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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 September 30, 2004

 

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

 

APROPOS TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Illinois

 

36-3644751

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

One Tower Lane, 28th Floor
Oakbrook Terrace, Illinois 60181

(Address of principal executive offices, including zip code)

 

 

 

(630) 472-9600

(Registrant’s telephone number, including area code)

 

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 October 22, 2004, was 17,511,432.

 

 



 

APROPOS TECHNOLOGY, INC.

TABLE OF CONTENTS

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed consolidated balance sheets at September 30, 2004 and December 31, 2003

 

 

 

 

 

Condensed consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003

 

 

 

 

 

Condensed consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003

 

 

 

 

 

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.

Unregistered Sales of Equity 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

 

 

 

 

Signatures

 

 

2



 

Part I.     Financial Information.

 

Item 1.    Financial Statements.

 

Apropos Technology, Inc.

Condensed Consolidated Balance Sheets

In thousands, except share and per share amounts

 

 

 

September 30
2004

 

December 31
2003

 

 

 

(Unaudited)

 

(Note 1)

 

Assets

 

 

 

 

 

Current assets :

 

 

 

 

 

Cash and cash equivalents

 

$

38,076

 

$

38,265

 

Short-term investments

 

3,008

 

1,000

 

Accounts receivable, less allowances for doubtful accounts of $187 at September 30, 2004 and $265 at December 31, 2003

 

2,859

 

2,895

 

Inventory

 

81

 

73

 

Prepaid expenses and other current assets

 

467

 

588

 

Total current assets

 

44,491

 

42,821

 

 

 

 

 

 

 

Equipment, net

 

618

 

921

 

Other assets

 

21

 

199

 

Total assets

 

$

45,130

 

$

43,941

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities :

 

 

 

 

 

Accounts payable

 

$

137

 

$

81

 

Accrued expenses

 

1,129

 

1,179

 

Accrued compensation and related accruals

 

812

 

377

 

Accrued restructuring, current portion

 

798

 

438

 

Advance payments from customers

 

118

 

186

 

Deferred revenues

 

3,610

 

3,296

 

Total current liabilities

 

6,604

 

5,557

 

 

 

 

 

 

 

Accrued restructuring, less current portion

 

390

 

560

 

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, 17,511,432 shares issued and outstanding at September 30, 2004; 17,257,225 issued and 16,946,114 outstanding at December 31, 2003

 

175

 

173

 

Additional paid-in capital

 

102,872

 

102,263

 

Treasury stock, at cost

 

 

(392

)

Accumulated deficit

 

(64,911

)

(64,220

)

Total shareholders’ equity

 

38,136

 

37,824

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

45,130

 

$

43,941

 

 

See notes to condensed consolidated financial statements.

 

3



 

Apropos Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

In thousands, except per share amounts

 

 

 

Three months ended
September 30

 

Nine months ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

Revenue

 

 

 

 

 

 

 

 

 

Software licenses

 

$

1,731

 

$

1,677

 

$

5,357

 

$

5,326

 

Services and other

 

3,249

 

3,034

 

9,751

 

9,199

 

Total revenue

 

4,980

 

4,711

 

15,108

 

14,525

 

 

 

 

 

 

 

 

 

 

 

Cost of goods and services

 

 

 

 

 

 

 

 

 

Cost of software

 

172

 

91

 

459

 

294

 

Cost of services and other

 

897

 

1,003

 

2,769

 

3,336

 

Total cost of goods and services

 

1,069

 

1,094

 

3,228

 

3,630

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

3,911

 

3,617

 

11,880

 

10,895

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Sales and marketing

 

1,887

 

1,628

 

5,320

 

5,836

 

Research and development

 

1,021

 

1,117

 

3,105

 

4,312

 

General and administrative

 

1,132

 

1,475

 

3,175

 

4,466

 

Stock compensation charge

 

 

75

 

 

225

 

Restructuring and other charges

 

836

 

2,427

 

1,291

 

2,875

 

Total operating expenses

 

4,876

 

6,722

 

12,891

 

17,714

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(965

)

(3,105

)

(1,011

)

(6,819

)

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

145

 

99

 

347

 

382

 

Other, net

 

5

 

5

 

(27

)

2

 

Total other income (expense)

 

150

 

104

 

320

 

384

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(815

)

$

(3,001

)

$

(691

)

$

(6,435

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.05

)

$

(0.18

)

$

(0.04

)

$

(0.38

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

17,343

 

16,842

 

17,240

 

16,749

 

 

See notes to condensed consolidated financial statements.

