<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1997
REGISTRATION NO. 333-17753
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APEX PC SOLUTIONS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
WASHINGTON 3577 91-1577634
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of classification code number) identification number)
incorporation or organization)
</TABLE>
------------------------
20031 142ND AVENUE, N.E.
WOODINVILLE, WASHINGTON 98072
(206) 402-9393
(Address and telephone number of principal executive offices and principal place
of business)
------------------------
KEVIN J. HAFER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
20031 142ND AVENUE, N.E.
WOODINVILLE, WASHINGTON 98072
(206) 402-9393
(Name, address, and telephone number of agent for service)
------------------------
COPIES TO:
SAMUEL F. SARACINO, ESQ. JEFFREY D. SAPER, ESQ.
KAREN A. ANDERSEN, ESQ. PATRICK J. SCHULTHEIS, ESQ.
DAVIS WRIGHT TREMAINE LLP WILSON SONSINI GOODRICH & ROSATI,
2600 CENTURY SQUARE -- 1501 FOURTH PROFESSIONAL CORPORATION
AVENUE
SEATTLE, WASHINGTON 98101-1688 650 PAGE MILL ROAD
(206) 622-3150 PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 1997
3,500,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE 3,500,000 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING ISSUED
AND SOLD BY APEX PC SOLUTIONS, INC. ("APEX" OR THE "COMPANY").
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK
OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
WILL BE BETWEEN $9.00 AND $11.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION
OF CERTAIN FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE. THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "APEX."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL (3).......................................... $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $850,000.
(3) CERTAIN OF THE COMPANY'S SHAREHOLDERS (THE "SELLING SHAREHOLDERS") HAVE
GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 525,000
ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS, IF ANY.
IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL
TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , AND THE
PROCEEDS TO SELLING SHAREHOLDERS WILL TOTAL $ . SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT FEBRUARY , 1997.
-------------------
MONTGOMERY SECURITIES DAIN BOSWORTH
INCORPORATED
FEBRUARY , 1997
<PAGE>
FOR INSIDE FRONT COVER:
Beginning at the top of this page, the following text cascades from right to
left down the page:
"The proliferation of distributed network computing using a
client/server architecture of interconnected PCs has created significant
network administration and space problems for the organizations that
rely on them. International Data Corporation projects that worldwide
shipments of PC servers and superservers will reach approximately 2.6
million units in the year 2000.
Apex's product family combines sophisticated switching technology and
customized cabinet systems to aid network administrators in managing
their organizations' complex and growing server populations."
The Company's logo ("Company Logo") appears beneath the foregoing text on
the left side of the page.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR GATEFOLD:
This page consists of a two-page gatefold (the "Gatefold"). Centered across
the top is the phrase "THE APEX PRODUCT SOLUTIONS." The Company Logo precedes
the text at the top of the left page of the Gatefold.
On the left half of the left page of the Gatefold, three different graphical
images (the "Problem Graphics") are organized top to bottom underneath the
phrase "Client/Server Problems". The top Problem Graphic consists of a depiction
of approximately eight different desktop and tower server computers ("servers"),
each with its own video monitor and keyboard, cabled together. The middle
Problem Graphic consists of a depiction of approximately thirty-two servers,
each with its own video monitor and keyboard, cabled together. The bottom
Problem Graphic consists of a depiction of numerous servers computers, each with
its own video monitor and keyboard, cabled together and stored on large tables.
A dotted-lined arrow flows from left to right from each Problem Graphic to
its corresponding Apex Solution Graphic described below.
On the right half of the left page of the Gatefold are the following six
paragraphs superimposed over a large half-toned Mountain Image:
"Client/server networks typically utilize multiple servers designed to
operate as stand-alone systems, each with a console consisting of a
keyboard, video monitor and mouse.
Apex switching systems consolidate the control and monitoring of
multiple network servers to a centralized command center consisting of
one or more console positions. Apex switching products provide
connectivity to virtually all major server platforms.
When a network fails, an administrator's ability to quickly and
efficiently diagnose and correct the problem is often hampered because
the administrator is not able to access the software tools that reside
on the network and that are normally used to manage network failures.
Apex's ViewPoint provides direct connections to network servers,
enabling network administrators to access individual servers from up to
a thousand feet away as if they were physically present at that server,
even if the network is down.
Without efficient storage and configuration, network hardware consumes
substantial and often expensive floor space and creates clutter that
hampers network administration.
Apex integrated cabinet solutions consolidate servers and other hardware
in a single location to facilitate more efficient physical access for
hardware maintenance tasks. Apex provides customized solutions for the
storage of heterogeneous server populations."
On the left half of the right page of the Gatefold, three different
graphical images (the "Apex Solution Graphics") are organized top to bottom. The
top Apex Solution Graphic (which is paired with the top Problem Graphic
described above) consists of a graphical representation of an Apex switch (over
which the words "OutLook or OutLook(4)" are superimposed), to the left of which
is a column of eight attached servers and to the right of which is a column of
four attached keyboard, video monitor and mouse consoles (with the top console
in full-tone to depict a configuration using an OutLook switch and the bottom
three consoles shaded to depict a configuration using an OutLook(4) switch). The
middle Apex Solution Graphic (which is paired with the middle Problem Graphic)
is similar to the top Apex Solution Graphic described above, except that the
word "ViewPoint" is superimposed over the graphical representation of the Apex
switch and the words "Up to 32 Networked Servers" are above the column of
attached servers and the words "Up to 16 Users" are above the column of attached
consoles. The bottom Apex Solution Graphic depicts four DensePack cabinets with
the same graphical representation of an Apex switch in front of the middle two
cabinets and the word "DensePack" superimposed over the top of that
representation. The DensePack cabinet depictions in the bottom Apex Solution
Graphic represent different physical configurations of different types of
servers, and over the DensePack cabinet depictions, from left to right, are the
phrases "Rack Mount Systems," "Tower Systems," "Desktop Systems" and
"Combination."
On the right half of the right page of the Gatefold, three photographs
depicting actual uses of the Company's products (the "Apex Solution
Photographs") are organized from top to bottom. Each Apex Solution Photograph is
paired (by means of a dotted-lined arrow) with the corresponding Apex Solution
Graphic. The top Apex Solution Photograph is accompanied by the following text:
"OutLook and OutLook(4) can be expanded to provide centralized control of up to
64 servers from one or four console positions, respectively." The middle Apex
Solution Photograph is accompanied by the following text: "ViewPoint addresses
the needs of very large server-intensive organizations with large network
administrative staffs. A single ViewPoint, integrated with multiple OutLook
switches, can access as many as 256 servers from as many as 16 consoles." The
bottom Apex Solution Photograph is accompanied by the following text: "DensePack
cabinets are designed to house network servers, related peripherals and
communication equipment. DensePack cabinets are typically customized and are
pre-cabled to allow quick hardware installations and connections."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE
OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE
ONLY PREDICTIONS AND INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Apex PC Solutions, Inc. (the "Company" or "Apex") designs, manufactures and
markets stand-alone switching systems and integrated server cabinet solutions
for the client/server computing market. The Company's switching systems enable
client/server network administrators to manage multiple servers from a single
keyboard, video monitor and mouse configuration (a "console"). Designed to
address space, cost, administration and maintenance issues that organizations
increasingly face when adopting client/server architecture, the Company's
sophisticated switching and integrated cabinet systems enable network
administrators to manage more efficiently their organizations' complex and
growing server populations.
The desire of many organizations to decentralize computing power while
sharing technology resources and providing broad access to enterprise data has
resulted in the widespread adoption of distributed network computing
environments using a client/server architecture of interconnected PCs. According
to International Data Corporation, a market research firm, worldwide shipments
of PC servers and super servers are expected to grow 21.8% on a compounded
annual basis from 1996 to 2000, reaching approximately 2.6 million units shipped
in the year 2000.
The growing adoption of client/server architecture has created significant
network administration and space problems for organizations. Client/server
networks utilize servers that were designed to operate as stand-alone systems,
each with its own console. Thus, to perform network administration and
management tasks, network administrators must deal with an unwieldy number of
consoles, whether centrally located or dispersed throughout the organization. In
addition, constant availability of the network has become increasingly
important. When a network fails, an administrator's ability to quickly and
efficiently diagnose and correct the problem is often hampered because the
administrator is not able to access the software tools that reside on the
network which would otherwise be relied upon to rectify network failures. As
organizations' network computing needs increase, the number of servers, consoles
and other peripherals proliferates, creating storage and configuration problems.
The increased use of "heterogeneous" server configurations using different
platforms, such as Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC
Alpha and Sun Sparc, and different operating systems, such as Windows NT, Unix,
NetWare and OS/2, compounds the administration and storage problems faced by
network administrators.
The Company provides "plug and play" switching systems and integrated server
cabinet solutions for many of the network administration, management and storage
problems faced by organizations using client/server architecture. The Company's
switching products, including OUTLOOK, OUTLOOK(4) and VIEWPOINT, enable network
administrators to access multiple servers from one or more centralized consoles,
consolidate hardware requirements, and provide direct hardwired connections
between the console and the attached servers through the switch which facilitate
access to servers even when the network is down. In addition, the Company's
switching systems are able to work with heterogeneous server populations. All of
the Company's switching products utilize the Company's proprietary On Screen
Configuration And Reporting ("OSCAR") interface. OSCAR allows network
administrators to immediately identify and access servers according to the
administrators' own naming conventions. The Company also offers server cabinet
solutions to consolidate and store heterogeneous servers and related hardware in
a single cabinet that facilitates more efficient physical access for hardware
maintenance tasks.
3
<PAGE>
The Company markets and sells its products through a direct sales force and
various distribution channels. Apex supplies stand-alone switching systems to
Compaq Computer Corporation and Hewlett-Packard Company for integration into
their product offerings. Sales to Compaq and Hewlett-Packard represented
approximately 30% and 15%, respectively, of the Company's net sales for 1996 and
54% and 6% of net sales, respectively, for 1995. According to International Data
Corporation, Compaq and Hewlett-Packard shipped 43% of all PC servers and 66% of
all super servers shipped worldwide in 1995. Customers of the Company's branded
products in 1996 included Microsoft Corporation, Wells Fargo Bank, Owens
Corning, Peoplesoft and the National Association of Securities Dealers.
The Company's objective is to become the leading provider of hardware
solutions for the administration, management and storage challenges inherent in
the client/server network environment. Key elements to the Company's strategy
for achieving this objective are to (i) continue to develop innovative products
and enhancements to existing products, (ii) leverage its OEM experience to enter
into new relationships with other server manufacturers in the U.S. and Europe,
(iii) increase market penetration for its branded products through direct sales
and reseller channels, and (iv) create an international distribution network for
the Company's branded switching products.
In December 1995, the Company effected a leveraged recapitalization (the
"Leveraged Recapitalization") pursuant to which (i) the Company redeemed from
one of its shareholders Common Stock representing a 50% voting interest in the
Company prior to the Leveraged Recapitalization for approximately $12.5 million
in cash and a Class B Subordinated Promissory Note in the principal amount of
$10.0 million, and (ii) the Company sold to a group of new investors Common
Stock and Series A Redeemable and Convertible Preferred Stock respresenting a
50% voting interest in the Company after the Leveraged Recapitalization for $2.5
million and sold to such investors Class A Subordinated Promissory Notes in the
aggregate principal amount of $10.0 million. The value of the Company prior to
the Leverage Recapitalization, as determined by an independent appraisal
obtained in advance of the transaction, was approximately $23.7 million. The
subordinated promissory notes issued by the Company in connection with the
Leveraged Recapitalization require the repayment of all principal and any
accrued and unpaid interest on the consummation of certain liquidity events,
including this offering. Approximately 63% of the net proceeds of this offering
will be used to repay the subordinated promissory notes issued by the Company in
connection with the Leveraged Recapitalization.
The executive office of the Company is located at 20031 142nd Avenue, N.E.,
Woodinville, Washington 98072, and its telephone number is (206) 402-9393.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......................... 3,500,000 shares
Common Stock to be outstanding after this offering.......... 12,160,016 shares (1)
Use of proceeds............................................. To repay indebtedness, redeem
preferred stock and for
general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol............................... APEX
</TABLE>
- ------------------------
(1) Excludes (i) 683,864 shares of Common Stock reserved for issuance upon the
exercise of options outstanding at December 31, 1996, at a weighted average
exercise price of $0.1893 per share, (ii) 817,880 additional shares reserved
for future issuance pursuant to the Company's 1995 Employee Stock Plan, and
(iii) 250,000 shares reserved for future issuance pursuant to the Company's
Employee Stock Purchase Plan. See "Capitalization," "Management--Employee
Stock Plan; --Employee Stock Purchase Plan" and "Description of Capital
Stock."
- ------------------------
APEX PC SOLUTIONS, OSCAR, OUTLOOK, OUTLOOK(4), SUNDIAL, VIEWPOINT AND
SWITCHBACK ARE TRADEMARKS OF THE COMPANY. THIS PROSPECTUS ALSO INCLUDES
TRADEMARKS OF OTHER COMPANIES.
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
GIVES EFFECT TO A TWO-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN
JANUARY 1996 AND A FOUR-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN
DECEMBER 1996 AND ASSUMES (I) THE CONVERSION OF ALL OUTSTANDING SHARES OF SERIES
A REDEEMABLE AND CONVERTIBLE PREFERRED STOCK INTO SHARES OF COMMON STOCK UPON
CONSUMMATION OF THIS OFFERING, (II) THE REDEMPTION OF ALL OUTSTANDING SHARES OF
SERIES B REDEEMABLE PREFERRED STOCK UPON CONSUMMATION OF THIS OFFERING AND (III)
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................................... $ 7,310 $ 19,671 $ 33,622
Gross profit........................................................................ 2,817 9,035 14,383
Income from operations.............................................................. 933 3,737 7,328
Interest income (expense), net...................................................... 7 (186) (1,859)
Income from continuing operations before taxes...................................... 940 3,551 5,469
Income from continuing operations................................................... 940 3,603 3,608
Income from discontinued service operations......................................... 601 -- --
Net income.......................................................................... $ 1,541 $ 3,603 $ 3,608
PRO FORMA DATA (1)(2):
Pro forma net income................................................................ $ 1,017 $ 2,344 $ 3,608
Pro forma income per share.......................................................... $ 0.20 $ 0.40
Weighted average shares used in computing pro forma
income per share (3).............................................................. 11,520 9,120
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED (4)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 2,119 $ 7,219
Working capital...................................................................... 8,372 13,472
Total assets......................................................................... 11,953 17,053
Subordinated debt.................................................................... 20,000 --
Long-term debt....................................................................... 5,615 15
Series A Redeemable and Convertible Preferred Stock.................................. 2,205 --
Series B Redeemable Preferred Stock.................................................. 1,000 --
Shareholders' equity (deficit)....................................................... (18,880) 12,870
</TABLE>
- ------------------------------
(1) From inception through October 31, 1995, the Company was treated as an S
Corporation for federal income tax purposes. The pro forma data reflects an
estimate of income tax expense as if the Company were taxable as a C
Corporation for the years ended December 31, 1994 and 1995. See Notes 1 and
11 of Notes to Financial Statements.
