UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITITES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2003

 

OR

 

o  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 000-30654

 

 

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 ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý

 

The number of shares outstanding of the registrant’s Common Shares, par value $0.01 per share, as of April 21, 2003, was 16,702,984.

 

 

APROPOS TECHNOLOGY, INC.
TABLE OF CONTENTS

 

Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed consolidated balance sheets at March 31, 2003 and  December 31, 2002
	Condensed consolidated statements of operations for the quarters ended March 31, 2003 and 2002
	Condensed consolidated statements of cash flows for the quarters ended March 31, 2003 and 2002
	Notes to condensed consolidated financial statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II.	Other Information
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Signatures
Certifications

 

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Part I.  Financial Information.

 

Item 1.  Financial Statements.

 

Apropos Technology, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts

 

		March 31 2003			December 31 2002
		(Unaudited)			(Note 1)
Assets
Current assets :
Cash and cash equivalents		$	25,959		$	19,333
Short-term investments		14,506			22,718
Accounts receivable, less allowances for doubtful accounts of $500 at March 31, 2003 and $474 at December 31, 2002		3,043			2,837
Inventory		267			194
Prepaid expenses and other current assets		1,142			1,016
Total current assets		44,917			46,098
Equipment, net		1,876			2,174
Other assets		225			240
Total assets		$	47,018		$	48,512
Liabilities and shareholders’ equity
Current liabilities :
Accounts payable		$	217		$	127
Accrued expenses		1,800			1,935
Accrued compensation and related accruals		408			658
Advance payments from customers		214			235
Deferred revenues		3,440			2,747
Total current liabilities		6,079			5,702
Commitments and contingencies		—			—
Shareholders’ equity :
Preferred shares, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding		—			—
Common shares, $0.01 par value, 60,000,000 shares authorized, 17,008,350 shares issued and 16,697,239 shares outstanding at March 31, 2003; 16,971,940 issued and 16,660,829 outstanding at December 31, 2002		170			170
Additional paid-in capital		101,678			101,578
Treasury stock, at cost		(392		)	(392		)
Accumulated deficit		(60,517		)	(58,546		)
Total shareholders’ equity		40,939			42,810
Total liabilities and shareholders’ equity		$	47,018		$	48,512

 

See notes to condensed consolidated financial statements.

 

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Apropos Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
In thousands, except per share amounts

 

		Quarter ended March 31
		2003			2002
Revenue
Software licenses		$	2,061		$	2,255
Services and other		3,096			2,905
Total revenue		5,157			5,160
Cost of goods and services
Cost of software		70			61
Cost of services and other		1,157			1,361
Total cost of goods and services		1,227			1,422
Gross margin		3,930			3,738
Operating expenses
Sales and marketing		2,284			3,488
Research and development		1,695			1,991
General and administrative		1,567			2,164
Stock compensation charge		75			107
Restructuring and other charges		448			—
Total operating expenses		6,069			7,750
Loss from operations		(2,139		)	(4,012		)
Other income (expense)
Interest income		160			267
Other, net		8			(16		)
Total other income		168			251
Net loss		$	(1,971	)	$	(3,761	)
Basic and diluted net loss per share		$	(0.12	)	$	(0.23	)
Weighted-average number of shares outstanding		16,675			16,658

 

See notes to condensed consolidated financial statements.

 

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Apropos Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
In thousands

 