 

4



 

Apropos Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

In thousands

 

 

 

Nine months ended
September 30

 

 

 

2004

 

2003

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(691

)

$

(6,435

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

353

 

845

 

Provision for doubtful accounts

 

 

36

 

Stock compensation charge

 

 

225

 

Non-cash restructuring charge

 

519

 

392

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

36

 

353

 

Inventory

 

(8

)

35

 

Prepaid expenses and other current assets

 

120

 

422

 

Other assets

 

9

 

8

 

Accounts payable

 

57

 

7

 

Accrued expenses

 

(50

)

(177

)

Accrued compensation and related accruals

 

436

 

(387

)

Accrued restructuring

 

188

 

812

 

Advanced payments from customers

 

(68

)

(116

)

Deferred revenue

 

314

 

689

 

Net cash provided by (used in) operating activities

 

1,215

 

(3,291

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Maturities and sales of short-term investments

 

1,000

 

27,039

 

Purchases of short-term investments

 

(3,008

)

(5,470

)

Purchases of equipment

 

(152

)

(123

)

Net cash provided by (used in) investing activities

 

(2,160

)

21,446

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from exercise of options

 

692

 

211

 

Proceeds from employee stock purchase plan

 

64

 

54

 

Net cash provided by financing activities

 

756

 

265

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(189

)

18,420

 

Cash and cash equivalents, beginning of period

 

38,265

 

19,333

 

Cash and cash equivalents, end of period

 

$

38,076

 

$

37,753

 

 

See notes to condensed consolidated financial statements.

 

5



 

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, 2003, 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, 2003, included with its Annual Report on Form 10-K filed with the SEC on March 30, 2004.  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

 

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.

 

3.              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.

 

In accordance with the interim disclosure provisions of SFAS No. 148, the pro forma effect on the Company’s net income (loss) had compensation expense been recorded for the three and nine months ended September 30, 2004 and 2003, respectively, as determined under the fair value method, is shown below.

 

6



 

 

 

Three months ended
September 30

 

Nine months ended
September 30

 

In thousands, except per share amounts

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net loss, as reported

 

$

(815

)

$

(3,001

)

$

(691

)

$

(6,435

)

Add: Stock-based employee compensation expense included in reported net loss

 

246

 

75

 

246

 

225

 

Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

 

(457

)

(296

)

(890

)

(995

)

Net loss, pro forma

 

$

(1,026

)

$

(3,222

)

$

(1,335

)

$

(7,205

)

Basic and diluted loss per share, as reported

 

$

(0.05

)

$

(0.18

)

$

(0.04

)

$

(0.38

)

Basic and diluted loss per share, pro forma

 

$

(0.06

)

$

(0.19

)

$

(0.08

)

$

(0.43

)

 

Options to purchase 2,009,678 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of September 30, 2004, and options to purchase 2,690,615 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of September 30, 2003.

 

4.              Geographic Information

 

Revenues derived from customers outside of North America accounted for 20.8% and 21.7% of the Company’s total revenues in the three months ended September 30, 2004 and 2003, respectively.  Revenues derived from customers outside of North America accounted for 19.0% and 24.8% of the Company’s total revenues in the nine months ended September 30, 2004 and 2003, 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.

 

5.              Litigation and contingencies

 

The Company was 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 defendants breached duties owed to the Company in connection certainly allegedly false and misleading statements in the Company’s Registration Statement and Prospectus in connection with the Company’s initial public offering.  The complaint, which was amended in August 2002, sought unspecified money damages and other relief ostensibly on behalf of the Company.  In September 2004, the action was dismissed without prejudice.