(2) Of the proceeds from this offering, approximately $25.6 million will be used
to repay long-term debt. Net income and pro forma earnings per share for the
year ended December 31, 1996 would have been approximately $4.9 million and
$0.42, respectively, if the offering of shares and repayment of debt had
occurred on January 1, 1996.
(3) See Note 1 of Notes to Financial Statements.
(4) Adjusted to reflect the sale and issuance by the Company of the 3,500,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $10.00 per share, the application of the estimated net proceeds
therefrom and the redemption of 80,000 shares of Series B Redeemable
Preferred Stock at a price of $5.00 per share in January 1997. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED HEREBY.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from original equipment manufacturer ("OEM") customers; the timing
of shipments; the timing of new product introductions and enhancements by the
Company and its competitors; changes in product or distribution channel mixes;
changes in pricing policies or price reductions by the Company or its
competitors; the availability and cost of supplies and components; sales and
marketing expenses related to entering into new markets, introducing new
products and retaining current OEM and other large customers; seasonal customer
demand; and fluctuations in sales of servers due to changes in economic
conditions or capital spending levels.
In general, the Company's sales cycle varies substantially and may be
lengthy, making net sales difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders for products several months prior to scheduled shipment
dates, these orders are subject to cancellation up to eight weeks prior to the
scheduled shipment date. The Company generally must plan production, order
components and undertake its manufacturing activities prior to the time that
these orders become firm. In addition, the Company's OEM customers have in the
past requested, and will likely continue to request from time to time, that the
Company delay shipment dates or cancel orders for products that are subject to
firm orders. Accordingly, sales to OEMs for future quarters are difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales (i.e.,
sales to customers other than OEMs) as a percentage of net sales, the Company's
quarterly sales and operating results will become more dependent upon the volume
and timing of branded product orders received during the quarter. Because
customers of the Company's branded products (including resellers) typically
place orders shortly before their requested shipment date, revenues from branded
sales are difficult to forecast. The failure of the Company to accurately
forecast the timing and volume of orders for branded products during any given
quarter could adversely affect the Company's operating results for such quarter
and, potentially, for future periods.
Gross margins may vary significantly from period to period depending on a
number of factors, including: the ratio of OEM sales to branded sales, as OEM
sales typically have lower gross margins than branded sales; product mix,
including the percentage of cabinet system sales, which generally have lower
gross margins than sales of stand-alone switching systems; raw materials and
labor costs; new product introductions by the Company and its competitors; and
the level of outsourcing of manufacturing and assembly services by the Company.
The Company expects that its gross margins will decline in the future primarily
due to increased competition and the introduction of new technologies which may
affect the prices of the Company's products. The Company expects that its
operating results will be affected by seasonal trends and by general conditions
in the server market. The Company believes that it has experienced and will
continue to experience some degree of seasonality due to customer buying cycles.
The Company believes that the fourth quarter has generally higher net sales
levels due to customer budgeting and procurement cycles, which correspondingly
may depress net sales in other quarters. Because the Company's business and
operating results depend to a significant extent on the general conditions in
the server market, any adverse change in the server market due to adverse
economic conditions, declining capital spending levels or other factors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
6
<PAGE>
DEPENDENCE UPON A LIMITED NUMBER OF OEM CUSTOMERS
A substantial portion of the Company's sales is concentrated among a limited
number of OEM customers. For 1994, 1995 and 1996, sales to OEMs represented
approximately 38%, 69% and 71% of the Company's net sales, respectively. For
1994, 1995 and 1996, sales to Compaq Computer Corporation ("Compaq") represented
approximately 36%, 54% and 30% respectively, of the Company's net sales. Sales
to Hewlett-Packard Company ("Hewlett-Packard") represented 15% of the Company's
net sales for 1996. The Company's OEM business is subject to risks such as
contract termination, reduced or delayed orders, adoption of competing products
developed by third parties for the OEM or by the OEM's internal development
team, and change in corporate ownership, financial condition, business direction
or product mix by the OEM, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company has experienced, and may continue to experience, significant reductions
or delays in orders from its OEM customers, which have had and may in the future
have a material adverse effect on the Company's quarterly sales and operating
results. See "--Fluctuations in Operating Results" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." For example, in
late 1995, one of the Company's OEM customers determined that its orders in the
last half of 1995 exceeded its needs. Accordingly, at such customer's request,
the Company delayed its scheduled deliveries to such OEM for the first half of
1996. The loss of any one of the Company's OEM customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, in October 1995, the Company entered into an OEM
arrangement with International Business Machines Corporation ("IBM") for the
production of an integrated server cabinet system incorporating the Company's
switching products. While the products supplied by the Company met IBM's
requirements, IBM concluded that its program had not achieved IBM's desired
results and sought to terminate the program in mid-1996 after the Company had
expended significant financial, product development and operational resources in
connection with this OEM arrangement. Although the Company negotiated a
settlement with IBM that reimbursed the Company for its direct costs associated
with the program, the Company's branded product development efforts were delayed
as a result of the Company's commitment of substantial product development
resources to the IBM program in the third and fourth quarters of 1995 and the
first quarter of 1996. For 1996, sales to IBM represented 18% of the Company's
net sales. While the Company has contracts with certain of its existing OEM
customers, none of the Company's OEM customers is obligated to purchase products
from the Company except pursuant to binding purchase orders. Consequently, any
OEM customer could cease doing business with the Company at any time. The
Company's dependence upon its OEMs also results in a significant concentration
of credit risk, as a substantial portion of the Company's trade receivables
outstanding from time to time is concentrated among a limited number of
customers. See Note 1 of Notes to Financial Statements.
INTENSE COMPETITION
The markets for the Company's products are highly fragmented and intensely
competitive. The Company's business is becoming increasingly sensitive to new
product introductions, price changes and marketing efforts by its competitors.
Accordingly, the Company's future success will be highly dependent upon timely
completion and introduction of new products and product features at competitive
price and performance levels which address the evolving needs of the Company's
customers. The Company is currently experiencing increased price competition in
both the market for stand-alone switching systems and the market for integrated
server cabinets and expects that pricing pressures will increase in the future.
Increased competition could result in price reductions and loss of market share,
which would adversely affect the Company's business, financial condition and
results of operations. In the market for integrated switching systems, the
Company competes with independent third parties such as Cybex Computer Products
Corporation, Raritan Computer Inc., Rose Electronics, Elsner ComputerTechnik
GmbH and StarTech Computer Accessories Ltd. In addition, certain of the
Company's OEM customers, such as Hewlett-Packard and Compaq, could choose to
internally manufacture switch products or offer those supplied by the Company's
competitors. In the market for server cabinets, the Company competes with a
significant number of regional
7
<PAGE>
manufacturers. Moreover, each of the Company's current OEM customers sells its
own branded integrated server cabinets. The Company's server cabinets also
compete with other types of lower density, unenclosed technology storage
systems. The market for enclosed server cabinets and other technology storage
systems is characterized by intense price competition and low barriers to entry,
and many of the Company's competitors in this market offer products at
significantly lower price points. The Company's ability to compete successfully
in this market will depend in part upon the Company's ability to continue to
differentiate its cabinet systems from competing products. See
"Business--Competition."
The Company's current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
the Company, may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties that enhance the ability of
their products to address the needs of the Company's prospective customers.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressure faced by the
Company will not have a material adverse effect on the Company's business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; NEED FOR NEW PRODUCT INTRODUCTIONS
The market for the Company's switching products is characterized by rapid
technological advances, frequent new product introductions and enhancements, and
significant price competition. The introduction of products incorporating
superior or alternative technologies, the emergence of new industry standards or
changes in the market's pricing structure could render the Company's existing
products and products under development obsolete or unmarketable. The Company's
switching systems combine components, such as printed circuit boards,
connectors, cable assemblies, power supplies and enclosures, that are
manufactured by other companies and are generally available to the Company's
competitors and potential competitors. The Company's future success will depend
in large part upon its continued innovative application of such commercially
available components to the expansion and enhancement of its existing products
and the development and introduction of new products which address changing
customer needs on a cost-effective and timely basis. The Company's failure to
respond on a timely basis to technological developments, changes in industry
standards or customer requirements, or any significant delay in product
development or introduction could have a material adverse effect on the
Company's business, financial condition and results of operations. Due to the
Company's significant reliance on OEM relationships, the Company's product
development efforts are often focused on developing new products or enhancements
for OEM customers. At times, these new products or enhancements may not be
readily marketable to other customers without significant modification. The
termination or significant disruption of the Company's relationship with any OEM
or other customer for whom the Company has devoted significant product
development resources is likely to result in lost opportunities with respect to
the development of other products or enhancements. See "--Dependence Upon a
Limited Number of OEM Customers."
DEPENDENCE UPON SUPPLIERS AND OUTSOURCED MANUFACTURING
The principal components of the Company's switching products are power
supplies, cable assemblies, line filters, enclosures and printed circuit boards,
all of which are purchased from outside vendors. The Company buys components
under purchase orders and generally does not have long-term agreements with its
suppliers. Any termination of or significant disruption in the Company's
relationship with suppliers of its switching product components may prevent the
Company from filling customer orders in a timely manner, as the Company
generally does not maintain large inventories of its products or components. The
Company purchases a number of the components for its switching products from
sole or a limited number of suppliers. For example, the Company currently
obtains printed circuit boards included in, and the partial assembly of,
concentrator switches from a single source. In addition, the frames for the
Company's server cabinet systems are obtained from a single source and the sheet
metal components are purchased
8
<PAGE>
locally from a small number of manufacturers. The Company has occasionally
experienced and may in the future experience delays in delivery of such
components. Although alternate suppliers are available for most of the
components and services needed to produce the Company's products, the number of
suppliers of some components is limited, and qualifying a replacement supplier
and receiving components from alternate suppliers could take several months. The
Company depends upon its suppliers to deliver components that are free from
defects, competitive in functionality and cost and in compliance with the
Company's specifications and delivery schedules. Disruption in supply, a
significant increase in the cost of one or more components, failure of a third
party supplier to remain competitive in functionality or price, or the failure
of a supplier to comply with any of the Company's procurement needs could delay
or interrupt the Company's ability to manufacture and deliver its products to
customers on a timely basis, thereby adversely affecting the Company's business,
financial condition and results of operations.
The Company relies on third party manufacturers for subassembly of the
Company's products. These outsourcing arrangements, and any future outsourcing
arrangements involve numerous risks, including reduced control over product
quality, delivery schedules, manufacturing yields and costs. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, the Company remains primarily
responsible to its customers for warranty obligations.
RELIANCE ON CLIENT/SERVER MARKET; IMPROVING NETWORK RELIABILITY AND TOOLS
The Company's business is dependent upon the continued acceptance of the
PC-based client/server model of network computing. Although distributed network
computing utilizing client/server architecture has gained increasing acceptance,
there can be no assurance that use of this networking model will continue to
grow or that it will not be replaced by new technologies for network computing,
thereby rendering the Company's products obsolete. In addition, the market for
the Company's switching products is driven in part by the inherent unreliability
of client/server networks. As client/server networks continue to proliferate,
however, server manufacturers and software providers may develop greater
reliability and better tools for managing networks. To the extent that greater
reliability and better network management tools are successfully developed, the
Company's switching products could be rendered obsolete, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATING TO DEVELOPMENT OF EXPANDED RESELLER CHANNEL
The Company expects to rely increasingly on resellers, including value added
resellers and systems integrators, to sell its branded products, and the
Company's strategy contemplates the expansion of its reseller channel both
domestically and internationally. The Company's future success will depend in
part on its ability to attract, train and motivate such resellers. There can be
no assurance that the Company will be successful in expanding its reseller
channel. The Company will be required to invest significant additional resources
in order to expand its reseller channel, and there can be no assurance that the
cost of the Company's investment in further developing this channel will not
exceed the revenues generated from such investment. The Company provides and
expects to continue providing discounts and other special pricing arrangements
to its resellers. As a result of such discounts and other arrangements, the
Company's gross margins on sales through resellers are expected to be lower than
gross margins on direct sales. Although the Company's existing reseller
arrangements generally do not afford material rights of return, as the Company
expands its reseller channel, the Company expects that certain resellers will
have significant rights of return. There can be no assurance that actual returns
in the future will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Product Returns and
Warranty Claims." The Company's agreements with its resellers generally are
nonexclusive and may be terminated on short notice by either party without
cause. The Company's resellers are not within the control of the Company, are
not obligated to purchase products from the Company and frequently offer
products of several different manufacturers, including products competitive with
the Company's products. There can be no assurance that these resellers will not
give higher priority to the sale of such other products. A reduction in
9
<PAGE>
sales efforts by the Company's resellers could lead to reduced sales by the
Company and could materially adversely affect the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent in large part upon its ability to retain its key
management and technical personnel, including Kevin Hafer, President and Chief
Executive Officer, and Chris Sirianni, Vice President, Sales and Marketing. The
future success of the Company will be highly dependent upon the personal efforts
of Mr. Hafer, Mr. Sirianni and other key management and technical personnel, and
the loss of services of any one of them could have a material adverse effect on
the Company's business, financial condition and results of operations. Mr. Hafer
is the only executive officer or employee with whom the Company has entered into
an employment agreement and the only executive officer upon whom the Company
maintains "key-man" life insurance. The Company's success will also be dependent
in part upon its ability to attract, retain and motivate highly skilled
employees. Competition for employees with the skills required by the Company,
particularly engineering and other technical personnel, is intense, and there
can be no assurance that the Company will be able to attract and retain highly
skilled employees in sufficient numbers to sustain its current business or to
support future growth.