		Quarter ended March 31
		2003			2002
Cash flows from operating activities
Net loss		$	(1,971	)	$	(3,761	)
Adjustments to reconcile net loss to net cash used in operating activities :
Depreciation and amortization		318			371
Provision for doubtful accounts		27			41
Stock compensation charge		75			107
Changes in operating assets and liabilities :
Accounts receivable		(233		)	35
Inventory		(73		)	(14		)
Prepaid expenses and other current assets		(126		)	(58		)
Other assets		15			(80		)
Accounts payable		90			35
Accrued expenses		(135		)	44
Accrued compensation and related accruals		(250		)	86
Advanced payments from customers		(21		)	66
Deferred revenue		693			482
Net cash used in operating activities		(1,591		)	(2,646		)
Cash flows used in investing activities
Maturities and sales of short-term investments		13,682			20,825
Purchases of short-term investments		(5,470		)	(18,109		)
Purchases of equipment		(20		)	(39		)
Net cash provided by investing activities		8,192			2,677
Cash flows provided by financing activities
Proceeds from exercise of options		25			34
Net cash provided by financing activities		25			34
Net change in cash and cash equivalents		6,626			65
Cash and cash equivalents, beginning of period		19,333			17,548
Cash and cash equivalents, end of period		$	25,959		$	17,613

 

See notes to condensed consolidated financial statements.

 

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Apropos Technology, Inc.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

 

1.              Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  In management’s opinion, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented.

 

The balance sheet at December 31, 2002, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2002, included with its Annual Report on Form 10-K filed with the SEC on March 31, 2003.  The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any other interim period or for the full fiscal year.

 

2.              Loss Per Share and stock based compensation

 

Loss per share

 

Basic net loss per share is based upon the net loss and upon the weighted-average number of Common Shares outstanding during the period.  Diluted net loss per common share adjusts for the effect of common share equivalents, such as convertible securities, stock options, and stock warrants, only in the periods presented in which such effect would have been dilutive.  Diluted net loss per share is not presented separately, as the effect of the common share equivalents is anti-dilutive for each of the periods presented.  Accordingly, diluted net loss per share is the same as basic net loss per share.

 

Stock-Based Compensation

 

The Company has elected to determine the value of stock-based compensation arrangements under the provisions of Accounting Principles Board, or APB, Opinion No. 25 “Accounting for Stock Issued to Employees.” The pro forma disclosures required under Statement of Financial Accounting Standards, or SFAS No. 148, “Accounting for Stock Based Compensation Transition and Disclosure–an Amendment of SFAS No. 123” are included below. SFAS No. 123, “Accounting for Stock Based Compensation” permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with stock-based compensation arrangements.

 

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In accordance with the interim disclosure provisions of SFAS No. 148, the pro forma effect on the Company’s net loss had compensation expense been recorded for the first quarter of 2003 and 2002, respectively, as determined under the fair value method, is shown below.

 

		Three months ended March 31
in thousands, except per share amounts		2003			2002
Net loss, as reported		$	1,971		$	3,761
Less: Stock-based employee compensation expense included in reported net loss		(75		)	(107		)
Add: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		373			377
Net loss, pro forma		$	2,269		$	4,031
Basic and diluted net loss per share, as reported		$	0.12		$	0.23
Basic and diluted net loss per share, pro forma		$	0.14		$	0.24

 

Options to purchase 2,724,002 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of March 31, 2003, and options to purchase 2,146,463 Common Shares with exercise prices of  $0.10 to $22.00 per share were outstanding as of March 31, 2002

 

3.              Geographic Information

 

Revenues derived from customers outside of North America accounted for 27.1% and 30.5% of the Company’s total revenues in the quarters ended March 31, 2003 and 2002, 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.

 

4.              Litigation and contingencies

 

In November 2001, the Company was named as a defendant in several shareholder class action litigations that have been filed in federal court in Chicago against the Company, certain of its current and former directors and officers, and the underwriters of the Company’s initial public offering.  These litigations are allegedly brought on behalf of purchasers of the Company’s stock, and assert that the Company violated the federal securities laws by making misstatements and omissions in its Registration Statement and Prospectus in connection with the Company’s initial public offering in February 2000.  The plaintiffs seek unspecified damages.  In April 2002 an amended consolidated complaint was filed which supersedes the original, separate complaints.  On March 31, 2003, the Court issued its decision on the motion of the Company and other defendants to dismiss the case, granting that motion in part and denying it in part.  The Company has moved the Court for reconsideration of, or alternatively for permission to file an immediate appeal as to, that portion of the order denying the motion.  Although legal proceedings are inherently uncertain and their ultimate outcome cannot be predicted with certainty, the Company believes the allegations are without merit and intends to defend the litigation vigorously.

