<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________to ______________
Commission file number 012378
------
APERTUS TECHNOLOGIES INCORPORATED
---------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1349953
--------- ----------
(State or other jurisdiction of (I. R. S.
Employer Identification Number) incorporation or organization)
7275 FLYING CLOUD DRIVE, EDEN PRAIRIE, MINNESOTA 55344
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 828-0300
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.05 par value 14,279,951
- ---------------------------- ------------------------------------------
Class Shares outstanding on September 28, 1997
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations - Three and Six Months
Ended September 28, 1997 and September 29, 1996................. 1
Consolidated Balance Sheets - September 28, 1997 and
March 30, 1997.................................................. 2 - 3
Consolidated Statements of Cash Flows - Six Months Ended
September 28, 1997 and September 29, 1996....................... 4
Notes to Financial Statements................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition............................................. 6
Results of Operations........................................... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 7
Item 2. Changes in Securities................................. 7
Item 3. Defaults Upon Senior Securities....................... 7
Item 4. Submission of Matters to a Vote of
Security Holders...................................... 7
Item 5. Other Information..................................... 7
Item 6. Exhibits and Reports on Form 8-K...................... 7
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
Sept 28, Sept 29, Sept 28, Sept 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Sales......................... $ 433 $ 378 $ 624 $ 771
Rentals and services.......... 103 53 191 71
------ ------ ------ ------
Total........................... 536 431 815 842
Costs and Expenses
Cost of revenues.............. 418 274 857 455
Research, development
and engineering.............. 492 144 981 257
Selling, general and
administrative............... 977 1,128 1,908 2,227
------ ------ ------ ------
Total........................... 1,887 1,546 3,746 2,939
------ ------ ------ ------
Loss From
Operations.................... (1,351) (1,115) (2,931) (2,097)
Interest Income................. 109 79 236 170
Interest Expense................ (37) (20) (34) (38)
Income Tax...................... (3) (5) (5) (10)
------ ------ ------ ------
Net Loss From Continuing
Operations..................... (1,282) (1,061) (2,734) (1,975)
Income From Discontinued Internet
Solutions Division............. 303 376 1,228 161
------ ------ ------ ------
Net Loss........................ $(979) $(685) $(1,506) $(1,814)
====== ====== ====== ======
Earnings (Loss) per Share:
Continuing Operations........... $ (.09) $ (.08) $ (.19) $ (.14)
Discontinued Operations......... .02 .03 .09 .01
------ ------ ------ ------
Total........................... $ (.07) $ (.05) $ (.10) $ (.13)
====== ====== ====== ======
Weighted Average Number
of Common and Common
Equivalent Shares............. 14,228 14,120 14,193 14,083
====== ====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
Unaudited
---------
Sept 28, March 30,
1997 1997
--------- ----------
<S> <C> <C>
Current Assets
Cash and cash equivalents......................... $10,202 $13,865
Cash in escrow.................................... 822 802
Accounts receivable - net......................... 266 9,437
Inventories....................................... -- 923
Current portion of installment
receivables - net................................ -- 420
Other............................................. 178 413
------- --------
Total current assets............................ 11,468 25,860
Property and Equipment - net........................ 1,200 3,715
Capitalized Software - net.......................... 1,030 1,373
Installment Receivables - net of current
portion........................................... -- 539
Goodwill - net...................................... -- 390
------- --------
Total assets of continuing operations............... 13,698 31,877
Net assets of discontinued operations............... 6,424 --
------- --------
Total assets........................................ $20,122 $31,877
======= ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Unaudited
---------
Sept 28, March 30,
1997 1997
--------- ----------
Current Liabilities
Accounts payable............................ $2,685 $7,603
Accrued expenses............................ 2,353 4,281
Deferred revenue............................ 143 3,733
Notes payable............................... 1,000 1,000
------ ------
Total current liabilities................. 6,181 16,617
Shareholders' Equity
Common stock--authorized, 30,000,000
shares at $.05 par value; issued and
outstanding at:
Sept 28, 1997 - 14,279,951 Shares
March 30, 1997 - 14,158,623 Shares...... 714 708
Additional paid-in-capital................. 57,524 57,373
Accumulated deficit........................ (44,221) (42,715)
Deferred compensation...................... ( 76) (106)
------- -------
Total shareholders' equity............... 13,941 15,260
------- -------
Total.................................... $20,122 $31,877
======= =======
See accompanying Notes to Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------
Sept 28, Sept 29,
1997 1996
--------- ---------
<S> <C> <C>
Operating Activities:
Net loss....................................................... $(1,506) $(1,814)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization.................................. 1,070 2,362
Accounts receivable............................................ 892 (3,236)
Installment receivables........................................ 272 427
Inventory...................................................... 20 37
Other assets................................................... 13 753
Accounts payable, accrued expenses, deferred income and
income taxes................................................... (4,514) (654)
------- -------
Net cash flows used in operating activities................... (3,753) (2,125)
------- -------
Investing Activities:
Maturities of marketable securities ........................... - 3,766
Purchases of property and equipment............................ (47) (413)
Capitalized software........................................... - (1,703)
Note receivable................................................ 8,700
Change in cash held in escrow.................................. (20) 758
------- -------
Net cash flows from, (used in) investing activities............ (67) 11,108
------- -------
Financing Activities:
Debt transactions:
Repayments................................................... - (8,976)
Capital transactions:
Stock options exercised...................................... 157 255
------- -------
Net cash flows from, (used in) financing activities............ 157 (8,721)
------- -------
Net increase (decrease) in cash and cash equivalents............ (3,663) 262
Beginning cash and cash equivalents............................. 13,865 5,455
------- -------
Ending cash and cash equivalents................................ $10,202 $ 5,717
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest......................................... $ 26 $ 182
Cash paid for income taxes..................................... 32 13
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. MANAGEMENT REPRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations for any interim
period are not necessarily indicative of results for the year. These statements
should be read in conjunction with the financial statements and related notes
included in the Company's Annual Report on form 10-K for the year ended March
30, 1997.
2. DISCONTINUED OPERATIONS
The Company closed an Asset Purchase Agreement with Computer Network Technology
(CNT) on October 31, 1997 providing for the sale of the Company's Internet
Solutions Division. The assets being purchased by CNT and the liabilities being
assumed by CNT have been netted on the balance sheet and shown as net assets of
discontinued operation.
The terms of the Agreement provide for CNT to pay the Company $11.4 million in
cash and to assume certain liabilities. The interim statements of operations
for the three and six months ended September 28, 1997 and September 29, 1996,
have been prepared to show the operations of the Internet Solutions Division as
discontinued. See reference to Form 8-K in Item 6 below. Note that the Company
expects to recognize a gain on the sale in the third quarter when it is
realized.
3. ACQUISITION OF CARLETON CORPORATION
The Company closed an Agreement and Plan of Merger with Carleton Corporation on
October 31, 1997. Under the terms of the Agreement, the Company acquired the
stock of Carleton Corporation through the issuance of up to approximately 2.8
million shares of the Company's common stock and notes with an initial face
value of $2.0 million that is subject to adjustment based upon revenue
performance of the Company and the market price of the Company's common stock.
The transaction will be accounted for under the purchase method of accounting.
See reference to Form 8-K in Item 6 below.
<PAGE>
4. NET LOSS PER SHARE
Net loss per share for the three and six month periods ended September 28, 1997
and September 29, 1996 are computed using the weighted average number of common
stock outstanding during the periods.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted on March 29,
1998. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods
as appropriate. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. There is no
impact expected to net loss per share for the three and six month periods
ended September 28, 1997 and September 29, 1996.