 

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 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.  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

 

7



 

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.

 

In June 2003, the Company elected to participate in a proposed settlement agreement with the plaintiffs in this litigation.  If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against the Company and against any of the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation as against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1 billion by insurers of the participating issuer defendants.  If recoveries totaling $1 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, the Company and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of their IPOs.

 

The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. The Company expects that its insurance proceeds will be sufficient for these purposes and that it will not otherwise be required to contribute to the proposed settlement.

 

Formal settlement documents, including a stipulation of settlement and related documents, have now been filed with the Court.  The plaintiffs in the cases against us, along with the plaintiffs in the other related cases in which issuer defendants have agreed to the proposed settlement, have requested preliminary approval by the Court of the proposed settlement, including the form of the notice of the proposed settlement that will be sent to members of the proposed classes in each settling case.  Certain underwriters who were named as defendants in the settling cases, and who are not parties to the proposed settlement, have filed an opposition to preliminary approval of the proposed settlement of those cases.  In mid-September, the Court asked lead counsel for the plaintiffs and for the issuer defendants for additional information concerning the adequacy of the settlement amount and how plaintiffs intend to allocate any consideration paid under the settlement among the more than 300 separate class actions that are included in the settlement.  Counsel for the plaintiffs and for the issuer defendants are in the process of providing to the Court the information that it has requested.

 

Consummation of the proposed settlement remains conditioned upon receipt of both preliminary and final court approval.  If the Court preliminarily approves the proposed settlement, it will direct that notice of the terms of the proposed settlement be published in a newspaper and mailed to all proposed class members and schedule a fairness hearing, at which objections the proposed settlement will be heard. Thereafter, the Court will determine whether to grant final approval to the proposed settlement.

 

If the proposed settlement described above is not consummated, the Company intends to continue to defend the litigation vigorously.  Moreover, if the proposed settlement is not consummated, the Company believes that the underwriters may have an obligation to indemnify it for the legal fees and other costs of defending this suit.

 

While the Company cannot guarantee the outcome of the above proceedings, the Company believes that the final result of these actions will have no material effect on its consolidated financial condition, results of operations or cash flows.

 

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, 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 condition or results of operations, or cash flows.

 

8



 

6.              Restructuring and other charges

 

In the third quarter of 2004, the Company recorded a charge of $836,000 related to the separation agreement with the Company’s former Chief Executive Officer, exit costs related to the relocation of the Company’s EMEA headquarters and the consolidation of the corporate headquarters.  The separation agreement costs of $555,000 consisted of three components.  The first component was severance totaling $239,000 from the pre-existing employment agreement; the second component was stock compensation charge of $246,000 for the acceleration of option vesting; and the third component was related legal fees of $70,000.  The exit costs of $49,000 for the relocation of the Company’s EMEA headquarters related to the cancellation of certain telephony contracts.  The existing reserve for the corporate headquarters vacated space was increased by $232,000 due to the fact the Company has been unable to find a tenant to sublet the excess facility space and believes that in the current market the Company is unlikely to find a tenant to sublease the space through the end of the lease term of May 2006.

 

In the second quarter of 2004, the Company recorded a charge of $88,000 related to the consolidation of the corporate headquarters.  This adjustment to the existing reserve was due to the fact the Company has been unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by six months.

 

In the first quarter of 2004, the Company recorded a charge of $368,000.  In late January 2004, the U.K. operations moved into new premises that are more suitable for their current staffing levels.  The old facility, which had a lease through March 2005, was in use until the move.  The U.K. lease termination charge of approximately $309,000, consisted of forfeiture of the rent deposit, abandonment of assets, and other direct disposal costs.  Additionally, the Company recorded an adjustment of $59,000 for the reserve related to the consolidation of the corporate headquarters.  This adjustment was due to the fact the Company has been unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by three months.

