporation, these By-laws may
be made, altered, amended or repealed by the shareholders or the Board of
Directors, but no by-laws adopted by the shareholders may be altered, amended or
repealed by the Board of Directors.
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ARTICLE 12
VOTING SHARES OF INTERESTS IN OTHER CORPORATIONS
The Chairman of the Board, the Chief Executive Officer or the President and
each of them, shall have, the authority to act for the corporation by voting any
shares or exercising any other interest owned by the corporation in any other
corporation or other business association, including wholly or partially owned
subsidiaries of the corporation, such authority to include, but not be limited
to, power to attend any meeting of any such corporation or other business
association, to vote shares in the election of directors and upon any other
matter coming before any such meeting, to waive notice of any such meeting and
to consent to the holding thereof without notice, and to appoint a proxy or
proxies to represent the corporation at any such meeting with all powers that
said officer would have under this section if personally present.
18
<PAGE>
Exhibit 10.3
April 23, 1997
Mr. Richard Brown
Hamilton Lodge
Dean Lane
Cookham Dean
Berkshire
SL6 9AF
United Kingdom
Dear Richard
OFFER OF EMPLOYMENT
Over the last several months, we have spent a great deal of time evaluating our
plans to launch into the international marketplace. After careful evaluation by
the management team, it has been determined that we are willing, financially
capable and have a product that is ready with minimal entry level changes
required. Furthermore, the international market for a standards based call
center product with rich CTI functionality appears to be potentially more robust
than the US.
This immediate market opportunity has focused our attention on recruiting an
experienced, high energy individual that will be able to both plan for and
exploit this opportunity. After our initial meeting and your subsequent visit
to our corporate facility, the management team is in unanimous agreement that
you fit this profile.
I am pleased to extend this invitation to you to join Apropos Technology in the
capacity of Director, International Operations, reporting to me.
Your objectives will include:
. Develop a plan to exploit the international marketplace. The initial focus
will be on Europe and we anticipate we will move to Asia Pacific in the
near future. The plan you develop will determine the best business model
which will primarily be focused on product distribution and support
strategies.
. Provide Product Marketing with focused input regarding the special
product, literature, trade show, home page and other unique requirements
of your marketplace.
. Work with Finance in setting up the optimal business structure.
<PAGE>
. Develop a hiring plan that brings the appropriate staff in when
required to sell and support our systems in line with the distribution
methods selected.
. Virtually any other task required to create a world class call center
solution company.
Should you wish to accept this offer, it is anticipated that your start date
will be on or before 1st June 1997. Please advise the earliest date you will be
able to join us.
The following represent your proposed terms of employment:
Your legal employer will be Apropos Technology Ltd., Royal Albert House, Sheet
Street, Windsor, Berkshire, SL4 1BE.
For statutory purposes your employment will be counted as continuous from the
agreed date of joining, once agreed.
Salary and Benefits
Your compensation will consist of basis salary plus bonus element. Your basic
salary will be (Pounds)67,000 per annum ((Pounds)5583 per month) from our UK
payroll source. In addition, a bonus package will be provided with an
annualized target of (Pounds)24,000 paid quarterly which will consist of a set
of mutually agreed upon MBO's. This bonus will transition to a plan based 50%
on MBO's and 50% on financial performance such as revenue, bookings and or
margin contribution in 1998. This will result in a targeted annual compensation
of (Pounds)91,000. In addition, you will be granted an incentive stock option
of 20,000 shares of Apropos stock. The ISO has a standard twelve month
probation period after which on the first anniversary date you will vest the
first twelve (12) months and accrue 1/48 of the total option each month
thereafter until the option is fully vested at four years.
You will be provided with a benefit plan which includes health insurance for you
and your dependents, life insurance at 3 times your annual salary, annual
pension contribution of 5% and permanent health insurance.
The basis working hours are 9:00 to 5:30pm Monday to Friday, with one hour for
lunch. You may however be required to work such additional time outside these
hours as reasonably needed to complete your duties.
Car Allowance
This position has the benefit of a car allowance of (Pounds)12,500 per annum
((Pounds)1042/month) to provide your own vehicle for business use. The company
reimburses business mileage at between 30 and 40 pence/mile (dependent upon
cubic capacity of your vehicle).
<PAGE>
Holiday Entitlement and Pay
You are entitled to 23 working days annual vacation, and also 8 statutory bank
holidays. The company can designate up to a maximum of 7 working days,
including a Christmas/New Year shutdown, and the balance of your entitlement is
to be taken by arrangement with your manager. Your holiday entitlement for the
balance of 1997 will be advised when your start date is confirmed.
Long service holidays are provided in addition as follows:
After 5 years service - 1 extra day
After 10 years service - 2 extra days
After 15 years service - 3 extra days
After 20 years service - 4 extra days
After 25 years service - 5 extra days
Sickness Absence
The company operates a sickness absence pay scheme.
Notice of Termination of Employment
In the event of the Company terminating your employment, you are entitled to
receive three months notice.
If you wish to leave the Company's employment, you are required to give three
months notice.
Grievance and Disciplinary procedure
If you have a grievance or are dissatisfied with a disciplinary decision, you
should initially discuss it with your Manager. If your dissatisfaction cannot
be resolved at this level you should contact his/her Manager. If you are still
dissatisfied you should contact the Human Resources Manager.
Business Ethics and Confidentiality
You will treat as confidential, and not make use of, disclose or divulge any
information which belongs or relates to Apropos Technology Inc. or any of its
subsidiary operations including Apropos Technology Ltd.
In order to protect Apropos' proprietary rights, you are deemed to have assigned
to Apropos Technology, all right title and any interest in and to any inventions
made, originated or developed during the course of or otherwise related to the
service provided to Apropos by yourself during your employment by Apropos.
<PAGE>
Whilst I hope that this statement of terms and conditions of employment is self
explanatory, should you have any questions please do not hesitate to contact me.
Richard, I am sincerely looking forward to working with you in building from the
ground up, the best designed and performing international operation for an
international software firm in the industry. We have the foundation in place
with our current products and set of partners to aggressively launch this
endeavor. The window of opportunity is wide open for all of us to exploit.