 

The Company has been named as a nominal defendant in a shareholder derivative action filed in February 2002 against certain of its present and former directors and officers.  The complaint alleges, among other things, that the alleged conduct challenged in the securities cases pending against the Company in Chicago (described above) constitutes a breach of the defendants’ fiduciary duties to the Company.  The complaint seeks unspecified money damages and other relief ostensibly on behalf of the Company.  In August 2002, the plaintiffs filed an amended complaint.  The defendants, including the Company, intend to move to dismiss the Amended Complaint in its entirety.  Although legal proceedings are inherently uncertain and their ultimate outcome cannot be predicted with certainty, the Company believes the allegations are without merit and intends to defend the litigation vigorously.

 

In November 2001, the Company was named as a defendant in shareholder class action litigation that has been filed in federal court in New York City against the Company and certain of its current and former officers and the underwriters of the Company’s initial public offering (“IPO”).  This lawsuit alleges, among other things, that the underwriters of the

 

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Company’s IPO improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company’s stock in the aftermarket as conditions of receiving shares in the Company’s IPO.  The lawsuit further claims that these supposed practices of the underwriters should have been disclosed in the Company’s IPO prospectus and registration statement. In April 2002, an amended complaint was filed which, like the original complaint, alleges violations of the registration and antifraud provisions of the federal securities laws and seeks unspecified damages.  The Company understands that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which along with the case against the Company have all been transferred to a single federal district judge for purposes of coordinated case management.  In July 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints against them on various legal grounds common to all or most of the issuer defendants.  This motion is currently pending.  In October 2002, the Court approved a stipulation providing for the dismissal of the individual defendants without prejudice.  In February 2003, the Court issued a decision granting in part and denying in part the motion to dismiss the litigation filed by the Company and the other issuer defendants.  The claims against the Company under the antifraud provisions of the securities laws were dismissed with prejudice; the claims under the registration provisions of the securities laws were not dismissed as to the Company or virtually any other issuer defendant.  Although legal proceedings are inherently uncertain and their ultimate outcome cannot be predicted with certainty, the Company believes that the claims against it are without merit, and intends to defend the litigation vigorously.

 

The Company is a party in various other disputes and litigation that have arisen in the course of the Company’s business. In the opinion of management, based upon consultation with legal counsel, although legal proceedings can not be predicted with certainty, the ultimate outcome of these disputes and lawsuits are not expected to have a material impact on the Company’s financial position or results of operations.

 

5.              Restructuring and other charges

 

In the first quarter of 2003, the Company recorded a charge of $448,000.  This charge related to staff reductions of 30 persons.  As of March 31, 2003, there was approximately $141,000 included in Accrued expenses in the Condensed Consolidated Balance Sheet for undisbursed payments related to the restructuring charge.  The Company estimates these funds will be disbursed over the next quarter.

 

As of December 31, 2002, there was approximately $420,000 included in Accrued expenses in the Condensed Consolidated Balance Sheet for undisbursed payments related to the restructuring charge in the third quarter of 2002.  As of March 31, 2003, there was approximately $133,000 included in Accrued expenses in the Condensed Consolidated Balance Sheet for undisbursed payments related to the restructuring charge in the third quarter of 2002.  The Company estimates these funds will be disbursed over the next two quarters.

 

Reconciliation of the restructuring liability, as of March 31, 2003, is as follows:

 

in thousands		Balance as of 12/31/02			2003 Charge to the Statement of Operations			Cash payments			Balance as of 3/31/03
Employee termination costs		$	396		$	448		$	594		$	250
Other		24			—			—			24
		$	420		$	448		$	594		$	274

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Except for historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions for forward-looking statements described in the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on the Company’s current expectations and are subject to a number of risks, uncertainties, and assumptions relating to the Company’s operations, financial condition, and results of operations.  Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statement made by the Company in this Quarterly Report.  These and other risks are detailed under the caption “Risk Factors Associated with Apropos’ Business and Future Operating Results” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission.  The Company does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

 

The following discussion should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report.