 

In the third quarter of 2003, the Company conducted an extensive review of its operations to better align its operating cost structure with current revenue levels.  This review focused on staffing levels, facility needs and long-lived assets utilized in the business.  As a result of this review, the Company recorded a Restructuring and other charges of $2.4 million.  This charge was comprised of three components:  a charge related to staff reductions of $738,000, a facility termination charge of $1.3 million and an asset impairment charge of $345,000.  The staff reduction charge related to staff reductions of 33 persons in July 2003.  The charge for staff reductions was based on the severance payments and residual benefits to be paid.  The facility termination charge related to leased space that the Company ceased use on August 31, 2003.  This facility termination charge is comprised of future lease obligations and related expenses offset by anticipated income from subletting the space.  This facility termination charge also includes $47,000 related to disposal of assets that were abandoned as part of the exit plan.  The asset impairment charge related to software infrastructure systems and furniture and fixtures.  As a result of these staff reductions, these assets no longer provided benefit to the Company and therefore abandoned.  The asset impairment charge was based on the net book value of the assets as of September 30, 2003, the date of abandonment.

 

In the first quarter of 2003, the Company recorded a charge of $448,000.  This charge related to staff reductions of 30 persons.

 

9



 

A summary of the restructuring and other charge, is as follows:

 

In thousands

 

Employee
termination costs

 

Facility
termination costs

 

Asset
impairment charge

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2002

 

396

 

 

 

24

 

420

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 Provision

 

1,186

 

1,344

 

345

 

30

 

2,905

 

2003 Adjustments

 

 

 

 

(30

)

(30

)

2003 Cash Payments

 

(1,552

)

(106

)

 

(13

)

(1,671

)

2003 Non-cash charge offs

 

 

(47

)

(345

)

 

(392

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2003

 

$

30

 

$

1,191

 

$

 

$

11

 

$

1,232

 

 

In thousands

 

Employee
termination costs

 

Facility
termination costs

 

Asset
impairment
charge

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2003

 

$

6

 

$

981

 

$

 

$

11

 

$

998

 

 

 

 

 

 

 

 

 

 

 

 

 

2004 Provision

 

485

 

253

 

104

 

70

 

912

 

2004 Adjustments

 

 

379

 

 

 

379

 

2004 Cash Payments

 

 

(512

)

 

(70

)

(582

)

2004 Non-cash charge offs

 

(246

)

(169

)

(104

)

 

(519

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2004

 

$

245

 

$

932

 

$

 

$

11

 

$

1,188

 

 

Included in Accrued restructuring at September 30, 2004 is approximately $17,000 related to the staff reductions in the third quarter of 2002, which the Company estimates will be disbursed over the next quarter.  In addition there is approximately, $239,000 related to the former CEO separation agreement, which the Company estimates will be disbursed over the next four quarters.  The remaining $932,000, of which $390,000 is classified as non-current, relates to the facility termination costs, which the Company estimates will be disbursed over remaining life of the lease through the second quarter of 2006.

 

10



 

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, 2003, 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 or for any other reason.

 

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 upon delivery. The Company recognizes revenue from fees for professional services when they are 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 markets its solution to its customers 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 23.4% and 28.7% of the Company’s total revenue for the three months ended September 30, 2004 and 2003, respectively. Revenue generated via resellers and OEMs accounted for 26.7% and 26.8% of the Company’s total revenue for the nine months ended September 30, 2004 and 2003, respectively. Management expects that revenue derived from sales to resellers and OEMs to be comparable in the foreseeable future.

 

The Company relies on its customers and resellers to submit purchase orders for its product and services.  In addition, the Company enters into general sales contracts with its customers and resellers; however, none of its customers or resellers is obligated to purchase its product or its services pursuant to these contracts. 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

 

11



 

                                          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 customer and end when product is shipped. The length of the sales cycle for customer orders depends on a number of factors including:

 

                                          a customer’s awareness of the capabilities of the type of solutions Apropos sells and the amount of customer education required;

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

                                          a customer’s budgetary constraints;

                                          the timing of a customer’s budget cycles;

                                          concerns of the Company’s customer 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.