Whilst the offer we are providing provides some obvious financial rewards, I
truly believe that the greater opportunity for you is to build something from
scratch that has your name on it. The entire management team at Apropos will do
whatever is necessary to make you and your efforts a success. I personally
believe in you and the opportunity and am committed to making this an "exceeds
expectations" situation for all involved.
This offer will remain open for a period of 7 days from the date of this letter.
Should you decide to join Apropos, I would appreciate you signing and returning
one copy of this letter to me as your agreement to the terms and conditions set
out here.
Sincerely,
James M. Nelson
Vice President Sales
I agree to the terms and conditions contained in this letter.
- ----------------------------------------------------------------------------
Accepted, Richard David Brown Date
<PAGE>
EXHIBIT 10.6
APROPOS TECHNOLOGY, INC.
EMPLOYEE STOCK PURCHASE PLAN OF 2000
1. Purpose. Apropos Technology, Inc., an Illinois corporation (the
"Company"), hereby adopts the Apropos Technology, Inc. Employee Stock Purchase
Plan of 2000 (the "Plan"). The purpose of the Plan is to provide an opportunity
for the employees of the Company and any designated subsidiaries to purchase
Common Shares of the Company at a discount through voluntary automatic payroll
deductions, thereby attracting, retaining and rewarding such persons and
strengthening the mutuality of interest between such persons and the Company's
shareholders.
2. Shares Subject to Plan. An aggregate of 1,000,000 Common Shares (the
"Shares") may be sold pursuant to the Plan. Such Shares may be authorized but
unissued Common Shares, treasury shares or Common Shares purchased in the open
market. If there is any change in the outstanding shares of Common Shares by
reason of a stock dividend or distribution, stock split-up, recapitalization,
combination or exchange of shares, or by reason of any merger, consolidation or
other corporate reorganization in which the Company is the surviving
corporation, the number of Shares available for sale shall be equitably adjusted
by the Committee appointed to administer the Plan to give proper effect to such
change.
3. Administration. The Plan shall be administered by a committee (the
"Committee") which shall be the Compensation Committee of the Board of Directors
or another committee consisting of not less than two directors of the Company
appointed by the Board of Directors, all of whom shall qualify as non-employee
directors within the meaning of Securities and Exchange Commission Regulation
(S) 240.16b-3 or any successor regulation. The Committee is authorized, subject
to the provisions of the Plan, to establish such rules and regulations as it
deems necessary for the proper administration of the Plan and to make such
determinations and interpretations and to take such action in connection with
the Plan and any Benefits granted hereunder as it deems necessary or advisable.
All determinations and interpretations made by the Committee shall be binding
and conclusive on all participants and their legal representatives. No member of
the Board, no member of the Committee and no employee of the Company shall be
liable for any act or failure to act hereunder, by any other member or employee
or by any agent to whom duties in connection with the administration of this
Plan have been delegated or, except in circumstances involving his or her bad
faith, gross negligence or fraud, for any act or failure to act by the member or
employee.
4. Eligibility. All regular employees of the Company, and of each
qualified subsidiary of the Company which may be so designated by the Committee,
other than, in the discretion of the Committee:
(a) employees whose customary employment is 20 hours or less per week;
(b) employees whose customary employment is for not more than 5 months
per year; and
<PAGE>
(c) employees who have not been employed for at least one year as of any
Enrollment Date (as defined in paragraph 5);
shall be eligible to participate in the Plan. For the purposes of this Plan, the
term "employee" means any individual in an employee-employer relationship with
the Company or a qualified subsidiary of the Company, but shall exclude (a) any
independent contractor; (b) any consultant, (c) any individual performing
services for the Company or a qualified subsidiary who has entered into an
independent contractor or consultant agreement with the Company or a qualified
subsidiary; (d) any individual performing services for the Company or a
qualified subsidiary under an independent contractor or consultant agreement, a
purchase order, a supplier agreement or any other agreement that the Company or
a qualified subsidiary enters into for services; (e) any "leased employee" as
defined in Section 414(n) of the Internal Revenue Code; and (f) any individual
whose terms and conditions of employment are governed by a collective bargaining
agreement resulting from good faith collective bargaining where benefits of the
type being offered under the Plan were the subject of such bargaining, unless
such agreement specifies that such individuals are eligible for the Plan. The
term "qualified subsidiary" means any corporation or other entity in which a
fifty percent (50%) or greater interest is, at the time, directly or indirectly
owned by the Company or by one or more subsidiaries or by the Company and one or
more subsidiary which is designated for participation by the Committee.
5. Participation. An eligible employee may elect to participate in the
Plan as of any "Enrollment Date". Enrollment Dates shall occur on the first day
of an Offering Period (as defined in paragraph 8). Any such election shall be
made by completing and forwarding an enrollment and payroll deduction
authorization form to the Secretary of the Company prior to such Enrollment
Date, authorizing payroll deductions in an amount not exceeding 10% of the
employee's gross pay for the payroll period to which the deduction applies. A
participating employee may increase or decrease payroll deductions as of any
subsequent Enrollment Date by completing and forwarding a revised payroll
deduction authorization form to the Secretary of the Company; provided, that
changes in payroll deductions shall not be permitted to the extent that they
would result in total payroll deductions exceeding 10% of the employee's gross
pay. An eligible employee may not initiate, increase or decrease payroll
deductions as of any date other than an Enrollment Date. For purposes of this
Plan, the term "gross pay" means the gross amount of pay an employee would
receive at each regular pay period date before any deduction for required
federal or state withholding and any other amounts which may be withheld.
6. Payroll Deduction Accounts. The Company shall establish a "Payroll
Deduction Account" for each participating employee, and shall credit all payroll
deductions made on behalf of each employee pursuant to paragraph 5 to his or her
Payroll Deduction Account. No interest shall be credited to any Payroll
Deduction Account.
7. Withdrawals. An employee may withdraw from an Offering Period at any
time by completing and forwarding a written notice to the Secretary of the
Company. Upon receipt of such notice, payroll deductions on behalf of the
employee shall be discontinued commencing with the immediately following payroll
period, and such employee may not again
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<PAGE>
be eligible to participate in the Plan until the next Enrollment Date. Amounts
credited to the Payroll Deduction Account of any employee who withdraws shall
remain in the account and be used to purchase Shares in accordance with
paragraph 9 hereof, subject to the limitations in paragraph 8 hereof.