5. INVENTORIES
Inventories at March 30, 1997 consisted of:
Raw material $ 390
Work-in-process 455
Finished goods 78
-------
$ 923
=======
All of the inventory at September 28, 1997 is included in the net assets of
discontinued operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
- ---------------------------------------------------------------------
and Results of Continuing Operations
-------------------------------------
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements contain words or phrases such as "will likely
result," "are expected to, "will continue," "is anticipated," "estimate,"
"project" or similar expressions. These forward-looking statements involve
risks and uncertainties that may cause the Company's actual results to differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, the
following: inability to integrate the operations and products of Carleton
Corporation; decreased demand for the Company's products; heightened
competition; market acceptance risk; risk of lengthening sales cycles with key
customers; risk of technological obsolescence of the Company's products;
inability to manage the Company's cost structure; risks associated with sales
of products outside the United States; increased expenses; failure to obtain
new customers or retain existing customers; inability to carry out marketing
and sales plans; loss or retirement of key executives; risks associated with
the company's dependence on proprietary technology, including those related to
adequacy of copyright, trademark and trade secret protection; and risks
associated with single sources of supply for certain components used in the
Company's products. The forward-looking statements herein are qualified in
their entirety by the cautions and risk factors set forth under "Cautionary
Statement" filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q.
Financial Condition
The consolidated Balance Sheet as of September 28, 1997, reflects the effects of
the discontinued operations (see Note 2 to the Financial Statements) by showing
the net assets of the discontinued operations as a single line item. The
proceeds from the sale of the Internet Solutions Division and the anticipated
gain will be recognized in the third quarter. The Company remains in a strong
balance sheet position with working capital of approximately $5.3 million at
September 28, 1997. The proceeds from the sale of the Internet Solutions
Division will significantly increase the working capital and the cash position
of the Company. The Company believes the cash position will be adequate to
support anticipated short-term operating losses, make capital investments and
fund working capital needs as it moves forward in the near future.
Results of Operations
The consolidated Statements of Operations for the three and six month periods
ended September 28, 1997 and September 29, 1996 reflect the effects of the
discontinued operations (see Note 2 to the Financial Statements) by showing the
operations of the Internet Solutions Division as a single line item.
Loss from operations for the three month period ended September 28, 1997 was
$236,000 higher than for the same period in the prior year. Although revenues
were $105,000 higher than the prior year, costs and expenses were $341,000
higher. The higher costs were due primarily to increased software amortization
and increased professional service cost components in cost of revenues and no
capitalization of software development costs in the current year. Selling,
general and administrative expenses were $151,000 lower than the comparable
period in the prior year due to the expense reductions which were made at the
end of the prior fiscal year and the first quarter of the current year.
Loss from operations for the six month period ended September 28, 1997 was
$834,000 higher than for the same period in the prior year. Revenues were down
slightly and costs and expenses were $807,000 higher. The reasons for the cost
and expense differences are similar to those noted above for the three month
periods.
The Company anticipates to incur operating losses into fiscal 1999 as it
restructures in relation to the transactions which have occurred in October (see
Notes 2 and 3 to the Financial Statements).
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Form 8-K Current Report
filed September 5, 1996 (SEC file number 0-12378))
3.2 Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the
Company's Form 8-K Current Report filed September 5, 1996 (SEC file
number 0-12378))
27 Financial Data Schedule
99.1 Cautionary Statement
(b) No reports on Form 8-K were filed during the quarter ended September
28, 1997. A report on Form 8-K was filed on November 10, 1997 to report the
Company's acquisition of Carleton Corporation and the sale of the Company's
Internet Solutions Division to Computer Network Technology.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the by
the undersigned thereunto duly authorized.