MANAGEMENT OF GROWTH
In recent periods, the Company has experienced rapid revenue and customer
growth and expansion in the number of its employees, its product offerings and
the scope and complexity of its financial systems. This growth has placed
significant strain on the Company's management, operational and financial
resources and has resulted in new and increased responsibilities for management
personnel. The Company's officers have had limited or no experience in managing
companies larger than the Company, and, in addition, the Company's Chief
Financial Officer was hired in September 1996. There can be no assurance that
the Company's management, personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations. The Company's
ability to effectively manage its recent growth and any future growth will
require the Company to continue to implement and improve its operational,
financial and information systems and will likely require additional management
personnel. In addition, the Company believes that it must develop greater
engineering, marketing, sales and customer support capabilities in order to
develop new products and product enhancements, secure new customers at a rate
necessary to achieve desired growth and effectively serve the evolving needs of
present and future customers. There can be no assurance that the Company will be
successful in strengthening these capabilities. Without adequate management,
engineering, product development, marketing and sales and customer support
capabilities, the Company's ability to effectively manage its growth, expand and
enhance its product line, further penetrate its existing markets and develop new
markets will be significantly limited. If the Company's management is unable to
effectively manage the Company's growth, the business, financial condition and
results of operations of the Company will be materially adversely affected.
PRODUCT RETURNS AND WARRANTY CLAIMS
The Company's products carry warranties for parts and service. Although the
Company's historical product return and warranty claims have not been
significant, the Company's business, financial condition and results of
operations could be materially adversely affected should the rate of product
returns or warranty claims increase in the future. In addition, the Company may
change its warranty policies in the future as a result of competitive pressures.
LIMITED PROTECTION OF PROPRIETARY RIGHTS; RISKS OF THIRD PARTY INFRINGEMENTS
The Company's future success will depend in part upon its ability to protect
its proprietary rights in its products. The Company seeks to protect its
intellectual property rights by invoking the benefits of the patent, trademark,
copyright, trade secret and unfair competition laws of the United States, which
afford only limited protection. While the Company has no patents granted, it has
filed a United States patent application
10
<PAGE>
and a corresponding application under the provisions of the Patent Cooperation
Treaty (which permits the filing of corresponding foreign patent applications in
numerous foreign countries within a limited time period) with respect to various
aspects of its OUTLOOK and VIEWPOINT products and its On Screen Configuration
And Reporting ("OSCAR") interface. There can be no assurance that patents will
issue from any of the Company's pending applications or that any claims allowed
from pending applications will be of sufficient scope or strength, or be issued
in all countries where the Company's products can be sold, or provide meaningful
protection or any commercial advantage to the Company. Moreover, competitors of
the Company may be able to design around the Company's patents if any are
issued. The laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus increase the likelihood of piracy of the Company's
technology and products. Although the Company is not aware of any current
infringement of its intellectual property rights, or any violation of its trade
secrets or nondisclosure or licensing arrangements, there can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of its technology or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
The network server, electronics and related industries are characterized by
vigorous pursuit and protection of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. The Company may from time to time be subject to proceedings alleging
infringement by the Company of intellectual property rights owned by third
parties. If necessary or desirable, the Company may seek licenses under such
intellectual property rights. However, there can be no assurance that licenses
will be offered or that the terms of any offered license will be acceptable to
the Company. The failure to obtain a license from a third party for technology
used by the Company could cause the Company to incur substantial liabilities and
to suspend or cease the manufacture of products requiring such technology.
Further, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event of
an adverse result in any such litigation, the Company could be required to pay
substantial damages, suspend or cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. In the
event that any third party makes a successful claim against the Company or its
customers and a license is not made available to the Company on commercially
reasonable terms, the Company's business, financial condition and results of
operations would be adversely affected. See "Business--Proprietary Technology."
INCREASED DEMANDS ON CUSTOMER SUPPORT OPERATIONS
Growth of the Company's branded sales, should it occur, is likely to be
accompanied by increasing demands on the Company's customer support operations.
As a result of the Company's commitment to a high level of customer support, the
Company is likely to need to invest significant resources in the maintenance and
improvement of its customer support resources. Any failure to maintain adequate
customer support could cause customer dissatisfaction, result in reduced sales
of the Company's products and, accordingly, materially adversely affect the
Company's business, financial condition and results of operations.
11
<PAGE>
RISKS RELATING TO DEVELOPMENT OF INTERNATIONAL DISTRIBUTION NETWORK AND
INTERNATIONAL SALES
The Company's strategy contemplates the development of an international
distribution network in an effort to increase international sales of its branded
switching products. See "Business--The Apex Strategy; --Sales and Marketing."
There can be no assurance that the Company will be successful in creating an
international distribution network or in marketing and selling its products in
foreign markets. If the revenues generated by international sales are not
adequate to recover the expense of establishing, expanding and maintaining an
international distribution network, the Company's business, financial condition
and results of operations will be materially adversely affected. If
international sales become a more significant component of the Company's net
sales, the Company's business will become more vulnerable to the risks inherent
in doing business on an international level, including difficulties in managing
foreign resellers, longer payment cycles and problems in collecting accounts
receivable, the effects of seasonal customer demand, changes in regulatory
requirements, export restrictions, tariffs and other trade barriers,
fluctuations in currency exchange rates, potentially adverse tax consequences
and political instability. The existence or occurrence of any one of these
factors could have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED INDEPENDENT OPERATING HISTORY
The business of the Company was operated as a division of, and was provided
financial and operational support by, Apex Computer Company (the "Predecessor")
through January 1993. In February 1993, the net assets of that division were
spun off as a dividend to the sole shareholder of the Predecessor, who
contributed those assets to the Company as its initial capital. The historical
core business of the Company, computer maintenance services, was discontinued in
mid-1994. As a company with limited independent operating history, the Company
is subject to the risks inherent in a new business enterprise, including limited
predictability of future operating results, competition from more established
businesses, limited financial resources, limited management resources, limited
sales and distribution capabilities, limited technical personnel resources and
vulnerability to adverse economic conditions. Although the Company achieved
profitability for the eleven months ended December 31, 1993 and was profitable
in 1994, 1995 and 1996, there can be no assurance that growth in net sales will
continue or that the Company will be able to achieve or sustain profitability on
a quarterly or annual basis in the future.
CONTROL BY EXISTING SHAREHOLDERS
Following this offering, the Company's executive officers, directors and
principal shareholders will beneficially own approximately 70% of the Company's
outstanding shares of Common Stock (66% if the Underwriters' over-allotment
option is exercised in full). As a result of their securities ownership and
positions with the Company, such shareholders, acting in concert, will be in a
position to elect all of the members of the Board of Directors and to control
the approval of substantially all matters requiring approval by the shareholders
of the Company. This concentration of ownership under certain circumstances
could have the effect of preventing or delaying a change in control of the
Company. See "Principal Shareholders."
EFFECT OF ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Amended and Restated Articles of Incorporation,
the Company's Board of Directors has the authority to issue shares of preferred
stock ("Preferred Stock") and to determine the designations, preferences and
rights and the qualifications and restrictions of those shares without any
further vote or action by the shareholders. The issuance of Preferred Stock, as
well as certain provisions of Washington law and the Company's bylaws, could
have the effect of making it more difficult or expensive for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. See "Description of Capital Stock."
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<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in this offering will incur immediate,
substantial dilution of $8.76 per share, assuming an initial public offering
price of $10.00 per share. In addition, investors purchasing shares in this
offering will incur additional dilution to the extent that outstanding options
are exercised. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales, and the potential for sales, of substantial amounts of the Common
Stock in the public market after this offering could adversely affect the market
price of the Common Stock. Upon consummation of this offering, there will be
12,160,016 shares of Common Stock outstanding. Of that number, the 3,500,000
shares offered hereby (4,025,000 shares if the Underwriters' over-allotment
option is exercised in full) will be immediately eligible for sale in the public
market without restriction unless acquired by an "affiliate" of the Company as
that term is defined in Rule 144 ("Rule 144") under the Securities Act of 1933,
as amended (the "Securities Act") and the remaining 8,660,016 shares (8,135,016
shares if the Underwriters' over-allotment option is exercised in full) are
"restricted securities" (the "Restricted Shares") under the Securities Act. All
of the holders of Restricted Shares have agreed not to sell their shares without
the consent of the Underwriters for a period of 180 days from the date of this
Prospectus. 1,860,016 Restricted Shares will be eligible for sale in the public
market after expiration of these lock-up agreements, and the remaining 6,800,000
(6,275,000 if the Underwriters' over-allotment option is exercised in full)
Restricted Shares will become eligible for sale in the public market from time
to time in the future, in each case subject to the provisions of Rule 144.
Moreover, holders of approximately 4,000,000 (3,774,000 if the Underwriters'
over-allotment option is exercised in full) Restricted Shares are entitled to
certain rights with respect to registration of such shares for offer or sale to
the public. To the extent that such registration rights are exercised, the
number of shares freely tradeable in the public market will increase which could
adversely affect the market price of the Common Stock. In addition, following
the date of this Prospectus, the Company intends to register approximately
2,161,760 and 250,000 shares of Common Stock reserved for issuance under its
1995 Employee Stock Plan and under an Employee Stock Purchase Plan that will
become effective upon consummation of this offering. See "Management--Employee
Stock Plan; -- Employee Stock Purchase Plan," "Shares Eligible for Future Sale"
and "Description of Capital Stock-- Registration Rights."
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market for
the Common Stock will develop or be sustained in the future. The initial public
offering price of the Common Stock will be determined by negotiations between
the Company and the Underwriters and may have no relationship to the price at
which the Common Stock will trade after completion of this offering. See
"Underwriting."
As a private company, the fair market value of the Company's Common Stock
has in the past fluctuated dramatically. For example, at the time of the
Leveraged Recapitalization in December 1995, the new investors purchased Common
Stock for $0.18375 per share. In addition, for the purpose of granting options
to purchase Common Stock to its management in February, June, September and
October 1996 and January 1997, the Company estimated the fair market value of
its Common Stock to be $0.18375, $0.18375, $0.50, $6.25 and $6.25, respectively.
The Company used its best efforts to estimate these market values based on
information available to it at the times of the option grants, including an
independent third party appraisal and an internal assessment of factors that
would impede the Company's ability to effect a public offering of its shares.
The Company is responsible for the reasonableness of the fair value estimates,
and there can be no assurance that an independent third party would have
purchased shares of Common Stock at such prices.
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<PAGE>
The stock market has from time to time experienced extreme price and volume
fluctuations, and such fluctuations have been particularly acute with respect to
the securities of companies in the computer and other technology industries,
especially those with small and middle market capitalizations. The market price
for the Common Stock may be highly volatile as a result of a number of factors,
including, but not limited to, fluctuations in operating results by the Company
and its competitors, any failure by the Company or its competitors to meet
analysts' expectations, changes in analysts' estimates, the state of the
national economy, stock market conditions, actions by governmental agencies,
litigation involving the Company, announcements of technological innovations or
product introductions or delays by the Company or its competitors, and general
conditions in the client/server industry. Many of such factors are beyond the
Company's control.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby are estimated to be $31,700,000, assuming an initial
public offering price of $10.00 per share and after deduction of the
underwriting discount and estimated offering expenses payable by the Company.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders if the Underwriters' over-allotment option is
exercised.
Approximately $20.0 million of the net proceeds will be used to repay
outstanding indebtedness under its Class A and Class B Subordinated Promissory
Notes (the "Subordinated Notes"). The Subordinated Notes were issued in December
1995 to various affiliates of the Company. The Subordinated Notes bear interest
at a rate of 7% per annum and, pursuant to their terms, are due and payable upon
consummation of certain events, including this offering. The proceeds from the
sale and issuance of the Class A Subordinated Notes were used by the Company to
redeem shares from an affiliate of the Company, Britannia Holdings Limited, and
the Class B Subordinated Note was issued by the Company to such affiliate in
connection with such redemption. See "Certain Transactions." Approximately $5.6
million of the net proceeds will be used to repay long-term bank debt of the
Company incurred in December 1995. Such bank debt bears interest at prime plus
1.5% and matures in December 2002. In addition, $600,000 will be used to redeem
120,000 outstanding shares of the Company's Series B Redeemable Preferred Stock.
The Series B Redeemable Preferred Stock was issued to the Company's President
and Chief Executive Officer in December 1995 and is required to be redeemed upon
the occurrence of certain events, including consummation of this offering. See
"Certain Transactions."
The remaining approximately $5.5 million of net proceeds will be used for
general corporate purposes. Pending the uses described above, the Company
intends to invest the net proceeds from this offering in short-term, interest
bearing, investment-grade securities.
DIVIDEND POLICY
For the foreseeable future, the Company expects to retain earnings to
finance the expansion and development of its business. The payment of dividends
is within the discretion of the Company's Board of Directors and will depend on
the earnings, capital requirements and operating and financial condition of the
Company, among other factors. In addition, the Company's line of credit facility
prohibits the payment of dividends if any loans are outstanding under such
facility.
From its inception through October 31, 1995, the Company was treated for
federal income tax purposes as an S Corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended. As a result, the Company's earnings
from its inception through October 31, 1995 (the "Termination Date") were for
federal income tax purposes taxed directly to the Company's sole shareholder, at
his individual federal income tax rate, rather than to the Company. Subsequent
to the Termination Date, the Company was no longer treated as an S Corporation
and, accordingly, has been subject to federal and state income taxes on its
earnings after October 31, 1995. In 1995, prior to the Termination Date, the
Company's Board of Directors declared dividends in the aggregate amount of
$4,614,322. See "Certain Transactions."