8. Offering Periods. The first Offering Period hereunder shall commence
on the consummation of the Company's initial public offering and shall continue
until December 31, 2000. Thereafter, the Plan shall be implemented by
consecutive Offering Periods with a new Offering Period commencing on the first
trading day on or after January 1 and July 1 of each year, or on such other date
as the Committee shall determine, and continuing thereafter to the last trading
day of the respective six-month period or until terminated in accordance with
paragraph 17 hereof. "Trading day" shall mean a day on which the Nasdaq National
Market System is open for trading. The Committee shall have the power to change
the duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings. The last trading day of each Offering Period prior
to the termination of the Plan (or such other trading date as the Committee
shall determine) shall constitute the purchase dates (the "Share Purchase
Dates") on which each employee for whom a Payroll Deduction Account has been
maintained shall purchase the number of Shares determined under paragraph 9(a).
Notwithstanding the foregoing, the Company shall not permit the exercise of any
right to purchase Shares
(a) to an employee who, immediately after the right is granted, would own
shares possessing 5% or more of the total combined voting power or value of
all classes of stock of the Company or any subsidiary; or
(b) which would permit an employee's rights to purchase shares under this
Plan, or under any other qualified employee stock purchase plan maintained
by the Company or any subsidiary, to accrue at a rate in excess of $25,000
of the fair market value of such shares (determined at the time such rights
are granted) for each calendar year in which the right is outstanding at
any time.
For the purposes of subparagraph (a), the provisions of Section 424(d) of the
Internal Revenue Code shall apply in determining the stock ownership of an
employee, and the shares which an employee may purchase under outstanding rights
or options shall be treated as shares owned by the employee.
9. Purchase of Shares.
(a) Subject to the limitations set forth in paragraphs 7 and 8, each
employee participating in an offering shall have the right to purchase as many
whole Shares as may be purchased with the amounts credited to his or her Payroll
Deduction Account as of the payroll date coinciding with or immediately
preceding the last Wednesday of the month (or such other date as the Committee
shall determine) in which occurs the applicable Share Purchase Date (the "Cutoff
Date"). Fractional shares may not be purchased under the Plan. Any amount
remaining in the Payroll Deduction Account of a participant after the Share
Purchase Date shall be retained
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<PAGE>
in the account for the purchase of additional Shares in subsequent Offering
Periods. Employees may purchase Shares only through payroll deductions, and cash
contributions shall not be permitted.
(b) The "Purchase Price" for Shares purchased under the Plan shall be not
less than the lesser of an amount equal to 85% of the closing price of Common
Shares (i) at the beginning of the Offering Period or (ii) on the Share Purchase
Date. For these purposes, the closing price shall be as reported on the NASDAQ
National Market System list as reported in the Wall Street Journal, Midwest
Edition. The Committee shall have the authority to establish a different
Purchase Price as long as any such Purchase Price complies with the provisions
of Section 423 of the Internal Revenue Code.
(c) On each Share Purchase Date, the amount credited to each
participating employee's Payroll Deduction Account as of the immediately
preceding Cutoff Date shall be applied to purchase as many whole Shares as may
be purchased with such amount at the applicable Purchase Price. Any amount
remaining in an employee's Payroll Deduction Account as of the relevant Share
Purchase Date in excess of the amount that may properly be applied to the
purchase of Shares as a result of the application of the limitations set forth
in paragraph 8 hereof shall be refunded to the employee as soon as practicable.
10. Brokerage Accounts or Plan Share Accounts. By enrolling in the Plan,
each participating employee shall be deemed to have authorized the establishment
of a brokerage account on his or her behalf at a securities brokerage firm
selected by the Committee. Alternatively, the Committee may provide for Plan
share accounts for each participating employee to be established by the Company
or by an outside entity selected by the Committee which is not a brokerage firm.
Shares purchased by an employee pursuant to the Plan shall be held in the
employee's brokerage or Plan share account ("Plan Share Account") in his or her
name, or if the employee so indicates on his or her payroll deduction
authorization form, in the employee's name jointly with a member of the
employee's family, with right of survivorship. An employee who is a resident of
a jurisdiction which does not recognize such a joint tenancy may request that
such Shares be held in his or her name as tenant in common with a member of the
employee's family, without right of survivorship.
11. Rights as Shareholder. An employee shall have no rights as a
shareholder with respect to Shares subject to any rights granted under this Plan
until payment for such Shares has been completed at the close of business on the
relevant Share Purchase Date.
12. Certificates. Certificates for Shares purchased under the Plan will
not be issued automatically. However, certificates for whole Shares purchased
shall be issued as soon as practicable following an employee's written request.
The Company may make a reasonable charge for the issuance of such certificates.
13. Termination of Employment. If a participating employee's employment
is terminated for any reason, including death, if an employee is granted a leave
of absence of more
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<PAGE>
than 90 days duration or if an employee otherwise ceases to be eligible to
participate in the Plan, payroll deductions on behalf of the employee shall be
discontinued and any amounts then credited to the employee's Payroll Deduction
Account shall remain in the account and be used to purchase Shares in accordance
with paragraph 9 hereof, subject to the limitations in paragraph 8 hereof. Any
amount remaining in the Payroll Deduction Account after the final Share Purchase
Date shall be refunded to the employee as soon as practicable.
14. Rights Not Transferable. Rights granted under this Plan are not
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during an employee's lifetime only
by the employee.
15. Employment Rights. Neither participation in the Plan, nor the exercise
of any right granted under the Plan, shall be made a condition of employment, or
of continued employment with the Company or any subsidiary.
16. Application of Funds. All funds received by the Company for Shares
sold by the Company on any Share Purchase Date pursuant to this Plan may be used
for any corporate purpose.