 

Overview

 

The Company develops, markets, and supports a leading real-time, multi-channel interaction management application for managing customer interactions across a variety of communications media, including E-mail, Fax, Web, and Voice.  The Company’s solution enhances customer relationship management applications, such as sales, marketing, and service, through intelligent, value-based management of all interactions.

 

The Company’s operations commenced in January 1989, and, from inception to early 1995, operating activities consisted primarily of research and development and consulting.  As an integral part of the Company’s growth strategy, during February 2000, the Company completed an initial public offering of 3,977,500 Common Shares (the “IPO”) resulting in net proceeds to the Company of approximately $79.3 million.

 

Critical Accounting Policies

 

Revenue.  The Company recognizes revenue from the sale of software and hardware upon delivery. The Company recognizes revenue from fees for implementation services using the percentage of completion method. The Company calculates percentage of completion based on the estimated total number of hours of service required to complete specific tasks in an implementation project and the specific tasks completed. The Company recognizes support and maintenance services ratably over the term of its maintenance contracts, which are typically annual contracts. Training services are recognized as such services are completed.

 

The Company derives revenue principally from the sale of software licenses and from fees for implementation, technical support, and training services.  The Company also derives revenue from reimbursable costs that are invoiced to the customer.  Revenue from reimbursable costs constituted 1.2% and 1.7% of the Company’s total revenue for the first quarter of 2003 and 2002, respectively, and is included in revenue from services and other.

 

The Company markets its solution to its clients primarily through its direct sales force, value-added resellers, and original equipment manufacturers, or OEMs, in North America, Europe, South America, Asia, Africa, and Australia. Revenue generated via resellers and OEMs accounted for 27.4% and 20.8% of the Company’s total revenue for the first quarter of 2003 and 2002, respectively.  Management expects that revenue derived from sales to resellers and OEMs may increase as a percentage of total revenue as the Company expands its product capabilities and focuses its sales efforts on its distribution channels.

 

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Although the Company enters into general sales contracts with its clients and resellers, none of its clients or resellers is obligated to purchase its product or its services pursuant to these contracts. The Company relies on its clients and resellers to submit purchase orders for its product and services. All of the Company’s 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 the Company’s specified warranty is either a refund of the price paid or modification of the product to satisfy the warranty.

 

The Company has generally experienced a product sales cycle of six to nine months. The Company considers the life of the sales cycle to begin on the first face-to-face meeting with the prospective client and end when product is shipped. 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 solutions Apropos sells and the amount of client education required;

•                  concerns that the Company’s client may have about its limited operating history and track record and the Company’s size compared to many of its larger competitors;

•                  a client’s budgetary constraints;

•                  the timing of a client’s budget cycles;

•                  concerns of the Company’s client about the introduction of new products by the Company or its competitors that would render its current product noncompetitive or obsolete; and

•                  downturns in general economic conditions, including reductions in demand for contact center services.

 

The Company’s OEM contracts contain additional provisions regarding product technical specifications, labeling instructions, and other instructions regarding customization and rebranding. The Company’s OEM contracts contain volume discounts.

 

Sales to clients outside the United States accounted for 27.1% and 30.5% of the Company’s total revenue during the first quarter of 2003 and 2002, respectively.  Management expects the portion of the Company’s total revenue derived from sales to customers outside the United States to be comparable in the foreseeable future.

 

Cost of goods and services.  Cost of goods and services 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 the Company resells as part of its solution; and

•                  payments for third party software used with the Company’s product.

 

The Company recognizes costs of software, maintenance, support and training services, and hardware as they are incurred. Costs of implementation services are recognized using the percentage of completion method described above.