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CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 31, 1996, (ii) the pro forma capitalization of the Company
reflecting the conversion of all outstanding shares of Series A Redeemable and
Convertible Preferred Stock into Common Stock upon consummation of this
offering, and (iii) the capitalization of the Company as adjusted to give effect
to the sale of the 3,500,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $10.00 per share, after
deduction of the underwriting discount and estimated offering expenses and after
the anticipated application of the estimated net proceeds therefrom and the
redemption of 80,000 shares of Series B Redeemable Preferred Stock at a price of
$5.00 per share on January 1, 1997. The information in the table below is
qualified in its entirety by, and should be read in conjunction with, the
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt:
Note payable to bank............................................................ $ 5,600 $ 5,600 $ --
Class A Subordinated Promissory Notes........................................... 10,000 10,000 --
Class B Subordinated Promissory Notes........................................... 10,000 10,000 --
Other long-term debt............................................................ 15 15 15
---------- ----------- -----------
Total long-term debt.......................................................... 25,615 25,615 15
---------- ----------- -----------
Series A Redeemable and Convertible Preferred Stock, no par value; 300,000 shares
authorized, 300,000 shares issued and outstanding, actual; no shares authorized
or outstanding, pro forma or as adjusted......................................... 2,205 -- --
Series B Redeemable Preferred Stock, no par value; 200,000 shares authorized,
200,000 shares issued and outstanding, actual; 120,000 shares issued and
outstanding, pro forma; no shares authorized or outstanding, as adjusted (1)..... 1,000 1,000 --
---------- ----------- -----------
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares authorized, no shares
outstanding as adjusted.......................................................
Common Stock, no par value; 10,000,000 shares authorized actual and pro forma;
6,260,016 shares outstanding actual; 8,660,016 shares outstanding pro forma;
100,000,000 authorized as adjusted; 12,160,016 shares outstanding as adjusted
(2)........................................................................... 648 2,853 34,553
Deferred compensation........................................................... (93) (93) (93)
Accumulated deficit............................................................. (19,435) (19,435) (19,435)
---------- ----------- -----------
Total shareholders' equity.................................................... (18,880) (16,675) 15,025
---------- ----------- -----------
Total capitalization............................................................ $ 9,940 $ 9,940 $ 15,040
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------------------
(1) The Company redeemed 80,000 shares of Series B Redeemable Preferred Stock,
at a price of $5.00 per share, on January 1, 1997. See "Certain
Transactions." Upon consummation of this offering, the remaining 120,000
shares of Series B Redeemable Preferred Stock will be redeemed at a price of
$5.00 per share.
(2) Excludes (i) 683,864 shares of Common Stock reserved for issuance upon the
exercise of options outstanding at December 31, 1996, at a weighted average
exercise price of $0.1893 per share, (ii) 817,880 additional shares reserved
for future issuance pursuant to the Company's 1995 Employee Stock Plan and
(iii) 250,000 shares reserved for future issuance pursuant to the Company's
Employee Stock Purchase Plan. See "Management--Employee Stock Plan;
--Employee Stock Purchase Plan."
15
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company as of
December 31, 1996 was $(16,675,168), or $(1.93) per share of Common Stock, after
giving effect to the automatic conversion of all outstanding shares of Series A
Redeemable and Convertible Preferred Stock upon the consummation of this
offering. "Pro forma net tangible book value (deficit) per share" represents the
amount of total tangible assets of the Company less total liabilities and Series
B Redeemable Preferred Stock divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of 3,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial offering price of $10.00 per
share (and deducting the underwriting discount and estimated offering expenses
payable by the Company), the pro forma net tangible book value of the Company as
of December 31, 1996 would have been approximately $15,024,832 or $1.24 per
share. This represents an immediate increase in net tangible book value of $3.17
per share to existing shareholders and an immediate dilution of $8.76 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 10.00
Pro forma net tangible book value (deficit) per share before
this offering.............................................. $ (1.93)
Increase in net tangible book value per share attributable
to new investors........................................... 3.17
---------
Pro forma net tangible book value per share after this
offering................................................... 1.24
---------
Dilution per share to new investors......................... $ 8.76
---------
---------
</TABLE>
The following table summarizes as of December 31, 1996 the differences
between existing shareholders and new investors with respect to the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share paid, assuming an initial offering price of
$10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 8,660,016 71.2% $ 3,211,759 8.4% $ 0.37
New investors.................. 3,500,000 28.8 35,000,000 91.6 $ 10.00
------------ ----- ------------- -----
Total.................... 12,160,016 100.0% $ 38,211,759 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The foregoing tables assume no exercise of the Underwriters' over-allotment
option or of any outstanding stock options to purchase Common Stock. As of
December 31, 1996, there were outstanding stock options to purchase an aggregate
of 683,864 shares of Common Stock with a weighted average exercise price of
$0.1893 per share. To the extent such outstanding options are exercised, there
will be further dilution to new investors. See "Management--Employee Stock
Plan."
- ------------------------
(1) If the Underwriters' over-allotment option is exercised in full, sales by
the Selling Shareholders in this offering will reduce the number of shares
held by existing shareholders to 8,135,016 shares or 66.9% of the total
number of shares of Common Stock to be outstanding after this offering, and
will increase the number of shares held by the new investors to 4,025,000
shares or 33.1% of the total number of shares of Common Stock to be
outstanding after this offering. See "Principal Shareholders."
16
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1994, 1995
and 1996 and the balance sheet data as of December 31, 1995 and 1996 are derived
from financial statements of the Company which have been audited by Coopers &
Lybrand L.L.P., independent accountants, and which are contained elsewhere in
this Prospectus. The balance sheet data as of December 31, 1994 are derived from
financial statements of the Company which have been audited by Coopers & Lybrand
L.L.P., independent accountants, and are not included in this Prospectus. The
following selected financial data should be read in conjunction with the
Company's financial statements and the related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................................................... $ 7,310 $ 19,671 $ 33,622
Cost of sales................................................................. 4,493 10,636 19,239
--------- --------- ---------
Gross profit.................................................................. 2,817 9,035 14,383
--------- --------- ---------
Operating expenses:
Research and development.................................................... 278 913 965
Sales and marketing......................................................... 370 1,631 2,481
General and administrative.................................................. 1,236 2,754 3,609
--------- --------- ---------
Total operating expenses................................................ 1,884 5,298 7,055
--------- --------- ---------
Income from operations........................................................ 933 3,737 7,328
--------- --------- ---------
Interest income (expense), net................................................ 7 (186) (1,859)
--------- --------- ---------
Income from continuing operations before taxes................................ 940 3,551 5,469
Provision (benefit) for income taxes.......................................... -- (52) (1,861)
--------- --------- ---------
Income from continuing operations............................................. 940 3,603 3,608
Income from discontinued service operations................................... 601 -- --
--------- --------- ---------
Net income.................................................................... $ 1,541 $ 3,603 $ 3,608
--------- --------- ---------
--------- --------- ---------
PRO FORMA DATA (1)(2):
Historical income from operations before provision for income taxes........... $ 1,541 $ 3,551 $ 5,469
Pro forma provision for income taxes.......................................... 524 1,207 1,861
--------- --------- ---------
Pro forma net income.......................................................... $ 1,017 $ 2,344 $ 3,608
--------- --------- ---------
--------- --------- ---------
Pro forma income per share.................................................... $ 0.20 $ 0.40
--------- ---------
--------- ---------
Weighted average shares used in computing pro forma income per share (3)...... 11,520 9,120
--------- ---------
--------- ---------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 388 $ 2,676 $ 2,119
Working capital................................................................... 1,603 4,650 8,372
Total assets...................................................................... 2,338 9,048 11,953
Subordinated debt................................................................. 0 20,000 20,000
Long-term debt, less current portion.............................................. 225 5,615 5,111
Series A Redeemable and Convertible Preferred Stock............................... 0 2,205 2,205
Series B Redeemable Preferred Stock............................................... 0 1,000 1,000
Shareholders' equity (deficit).................................................... 1,462 (21,543) (18,880)
</TABLE>
- ------------------------
(1) From inception through October 31, 1995, the Company was treated as an S
Corporation for federal income tax purposes. The pro forma data reflects an
estimate of income tax expense as if the Company were taxable as a C
Corporation for each of the years ended December 31, 1995 and 1994. See
Notes 1 and 11 of Notes to Financial Statements.
(2) Of the proceeds from this offering, approximately $25.6 million will be used
to repay long-term debt. Net income and pro forma earnings per share for
1996 would have been approximately $4.9 million and $0.42, respectively, if
the offering of shares and repayment of debt had occurred on January 1,
1996.
(3) See Note 1 of Notes to Financial Statements for calculation of weighted
average shares used in computing pro forma income per share.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS"
AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company operated as a division of Apex Computer Company (the "Predecessor")
through January 1993, providing computer maintenance services to Microsoft
Corporation ("Microsoft") and selling integrated server cabinets and, to a
limited extent, stand-alone switching systems, primarily to Microsoft. In
February 1993, the assets of that division were spun off as a dividend to the
sole shareholder of the Predecessor, who contributed those assets as the initial
capital of the Company. See "Certain Transactions." Throughout 1993, the Company
derived revenue primarily from the provision of computer maintenance services to
Microsoft. In May 1994, the Company began selling stand-alone switching systems
to Compaq for integration into server cabinets. In June 1994, the Company
discontinued its computer maintenance service business and determined to
concentrate on sales of stand-alone switching products and server cabinets,
including server cabinets with integrated switching systems.
In December 1995, the Company effected a leveraged recapitalization (the
"Leveraged Recapitalization") pursuant to which (i) the Company redeemed from
one of its shareholders Common Stock representing a 50% voting interest in the
Company prior to the Leveraged Recapitalization for approximately $12.5 million
in cash and a Class B Subordinated Promissory Note in the principal amount of
$10.0 million, and (ii) the Company sold to a group of entities affiliated with
TA Associates, Inc. (the "TA Group") Common Stock and Series A Redeemable and
Convertible Preferred Stock representing a 50% voting interest in the Company
after the Leveraged Recapitalization for $2.5 million and sold to the TA Group
Class A Subordinated Promissory Notes in the aggregate principal amount of $10.0
million. The value of the Company prior to the Leveraged Recapitalization, as
determined by an independent appraisal obtained in advance of the transaction,
was approximately $23.7 million. The subordinated promissory notes issued by the
Company in connection with the Leveraged Recapitalization bear interest at a
rate of 7% per annum, provide for quarterly interest payments and require the
repayment of all principal and any accrued and unpaid interest on the
consummation of certain liquidity events, including this offering. Approximately
63% of the net proceeds of this offering will be used to repay the subordinated
promissory notes issued by the Company in connection with the Leveraged
Recapitalization. The Company effected the Leveraged Recapitalization for a
number of reasons, including the redemption of shares of a majority shareholder
who desired liquidity and the addition of the expertise of a venture capital
investor to the Company's Board of Directors. Moreover, the Company believes
that the addition of this expertise and the willingness of the TA Group to
invest substantial sums in the Company in the form of equity and subordinated
indebtedness helped the Company obtain its long-term bank financing. See
"Certain Transactions."
From its inception through October 31, 1995 (the "Termination Date"), the
Company was treated for federal income tax purposes as an S Corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended. As a result, the
Company's earnings from its inception through the Termination Date were for
federal income tax purposes taxed directly to the Company's sole shareholder, at
his individual federal income tax rate, rather than to the Company. The pro
forma provision for income taxes reflects an estimate of income tax expense at
federal statutory rates as if the Company were taxable as a C
19
<PAGE>
Corporation for each of the years ended December 31, 1994 and 1995. See Notes 1
and 11 of Notes to Financial Statements.
A substantial portion of the Company's sales are concentrated among a
limited number of OEM customers. For 1994, 1995 and 1996, sales to the Company's
OEM customers, represented approximately 38%, 69% and 71% of the Company's net
sales, respectively. The Company's OEM business is subject to risks such as
contract termination, reduced or delayed orders, adoption of competing products
developed by third parties for the OEM or by the OEM's internal development
team, and change in corporate ownership, financial condition, business direction
or product mix by the OEM, any of which could have a material adverse effect on
the Company's results of operations. The Company has experienced, and may
continue to experience, significant reductions or delays in orders from its OEM
customers which have had and may in the future have a material adverse effect on
the Company's quarterly sales and operating results. See "Risk
Factors--Fluctuations in Operating Results." In December 1995, one of the
Company's OEM customers determined that its orders of Company switches in late
1995 exceeded its needs. Accordingly, at such customer's request, the Company
delayed its scheduled deliveries to such OEM for additional switches in the
first half of 1996. While the Company has contracts with certain of its existing
OEM customers, none of the Company's OEM customers is obligated to purchase
products from the Company except pursuant to binding purchase orders. The
failure of any of the Company's OEMs to continue to place orders at current or
anticipated levels would likely have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Dependence Upon a Limited Number of OEM Customers."
In 1995, the Company entered into an OEM arrangement with IBM for the
production of an integrated server cabinet system incorporating the Company's
switching products. While the products supplied by the Company met IBM's
requirements, IBM concluded that its program had not achieved desired results
and sought to terminate the program in mid-1996 after the Company had expended
significant product development and operational resources in connection with
this OEM arrangement. Although the Company negotiated a settlement that covered
its direct costs associated with the program, the Company's branded product
development efforts were delayed as a result of the Company's commitment of
substantial product development resources to the IBM program in the third and
fourth quarters of 1995 and the first quarter of 1996. IBM accounted for only 1%
of the Company's net sales in 1995, but accounted for 18% of the Company's net
sales in 1996.
The Company is currently experiencing increased price competition in both
the market for stand-alone switching systems and the market for integrated
server cabinet systems and expects that pricing pressures will increase in the
future. Increased competition could result in price reduction and loss of market
share which would adversely affect the Company's business, financial condition
and results of operations. See "Risk Factors--Intense Competition."