 

Revenues derived from customers outside of North America accounted for 20.8% and 21.7% of the Company’s total revenues in the three months ended September 30, 2004 and 2003, respectively.  Revenues derived from customers outside of North America accounted for 19.0% and 24.8% of the Company’s total revenues in the nine months ended September 30, 2004 and 2003, 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:

 

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

                                          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; and

                                          the cost of reimbursable travel included in revenue.

 

The Company recognizes costs of software, implementation services, support and training services as they are incurred.

 

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. 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.

 

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 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.

 

12



 

Other income and expenses.  Other income and expense relates primarily to interest earned and/or owed. Interest income is generated by the investment of cash raised in rounds of equity financing, most notably the IPO in February 2000. Interest expense is generated primarily from outstanding debt and certain capitalized obligations, including any capital leases.

 

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.  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.

 

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.

 

 

 

Three months ended
September 30

 

Nine months ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

Revenue

 

 

 

 

 

 

 

 

 

Software licenses

 

34.8

%

35.6

%

35.5

%

36.7

%

Services and other

 

65.2

%

64.4

%

64.5

%

63.3

%

Total revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

 

 

Costs of goods and services

 

 

 

 

 

 

 

 

 

Cost of software

 

3.5

%

1.9

%

3.0

%

2.0

%

Cost of services and other

 

18.0

%

21.3

%

18.4

%

23.0

%

Total costs of goods and services

 

21.5

%

23.2

%

21.4

%

25.0

%

 

 

 

 

 

 

 

 

 

 

Gross margin

 

78.5

%

76.8

%

78.6

%

75.0

%

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Sales and marketing

 

37.9

%

34.6

%

35.2

%

40.2

%

Research and development

 

20.5

%

23.7

%

20.6

%

29.7

%

General and administrative

 

22.7

%

31.3

%

21.0

%

30.7

%

Stock compensation charge

 

0.0

%

1.6

%

0.0

%

1.5

%

Restructuring and other charges

 

16.8

%

51.5

%

8.5

%

19.8

%

Total operating expenses

 

97.9

%

142.7

%

85.3

%

121.9

%

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(19.4

)%

(65.9

)%

(6.7

)%

(46.9

)%

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

3.0

%

2.2

%

2.1

%

2.6

%

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(16.4

)%

(63.7

)%

(4.6

)%

(44.3

)%

 

Quarter Ended September 30, 2004, Compared to Quarter Ended September 30, 2003

 

Revenue. Revenue increased 5.7% to $5.0 million in the quarter ended September 30, 2004, from $4.7 million in the quarter ended September 30, 2003.

 

Revenue from software licenses increased 3.2% to $1.73 million in the quarter ended September 30, 2004, from $1.68 million in the quarter ended September 30, 2003.  The Company primarily attributes this increase in software revenue to more orders from existing customers in the third quarter of 2004 compared to the third quarter of 2003.

 

13



 

Revenue from services and other, consisting of professional services, customer support and rebillable costs, increased 7.1% to $3.2 million in the quarter ended September 30, 2004, from $3.0 million in the quarter ended September 30, 2003.  The Company primarily attributes this increase to increased customer support revenue as a result of the Company’s expanding customer base, and to increased professional services revenue due to increasing demand for implementing system upgrades.

 

Gross margin. Gross margins improved to 78.5% of total revenue in the quarter ended September 30, 2004, from 76.8% of total revenue in the quarter ended September 30, 2003. This increase is due primarily to improved utilization of implementation and customer support staff .

 

Gross margins from software licenses decreased to 90.0% of software revenue in the quarter ended September 30, 2004 from 94.6% of software revenue in the quarter ended September 30, 2003. Product costs consist primarily of third party software used in conjunction with the Company’s software.

 

Gross margin from services and other represented 72.4% of services and other revenue in the quarter ended September 30, 2004, and 66.9% of services and other revenue in the quarter ended September 30, 2003.  This increase is due to improved utilization of implementation and customer support staff offset to a lesser extent by higher use of subcontracted services.