APERTUS TECHNOLOGIES INCORPORATED
Date: November 11, 1997 By: /s/ Steve Thimjon
---------------------------------
Steve Thimjon
Vice President
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
27 Financial Data Schedule
99.1 Cautionary Statement
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-30-1997 MAR-30-1997
<PERIOD-START> JUN-30-1997 MAR-31-1997
<PERIOD-END> SEP-28-1997 SEP-28-1997
<CASH> 11,024 11,024
<SECURITIES> 0 0
<RECEIVABLES> 597 597
<ALLOWANCES> 331 331
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,468 11,468
<PP&E> 3,700 3,700
<DEPRECIATION> 2,500 2,500
<TOTAL-ASSETS> 20,122 20,122
<CURRENT-LIABILITIES> 5,181 5,181
<BONDS> 1,000 1,000
0 0
0 0
<COMMON> 58,238 58,238
<OTHER-SE> (44,297) (44,297)
<TOTAL-LIABILITY-AND-EQUITY> 20,122 20,122
<SALES> 433 624
<TOTAL-REVENUES> 536 815
<CGS> 418 857
<TOTAL-COSTS> 1,887 3,746
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 37 34
<INCOME-PRETAX> (1,279) (2,729)
<INCOME-TAX> (3) (5)
<INCOME-CONTINUING> (1,282) (2,734)
<DISCONTINUED> 303 1,228
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (979) (1,506)
<EPS-PRIMARY> (0.09) (0.19)<F1>
<EPS-DILUTED> (0.09) (0.19)<F1>
<FN>
<F1>EPS is for continuing operations only.
</FN>
</TABLE>
<PAGE>
Exhibit 99.1
------------
CAUTIONARY STATEMENT
Apertus Technologies Incorporated ("Apertus" or the "Company"), or
persons acting on behalf of the Company, or outside reviewers retained by the
Company making statements on behalf of the Company, or underwriters, from time
to time, may make, in writing or orally, "forward-looking statements" as defined
under the Private Securities Litigation Reform Act of 1995 (the "Act"). This
Cautionary Statement is for the purpose of qualifying for the "safe harbor"
provisions of the Act and is intended to be a readily available written document
that contains factors which could cause results to differ materially from those
projected in such forward-looking statements. These factors are in addition to
any other cautionary statements, written or oral, which may be made or referred
to in connection with any such forward-looking statement.
The following matters, among others, may have a material adverse
effect on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement shall be deemed to be a
statement that any one or more of the following factors may cause actual results
to differ materially from those which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statement or statements:
INTEGRATION OF OPERATIONS
If Apertus is to realize the anticipated benefits of the merger with
Carleton Corporation (the "Merger"), the operations of the two companies must be
integrated and combined efficiently. The process of rationalizing management
services, administrative organizations, facilities, management information
systems and other aspects of operations, while managing a larger and
geographically expanded entity, will present a significant challenge to the
management of the combined company, particularly at a time when Apertus is in
the process of divesting its Internet Solutions Division ("ISD") business. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the Merger will be fully realized. The dedication of
management resources to such integration may detract attention from the day-to-
day business of Apertus. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. There can be no assurance that there will not be substantial costs
associated with the integration process, that such activities will not result in
a decrease in revenues or that there will not be other material adverse effects
of these integration efforts. Such effects could materially reduce the short-
term earnings of the Company.
FLUCTUATIONS IN OPERATING RESULTS
Apertus has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations.
<PAGE>
Seasonal factors, which Apertus believes are common in the computer software
industry, are likely to increase as Apertus focuses on larger corporate
accounts. Accordingly, the Company's quarterly results of operations are
difficult to predict, and delays in product delivery or in closings of sales
near the end of the quarter could cause quarterly revenues and, to a greater
degree, net income to fall substantially short of anticipated levels. Factors
that may contribute to such fluctuations in addition to seasonal factors
include: the number of new orders and product shipments; the size and timing
of individual orders; the timing of introduction of products or product
enhancements by the Company, the Company's competitors or other providers of
hardware, software and components for the Company's markets; competition and
pricing in the software industry; market acceptance of new products; reduction
in demand for existing products and shortening of product life cycles as a
result of new product introductions by competitors; product quality problems;
customer order deferrals in anticipation of new products; changes in customer
budgets; changes in operating expenses; changes in strategy; personnel
changes; foreign currency exchange rates; mix of products sold; conditions or
events in the manufacturing industry; and general economic conditions.
In addition, the achievement of anticipated revenues is substantially
dependent on the ability of Apertus to attract, on a timely basis, and retain
skilled personnel, especially sales, service and implementation personnel. As a
result of these factors, revenues for any quarter are subject to significant
variation, and Apertus believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock.