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales......................................................................... 100.0% 100.0% 100.0%
Cost of sales..................................................................... 61.5 54.1 57.2
----- ----- -----
Gross margin...................................................................... 38.5 45.9 42.8
----- ----- -----
Operating expenses:
Research and development........................................................ 3.8 4.6 2.9
Sales and marketing............................................................. 5.0 8.3 7.4
General and administrative...................................................... 16.9 14.0 10.7
----- ----- -----
Total operating expenses...................................................... 25.7 26.9 21.0
----- ----- -----
Income from operations............................................................ 12.8 19.0 21.8
----- ----- -----
Interest income (expense), net.................................................... 0.1 (0.9) (5.6)
----- ----- -----
Income from continuing operations before provision for income taxes............... 12.9 18.1 16.2
Provision for income taxes (pro forma through December 31, 1995).................. 4.4 6.2 5.5
----- ----- -----
Income from continuing operations (pro forma through December 31, 1995)........... 8.5 11.9 10.7
Income from discontinued service operations (net of pro forma taxes).............. 5.4 -- --
----- ----- -----
Net income (pro forma through December 31, 1995).................................. 13.9% 11.9% 10.7%
----- ----- -----
----- ----- -----
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated server cabinets. Net sales increased 71% to
$33.6 million for 1996 from $19.7 million for 1995. This increase was due
primarily to increased sales of stand-alone switching systems to OEMs, sales of
integrated server cabinet systems to IBM in the first half of 1996, and, to a
lesser extent, sales of branded switching systems to resellers.
GROSS MARGIN. Gross margin is affected by a variety of factors, including:
the ratio of OEM sales to branded sales, as OEM sales typically have lower gross
margins than branded sales; product mix, including the percentage of cabinet
system sales which generally have lower gross margins than sales of stand-alone
switching systems; raw materials and labor costs; new product introductions by
the Company and its competitors; and the level of outsourcing of manufacturing
and assembly services by the Company. Gross margin declined to 42.8% for 1996
from 45.9% for 1995, due to increased OEM sales as a percentage of net sales,
including sales of cabinet systems to IBM in the first half of 1996, as well as
increased outsourcing by the Company of component assembly to meet customer
demand. In addition, the Company accrued $845,000 in warranty and inventory
reserves in 1996. The Company expects that increased competition may affect
pricing and therefore erode the Company's gross margins in the future. See "Risk
Factors--Intense Competition."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation for engineers and materials costs and are expensed as they
are incurred. Research and development expenses increased to $965,000 for 1996
from $913,000 for 1995, but decreased as a percentage of net sales to 2.9% for
1996 from 4.6% for 1995. The Company believes that the timely development of
innovative products and enhancements to existing products is essential to
maintaining its competitive position and, therefore,
21
<PAGE>
expects research and development expenditures to increase in absolute dollars
and as a percentage of net sales.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
promotional material, trade show expenses and sales and marketing personnel
costs, including sales commissions and travel. Sales and marketing expenses
increased to $2.5 million for 1996 from $1.6 million for 1995, but declined as a
percentage of net sales to 7.4% for 1996 from 8.3% for 1995. The increase in
absolute dollars was primarily due to increased advertising and trade show
expenses, including travel, and, to a lesser extent, increased personnel costs.
The Company expects these expenditures to increase in absolute dollars as it
seeks to increase its branded sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include personnel costs for administration, finance, human resources and general
management, as well as rent, utilities and legal and accounting expenses, and
provision for Washington State's gross receipts tax. General and administrative
expenses increased to $3.6 million for 1996 from $2.8 million for 1995. As a
percentage of net sales, general and administrative expenses declined to 10.7%
for 1996 from 14.0% for 1995. The increase in absolute dollars was primarily due
to the move to larger facilities by the Company in September 1995 which
increased rent, an increase in the Company's allowance for doubtful accounts,
state tax increases associated with increased net sales and, to a lesser extent,
increased legal and accounting costs and the addition of corporate
infrastructure to support the Company's growth in net sales. The addition of
personnel in the Company's finance and administration departments, together with
expenses such as legal and accounting fees associated with being a public
company, are expected to increase general and administrative costs in the
future.
NET INTEREST EXPENSE (INCOME). Net interest expense increased to $1.9
million for 1996 from $186,000 for 1995. The increase in net interest expense
resulted from indebtedness incurred in the Leveraged Recapitalization.
PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $1.9 million for 1996. The effective federal tax rate for 1996 was
approximately 34%.
NET INCOME. Net income increased to $3.6 million for 1996 from pro forma
net income of $2.3 million for 1995 due primarily to increased sales and related
gross profits offset in part by increased interest expense associated with the
Leveraged Recapitalization. As a percentage of net sales, net income declined to
10.7% for 1996 from 11.9% (pro forma) for 1995. The increase in absolute dollars
and the decrease as a percentage of net sales was due to the factors discussed
above.
YEARS ENDED DECEMBER 31, 1995 AND 1994
NET SALES. Net sales increased 169% to $19.7 million for 1995 from $7.3
million for 1994. This increase was primarily due to the initiation and growth
of sales of stand-alone switching systems to OEM customers and, to a lesser
extent, an increase in sales of branded stand-alone switching systems.
GROSS MARGIN. Gross margin increased to 45.9% for 1995 from 38.5% for 1994,
primarily due to greater sales of stand-alone switching systems, which generally
have higher gross margins than server cabinets, and, to a lesser extent,
increases in branded sales with higher gross margins and economies of scale
gained from volume increases.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $913,000 for 1995 from $278,000 for 1994. As a percentage of net
sales, research and development expenses increased to 4.6% in 1995 from 3.8% in
1994. The increases in absolute dollars and as a percentage of net sales were
primarily due to the addition of new engineers and the development of OUTLOOK
and VIEWPOINT prototypes.
22
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$1.6 million for 1995 from $370,000 for 1994. As a percentage of net sales,
sales and marketing expenses increased to 8.3% in 1995 from 5.0% in 1994. The
increases in absolute dollars and as a percentage of net sales were primarily
due to increased advertising and tradeshow expenses and, to a lesser extent,
sales commissions and personnel costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.8 million for 1995 from $1.2 million for 1994. As a percentage
of net sales, general and administrative expenses declined to 14.0% in 1995 from
16.9% in 1994. The increase in absolute dollars was primarily due to
approximately $1.4 million incurred in December 1995 for transaction costs and
bonuses associated with the Leveraged Recapitalization.
NET INTEREST EXPENSE (INCOME). Net interest expense was $186,000 in 1995.
The Company earned interest income of $7,000 in 1994. The increase in interest
expense from 1994 to 1995 resulted from certain loans made to the Company by its
founder and former sole shareholder.
NET INCOME. Pro forma net income increased to $2.3 million for 1995 from
$1.0 million for 1994. As a percentage of net sales, pro forma net income
declined to 11.9% in 1995 from 13.9% in 1994. The increase in absolute dollars
and the decline as a percentage of net sales were due to the factors discussed
above.
23
<PAGE>
QUARTERLY INFORMATION
The following tables set forth certain unaudited statement of operations
data for the eight quarters ended December 31, 1996, as well as such data
expressed as a percentage of net sales for the periods indicated. Such data have
been derived from unaudited condensed financial statements that, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. Such data should be
read in conjunction with the Company's audited financial statements and the
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................... $ 3,166 $ 4,011 $ 4,606 $ 7,888 $ 7,916 $ 6,086
Cost of sales................................ 1,681 2,121 2,385 4,449 4,668 3,675
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................................. 1,485 1,890 2,221 3,439 3,248 2,411
Operating expenses:
Research and development................... 158 189 298 268 258 206
Sales and marketing........................ 295 316 392 628 577 540
General and administrative................. 248 242 307 1,957 449 482
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses................. 701 747 997 2,853 1,284 1,228
----------- ----------- ----------- ----------- ----------- -----------
Income from operations....................... 784 1,143 1,224 586 1,964 1,183
----------- ----------- ----------- ----------- ----------- -----------
Interest income (expense), net............... 4 (10) (26) (154) (472) (475)
Income from continuing operations before
income taxes............................... 788 1,133 1,198 432 1,492 708
Provision for income taxes (pro forma through
December 1995)............................. 268 385 408 146 508 241
----------- ----------- ----------- ----------- ----------- -----------
Net income (pro forma through December
1995)...................................... $ 520 $ 748 $ 790 $ 286 $ 984 $ 467
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Income per share (pro forma through December
1995)...................................... $ 0.05 $ 0.06 $ 0.07 $ 0.02 $ 0.11 $ 0.05
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding.......... 11,520 11,520 11,520 11,520 9,120 9,120
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 53.1 52.9 51.8 56.4 59.0 60.4
----------- ----------- ----------- ----------- ----------- -----------
Gross margin................................. 46.9 47.1 48.2 43.6 41.0 39.6
Operating expenses:
Research and development................... 5.0 4.7 6.5 3.4 3.3 3.4
Sales and marketing........................ 9.3 7.9 8.5 8.0 7.3 8.9
General and administrative................. 7.8 6.0 6.6 24.8 5.6 7.9
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses................. 22.1 18.6 21.6 36.2 16.2 20.2
----------- ----------- ----------- ----------- ----------- -----------
Income from operations....................... 24.8 28.5 26.6 7.4 24.8 19.4
----------- ----------- ----------- ----------- ----------- -----------
Interest income (expense), net............... 0.1 (0.3) (0.6) (1.9) (6.0) (7.8)
Income from continuing operations before
income taxes............................... 24.9 28.2 26.0 5.5 18.8 11.6
Provision for income taxes (pro forma through
December 1995)............................. 8.5 9.6 8.8 1.9 6.4 4.0
----------- ----------- ----------- ----------- ----------- -----------
Net income (pro forma through December
1995)...................................... 16.4% 18.6% 17.2% 3.6% 12.4% 7.6%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
SEPT. 30, DEC. 31,
1996 1996
----------- ---------
<S> <C> <C>
Net sales.................................... $ 9,265 $ 10,355
Cost of sales................................ 5,173 5,723
----------- ---------
Gross profit................................. 4,092 4,632
Operating expenses:
Research and development................... 191 310
Sales and marketing........................ 641 723
General and administrative................. 773 1,905
----------- ---------
Total operating expenses................. 1,605 2,938
----------- ---------
Income from operations....................... 2,487 1,694
----------- ---------
Interest income (expense), net............... (472) (440)
Income from continuing operations before
income taxes............................... 2,015 1,254
Provision for income taxes (pro forma through
December 1995)............................. 686 426
----------- ---------
Net income (pro forma through December
1995)...................................... $ 1,329 $ 828
----------- ---------
----------- ---------
Income per share (pro forma through December
1995)...................................... $ 0.14 $ 0.09
----------- ---------
----------- ---------
Weighted average shares outstanding.......... 9,120 9,120
SEPT. 30, DEC. 31,
1996 1996
----------- ---------
<S> <C> <C>
Net sales.................................... 100.0% 100.0%
Cost of sales................................ 55.8 55.3
----------- ---------
Gross margin................................. 44.2 44.7
Operating expenses:
Research and development................... 2.1 3.0
Sales and marketing........................ 6.9 7.0
General and administrative................. 8.4 18.4
----------- ---------
Total operating expenses................. 17.4 28.4
----------- ---------
Income from operations....................... 26.8 16.3
----------- ---------
Interest income (expense), net............... (5.1) (4.2)
Income from continuing operations before
income taxes............................... 21.7 12.1
Provision for income taxes (pro forma through
December 1995)............................. 7.4 4.1
----------- ---------
Net income (pro forma through December
1995)...................................... 14.3% 8.0%
----------- ---------
----------- ---------
</TABLE>
24
<PAGE>
Net sales for the second quarter of 1996 decreased from the first quarter of
1996 primarily as a result of a reduction in orders of switches by one of the
Company's OEM customers, which had determined that its orders for the Company's
switches in late 1995 had exceeded its needs.
The fluctuations in gross margin from quarter to quarter in 1996 resulted
from shifts in the Company's product mix between stand-alone switching systems
and integrated cabinets. The reductions in research and development expenses as
a percentage of net sales from the last quarter of 1995 to the first and
subsequent quarters of 1996 resulted from a significant increase in the
Company's net sales for 1996 as compared to 1995. The significant increase in
general and administrative expenses in absolute dollars and as a percentage of
net sales in the fourth quarter of 1995 over the prior three quarters was
attributable to the transactional expenses of the Leveraged Recapitalization,
and the compensation expenses associated with Mr. Hafer's 1995 bonus. See
"Certain Transactions." The significant increase in general and administrative
expenses in absolute dollars and as a percentage of net sales in the fourth
quarter of 1996 over the prior three quarters was attributable to compensation
expense of approximately $875,000 incurred as a result of the acceleration of
the vesting of the Series B Redeemable Preferred Stock issued to Mr. Hafer in
connection with the Leveraged Recapitalization and an increase in the Company's
allowance for doubtful accounts.
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from OEM customers; the timing of shipments; the timing of new
product introductions and enhancements by the Company and its competitors;
changes in product or distribution channel mixes; changes in pricing policies or
price reductions by the Company or its competitors; the availability and cost of
supplies and components; sales and marketing expenses related to entering into
new markets, introducing new products and retaining current OEM and other large
customers; seasonal customer demand; and fluctuations in sales of servers due to
changes in economic conditions or capital spending levels.
In general, the Company's sales cycle varies substantially and may be
lengthy, making revenues difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders for products several months prior to scheduled shipment
dates, these orders are subject to cancellation up to eight weeks prior to the
scheduled shipment date. The Company generally must plan production, order
components and undertake its manufacturing activities prior to the time that
these orders become firm. In addition, the Company's OEM customers have in the
past requested, and will likely continue to request from time to time, that the
Company delay shipment dates or cancel orders for products that are subject to
firm orders. Accordingly, sales to OEMs for future quarters are difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales as a
percentage of net sales, the Company's quarterly sales and operating results
will become more dependent upon the volume and timing of branded product orders
received during the quarter. Because customers of the Company's branded products
(including resellers) typically place orders shortly before their requested
shipment date, revenues from branded sales are difficult to forecast. The
failure of the Company to accurately forecast the timing and volume of orders
for branded products during any given quarter could adversely affect the
Company's operating results for such quarter and, potentially, for future
periods.
The Company believes that it has experienced and expects it will continue to
experience some degree of seasonality due to customer buying cycles. The Company
believes that the fourth quarter has generally higher net sales levels due to
customer budgeting and procurement cycles, which correspondingly may depress net
sales in other quarters.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996 the Company's principal sources of liquidity
consisted of approximately $2.1 million in cash and cash equivalents. In
addition, the Company has a line of credit with a bank that allows it to borrow
up to a specified amount based upon its accounts receivable. The Company also
has a letter of credit arrangement pursuant to which the bank will issue
commercial letters of credit up to an aggregate of $3.0 million (less any
amounts outstanding under the line of credit) at prime plus 1.5%. The combined
line of credit and letter of credit facility expires April 15, 1997. There were
no borrowings under the line of credit and the letter of credit facility
throughout 1996, and therefore, all $3.0 million was available.