 

Operating expenses. Operating expenses decreased 27.5% to $4.9 million in the quarter ended September 30, 2004, from $6.7 million in the quarter ended September 30, 2003.  This decrease primarily due to lower restructuring charges in the third quarter 2004 compared to the third quarter 2003. Total operating headcount increased by 2.9% to 72 employees at September 30, 2004, from 70 employees at September 30, 2003. As a percentage of total revenue, operating expenses were 97.9% in the quarter ended September 30, 2004, and 142.7% in the quarter ended September 30, 2003.

 

Sales and marketing expenses increased 15.9% to $1.9 million in the quarter ended September 30, 2004, from $1.6 million in the quarter ended September 30, 2003.  The increases in sales and marketing expenses were primarily due to higher personnel costs and marketing programs.

 

Research and development expenses decreased 8.6% to $1.0 million in the quarter ended September 30, 2004, from $1.1 million in the quarter ended September 30, 2003.  The decrease in research and development expenses related primarily from reductions in personnel.

 

General and administrative expenses decreased 23.2% to $1.1 million in the quarter ended September 30, 2004, from $1.5 million in the quarter ended September 30, 2003.  The decreases in general and administrative expenses were primarily due to lower facility costs related to the consolidation of the corporate facility, lower legal fees, lower insurance costs, offset to a lesser extent by higher personnel costs.

 

Stock compensation charge decreased 100% to $0 in the quarter ended September 30, 2004, from $75,000 in the quarter ended September 30, 2003. The decrease was due to all options issued prior to the IPO having become fully vested.  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 was amortized over the vesting period of the individual options, which is typically four years.

 

Restructuring and other charges.  In the third quarter of 2004, the Company recorded a charge of $836,000 related to the separation agreement with the Company’s former Chief Executive Officer, exit costs related to the relocation of the Company’s EMEA headquarters and the consolidation of the corporate headquarters.  The separation agreement costs of $555,000 consisted of three components.  The first component was severance totaling $239,000 from the pre-existing employment agreement; the second component was stock compensation charge of $246,000 for the acceleration of option vesting; and the third component was related legal fees of $70,000.  The exit costs of $49,000 for the relocation of the Company’s EMEA headquarters related to the cancellation of certain telephony contracts.  The existing reserve for the corporate headquarters vacated space was increased by $232,000 due to the fact the Company has been unable to find a tenant to sublet the excess facility space and believes that in the current market the Company is unlikely to find a tenant to sublease the space through the end of the lease term of May 2006.  In the third quarter of 2003, the Company conducted an extensive review of its operations to better align its operating cost structure with

 

14



 

current revenue levels.  This review focused on staffing levels, facility needs and long-lived assets utilized in the business.  As a result of this review, the Company recorded a Restructuring and other charges of $2.4 million.  This charge was comprised of three components:  a charge related to staff reductions of $0.7 million, a facility termination charge of $1.3 million and an asset impairment charge of $0.4 million.

 

Other income and expense. Interest income was $145,000 in the quarter ended September 30, 2004, and $99,000 in the quarter ended September 30, 2003. The increase in interest income is the result of an increase 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.  At September 30, 2004, the Company had approximately $52.8 million of domestic operating loss carryforwards for federal income tax purposes, which expire beginning in 2011through 2023.  Based on Internal Revenue Code regulations relating to changes in ownership in the Company, utilization of a portion of the net operating loss carryforwards is subject to annual limitations.  At September 30, 2004, the Company had foreign operating losses of approximately $8.8 million, which may be limited.  The Company’s use of these net operating losses may be limited in future periods.

 

Nine months ended September 30, 2004, Compared to Nine months ended September 30, 2003

 

Revenue. Revenue increased 4.0% to $15.1 million in the nine months ended September 30, 2004, from $14.5 million in the nine months ended September 30, 2003.

 

Revenue from software licenses increased 0.6% to $5.4 million in the nine months ended September 30, 2004, from $5.3 million in the nine months ended September 30, 2003.