 

Operating expenses.  The Company generally recognizes its operating expenses as they are incurred. Sales and marketing expenses consist primarily of compensation, commission, and travel expenses along with other marketing expenses, including trade shows, public relations, telemarketing campaigns, and other promotional expenses. Research and development expenses consist primarily of compensation expenses for personnel and, to a lesser extent, independent contractors who adapt the Company’s product for specific countries. General and administrative expenses consist primarily of compensation for administrative, financial, and information technology personnel and a number of non-allocable costs, including professional fees, legal fees, accounting fees, and bad debts.

 

Allowance for doubtful accounts.  The Company maintains an allowance for doubtful accounts to reflect the expected uncollectability of accounts receivable based on past collection history and specific risks identified among uncollected accounts.  Accounts receivable are charged to the allowance for doubtful accounts when the Company has determined

 

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that the receivable will not be collected.  Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with the customer.

 

Stock compensation charge.  Stock compensation charge represents the difference at the grant date between the exercise price and the pre-IPO deemed fair value of the Common Shares underlying the options. This amount is being amortized over the vesting period of the individual options, which is typically four years. This non-cash expense results in a corresponding increase to shareholders’ equity.  Subsequent to the IPO, the exercise price of all options granted has been equal to the fair market value of the underlying Common Shares, resulting in no compensation charge.

 

Other income and expenses.  Other income and expense relates primarily to interest earned and foreign currency remeasurement. Interest income is generated by the investment of cash raised in rounds of equity financing, most notably the IPO in February 2000.

 

Results of Operations

 

The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items included in the Company’s “Condensed Consolidated Statements of Operations” in the condensed consolidated financial statements.  Percentages are calculated from operating results rounded to the nearest thousand and may not equal calculations from the numbers referenced below in this section which may be rounded to the nearest hundred thousand.  Operating performance for any period is not necessarily indicative of performance for any future periods.

 

 

Quarter Ended March 31, 2003, Compared to Quarter Ended March 31, 2002

 

Revenue. Revenue remained relatively unchanged at $5.2 million in the quarter ended March 31, 2003, from $5.2 million in the quarter ended March 31, 2002.

 

Revenue from software licenses decreased 8.6% to $2.1 million in the quarter ended March 31, 2003, from $2.3 million in the quarter ended March 31, 2002.  The Company principally attributes this decrease in software revenue to fewer new customers added in the first quarter of 2003 compared to the first quarter of 2002.

 

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Revenue from services and other, consisting of professional services, customer support, hardware and rebillable costs, increased 6.6% to $3.1 million in the quarter ended March 31, 2003, from $2.9 million in the quarter ended March 31, 2002.  An increase in customer support revenue to $2.2 in the first quarter of 2003 from $1.8 million in the first quarter of 2002 as a result of the Company’s expanding customer base was partially offset by lower professional services revenue and related reimbursable costs due to fewer customers purchasing new systems.

 

Gross margin. Gross margins improved to 76.2% of total revenue in the quarter ended March 31, 2003, from 72.4% of total revenue in the quarter ended March 31, 2002. With implementation and customer staff support utilization relatively unchanged for the comparable period, this improvement is due primarily to lower hardware sales and lower reimbursable costs, both of which provide no gross margin.

 

Gross margins from software licenses decreased to 96.6% of software revenue in the quarter ended March 31, 2003 from 97.3% of software revenue in the quarter ended March 31, 2002. Product costs consist primarily of third party software used in conjunction with the Company’s software.

 

Gross margin from services and other represented 62.6% of services and other revenue in the quarter ended March 31, 2003, and 53.1% of services and other revenue in the quarter ended March 31, 2002.  This improvement is due primarily to lower hardware sales and lower reimbursable costs, both of which provide no gross margin.

 

Operating expenses. Operating expenses decreased 21.7% to $6.1 million in the quarter ended March 31, 2003, from $7.8 million in the quarter ended March 31, 2002.  This decrease primarily reflects lower staffing levels in the first quarter 2003 compared to the first quarter 2002. Total operating headcount decreased by 30.5% to 98 employees at March 31, 2003, from 141 employees at March 31, 2002. As a percentage of total revenue, operating expenses were 117.7% in the first quarter ended March 31, 2003, and 150.2% in the first quarter ended March 31, 2002.