The Company's operating activities generated cash of $725,000 for 1996, $2.2
million for 1995 and $1.4 million for 1994. See Note 1 of Notes to Financial
Statements and "Certain Transactions." The decrease in cash flow from operations
in 1996 when compared with 1995 resulted from increased interest expense and
payments of accrued expenses. At December 31, 1996, the Company's OEM customers
(including IBM) accounted for 75% of the accounts receivable. See "Risk
Factors--Dependence Upon a Limited Number of OEM Customers" and Note 1 of Notes
to Financial Statements.
In December 1995, the Company effected the Leveraged Recapitalization
pursuant to which the Company sold 1.6 million shares of Common Stock for a
total price of approximately $294,000, 300,000 shares of Series A Redeemable and
Convertible Preferred Stock for a total price of approximately $2.2 million and
$10.0 million in aggregate principal amount of Class A Subordinated Promissory
Notes. In connection therewith, the Company redeemed from one of its
shareholders 4.0 million shares of Common Stock for an aggregate price of
approximately $22.5 million, consisting of cash of approximately $12.5 million
and the issuance of a Class B Subordinated Promissory Note in the aggregate
principal amount of $10.0 million. The Class A and Class B Subordinated
Promissory Notes bear interest at a rate of 7% per annum, provide for quarterly
interest payments and require the repayment of all principal and any accrued and
unpaid interest on the consummation of certain liquidity events, including this
offering. As of December 31, 1996 the Company had outstanding indebtedness of
$20.0 million in principal amount of Class A and Class B Subordinated Promissory
Notes.
As part of the Leveraged Recapitalization, Kevin J. Hafer, the Company's
President and Chief Executive Officer, received 200,000 shares of the Company's
Series B Redeemable Preferred Stock. This Series B Redeemable Preferred Stock
was fully vested on January 1, 1997. The Company redeemed 80,000 shares of such
Series B Redeemable Preferred Stock on January 1, 1997 for $5.00 per share (an
aggregate of $400,000) and is obligated to redeem the balance of such shares for
$5.00 per share (an aggregate of $600,000) upon the consummation of this
offering.
Approximately $20.0 million of the net proceeds of this offering will be
used to repay outstanding indebtedness pursuant to the Class A and Class B
Subordinated Promissory Notes. Of the remaining net proceeds, approximately $5.6
million will be used to repay long-term bank debt of the Company incurred in
connection with the Leveraged Recapitalization, bearing interest at prime plus
1.5% or IBOR plus 2.75%. Because of the early retirement of the long-term debt,
the Company's statement of operations for the year ended December 31, 1997 will
reflect an extraordinary loss for the write-off of deferred financing costs of
approximately $220,000 associated with the subordinated promissory notes and
long-term bank debt. An additional $600,000 of net proceeds will be used to
redeem all outstanding shares of the Company's Series B Redeemable Preferred
Stock.
The Company believes that existing cash balances, cash generated from
operations and the funds available to it under credit facilities, together with
the proceeds from this offering, will be sufficient to fund its operations
through 1997.
26
<PAGE>
BUSINESS
OVERVIEW
The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company's switching systems enable client/ server network administrators to
manage multiple servers from a single keyboard, video monitor and mouse
configuration (a "console"). Designed to address space, cost, administration and
maintenance issues that organizations increasingly face when adopting
client/server architecture, the Company's sophisticated switching and integrated
cabinet systems enable network administrators to manage more efficiently their
organizations' complex and growing server populations.
The Company provides "plug and play" switching systems and integrated server
cabinet solutions for many of the network administration, management and storage
problems faced by organizations using client/server architecture. The Company's
switching products, including OUTLOOK, OUTLOOK(4) and VIEWPOINT, enable network
administrators to access multiple servers from one or more centralized
(consoles), consolidate hardware requirements, and provide direct hardwired
connections between the switch and the attached server which facilitate access
to servers even when the network is down. In addition, the Company's switching
systems are able to work with heterogeneous server populations. All of the
Company's switching products utilize the Company's proprietary On Screen
Configuration And Reporting ("OSCAR") interface. OSCAR allows network
administrators to immediately identify and access servers according to the
administrators' own naming conventions. The Company also offers server cabinet
solutions to consolidate and store heterogeneous servers and related hardware in
a single cabinet that facilitates more efficient physical access and safer
performance of hardware maintenance tasks.
The Company markets and sells its products through a direct sales force and
various distribution channels. Apex supplies stand-alone switching systems to
Compaq and Hewlett-Packard for integration into their product offerings. Sales
to Compaq and Hewlett-Packard represented approximately 30% and 15%,
respectively, of the Company's net sales for 1996 and 54% and 6% of net sales,
respectively, for 1995. According to International Data Corporation, Compaq and
Hewlett-Packard shipped 43% of all PC servers and 66% of all super servers
(servers with one or more processors and more memory and disk storage than PC
servers) shipped worldwide in 1995. The Company's branded sales customers for
1996 include Microsoft, Wells Fargo Bank, Owens Corning, Peoplesoft and the
National Association of Securities Dealers.
INDUSTRY BACKGROUND
Information technology has become increasingly critical to the operation of
most businesses as computers are utilized to perform multiple and diverse
functions throughout organizations. The desire of many organizations to
decentralize computing power while sharing technology resources and providing
broad access to enterprise data has resulted in the widespread adoption of
distributed network computing environments using a client/server architecture of
interconnected PCs. The typical client/server installation consists of a local
area network ("LAN") with multiple centralized PCs operating as "servers"
dedicated to performing specific functions for the many "client" PCs connected
to the LAN. According to International Data Corporation, worldwide shipments of
PC servers and super servers are expected to grow 21.8% on a compounded annual
basis from 1996 to 2000, reaching approximately 2.6 million units shipped in the
year 2000.
The proliferation of PC-based LANs and wide-area networks ("WANs") has
created significant network administration and space problems for the
organizations that rely on them. Network administrators, who may supervise up to
a thousand servers, must identify and access relevant servers to add or delete
users, to add, change or upgrade applications, to tune systems for better
optimization, and to diagnose and correct network failures. Client/server
networks utilize servers that were designed to operate as stand-alone systems,
each with its own console consisting of a keyboard, video monitor and mouse.
Thus, to
27
<PAGE>
perform network administration and management tasks, network administrators must
deal with an unwieldy number of consoles, whether centrally located or dispersed
throughout the organization. In addition, inadvertent access to network servers
can be difficult to prevent when there are many consoles, and, therefore,
multiple access points, available.
As network resources become more critical to organizations, constant
availability of the network becomes increasingly important. The time that a
network is down or degraded can cause significant inconvenience, loss of
productivity and financial loss. Because diagnosis and correction of anomalous
network behavior often requires the network staff to physically access each
affected server through its own console, quick and efficient "fault" management
can be difficult, especially when there are a large number of dispersed servers
involved. In addition, when a network fails, an administrator's ability to
quickly and efficiently diagnose and correct the problem is often hampered
because the administrator is not able to access the software tools that reside
on the network and that are normally used to manage network failures.
In addition to these network administration and management problems, as
organizations' network computing needs increase, the number of servers, consoles
and other peripherals proliferates. Without efficient storage and configuration,
network hardware consumes substantial and often expensive floor space, creates
clutter that hampers network administration and management, and increases the
risk of physical damage to expensive hardware. The typical individual keyboard,
monitor and mouse console architecture of servers exacerbates this space
problem, as multiple consoles consume valuable and costly space. The increased
use of "heterogeneous" server configurations using different platforms, such as
Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc,
and different operating systems, such as Windows NT, Unix, NetWare and O/S 2,
compounds the storage and administration problems faced by network
administrators.
The advent of console switching technology has facilitated more effective
network management by giving administrators the ability to control a larger
number of servers through fewer consoles. To date, however, most console
switching solutions have been difficult to install and configure, and many have
used proprietary cabling that has made network administrators reluctant to
embrace a solution that may restrict them from expanding or using a different
solution in the future. In addition, there have been a limited number of
solutions available for those users who want to control computers from a
distance, such as those who need access to computer resources in, but do not
want to expose those expensive resources to, harsh operating environments. The
space management solutions available to network administrators have generally
consisted of racks or cabinets designed to house only one type of server, and
most have not been technically designed for ease of access. Those with
distributed, heterogeneous client/server networks have often been left with no
customized solution.
THE APEX SOLUTION
The Company provides "plug and play" stand-alone switching systems and
integrated server cabinet solutions for many of the network administration,
management and storage problems faced by organizations with client/server
networks. By providing both console switching and cabinet systems, the Company
offers a comprehensive solution to the space and administrative issues related
to client/server networks. The Company's products allow organizations to:
- ACCESS MULTIPLE SERVERS FROM A CENTRAL LOCATION. Apex products allow
network administrators to manage multiple platforms from a centralized
console, to identify and access servers from a single screen according to
the administrator's own naming conventions, and to solve distance problems
by providing end-to-end connections of up to 1,000 feet.
- CONSOLIDATE HARDWARE REQUIREMENTS. Apex products reduce the need for
multiple keyboards, monitors and mice by allowing direct access to
multiple servers from a single console, thereby facilitating more
efficient network management and administration and reducing hardware
costs.
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<PAGE>
- PROVIDE "OUT-OF-BAND" ACCESS TO SERVERS. By providing direct hardwired
connections to network servers, Apex products enable network
administrators to access each server as if they were physically present at
that server, even when the network is down. Moreover, unlike the
connectivity approach of many competitive products, which connect numerous
switches to other switches in a continuous chain, the Company's switching
products are designed so that each server has its own connection to the
master switch in a two-tiered system. This direct linkage makes it easier
for network administrators to isolate problems with individual servers.
- PROVIDE CONNECTIVITY TO VIRTUALLY ALL MAJOR PLATFORMS. Apex switching
products work in heterogeneous server environments, providing connectivity
with Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and
Sun Sparc platforms.
- MAXIMIZE SPACE EFFICIENCY. Apex integrated cabinet solutions consolidate
servers and other hardware in a single location to facilitate more
efficient physical access for hardware maintenance tasks. The Company also
provides customized solutions for the storage of heterogeneous server
populations.
The following diagram illustrates how the Company's switching and cabinet
systems solve many of the network administration, management and storage
problems of client/server environments.
There follows a graphic with the heading "The Apex Solution". This graphic
illustrates how 24 dispersed servers, each with its own keyboard, video monitor
and mouse console, are consolidated into six centralized DensePack cabinets. By
combining one primary OutLook switch with three secondary OutLook switches,
access and control of the same number of servers is consolidated into one
keyboard, video monitor and mouse console.
THE APEX STRATEGY
The Company's objective is to become the leading provider of hardware
solutions for the administration, management and storage challenges inherent in
the client/server network environment. To achieve this objective, the Company is
implementing the following strategies:
- CONTINUE INNOVATIVE PRODUCT DEVELOPMENT. The Company believes that the
continued, timely development of innovative products and enhancements to
existing products is essential to maintaining its competitive position. By
maintaining close contact with key customers who are often early-adopters
of leading technologies, the Company seeks to develop new products, as
well as modifications and improvements to existing products. Many of the
Company's products are designed to accommodate future modifications and
additional features, which the Company believes facilitates the
development and integration of modifications and features if a market need
is perceived.
29
<PAGE>
- LEVERAGE OEM EXPERIENCE TO INCREASE OEM SALES. The Company intends to
leverage its significant experience in working with OEM customers to enter
into new relationships with other manufacturers of servers in the United
States and in Europe. The Company believes that the architecture, quality
and reliability of its products, together with the Company's commitment to
customer support, are attractive to OEMs.
- INCREASE BRANDED SALES. To increase its market penetration, the Company
intends to aggressively market its branded products to end users through a
direct sales force and through a variety of reseller channels. The Company
believes that its comprehensive and customized solutions will appeal to
many organizations that, because of heterogeneous server populations and
for other reasons, have problems that are not effectively solved by
competing switching and cabinet products. For the years ended December 31,
1995 and 1996, sales of Apex branded products represented approximately
32% and 29% respectively, of the Company's net sales.
- CREATE AN INTERNATIONAL DISTRIBUTION NETWORK. The Company intends to
create an international sales distribution network for the Company's
branded switching products, focusing initially on the network computing
market in Europe because of its large installed server base. The Company
is currently shipping its switching systems to OEMs with facilities in
Europe and the Company has begun efforts to build an international
third-party distribution network.
PRODUCTS
The Company provides comprehensive solutions to many of the network
administration, management and storage problems inherent in client/server
network environments by offering a family of stand-alone switching systems
together with integrated cabinet systems designed to store servers efficiently.
SWITCHING SYSTEMS
The Company's switching systems consolidate the control and monitoring of
multiple network servers to a centralized command center consisting of one or
more console positions. The Company's console switching products can work with
heterogeneous server populations that use different platforms, such as Intel,
Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc, and
different operating systems, such as Windows NT, Unix, NetWare and O/S 2. The
Company's switching products utilize the Company's proprietary On Screen
Configuration And Reporting ("OSCAR") interface that enables network
administrators to immediately identify and access servers according to the
administrators' own naming conventions, as opposed to predesignated numbers. The
Company's switching products operate on an out-of-band basis, meaning there is a
direct hardwired connection between the console and the attached servers through
the switch. This direct connection enables network administrators to access
network servers and locate the problem server even when the network is down.
OUTLOOK, introduced in September 1995, enables administrators to control up
to eight servers using a single console and, by integrating additional OUTLOOK
switches, can be expanded to provide centralized control of up to 64 servers.
OUTLOOK offers programmable scanning to allow users to vary the frequency and
duration of monitoring individual servers. OUTLOOK also enables network managers
to reduce inadvertent access to the system by eliminating additional consoles.
OUTLOOK provides access to a wide range of network elements such as file
servers, PBX monitors and database engines from a single console.