 

Revenue from services and other, consisting of professional services, customer support and rebillable costs, increased 6.0% to $9.8 million in the nine months ended September 30, 2004, from $9.2 million in the nine months ended September 30, 2003.  The Company attributes this increase to increased customer support revenue as a result of the Company’s expanding customer base.

 

Gross margin. Gross margins improved to 78.6% of total revenue in the nine months ended September 30, 2004, from 75.0% of total revenue in the nine months ended September 30, 2003. This increase is due primarily to improved utilization of implementation and customer support staff.

 

Gross margins from software licenses decreased to 91.4% of software revenue in the nine months ended September 30, 2004 from 94.5% of software revenue in the nine months ended September 30, 2003. Product costs consist primarily of third party software used in conjunction with the Company’s software.

 

Gross margin from services and other represented 71.6% of services and other revenue in the nine months ended September 30, 2004, and 63.7% of services and other revenue in the nine months ended September 30, 2003.  This increase is due to improved utilization of implementation and customer support staff.

 

Operating expenses. Operating expenses decreased 27.2% to $12.9 million in the nine months ended September 30, 2004, from $17.7 million in the nine months ended September 30, 2003.  This decrease primarily reflects lower relative staffing levels in the first nine months of 2004 compared to the first nine months of 2003. Total operating headcount at September 30, 2004 of 72, which increased by 3 or 2.9% from the beginning of 2004, compared to operating headcount at September 30, 2003 of 70, which decreased by 61 or 47% from the beginning of 2003. As a percentage of total revenue, operating expenses were 85.3% in the nine months ended September 30, 2004, and 121.9% in the nine months ended September 30, 2003.

 

Sales and marketing expenses decreased 8.8% to $5.3 million in the nine months ended September 30, 2004, from $5.8 million in the nine months ended September 30, 2003.  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 28.0% to $3.1 million in the nine months ended September 30, 2004, from $4.3 million in the nine months ended September 30, 2003.  The decrease in research and development expenses related primarily from reductions in personnel.

 

15



 

General and administrative expenses decreased 28.9% to $3.2 million in the nine months ended September 30, 2004, from $4.5 million in the nine months ended September 30, 2003.  The decreases in general and administrative expenses were primarily due to lower facility costs related to the consolidation of the corporate facility, lower legal fees, lower insurance costs, depreciation and lower personnel costs, as a result of fewer personnel.

 

Stock compensation charge decreased 100% to $0 in the nine months ended September 30, 2004, from $225,000 in the nine months ended September 30, 2003. The decrease was due to all options issued prior to the IPO having become fully vested.  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 was amortized over the vesting period of the individual options, which is typically four years.

 

Restructuring and other charges.  In the nine months ended September 30, 2004, the Company recorded a charge of $1.3 million.  In the third quarter of 2004, the Company recorded a charge of $555,000 related to the separation agreement with the Company’s former CEO, which consisted of three components.  The first component was severance totaling $239,000 from the pre-existing employment agreement; the second component was stock compensation charge of $246,000 for the acceleration of option vesting; and the third component was related legal fees of $70,000.  In the first and third quarters of 2004, the Company recorded charges related to the relocation of the U.K. operations.  In late January 2004, the U.K. operations moved into new premises that are more suitable for their current staffing levels.  The old facility, which had a lease through March 2005, was in use until the move.  The U.K. lease termination charge of approximately $357,000, consisted of forfeiture of the rent deposit, abandonment of assets, cancellation of certain telephony contracts and other direct disposal costs.  Additionally, the Company has recorded adjustments to increase the reserve in the first, second and third quarters totaling $379,000 related to the consolidation of the corporate headquarters.  These adjustments are due to the fact the Company has been unable to find a tenant to sublet the excess facility space and believes that in the current market the Company is unlikely to find a tenant to sublease the space through the end of the lease term of May 2006.  In the third quarter of 2003, the Company conducted an extensive review of its operations to better align its operating cost structure with current revenue levels.  This review focused on staffing levels, facility needs and long-lived assets utilized in the business.  As a result of this review, the Company recorded a Restructuring and other charges of $2.4 million.  This charge was comprised of three components:  a charge related to staff reductions of $0.7 million, a facility termination charge of $1.3 million and an asset impairment charge of $0.4 million.  In the first quarter of 2003, the Company recorded a charge of $448,000.  This charge related to staff reductions of 30 persons.