17. Amendments and Termination. The Board of Directors may amend the Plan
at any time, provided that no such amendment shall be effective unless approved
within 12 months after the date of the adoption of such amendment by the
affirmative vote of shareholders holding Common Shares entitled to a majority of
the votes represented by all outstanding Common Shares entitled to vote if such
shareholder approval is required for the Plan to continue to comply with the
requirements of Securities and Exchange Commission Regulation (S) 240.16b-3 and
Section 423 of the Internal Revenue Code. The Board of Directors may suspend the
Plan or discontinue the Plan at any time. Upon termination of the Plan, all
payroll deductions shall cease and all amounts then credited to the
participating employees' Payroll Deduction Accounts shall be equitably applied
to the purchase of whole Shares then available for sale, and any remaining
amounts shall be promptly refunded to the participating employees.
18. Applicable Laws. This Plan, and all rights granted hereunder, are
intended to meet the requirements of an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code, as from time to time amended, and the
Plan shall be construed and interpreted to accomplish this intent. Sales of
Shares under the Plan are subject to, and shall be accomplished only in
accordance with, the requirements of all applicable securities and other laws.
19. Expenses. Except to the extent provided in paragraph 12, all expenses
of administering the Plan, including expenses incurred in connection with the
purchase of Shares for sale to participating employees, shall be borne by the
Company and its subsidiaries.
20. Shareholder Approval. The Plan was adopted by the Board of Directors
on January 20, 2000, subject to shareholder approval. The Plan and any action
taken hereunder shall be null and void if shareholder approval is not obtained
at or before the next annual meeting of shareholders.
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<PAGE>
EXHIBIT 10.8
REGISTRATION RIGHTS AGREEMENT
March 19, 1996
To each of the several Purchasers named in
Schedule I to the Series A Convertible Preferred
Stock Purchase Agreement of even date herewith
(each a "Purchaser" and, collectively, the
"Purchasers")
Ladies and Gentlemen:
This will confirm that in consideration of your agreement on the date
hereof to purchase an aggregate of 804 shares (the "Preferred Shares") of Series
A Convertible Preferred Stock, $0.01 par value ("Preferred Stock"), of Teledata
Solutions, Inc., an Illinois corporation (the "Company"), pursuant to the Series
A Convertible Preferred Stock Purchase Agreement of even date herewith (the
"Purchase Agreement") between the Company and you and as an inducement to you to
consummate the transactions contemplated by the Purchase Agreement, the Company
covenants and agrees with each of you as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, $no par value, of the
Company, as constituted as of the date of this Agreement.
"Conversion Shares" shall mean shares of Common Stock issued upon
conversion of the Preferred Shares.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"Registration Expenses" shall mean the expenses so described in
Section 8.
"Restricted Stock" shall mean the Conversion Shares, excluding
Conversion Shares which have been (a) registered under the Securities Act
pursuant to an effective registration statement filed thereunder and
disposed of in accordance with the registration statement covering them or
(b) publicly sold pursuant to Rule 144 under the Securities Act.
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"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean the expenses so described in Section 8.
2. Restrictive Legend. Each certificate representing Preferred Shares
or Conversion Shares shall, except as otherwise provided in this Section 2 or in
Section 3, be stamped or otherwise imprinted with a legend substantially in the
following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND
ALL SUCH APPLICABLE LAWS OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE."
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company (it being agreed that Testa, Hurwitz & Thibeault
shall be satisfactory) the securities represented thereby may be publicly sold
without registration under the Securities Act and any applicable state
securities laws.
3. Notice of Proposed Transfer. Prior to any proposed transfer of any
Preferred Shares or Conversion Shares (other than under the circumstances
described in Sections 4, 5 or 6), the holder thereof shall give written notice
to the Company of its intention to effect such transfer. Each such notice shall
describe the manner of the proposed transfer and, if requested by the Company,
shall be accompanied by an opinion of counsel satisfactory to the Company (it
being agreed that Testa, Hurwitz & Thibeault shall be satisfactory) to the
effect that the proposed transfer may be effected without registration under the
Securities Act and any applicable state securities laws, whereupon the holder of
such stock shall be entitled to transfer such stock in accordance with the terms
of its notice; provided, however, that no such opinion of counsel shall be
required for a transfer to one or more partners of the transferor (in the case
of a transferor that is a partnership) or to an affiliated corporation (in the
case of a transferor that is a corporation). Each certificate for Preferred
Shares or Conversion Shares transferred as above provided shall bear the legend
set forth in Section 2, except that such certificate shall not bear such legend
if (i) such transfer is in accordance with the provisions of Rule 144 (or any
other rule permitting public sale without registration under the Securities Act)
or (ii) the opinion of counsel referred to above is to the further effect that
the transferee and any subsequent transferee (other than an affiliate of the
Company) would be entitled to transfer such securities in a public sale without
registration under the Securities Act. The restrictions provided for in this
Section 3 shall not apply to securities which are not required to bear the
legend prescribed by Section 2 in accordance with the provisions of that
Section.
4. Required Registration. (a) At any time after the earliest of (i)
six months after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
(ii) six months after the Company shall have become
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a reporting company under Section 12 of the Exchange Act, and (iii) the fifth
anniversary of the date of this Agreement, the holders of Restricted Stock
constituting at least 40% of the total shares of Restricted Stock then
outstanding may request the Company to register under the Securities Act all or
any portion of the shares of Restricted Stock held by such requesting holder or
holders for sale in the manner specified in such notice, provided that the
shares of Restricted Stock for which registration has been requested shall
constitute at least 20% of the total shares of Restricted Stock originally
issued if such holder or holders shall request the registration of less than all
shares of Restricted Stock then held by such holder or holders (or any lesser
percentage if the reasonably anticipated aggregate price to the public of such
public offering would exceed $5,000,000). For purposes of this Section 4 and
Sections 5, 6, 13(a) and 13(d), the term "Restricted Stock" shall be deemed to
include the number of shares of Restricted Stock which would be issuable to a
holder of Preferred Shares upon conversion of all Preferred Shares held by such
holder at such time, provided, however, that the only securities which the
Company shall be required to register pursuant hereto shall be shares of Common
Stock, and provided, further, however, that, in any underwritten public offering
contemplated by this Section 4 or Sections 5 and 6, the holders of Preferred
Shares shall be entitled to sell such Preferred Shares to the underwriters for
conversion and sale of the shares of Common Stock issued upon conversion
thereof. Notwithstanding anything to the contrary contained herein, no request
may be made under this Section 4 within 120 days after the effective date of a
registration statement filed by the Company covering a firm commitment
underwritten public offering in which the holders of Restricted Stock shall have
been entitled to join pursuant to Sections 5 or 6 and in which there shall have
been effectively registered all shares of Restricted Stock as to which
registration shall have been requested.