 

Sales and marketing expenses decreased 34.5% to $2.3 million in the first quarter ended March 31, 2003, from $3.5 million in the first quarter ended March 31, 2002.  The decrease in sales and marketing expenses resulted primarily from lower personnel costs, as a result of fewer personnel, and streamlined marketing programs.

 

Research and development expenses decreased 14.9% to $1.7 million in the first quarter ended March 31, 2003, from $2.0 million in the first quarter ended March 31, 2002.  The decrease in research and development expenses related primarily from reductions in personnel, and to a lesser extent by a decreased use of outside consultants.

 

General and administrative expenses decreased 27.6% to $1.6 million in the first quarter ended March 31, 2003, from $2.2 million in the first quarter ended March 31, 2002.  The decreases in general and administrative expenses were primarily due to lower personnel costs related to fewer personnel, lower professional fees and lower facility costs related to subletting a portion of one facility.  These decreases were offset to a lesser extent by higher insurance costs.

 

Stock compensation charge decreased 29.9% to $75,000 in the first quarter ended March 31, 2003, from $107,000 in the first quarter ended March 31, 2002. Stock compensation charge represents the difference at the grant date between the exercise price and the pre-IPO deemed fair value of the Common Shares underlying the options.  This amount is being amortized over the vesting period of the individual options, which is typically four years.  This non-cash expense results in a corresponding increase to additional paid in capital.  The decrease from the prior period primarily reflects cancelled options resulting from employees that are no longer employed by the Company.

 

Restructuring and other charges.  In the first quarter of 2003, the Company recorded a charge of $448,000.  This charge related to staff reductions of 30 persons.  As of March 31, 2003, there was approximately $141,000 included in Accrued expenses in the Condensed Consolidated Balance Sheet for undisbursed payments related to this restructuring charge.  The Company estimates these funds will be disbursed over the next quarter.

 

Other income and expense. Interest income was $160,000 in the first quarter ended March 31, 2003, and $267,000 in the first quarter ended March 31, 2002. The decrease in interest income is a result of lower cash, cash equivalents, and short-term investment balances and a decline in investment yields.

 

Income taxes.  There has been no provision or benefit for income taxes for any period since 1995 due to the Company’s operating losses.  As of March 31, 2003, the Company had approximately $50.6 million of domestic operating loss

 

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carryforwards for federal income tax purposes, which expire beginning in 2011 and foreign operating losses of approximately $7.8 million with no carry forward limits.  The Company’s use of these net operating losses may be limited in future periods.

 

Basic and diluted net loss per share.  Net loss per share decreased 47.6% to $0.12 in the first quarter ended March 31, 2003, from $0.23 in the first quarter ended March 31, 2002. The decrease in the loss per share is the result of a smaller net loss of $2.0 million for the three months ended March 31, 2003 compared to $3.8 million net loss for the three months ended March 31, 2002.  The number of shares used to compute net loss per share increased 0.1% to 16.7 million in the first quarter ended March 31, 2003, from 16.6 million in the first quarter ended March 31, 2002.  This increase was principally the result of stock issuances related to the Company’s stock option and employee stock purchase plans offset by treasury shares acquired in the fourth quarter of 2002.

 

Liquidity and Capital Resources

 

The Company’s operating activities resulted in net cash outflows of $1.6 million and $2.6 million in the first quarter of 2003 and 2002, respectively.  The operating cash outflows for these periods resulted from net losses experienced in each of the periods.  The cash used in operations was offset in both periods by non-cash charges for amortization of stock-based compensation and depreciation as well as higher amounts of unearned revenue.