COMPETITION
The computer software industry is intensely competitive, rapidly
changing and significantly affected by new product offerings and other market
activities. A number of companies offer products similar to the Company's
products. Many of the Company's existing competitors, as well as a number of
potential competitors, have more established and larger marketing and sales
organizations, significantly greater financial and technical resources and a
larger installed base of customers than the Company. The Company has no
proprietary barriers to entry which would limit competitors from developing
similar products or selling competing products in the Company's markets.
Accordingly, there can be no assurance that such competitors will not offer or
develop products that are superior to the Company's products or that achieve
greater market acceptance. Competition (including price competition) is likely
to increase substantially, which may result in price reductions and loss of
market share.
<PAGE>
There can be no assurance that Apertus will be able to compete successfully
against its competitors or that the competitive pressures faced by Apertus
will not adversely affect its financial performance.
The Company's principal markets are highly fragmented and consist of a
few large multinational suppliers and a much larger number of small, regional
competitors. The Company believes that its industry will experience
consolidation as management information systems become more complex and as more
manufacturers adopt sophisticated management information systems, forcing
smaller companies in the industry to specialize or merge with their competitors.
In order to compete effectively in the broad markets which the Company presently
targets, the Company will need to continue to grow and attain sufficient size to
ensure that it can develop new products on a timely basis in response to
evolving technology and new customer demands and can sell such products on a
timely basis to a variety of manufacturing industries worldwide. No assurance
can be given that the Company will be able to grow sufficiently to enable it to
compete effectively.
In order to be successful in the future, Apertus must respond
effectively to customer needs and properly select and incorporate those
technologies and application functionalities that will meet the challenges posed
by competitors' innovations. To accomplish this critical objective, Apertus must
continue to invest in enhancing its current products and, when necessary,
introduce new products to remain competitive.
ABILITY TO RECRUIT SALES, SERVICE AND IMPLEMENTATION PERSONNEL
The ability to achieve anticipated revenues is substantially dependent
on the ability of Apertus to attract on a timely basis and retain skilled
personnel, especially sales, service and implementation personnel. In addition,
Apertus believes that its future success will depend in large part on its
ability to attract and retain highly skilled technical, managerial, marketing
and professional services personnel to ensure the quality of products and
services provided to its customers. Competition for such personnel, in
particular for product development, sales and implementation personnel, is
intense, and Apertus competes in the market for such personnel against numerous
companies, including larger, more established companies with significantly
greater financial resources than Apertus. There can be no assurance that Apertus
will be successful in attracting and retaining skilled personnel. The Company's
inability to attract and retain qualified employees could have a material
adverse effect on the Company's business and operations.
<PAGE>
DEPENDENCE ON KEY EMPLOYEES
Apertus is dependent upon the continued services and management
experience of Robert Gordon and other executive officers. If Mr. Gordon or any
of such other executive officers were to leave Apertus, the Company's operating
results could be adversely affected. In addition, the Company's continued growth
depends on its ability to attract and retain skilled employees and on the
ability of its officers and key employees to manage growth successfully. The
loss of certain key employees or the Company's inability to attract and retain
other qualified employees could have a material adverse effect on the Company's
business and operations.
DEPENDENCE ON PRINCIPAL PRODUCTS
Substantially all of the Company's revenue following the sale of its
ISD will be derived from the sale of data extraction and integration systems,
and related support services. Accordingly, any event that adversely affects
fees derived from the sale of such systems, such as competition from other
products, significant flaws in the Company's software products or
incompatibility with third party hardware or software products, negative
publicity or evaluation, or obsolescence of the hardware platforms or software
environments in which the systems run, could have a material adverse effect on
the Company's business and operations. The Company's future financial
performance will depend, in substantial part, on the continued development and
introduction of new and enhanced versions of its products, and customer
acceptance of such new and enhanced products.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's software products is characterized by
rapid technological advances, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. The
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. Accordingly, the
Company's future success will depend upon their ability to enhance its current
products and develop and introduce new products that keep pace with
technological developments, satisfy varying end-user requirements and achieve
market acceptance. Any failure by the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could damage the
Company's competitive position and have an adverse effect on revenues. There can
be no assurance that the Company will be successful in developing and marketing
new products or product enhancements on a timely basis or that the Company will
not experience significant delays in the future, which could have a material
adverse effect on the Company's business and operations. In addition, there can
be no assurance that new products or product enhancements developed by the
Company will achieve market acceptance. Apertus may need to increase the size of
its product development staff in the near term to meet
<PAGE>
these challenges. There can be no assurance that Apertus will be successful in
hiring and training adequate product development personnel to meet its needs.