(b) Following receipt of any notice under this Section 4, the Company
shall immediately notify all holders of Restricted Stock from whom notice has
not been received and shall use its best efforts to register under the
Securities Act, for public sale in accordance with the method of disposition
specified in such notice from requesting holders, the number of shares of
Restricted Stock specified in such notice (and in all notices received by the
Company from other holders within 30 days after the giving of such notice by the
Company). If such method of disposition shall be an underwritten public
offering, the holders of a majority of the shares of Restricted Stock to be sold
in such offering may designate the managing underwriter of such offering,
subject to the approval of the Company, which approval shall not be unreasonably
withheld or delayed. The Company shall be obligated to register Restricted
Stock pursuant to this Section 4 on two occasions only, provided, however, that
such obligation shall be deemed satisfied only when a registration statement
covering all shares of Restricted Stock specified in notices received as
aforesaid, for sale in accordance with the method of disposition specified by
the requesting holders, shall have become effective and, if such method of
disposition is a firm commitment underwritten public offering, all such shares
shall have been sold pursuant thereto.
(c) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting holders, shares of Common Stock to be
sold by the Company for its own account, except as and to the extent that, in
the opinion of the managing underwriter (if such method of disposition shall be
an underwritten public offering), such inclusion would adversely affect the
marketing of the Restricted Stock to be sold. Except for registration
statements on Form S-4, S-8
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or any successor thereto, the Company will not file with the Commission any
other registration statement with respect to its Common Stock, whether for its
own account or that of other stockholders, from the date of receipt of a notice
from requesting holders pursuant to this Section 4 until the completion of the
period of distribution of the registration contemplated thereby.
5. Incidental Registration. If the Company at any time (other than
pursuant to Section 4 or Section 6) proposes to register any of its securities
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8 or another form not available for
registering the Restricted Stock for sale to the public), each such time it will
give written notice to all holders of outstanding Restricted Stock of its
intention so to do. Upon the written request of any such holder, received by
the Company within 30 days after the giving of any such notice by the Company,
to register any of its Restricted Stock, the Company will use its best efforts
to cause the Restricted Stock as to which registration shall have been so
requested to be included in the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent requisite to
permit the sale or other disposition by the holder of such Restricted Stock so
registered. In the event that any registration pursuant to this Section 5 shall
be, in whole or in part, an underwritten public offering of Common Stock, the
number of shares of Restricted Stock to be included in such an underwriting may
be reduced (pro rata among the requesting holders based upon the number of
shares of Restricted Stock owned by such holders) if and to the extent that the
managing underwriter shall be of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold by the Company therein,
provided, however, that such number of shares of Restricted Stock shall not be
reduced if any shares are to be included in such underwriting for the account of
any person other than the Company or requesting holders of Restricted Stock, and
provided, further, however, that in no event may less than one-third of the
total number of shares of Common Stock to be included in such underwriting be
made available for shares of Restricted Stock. Notwithstanding the foregoing
provisions, the Company may withdraw any registration statement referred to in
this Section 5 without thereby incurring any liability to the holders of
Restricted Stock.
6. Registration on Form S-3. If at any time (i) a holder or holders
of Preferred Shares or Restricted Stock request that the Company file a
registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the shares of Restricted Stock held by such
requesting holder or holders, the reasonably anticipated aggregate price to the
public of which would exceed $1,000,000, and (ii) the Company is a registrant
entitled to use Form S-3 or any successor thereto to register such shares, then
the Company shall use its best efforts to register under the Securities Act on
Form S-3 or any successor thereto, for public sale in accordance with the method
of disposition specified in such notice, the number of shares of Restricted
Stock specified in such notice. Whenever the Company is required by this
Section 6 to use its best efforts to effect the registration of Restricted
Stock, each of the procedures and requirements of Section 4 (including but not
limited to the requirement that the Company notify all holders of Restricted
Stock from whom notice has not been received and provide them with the
opportunity to participate in the offering) shall apply to such registration,
provided, however, that there shall be no limitation on the number of
registrations on Form S-3 which may be requested and obtained under this Section
6, and provided, further, however, that
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the requirements contained in the first sentence of Section 4(a) shall not apply
to any, registration on Form S-3 which may be requested and obtained under this
Section 6.
7. Registration Procedures. If and whenever the Company is required
by the provisions of Sections 4, 5 or 6 to use its best efforts to effect the
registration of any shares of Restricted Stock under the Securities Act, the
Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 4,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Restricted Stock and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Restricted Stock covered by such registration statement;
(d) use its best efforts to register or qualify the Restricted Stock
covered by such registration statement under the securities or "blue sky" laws
of such jurisdictions as the sellers of Restricted Stock or, in the case of an
underwritten public offering, the managing underwriter reasonably shall request,
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) use its best efforts to list the Restricted Stock covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify each seller of Restricted Stock and each
underwriter under such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing;
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(g) if the offering is underwritten and at the request of any seller
of Restricted Stock, use its best efforts to furnish on the date that Restricted
Stock is delivered to the underwriters for sale pursuant to such registration:
(i) an opinion dated such date of counsel representing the Company for the
purposes of such registration, addressed to the underwriters and to such seller,
stating that such registration statement has become effective under the
Securities Act and that (A) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the Securities
Act, (B) the registration statement, the related prospectus and each amendment
or supplement thereof comply as to form in all material respects with the
requirements of the Securities Act (except that such counsel need not express
any opinion as to financial statements contained therein) and (C) to such other
effects as reasonably may be requested by counsel for the underwriters or by
such seller or its counsel and (ii) a letter dated such date from the
independent public accountants retained by the Company, addressed to the
underwriters and to such seller, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
and
(h) make available for inspection by each seller of Restricted Stock,
any underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such seller
or underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the period
of distribution of Restricted Stock in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of distribution
of Restricted Stock in any other registration shall be deemed to extend until
the earlier of the sale of all Restricted Stock covered thereby and 120 days
after the effective date thereof.