 

The Company’s investing activities resulted in net cash inflows of $8.2 million and $2.7 million in the first quarter of 2003 and 2002, respectively.  This inflow was primarily the result of a decision by management to reduce the length of maturity on the Company’s investments.  The decision caused many investments to be classified as cash and cash equivalents instead of short-term investments.  These inflows were offset by capital expenditures of $20,000 and $39,000 in the first quarter of 2003 and 2002, respectively.

 

Financing activities generated $25,000 and $34,000 in cash in the first quarter of March 31, 2003 and 2002, respectively.  These funds were generated from proceeds received from stock option exercises.

 

The Company believes that its capital requirements, in large part, depend on future results of operations and, ultimately, achievement of profitability. The Company expects to devote resources to research and development efforts, expand sales channels, marketing programs with an emphasis on lead generation opportunities, fund capital expenditures, and provide for working capital and other general corporate purposes. Management believes that the existing cash and short-term investment balances will be sufficient to meet the working capital and capital expenditure requirements for at least the next twelve months.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relate primarily to the change in the amount of interest income the Company can earn on its investments. The Company does not use derivative financial instruments in its investment portfolio. The Company had short-term investments of $14.5 million at March 31, 2003. The Company’s short-term investments consist primarily of highest grade commercial paper and government agency bonds. The Company considers all investments with original maturities of less than one year, but greater than 90 days from the respective balance sheet date to be short-term investments. These investments are subject to interest rate risk and will fall in value if market interest rates increase. The Company believes a hypothetical increase in market interest rates by 10.0% from levels at December 31, 2002, would cause the fair value of these short-term investments to fall by an immaterial amount.  Since the Company is not required to sell these investments before maturity, the Company has the ability to avoid realizing losses on these investments due to a sudden change in market interest rates. On the other hand, declines in the interest rates over time will reduce interest income.

 

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Foreign Currency Risk

The Company develops products in the United States and sells these products in North America, Europe, South America, Asia, Africa, and Australia. As a result, its financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. As sales are generally made in U.S. dollars or British pound sterling, a strengthening of the dollar or pound could make the Company’s products less competitive in foreign markets. Given the level of income the Company currently derives from its foreign operations, the Company considers this exposure to be minimal. The Company believes a 10.0% change in exchange rates would not have a significant impact on its future earnings.

 

Item 4.  Controls and Procedures

 

The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.

 

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Part II. Other Information.

 

Item 1.  Legal Proceedings.

 

See Note 4 to the Company’s unaudited condensed consolidated financial statements in Item 1 – Part I of this Quarterly Report on Form 10-Q, which is hereby incorporated by reference.

 

Item 2.  Changes in Securities and Use of Proceeds.

 

Not applicable.

 

Item 3.  Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4.  Submission of Matters to a Vote of Security Holders.

 

Not applicable.

 

Item 5.  Other Information.

 

Not applicable.

 

Item 6.  Exhibits and Reports on Form 8-K.

 

(a)          The following exhibits are included herein:

 

99.1                      Certification pursuant to 18. U.S.C. Section 1350 as adopted pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002.

 

(b)         The Company did not file any reports on Form 8-K during the quarter ended March 31, 2003.

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 14, 2003.

 

 

	Apropos Technology, Inc.
	/s/ FRANCIS J. LEONARD
	Francis J. Leonard
	Chief Financial Officer and Vice President (Principal Financial Officer and Authorized Officer)

 

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Certifications

 

I, Kevin G. Kerns, certify that:

1                  I have reviewed this quarterly report on Form 10-Q of Apropos Technology, Inc.;

2                  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3                  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4.               The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a)              designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)             evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.               The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and

6.               The Registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 14, 2003
	/s/ KEVIN G. KERNS
	Kevin G. Kerns, Chief Executive Officer and President

 

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I, Francis J. Leonard, certify that:

1.               I have reviewed this quarterly report on Form 10-Q of Apropos Technology, Inc.;

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4.               The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a)              designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)             evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.               The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and

6.               The Registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 14, 2003
	/s/ FRANCIS J. LEONARD
	Francis J. Leonard, Chief Financial Officer and Vice President

 

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