Software programs as complex as those offered by the Company may
contain undetected errors or "bugs" when first introduced or as new versions are
released that, despite testing by the Company, are discovered only after a
product has been installed and used by customers. There can be no assurance that
errors will not be found in future releases of the Company's software, or that
any such errors will not impair the market acceptance of these products and
adversely affect operating results. Problems encountered by customers installing
and implementing new releases or with the performance of the Company's products
could have a material adverse effect on the Company's business and operations.
DEPENDENCE ON THIRD PARTY SUPPLIERS
Certain components of the Company's products are currently available
only from a single source. Delays in product shipments, delays in production
and increased supply costs could have a material adverse effect on the
Company's business and operations.
In addition, the Company's products incorporate and use software
products and computer hardware and equipment developed by other entities. There
can be no assurance that all of these entities will remain in business, that
such entities will continue to support these product lines, that their product
lines will remain viable or that these products will otherwise continue to be
available to the Company. If any of these entities ceases to do business or
abandons or fails to enhance a particular product line, the Company may need to
seek other suppliers. This could have a material adverse effect on the Company's
business and operations.
DEPENDENCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Apertus relies on a combination of copyright, trademark and trade
secret laws, employee and third-party nondisclosure agreements and other
industry standard methods for protecting ownership of its proprietary software.
There can be no assurance, however, that, in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the Company regards as
proprietary. Although the Company's licenses contain confidentiality and
nondisclosure provisions, there can be no assurance that such customers will
take adequate precautions to protect the Company's source codes or other
confidential information. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. There can be no assurance that the mechanisms used by the
Company to protect its software will be adequate or that the Company's
competitors will not independently develop software products that are
substantially equivalent or superior to the Company's software products.
The Company may receive notices from third parties claiming that the
Company's products infringe third party proprietary rights. Apertus expects
that, as the number of software products in the industry increases and the
functionality of these products further overlaps, software products will
increasingly be subject to such claims. Any such claim, with or without merit,
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could result in costly litigation and require Apertus to enter into royalty or
licensing arrangements. Such royalty or license arrangements, if required, may
not be available on terms acceptable to Apertus or at all.
PRODUCT LIABILITY
Because Apertus markets and sells its software products on a turnkey
basis, which includes rendering professional consulting services, Apertus incurs
significant risks of professional and other liability. No assurance can be given
that the limitations of liability set forth in the Company's license agreements
or other contracts would be enforceable or would otherwise protect the Company
from liability for damages to a customer resulting from a defect in one of the
Company's products or arising as a result of professional services rendered by
the Company. Such a claim, if successful and of sufficient magnitude, could
have a material adverse effect on the Company's business and operations.
ADDITIONAL BUSINESS RISKS
The future success of the Company's business and operations are
subject to several additional business risks, including (i) risk of lengthening
sales cycles with key customers; (ii) inability to manage the Company's cost
structure to a level consistent with profitability as the Company aggressively
funds new products while retaining its traditional products; (iii) risks
associated with sales of products outside the United States, including those
related to foreign regulatory requirements, exchange rate fluctuations and local
political, social and economic factors; (iv) higher service, administrative or
general expenses occasioned by the need for additional advertising, marketing,
administrative or management information systems expenditures; (v) failure to
obtain new customers or retain existing customers; (vi) termination of supply
contracts or renegotiation at less cost-effective rates or terms of payment;
(vii) inability to carry out marketing and sales plans; and (viii) changes in
interest rates causing a reduction of investment income or in the market value
of interest rate sensitive investments.
The foregoing review of factors pursuant to the Act should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of the Act.