In connection with each registration hereunder, the sellers of
Restricted Stock will furnish to the Company in writing such information with
respect to themselves and the proposed distribution by them as reasonably shall
be necessary in order to assure compliance with federal and applicable state
securities laws.
In connection with each registration pursuant to Sections 4, 5 or 6
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an
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arrangement between such underwriter and companies of the Company's size and
investment stature.
8. Expenses. All expenses incurred by the Company in complying with
Sections 4, 5 and 6, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, costs of insurance and reasonable fees
and disbursements of one counsel for the sellers of Restricted Stock, but
excluding any Selling Expenses, are called "Registration Expenses". All
underwriting discounts and selling commissions applicable to the sale of
Restricted Stock are called "Selling Expenses."
The Company will pay all Registration Expenses in connection with each
registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. Indemnification and Contribution. (a) In the event of a
registration of any of the Restricted Stock under the Securities Act pursuant to
Sections 4, 5 or 6, the Company will indemnify and hold harmless each seller of
such Restricted Stock thereunder, each underwriter of such Restricted Stock
thereunder and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Restricted Stock was registered under the Securities Act
pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each such seller, each such underwriter and each
such controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by any such seller, any such underwriter or any such controlling
person in writing specifically for use in such registration statement or
prospectus.
(b) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such
Restricted Stock thereunder, severally and not jointly, will indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of the Securities Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter
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and each person who controls any underwriter within the meaning of the
Securities Act, against all losses, claims, damages or liabilities, joint or
several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement under
which such Restricted Stock was registered under the Securities Act pursuant to
Sections 4, 5 or 6, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Company and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that such seller will be liable
hereunder in any such case if and only to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such seller, as such, furnished
in writing to the Company by such seller specifically for use in such
registration statement or prospectus, and provided, further, however, that the
liability of each seller hereunder shall be limited to the proportion of any
such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of the shares sold by such seller under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not in any event to exceed the proceeds received
by such seller from the sale of Restricted Stock covered by such registration
statement.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 9 and shall only relieve it
from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, provided,
however, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such
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action, with the expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party as
incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Restricted Stock exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 9 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling holder or any such controlling
person in circumstances for which indemnification is provided under this Section
9; then, and in each such case, the Company and such holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the public offering price of all
such Restricted Stock offered by it pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
10. Chances in Common Stock or Preferred Stock. If, and as often as,
there is any, change in the Common Stock or the Preferred Stock by way of a
stock split, stock dividend, combination or reclassification, or through a
merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock or the Preferred Stock as so changed.
11. Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Stock to the public without registration, at all
times after 90 days after any registration statement covering a public offering
of securities of the Company under the Securities Act shall have become
effective, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Restricted Stock forthwith upon request
a written statement by the Company as to its compliance with the reporting
requirements of such Rule 144
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and of the Securities Act and the Exchange Act, a copy of the most recent annual
or quarterly report of the Company, and such other reports and documents so
filed by the Company as such holder may reasonably request in availing itself of
any rule or regulation of the Commission allowing such holder to sell any
Restricted Stock without registration.
12. Representations and Warranties of the Company. The Company
represents and warrants to you as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Charter or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
13. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including without
limitation transferees of any Preferred Shares or Restricted Stock), whether so
expressed or not, provided, however, that registration rights conferred herein
on the holders of Preferred Shares or Restricted Stock shall only inure to the
benefit of a transferee of Preferred Shares or Restricted Stock if (i) there is
transferred to such transferee at least 20% of the total shares of Restricted
Stock originally issued pursuant to the Purchase Agreement to the direct or
indirect transferor of such transferee or (ii) such transferee is a partner,
shareholder or affiliate of a party hereto.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, addressed as follows:
if to the Company or any other party hereto, at the address of such
party set forth in the Purchase Agreement;
if to any subsequent holder of Preferred Shares or Restricted Stock,
to it at such address as may have been furnished to the Company in writing
by such holder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Preferred Shares or
Restricted Stock). or to the holders of
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Preferred Shares or Restricted Stock (in the case of the Company) in accordance
with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the holders
of at least two-thirds of the outstanding shares of Restricted Stock.
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(f) The obligations of the Company to register shares of Restricted
Stock under Sections 4, 5 or 6 shall terminate on the fifteenth anniversary of
the date of this Agreement.
(g) If requested in writing by the underwriters for the initial
underwritten public offering of securities of the Company, each holder of
Restricted Stock who is a party to this Agreement shall agree not to sell
publicly any shares of Restricted Stock or any other shares of Common Stock
(other than shares of Restricted Stock or other shares of Common Stock being
registered in such offering), without the consent of such underwriters, for a
period of not more than 270 days following the effective date of the
registration statement relating to such offering; provided, however, that all
persons entitled to registration rights with respect to shares of Common Stock
who are not parties to this Agreement, all other persons selling shares of
Common Stock in such offering, all persons holding in excess of 1% of the
capital stock of the Company on a fully diluted basis and all executive officers
and directors of the Company shall also have agreed not to sell publicly their
Common Stock under the circumstances and pursuant to the terms set forth in this
Section 13(g).
(h) Notwithstanding the provisions of Section 7(a), the Company's
obligation to file a registration statement, or cause such registration
statement to become and remain effective, shall be suspended for a period not to
exceed 90 days in any 24-month period if there exists at the time material non-
public information relating to the Company which, in the reasonable opinion of
the Company, should not be disclosed.
(i) The Company shall not grant to any third party any registration
rights more favorable than or inconsistent with any of those contained herein,
so long as any of the registration rights under this Agreement remains in
effect.
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(j) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
Please indicate your acceptance of the foregoing by signing and
returning the enclosed counterpart of this letter, whereupon this Agreement
shall be a binding agreement between the Company and you.