OUTLOOK(4), introduced in March 1996, includes the same features as OUTLOOK,
except that this multi-user system allows network administrators to administer
up to 64 servers from up to four console positions.
VIEWPOINT, introduced in September 1995 to address the needs of very large
server-intensive organizations with large network administrative staffs,
includes all of the attributes of OUTLOOK except that it enables network
administration staff to control up to 32 servers from as many as 16 console
positions. Total capacity can be expanded to as many as 256 servers by
integrating the VIEWPOINT switch with multiple
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<PAGE>
OUTLOOK switches, and VIEWPOINT's technology allows access to a server up to
1,000 feet away. VIEWPOINT also supports remote diagnostics via a serial port.
SUNDIAL, introduced in March 1996, enables administrators to control up to
10 Sun Sparc workstations from a single console and, by integrating additional
SUNDIAL switches, can be expanded to provide centralized control of up to 100
workstations. The SUNDIAL switch maintains communications with attached
workstations and, if power is interrupted, the unit's nonvolatile memory helps
restore the system's established settings. The SUNDIAL switch is designed to
work with the OUTLOOK, OUTLOOK(4) and VIEWPOINT switches.
SWITCHBACK, introduced in March 1995, consists of a local unit and a remote
unit that allow users to control the attached server from either a primary
console position or a remote console position linked by a single cable.
Intelligent circuits in SWITCHBACK enable the transmission of high resolution
video up to 500 feet away from the attached servers. The SWITCHBACK system
includes a lock-out feature that prevents system capture. The SWITCHBACK system
can be combined with the OUTLOOK and OUTLOOK(4) switches.
The U.S. list prices of the Company's switching systems as of December 31,
1996 were as set forth below. The list prices of the Company's products have
changed in the past, and the prices set forth below are likely to change in the
future.
<TABLE>
<CAPTION>
PRODUCT U.S. LIST PRICE
- -------------------------------------- ---------------
<S> <C>
OUTLOOK (4 PORT) $839
OUTLOOK (8 PORT) $995
OUTLOOK(4) $3,725
VIEWPOINT (DEPENDING ON CONFIGURATION) $12,000-$44,000
SUNDIAL $1,929
SWITCHBACK $895
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
The Company's current switching products are described in the table below:
<S> <C> <C>
PRODUCT NAME KEY FEATURES BENEFITS
OutLook - ports: 1 X 4 and 1 X 8 - reduces required space and hardware needs by allowing one
- capacity: 64 servers console to control up to four or eight servers per switch
- multi-platform compatibility
- OSCAR interface - multiple switches can be used to support up to 64 servers
- supports major server platforms
- OSCAR interface permits easy on-screen control of switch
OutLook(4) - ports: 4 X 8 - offers the benefits of OUTLOOK as well as permits up to
- capacity: 64 servers four administrator consoles to control up to eight servers
- multi-platform compatibility
- OSCAR interface
ViewPoint - ports: 16 X 32 - in addition to benefits of OUTLOOK and OUTLOOK(4), allows
- capacity: 256 servers up to 16 network administrator consoles to access up to 32
- 1000 ft. extension servers
- multi-platform compatibility - administrator consoles can be up to 1000 ft. away from
- OSCAR interface server
SunDial - ports: 1 X 10 - enables control of large Sun Sparc workstation networks
- capacity: 100 servers using a single console
- OSCAR interface - may be combined with OUTLOOK, OUTLOOK(4) and VIEWPOINT
switches
SwitchBack - 500 ft. extension product - allows the addition of a remote console up to 500 feet
away
- remote lock-out feature
- may be combined with OUTLOOK and OUTLOOK(4) switches
</TABLE>
DENSEPACK CABINET SYSTEMS
DENSEPACK cabinets are specifically designed to house network servers and
communication equipment, improve system administration and facilitate CPU
maintenance. DENSEPACK cabinets are typically customized to meet specific
customer needs and are pre-cabled to allow network administrators to quickly
install hardware and connect to their networks. DENSEPACK cabinets incorporate
the Company's OUTLOOK switching technology, as well as built-in ventilator fans,
large rear doors and optional slide-out shelves to facilitate access to cables,
connectors and servers. The DENSEPACK MODEL RS is a scaled-down version of the
Company's DENSEPACK and is designed for small businesses and stand-alone
departments. The DENSEPACK MODEL RS can be used in combination with full-sized
DensePack cabinets.
CUSTOMERS
To date, a substantial portion of the Company's net sales have been
generated from sales of switches to OEMs for integration into their product
offerings. For 1994, 1995 and 1996, sales to the Company's
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<PAGE>
OEM customers represented approximately 38%, 69% and 71% of the Company's net
sales, respectively. The following is a list of the Company's OEM customers and
representative branded product customers.
<TABLE>
<CAPTION>
OEM CUSTOMERS BRANDED PRODUCT CUSTOMERS
- --------------------------------- --------------------------------------
<S> <C>
Hewlett-Packard Microsoft
Compaq Wells Fargo Bank
Wright Line Owens Corning
Peoplesoft
National Association of Securities
Dealers
Countrywide Home Loans
Visa International
</TABLE>
For 1994, 1995 and 1996, sales to Compaq represented approximately 36%, 54%
and 30%, respectively, of the Company's net sales. In addition, for 1996, sales
to Hewlett-Packard and IBM represented approximately 15% and 18%, respectively,
of the Company's net sales. In 1995, the Company entered into an OEM arrangement
with IBM for the production of an integrated server cabinet system incorporating
the Company's switching products. While the products supplied by the Company met
IBM's requirements, IBM concluded that its program had not achieved desired
results and sought to terminate the program in mid-1996 after the Company had
expended significant product development and operational resources in connection
with this OEM arrangement. Although the Company negotiated a settlement that
covered its direct costs associated with the program, the Company's branded
product development efforts were delayed as a result of the Company's commitment
of substantial product development resources to the IBM program in the third and
fourth quarters of 1995 and the first quarter of 1996. IBM accounted for only 1%
of the Company's net sales in 1995, but accounted for 18% of the Company's net
sales in 1996. The loss or material decline in orders from any of the Company's
current OEM customers would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Fluctuations in Operating Results;--Dependence Upon a Limited Number of
OEM Customers."
The Company's backlog was $9.2 million at December 31, 1996 and $6.0 million
at December 31, 1995. Backlog consists of purchase orders with delivery dates
scheduled within the next six months. None of the Company's customers is
obligated to purchase products from the Company except pursuant to binding
purchase orders. Because of the timing of orders and the possibility of customer
changes to delivery schedules, the Company's backlog as of any particular date
may not be representative of actual sales for any succeeding period.
SALES AND MARKETING
The Company markets and sells its products through an internal sales force
and various distribution channels, including OEM and reseller arrangements. To
date, the Company has marketed its products primarily through advertisements in
trade publications, participation in major industry trade shows and the
Company's home page on the World Wide Web. The Company maintains a sales and
marketing staff of nine employees. The Company's sales personnel process written
and telephonic orders, support existing customers and respond to telephone
inquiries.
The Company currently sells various switching products to Compaq,
Hewlett-Packard and Wright Line pursuant to private label arrangements. These
OEM customers integrate and sell the Company's switches with their own
networking products, including network servers and integrated server cabinets.
The Company devotes significant sales and customer support resources to its OEM
accounts. The Company intends to leverage its significant experience in working
with OEM customers to enter into new relationships with other manufacturers of
servers in the United States and Europe. The Company believes that the
architecture, quality and reliability of its products, together with the
Company's commitment to customer
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<PAGE>
support, are attractive to OEMs. There can, however, be no assurance that the
Company will be successful in its attempts gain additional OEM customers.
The Company has relationships with a variety of resellers, including
distributors, value-added resellers and systems integrators, for the
distribution and sale of Apex branded switching and cabinet products in the
United States. The Company devotes resources to educating its resellers as to
the benefits of the Company's products and training them in the proper
installation and support of the Company's products. The Company's strategy
contemplates devoting additional resources to increase branded sales, and to
that end the Company intends to pursue additional relationships with resellers
in the United States. The Company has focused and expects to continue to focus
on contracting with local and regional resellers who have the technical
capability and market presence to assist end-user customers in developing
network space management and access and control solutions to meet their
particular needs. There can be no assurance that the Company will be successful
in expanding its reseller channel. See "Risk Factors--Risks Relating to
Development of Expanded Reseller Channel."
Compaq, Hewlett-Packard and, the Company believes, many other manufacturers
of servers market and sell their own branded server cabinets. Accordingly, the
Company believes it has limited opportunities to sell its own server cabinets to
new purchasers of servers. Instead, the Company believes that sales of its
server cabinets have been and will continue to be limited primarily to end-user
customers who have a need to more efficiently configure and manage existing
network systems.
To date, the Company's international sales have not been significant. The
Company's strategy is to create an international sales distribution network for
the Company's branded switching products focusing initially on the network
computing market in Europe because of its large installed server base. The
Company is currently shipping its switching systems to OEMs with facilities in
Europe and has hired a representative located in France in order to begin
efforts to build a third party distribution network. There can be no assurance
that the Company will be successful in creating an international distribution
network or successfully market and sell its products in foreign markets. In
addition, if international sales become a more significant component of the
Company's total sales, the Company's business will become more vulnerable to the
risks inherent in doing business on an international level, including the
effects of seasonality, unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in managing foreign
resellers, longer payment cycles and problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates and potentially
adverse tax consequences. See "Risk Factors--Risks Relating to Development of
International Distribution Network and International Sales."
CUSTOMER SUPPORT
The Company emphasizes customer support by developing innovative, high
quality products, encouraging customer feedback through contact with key
customers, and providing a customer hot-line that offers technical support for
the life of the Company's products. The Company's switches have a "plug and
play" design and do not require extensive configuration. The Company seeks to
respond quickly to customers' requests for technical support and service, and
the Company's engineering department often works with individual customers to
troubleshoot problems and develop custom solutions. The Company offers
warranties for parts and service on all of its products. To date, the Company
has not experienced significant product returns. There can be no assurance,
however, that the Company's rate of product returns will not increase or that
the Company's customer support operations will be sufficient to meet the needs
of the Company's customers. In addition, the Company may, as a result of
competitive pressures, change its warranty policies in the future to provide
warranty coverage that is greater in scope and duration than that currently
offered. To the extent that the Company were to increase its warranty coverage,
its risk of warranty claims and therefore its warranty reserves would likely
increase. See "Risk Factors--Product Returns and Warranty Claims; --Increased
Demands on Customer Support Operations."
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<PAGE>
PRODUCT DEVELOPMENT
The Company believes that the continued, timely development of new products
and enhancements to its existing products is essential to maintaining its
competitive position. The market for the Company's switching products in
particular is characterized by rapid technological advances, frequent new
product introductions and enhancements, and significant price competition. The
introduction of products incorporating superior or alternative technologies, the
emergence of new industry standards or changes in the market's pricing structure
could render the Company's existing products and products under development
obsolete or unmarketable. The Company's switching systems combine components,
such as printed circuit boards, connectors, cable assemblies, power supplies and
enclosures, that are manufactured by other companies and are generally available
to the Company's competitors and potential competitors. The Company's future
success will depend in large part upon its continued innovative application of
such commercially available components to the expansion and enhancement of its
existing products and the development and introduction of new products which
address changing customer needs on a cost-effective and timely basis. The
Company's failure to respond on a timely basis to technological developments,
changes in industry standards or customer requirements, or any significant delay
in product development or introduction could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors--Rapid Technological Change; Need for New Product Introductions."
The Company's engineering and product development efforts focus on
responding to the needs of its customers by providing practical, marketable
products that have immediate applications in their markets. By maintaining
contact with customers throughout the installation and technical support
process, the Company is able to identify and test potential design modifications
and improvements as well as new applications and extensions for existing
products. The Company anticipates that this process will enable the development
of new product categories and applications based on existing technology
developed to meet specific customer needs. Many of the Company's products are
designed to accommodate future modifications and additional features, which it
believes facilitates the development and integration of modifications and
features if a market need is perceived.
For 1994, 1995 and 1996, the Company's engineering and product development
expenditures were $278,000, $913,000 and $965,000, respectively. As of December
31 , 1996, the Company's engineering staff consisted of nine employees. To meet
the challenges of the rapidly changing technology in the computer industry, the
Company expects to make substantial investments in product development in the
future.
MANUFACTURING
The Company performs final assembly, quality assurance and testing of its
products. In order to avoid the capital investment required to establish and
maintain in-house manufacturing capabilities, the Company generally relies on
subcontractors in the United States for the assembly of printed circuit board
assemblies, subassemblies, chassis and equipment enclosures. The Company
believes that such assembly can typically be done by subcontractors at a lower
cost than if the Company assembled such items internally. Outsourcing
manufacturing operations allows the Company to concentrate its resources on
research and development, product design, quality assurance, marketing and
customer support. Prior to shipping, the Company subjects its finished products
to quality and regulatory screenings and functional testing to assure quality
and reliability.
The Company relies on various third party manufacturers, including Technical
Services, Inc., for subassembly of the Company's products. These outsourcing
arrangements and any future outsourcing arrangements involve several risks,
including reduced control over product quality, delivery schedules,
manufacturing yields and costs. Moreover, although arrangements with such
manufacturers may contain provisions for warranty obligations on the part of
such manufacturers, the Company remains primarily responsible to its customers
for warranty obligations. See "Risk Factors--Dependence Upon Suppliers and
Outsourced Manufacturing."
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<PAGE>
The Company purchases industry-standard parts and components for the
assembly of its products from multiple vendors and suppliers through a worldwide
sourcing program. No custom integrated circuits are currently used in any
product in production, although custom integrated circuits may be used in the
Company's products in the future. Circuit boards are currently obtained from a
number of sources, including Technical Services, Inc. Certain of the components
for the Company's switching products are available from a limited number of
suppliers. For example, Pioneer Standard Electronics, Inc. supplies the Company
with power supply components, Redmond Cable, Inc. supplies the Company with
cable components and Kent Electronics, Inc. supplies the Company with various
electronic components. In addition, the frames for the Company's server cabinet
systems are obtained from a single source, Everest Electronics Equipment (a
division of Wright Line), and the sheet metal components are purchased locally
from a small number of manufacturers, including Northwest Manufacturing. In the
past, the Company has experienced delays in the receipt of certain of its
switching and cabinet components, which have resulted in delays in related
product deliveries. The Company is attempting to manage such risks by qualifying
alternative sources and maintaining quality relationships and close personal
contact with each of its suppliers. Although the Company believes that there are
adequate alternative sources for its components, there can be no assurance that
delays in component and product deliveries will not occur in the future or that
the Company's reliance on sole or limited sources of supply for its components
will not otherwise adversely affect the Company's business. The inability to
obtain sufficient components as required or to develop alternative sources if
and as required in the future could result in delays or reductions in product
shipments, which, in turn, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Dependence Upon Suppliers and Outsourced Manufacturing."