 

Other income and expense. Interest income was $347,000 in the nine months ended September 30, 2004, and $382,000 in the nine months ended September 30, 2003. The decrease in interest income is a result of 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.  At September 30, 2004, the Company had approximately $52.8 million of domestic operating loss carryforwards for federal income tax purposes, which expire beginning in 2011 through 2023.  Based on Internal Revenue Code regulations relating to changes in ownership in the Company, utilization of a portion of the net operating loss carryforwards is subject to annual limitations.  At September 30, 2004, the Company had foreign operating losses of approximately $8.8 million, which may be limited.  The Company’s use of these net operating losses may be limited in future periods.

 

Liquidity and Capital Resources

 

The Company’s operating activities resulted in net cash inflows of $1.2 million in the nine months ended September 30, 2004 compared to net cash outflows of $3.3 million in the nine months ended September 30, 2003.  The increase of $4.5 million in cash generated from operations resulted primarily from a reduction of net losses by $5.7 million.  The operating cash inflows for the nine months ended September 30, 2004 resulted primarily from non-cash expenses and by increases to accrued compensation and deferred revenue billings, offset to a lesser extent by net losses.  The operating cash outflows for the nine months ended September 30, 2003 resulted from net loss incurred and a decrease in accrued compensation , offset by an increases in deferred revenue billings and accrued restructuring, and decreases in accounts receivables and prepaid expenses.

 

16



 

The Company’s investing activities resulted in net cash outflows of $2.2 million in the nine months ended September 30, 2004 and net cash inflows of $21.4 million in the nine months ended September 30, 2003.  The net outflows in the nine months ended September 30, 2004 were the result of the purchase of short-term investments and capital expenditures.  The net cash inflow in the nine months ended September 30, 2003 was primarily the 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.  This inflow was offset by capital expenditures in the nine months ended September 30, 2003.

 

Financing activities generated $756,000 and $265,000 in cash in the nine months ended September 30, 2004 and 2003, respectively.  These funds were generated from proceeds received from stock issuances related to the Company’s stock option and employee stock purchase plans.

 

As of September 30, 2004, the Company had no long-term obligations other than operating leases related to facilities utilized by the Company.  The following table summarizes the minimum lease payments for these operating leases as of September 30, 2004:

 

in thousands

 

Operating leases

 

 

 

 

 

Through September 30, 2005

 

$

1,403

 

Through September 30, 2006

 

897

 

 

 

 

 

 

 

$

2,300

 

 

The Company believes that its capital requirements, in large part, depend on future results of operations and achieving profitability. The Company expects to devote resources to research and development efforts, to expand sales efforts and marketing lead generation programs, to fund capital expenditures, and to provide for working capital and other general corporate purposes. Management believes that the existing cash and short-term investment balances of $41.1 million will be sufficient to meet the working capital and capital expenditure requirements for at least the next twelve months.

 

17



 

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 $3.0 million at September 30, 2004. The Company’s short-term investments consist primarily of bank certificates of deposit. 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, 2003, 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.

 

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 management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of September 30, 2004. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

18



 

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.  Unregistered Sales of Equity 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.

 

The following exhibits are included herein:

 

10.1

Separation and Release Agreement between the Company and Kevin G. Kerns dated September 14, 2004

10.2

Employment Agreement between the Company and David McCrabb dated July 30, 2004

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

19



 

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 November 12, 2004.

 

 

Apropos Technology, Inc.

 

 

 

 

/s/FRANCIS J. LEONARD

 

 

Francis J. Leonard
Chief Financial Officer and Vice President
(Principal Financial Officer and Authorized Officer)

 

20