Very truly yours,
TELEDATA SOLUTIONS, INC.
By: ____________________________
Title: _________________________
AGREED TO AND ACCEPTED as of the date first above written.
Purchasers named in Schedule I to the Purchase Agreement:
ARCH VENTURE FUND II, L.P.
By: ARCH Management Partners II, L.P., its General Partner
By: ARCH Venture Partners, L.P. its General Partner
By: ARCH Venture Corporation, its General Manager
By: ____________________________________
Keith Crandell
Managing Director
-12-
<PAGE>
ARCH II PARALLEL FUND, L.P.
By: ARCH Management Partners II, L.P., its General Partner
By: ARCH Venture Partners, L.P., its General Partner
By: ARCH Venture Corporation, its General Manager
By:_____________________
Keith Crandell
Managing Director
WILLIAM BLAIR CAPITAL PARTNERS V., L.P.
By: William Blair Capital Partners, LLC, its General Partner
By:_________________________________
Title: ______________________________
-13-
<PAGE>
AMENDMENT NO. 1
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 1, dated as of December 20,1996 by and among Teledata
Solutions, Inc., an Illinois corporation (the "Company"), certain holders of the
Company's outstanding securities (collectively, the "Existing Investors") and
those purchasers listed in Schedule I to the Series B Convertible Preferred
Stock Purchase Agreement (the "Purchase Agreement") dated the date hereof
(collectively, including such purchasers who participate in any Additional
Closing (as defined in the Purchase Agreement) and who execute a counterpart to
this Agreement, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 19th day of March
1996; and
WHEREAS, the Purchasers are purchasing from the Company and the Company is
issuing and selling to the Purchasers up to 1,599,888 shares (the "Series B
Shares") of Series B Convertible Preferred Stock, par value $.01, ("Series B
Stock") of the Company at the aggregate purchase price of up to $6,000,000
pursuant to the Purchase Agreement, and
WHEREAS, it is a condition to the purchase of the Series B Shares that the
Registration Rights Agreement be amended to grant the Purchasers certain rights
thereunder, and the parties hereto desire to amend the Registration Rights
Agreement as set forth below;
NOW, THEREFORE in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 be and hereby is amended to add the following definition in
appropriate alphabetical order:
"Preferred Shares" shall mean shares of the Company's Series A Convertible
Preferred Stock, par value $.01 and Series B Convertible Preferred Stock,
par value $.01.
2. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
3. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
4. This Amendment No. 1 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
-14-
<PAGE>
COMPANY:
TELEDATA SOLUTIONS, INC.
By:_______________________________________
Name:
Title:
EXISTING AND NEW PURCHASERS:
ARCH VENTURE FUND II, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, its General
Partner
By: ARCH Venture Corporation, its
General Partner
By:_____________________
Keith Crandell
Managing Director
ARCH II PARALLEL FUND, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, L.P., its
General Partner
By: ARCH Venture Corporation, its
General Manager
By:_____________________
Keith Crandell
Managing Director
-15-
<PAGE>
WILLIAM BLAIR CAPITAL PARTNERS V., L.P.
By: William Blair Capital Partners, LLC, its
General Partner
By:_________________________________
Name: ______________________________
NEW PURCHASERS:
ALLSTATE INSURANCE COMPANY
By: ______________________________________
By: ______________________________________
its Authorized Signatories
ARCH VENTURE FUND III, L.P.
By: ARCH Venture Partners, LLC, its General
Partner
By:______________________________________
Keith Crandell
Managing Director
-16-
<PAGE>
AMENDMENT NO. 2
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 2, dated as of March 11, 1998 by and among Apropos
Technology, Inc. (FKA "Teledata Solutions, Inc."), an Illinois corporation (the
"Company"), certain holders of the Company's outstanding securities
(collectively, the "Existing Investors") and the person listed under the heading
"New Investor" on the signature pages hereto (together with the Existing
Investors, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 19th day of March
1996, as amended by Amendment No. 1 to Registration Rights Agreement dated
December 20, 1996; and
WHEREAS, certain of the Purchasers are purchasing from the Company and the
Company is issuing and selling to such Purchasers an aggregate of 1,152,737
shares (the "Series C Shares") of Series C Convertible Preferred Stock, par
value $.01, of the Company (the "Series C Stock") at the aggregate purchase
price of $8,000,000 pursuant to the certain Series Convertible Preferred Stock
Purchase Agreement dated as of March 11, 1998 between the Company and such
Purchasers (the "Purchase Agreement"); and
WHEREAS, it is a condition to the purchase of the Series C Shares that the
Registration Rights Agreement be further amended to grant the Purchasers certain
rights thereunder, and the parties hereto desire to amend the Registration
Rights Agreement as set forth below;
NOW, THEREFORE in consideration of the foregoing and the promises and
covenant contained herein, the parties hereby agree as follows:
1. That Section 1 of the Registration Rights Agreement be and hereby is
amended to restate the definition of "Preferred Shares" to read in its
entirety as follows:
"Preferred Shares" shall mean shares of the Company's
Series A Convertible Preferred Stock, par value $.01,
Series B Convertible Preferred Stock, par value $.01,
and Series Convertible Preferred Stock, $.01 par value
per share.
2. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
3. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
4. This Amendment No. 2 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
-17-
<PAGE>
IN WITNESS WHEREOF, the Company, the Existing Investors and the New
Investor have executed this Amendment No. 2 as of the day and year first above.
COMPANY:
APROPOS TECHNOLOGY, INC
By:_______________________________________
Name:
Title:
EXISTING INVESTORS:
ARCH VENTURE FUND II, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, its General
Partner
By: ARCH Venture Corporation, its
General Partner
By:_____________________
Keith Crandell
Managing Director
ARCH II PARALLEL FUND, L.P.
By: ARCH Management Partners II, L.P., its
General Partner
By: ARCH Venture Partners, L.P., its
General Partner
By: ARCH Venture Corporation, its
General Manager
By:_____________________
Keith Crandell
Managing Director
-18-
<PAGE>
WILLIAM BLAIR CAPITAL PARTNERS V., L.P.
By: William Blair Capital Partners, LLC, its
General Partner
By:
---------------------------------
Name:
------------------------------
ALLSTATE INSURANCE COMPANY
By:
--------------------------------------
By:
--------------------------------------
its Authorized Signatories
ARCH VENTURE FUND III, L.P.
By: ARCH Venture Partners, LLC, its General
Partner
By:
--------------------------------------
Keith Crandell
Managing Director
NEW INVESTOR:
OHIO PARTNERS, LTD.
By:
--------------------------------------
Title:
-------------------------------------
-19-
<PAGE>
AMENDMENT NO. 3
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 3, dated as of February __, 2000, by and among Apropos
Technology, Inc. (f/k/a Teledata Solutions, Inc.), an Illinois corporation (the
"Company"), certain holders of the Company's outstanding securities
(collectively, the "Existing Investors") and Catherine R. Brady ("Brady"
together with the Existing Investors, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that certain
Registration Rights Agreement by and among the Company and the parties named
therein and dated as of March 19, 1996, as amended by Amendment No. 1 to the
Registration Rights Agreement dated December 20, 1996 and Amendment No. 2 to the
Registration Rights Agreement dated March 11, 1998 (as amended, the
"Registration Rights Agreement"); and
WHEREAS, pursuant to a letter agreement between Catherine R. Brady
("Brady") and the Company dated February __, 2000, the Company agreed to use its
reasonable best efforts to have Brady become a Purchaser under the Registration
Rights Agreement on the terms and subject to the conditions contained herein;
and
WHEREAS, the parties hereto desire to amend the Registration Rights
Agreement as set forth below;
NOW, THEREFORE, in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 of the Registration Rights Agreement be and hereby is
amended to insert the definition of "Brady Shares" and restate the definition of
"Restricted Stock" to read in its entirety as follows:
"Brady Shares" shall mean all of the 1,173,510 shares (after giving
effect to the Company's 7 for 4 stock split to take effect immediately
prior to the consummation of the Company's initial public offering) of
Common Stock of the Company owned by Brady."
"Restricted Stock" shall mean (A) the Conversion Shares and (B) with
respect to all Sections of the Registration Rights Agreement except
Sections 4, 6 and 8, the Brady Shares, but excluding any Conversion Shares
or Brady Shares that have been either (i) registered under the Securities
Act pursuant to an effective registration statement filed thereunder and
disposed of in accordance with the registration statement covering them, or
(ii) publicly sold pursuant to Rule 144 under the Securities Act."
2. That Section 5 of the Registration Rights Agreement be and hereby is
amended by adding the following phrase to the end of second sentence of the
Section 5:
-20-
<PAGE>
provided, however, that, notwithstanding anything in this Agreement to
the contrary, with respect to the Brady Shares, the registration
rights provided in this Section 5 shall not become effective with
respect to any Restricted Stock held by Brady until each Existing
Investor has sold (or been provided by the Company with an opportunity
pursuant to Sections 4, 5 or 6 of this Agreement to sell) Common
Shares pursuant to Sections 4, 5 or 6 of this Agreement for aggregate
net proceeds representing a Pro-Rata Portion of such Existing
Investor's Common Shares equivalent to Brady's Portion (with the
Average Price measured at a computation date of the filing date of
each registration statement).
3. Brady hereby acknowledges that she has no right to (i) any registration
rights pursuant to Section 4 or 6 of the Registration Rights Agreement and (ii)
have any of her expenses reimbursed by the Company pursuant to Section 8 or any
other provision of the Registration Rights Agreement.
4. For purposes of this Amendment, the following capitalized terms shall
have the meaning set forth below:
"Average Price" shall mean the average of the closing prices for the
Common Shares over the 20 trading days preceding the fifth trading day prior to
the date of computation.
"Brady's Portion" shall mean that portion of Brady Shares represented
by a fraction, the numerator of which is the amount of gross proceeds, less
underwriting discount received by Brady in the Company's initial public offering
("IPO"), and the denominator of which is the total number of shares owned by
Brady at the time of the IPO, multiplied by the offering price to the public.
"Pro-Rata Portion" shall mean a fraction, the numerator of which is
the aggregate gross proceeds less underwriting discounts received by the
Existing Investor in a sale or sales subsequent to the IPO, and the denominator
of which is the total number of shares owned by the Existing Investor at the
date of this Amendment multiplied by the Average Price in effect at the time the
computation is made.
5. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
6. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all other terms thereof shall remain in
full force and effect.
7. This Amendment No. 3 may be executed in counterparts, each of which
shall constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow]
-21-
<PAGE>
IN WITNESS WHEREOF, the Company, the Existing Investors and Catherine R.
Brady have executed this Amendment No. 3 as of the day and year first written
above.
COMPANY:
APROPOS TECHNOLOGY, INC.
By:
------------------------
Name: Kevin G. Kerns
Title: President
----------------------------
Catherine R. Brady
EXISTING INVESTORS:
ARCH VENTURE FUND II, L.P.
By: ARCH Management Partners II, L.P, its
General Partner
By: ARCH Venture Partners, L.P, its General
Partner
By: ARCH Venture Corporation, its
general partner
By:
-----------------------
Name:
----------------------
Title:
---------------------
-22-
<PAGE>
ARCH II PARALLEL FUND, L.P.
By: ARCH Management Partners II, L.P, its
General Partner
By: ARCH Venture Partners, L.P, its General
Partner
By: ARCH Venture Corporation, its
general partner
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
WILLIAM BLAIR CAPITAL PARTNERS V, L.P.
By: William Blair Capital Partners, LLC, its
general partner
By:
------------------------------
Name:
----------------------------
Title:
----------------------------
ALLSTATE INSURANCE COMPANY
By:
-----------------------------------
By:
-----------------------------------
Its authorized signatories
ARCH VENTURE FUND III, L.P.
By: ARCH Venture Partners, LLC
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
OHIO PARTNERS, LTD.
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
-23-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated January 13, 2000, in the Registration Statement,
as amended, (Form S-1 No. 333-90873) and related Prospectus of Apropos
Technology, Inc. dated February 10, 2000.
/s/ Ernst & Young LLP
Chicago, Illinois
February 10, 2000