COMPETITION
The market for the Company's products is highly fragmented and competitive,
and the Company expects competition to increase in the future. In the market for
integrated switching systems, the Company competes with independent third
parties such as Cybex Computer Products Corporation, Raritan Computer Inc., Rose
Electronics, Elsner ComputerTechnik GmbH and StarTech Computer Accessories Ltd.,
many of which have substantially greater financial, marketing and technical
resources than the Company. In addition, certain of the Company's OEM customers,
such as Hewlett-Packard and Compaq, could determine to internally manufacture
switch products or offer those supplied by the Company's competitors. In the
market for server cabinets, the Company competes with a significant number of
regional cabinet manufactures including Zero Stantron Cabinets, Ergotron Inc.,
Rittal Corporation, Hergo Corp. and Engineered Data Products Inc., many of which
have substantially greater financial, marketing and technical resources than the
Company. In addition, Compaq, Hewlett-Packard and Wright Line, all of whom are
OEM customers for certain of the Company's switching products, sell their own
branded integrated server cabinets. The Company's cabinet systems also compete
with other types of lower density, unenclosed technology storage systems.
In the market for integrated switches, the Company competes primarily on the
basis of technological advances, performance in relation to price, quality,
reliability, development capabilities and customer support. In the market for
enclosed server cabinets, the Company competes primarily on the basis of
available product features, quality, reliability, development capabilities and
customer support. In addition, the market for enclosed server cabinets and other
technology storage systems is characterized by intense price competition, and
many of the Company's competitors in this market offer products at significantly
lower price points. The Company's ability to compete successfully in this market
will depend in part upon the Company's ability to continue to differentiate its
cabinet systems from competing products.
The Company's future success will be highly dependent upon timely completion
and introduction of new products and product features at competitive price and
performance levels which address the evolving needs of the Company's customers.
The Company is currently experiencing increased price competition in
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<PAGE>
both the market for stand-alone switching systems and the market for integrated
cabinet systems and expects that pricing pressures will increase in the future.
Increased competition could result in price reduction and loss of market share
which would adversely affect the Company's business, financial condition and
results of operations. See "Risk Factors--Intense Competition."
PROPRIETARY TECHNOLOGY
The Company's future success is dependent in part upon its ability to
protect its proprietary rights in its products. The Company seeks to protect its
intellectual property rights by invoking the benefits of the patent, trademark,
copyright, trade secret and unfair competition laws of the United States, which
afford only limited protection. While the Company has no patents granted, it has
filed a United States patent application and a corresponding application under
the provisions of the Patent Cooperation Treaty (which permits the filing of
corresponding foreign patent applications in numerous foreign countries within a
limited time period) with respect to various aspects of its OUTLOOK and
VIEWPOINT products and its OSCAR interface. There can be no assurance that
patents will issue from any of the Company's pending applications or that any
claims allowed from pending applications will be of sufficient scope or
strength, or be issued in all countries where the Company's products can be
sold, or provide meaningful protection or any commercial advantage to the
Company. Also, competitors of the Company may be able to design around the
Company's patents if any are issued. The laws of certain foreign countries in
which the Company's products are or may be developed, manufactured or sold, may
not protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus increase the likelihood of
piracy of the Company's technology and products. Although the Company is not
aware of any current infringement of its intellectual property rights, or any
violation of its trade secrets, nondisclosure or licensing arrangements, there
can be no assurance that the steps taken by the Company to protect its
intellectual property rights will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
The network server, electronics and related industries are characterized by
vigorous pursuit and protection of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. The Company may from time to time be subject to proceedings alleging
infringement by the Company of intellectual property rights owned by third
parties. If necessary or desirable, the Company may seek licenses under such
intellectual property rights. However, there can be no assurance that licenses
will be offered or that the terms of any offered license will be acceptable to
the Company. The failure to obtain a license from a third party for technology
used by the Company could cause the Company to incur substantial liabilities and
to suspend or cease the manufacture of products requiring such technology.
Further, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event of
an adverse result in any such litigation, the Company could be required to pay
substantial damages, suspend or cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. In the
event that any third party makes a successful claim against the Company or its
customers and a license is not made available to the Company on commercially
reasonable terms, the Company's business, financial condition and results of
operation would be adversely affected.
37
<PAGE>
EMPLOYEES
As of December 31, 1996, the Company employed 53 persons, 15 of whom were in
administration and management, nine of whom were in engineering and product
development, two of whom were in service and technical support, 16 of whom were
in manufacturing and 11 of whom were in sales and marketing. The Company's
employees are not covered by any collective bargaining agreements with respect
to their employment by the Company. The Company believes that its employee
relations are good.
FACILITIES
The Company entered into a three-year lease in March 1995 and occupies
approximately 25,000 square feet in an industrial office building in
Woodinville, Washington. The rent for the Company's facilities is approximately
$18,000 per month plus taxes, insurance and normal maintenance. Although the
Company believes that its facilities are adequate for its current needs, it is
in the process of seeking approximately 11,000-12,000 additional square feet in
the same industrial office building. These additional facilities would increase
monthly rent by approximately $7,000, plus taxes, insurance and normal
maintenance.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Kevin J. Hafer............................. 39 President, Chief Executive Officer and Director
Douglas A. Bevis........................... 51 Vice President, Chief Financial Officer and Secretary
Christopher L. Sirianni.................... 42 Vice President, Sales and Marketing
Sterling Crum.............................. 42 Director
Jeffrey T. Chambers........................ 41 Director
William McAleer............................ 45 Director
Edwin L. Harper............................ 52 Director
</TABLE>
Kevin J. Hafer has been the President of the Company since June 1995, and
has served as the Chief Executive Officer of the Company since December 1995 and
as a Director of the Company since January 1996. From February 1993 to June
1995, Mr. Hafer served as the General Manager of the Company, and from December
1989 to January 1993 he served as the Manager and Technical Operations Director
of the Predecessor. Prior to joining the Company's predecessor, Mr. Hafer was
employed at Harris Corporation from May 1979 to September 1989, serving in
various management capacities.
Douglas A. Bevis has been the Vice President and Chief Financial Officer of
the Company since September 1996, and Secretary since December 1996. From
September 1990 to February 1996, Mr. Bevis was employed at CH2M HILL, Inc., a
national environmental engineering consulting firm, where he served as Vice
President and Treasurer from September 1990 to April 1993 and as Senior Vice
President and Chief Financial Officer from April 1993 to February 1996.
Christopher L. Sirianni has been the Vice President, Sales and Marketing of
the Company since August 1996. From March 1994 to August 1996, Mr. Sirianni
served as the Company's Director of Sales and Marketing. From August 1992 to
February 1994, Mr. Sirianni served as the Director of Sales of Coastal
Manufacturing, a metal fabrication company. Mr. Sirianni served as a
consultant/sales executive for National Precision Bearing, a distributor, from
November 1991 to June 1992. From September 1982 to October 1991, Mr. Sirianni
served in various capacities, including Vice President of Sales and Marketing
for Augat Communications, a telecommunications company.
Sterling Crum has served as a Director of the Company since its inception.
From the Company's inception until June 1995, Mr. Crum served as the Company's
President. From May 1985 to February 1993 Mr. Crum served in various capacities
for the Predecessor, including as President and as Director. In addition, since
November 1993 Mr. Crum has served as President and sole director of Water
Sports, Inc., a water sports recreation company.
Jeffrey T. Chambers has served as a Director of the Company since January
1996. Mr. Chambers has been employed by TA Associates, Inc., a venture capital
firm, or its predecessor, since 1980, has been a partner of affiliated venture
funds since 1984 and is currently a Managing Director of TA Associates, Inc. Mr.
Chambers is also a director of Diamond Multimedia Systems, Inc., McAfee
Associates, Inc. and Technology Solutions Company.
William McAleer has served as a Director of the Company since June 1996. Mr.
McAleer is currently Managing Director of Voyager Capital, which provides
venture financing and advisory services to information technology companies.
From 1988 through 1994, he was Vice President Finance, Chief Financial Officer
and Secretary with Aldus Corporation, a publicly held software company. Prior to
joining Aldus, he
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<PAGE>
was Vice President, Finance and Administration from 1987 to 1988 of Ecova
Corporation and also served as a Vice President with Westin Hotels Company from
1984 through 1987. Mr. McAleer is also a Director of FourGen Software
Technologies, Primus Communications Corporation and Truevision, Inc.
Edwin L. Harper has served as a Director of the Company since October 1996.
Since June 1996 Mr. Harper has served as President and Chief Executive Officer
of SyQuest Technology, a computer hardware company. From July 1993 to June 1996
Mr. Harper was employed as President and Chief Executive Officer of ComByte,
Inc., and from June 1988 to May 1993 Mr. Harper served in various capacities,
including President and Chief Executive Officer, at Colorado Memory Systems,
Inc. Mr. Harper is also a Director of SyQuest Technology and McAfee Associates,
a network security management company.
All members of the Board of Directors are elected to serve until their
respective successors have been elected and qualified or until their earlier
death, resignation or removal in the manner specified in the Company's Bylaws.
The officers are appointed to hold their respective offices until their
respective successors have been elected, or their earlier death, resignation or
removal in the manner specified by the Company's Bylaws.
OTHER KEY EMPLOYEES
In addition to directors and executive officers, the Company has the
following key employees:
Danny L. Beasley has served as the Company's Director of Engineering since
March 1994. From December 1992 to March 1994, Mr. Beasley served as a Research
and Development Engineer for the Company and the Predecessor. Mr. Beasley served
as the Director of Engineering for Spectralogic, Inc., an engineering design and
product development firm, from April 1989 to October 1992.
Stephen J. McCarthy has served as the Company's Director of Product
Development since July 1995. From February 1994 to July 1995, Mr. McCarthy
served as the Company's Research and Development Manager, and from November 1987
to February 1994 he served as the Account Manager for the Company and for the
Predecessor's on-site service division.
COMMITTEES
The Board of Directors has an Audit Committee, currently comprised of
Messrs. McAleer and Chambers, which meets with the Company's independent
auditors and reviews the Company's annual audit, internal controls and financial
management practices. The Board also has a Compensation Committee, currently
comprised of Messrs. Harper, Chambers and Crum, which meets with the Company's
officers and oversees the Company's compensation and benefits practices and
programs.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table summarizes all compensation
earned by the Company's Chief Executive Officer and by the Company's other most
highly compensated executive officer whose total annual salary and bonus
exceeded $100,000 (collectively, the "Named Executive Officers") for services
rendered in all capacities during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------
------------------------ STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------------------------------- --------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Kevin J. Hafer..................................... 1996 $ 157,692 $ 564,707(1) 24,000 $ 9,619(2)
President and Chief Executive Officer
Christopher L. Sirianni............................ 1996 $ 89,123 $ 148,396(3) 132,000 $ 4,456(4)
Vice President, Sales and Marketing
</TABLE>
- ------------------------
(1) Includes $480,000 bonus earned in 1996 and to be paid in 1997.
(2) Represents matching contributions in the aggregate amount of $7,500 made by
the Company in 1996 to its 401(k) Profit Sharing Plan and Trust on behalf of
Mr. Hafer and premium payments in the aggregate amount of $2,119 paid by the
Company in 1996 towards Mr. Hafer's life insurance policy. See "--Employment
Agreement" and "Certain Transactions."
(3) Includes $54,894 bonus earned in 1996 and to be paid in 1997.
(4) Represents matching contributions made by the Company to its 401(k) Profit
Sharing Plan and Trust on behalf of Mr. Sirianni.
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth certain
information with respect to grants to the Named Executive Officers of options to
purchase Common Stock of the Company made during the fiscal year ended December
31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR SHARE DATE
- -------------------------------------------------- ------------------ ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Kevin J. Hafer(2)................................. 24,000 3.8% $ 0.18375 06/10/06
Christopher L. Sirianni(3)........................ 132,000 20.7% $ 0.18375 01/22/06
</TABLE>
- ------------------------
(1) Stock options have an exercise price equal to the fair market value of the
underlying Common Stock on the date of grant. The Company granted options to
purchase an aggregate of 638,000 shares of Common Stock to employees and
non-employee directors in 1996.
(2) Mr. Hafer was granted options to purchase an additional 705,880 shares of
Common Stock in 1995. As of the date of this Prospectus, options to purchase
404,844 shares of Common Stock have vested and been exercised by Mr. Hafer.
Of the remaining 325,036 shares subject to options, options to purchase 666
shares will vest on January 1, 1998. Options to purchase approximately
16,458 shares will vest on the first day of each month from February 1998
through June 1999, and options to purchase approximately 6,372 shares will
vest on the first day of each month from July 1999 through January 2000.
(3) As of the date of this Prospectus, options to purchase 66,000 shares of
Common Stock have vested, of which options to purchase 54,424 shares have
been exercised by Mr. Sirianni. Of the remaining 66,000 shares subject to
options, options to purchase approximately 2,750 shares will vest on the
first day of each month from March 1998 through February 2000.
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<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth information with respect to option
exercises during the fiscal year ended December 31, 1996 by the Named Executive
Officers and 1996 year-end option values.
<TABLE>
<CAPTION>
VALUE
REALIZED NUMBER OF SECURITIES
(MARKET PRICE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF AT EXERCISE OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED LESS EXERCISE END FISCAL YEAR END
NAME ON EXERCISE PRICE) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- -------------------------------- --------------- ------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Kevin J. Hafer.................. 81,296 --(2) 0/325,036 --/$1,971,750
323,548 $ 102,322(3)
Christopher L. Sirianni......... 54,424 $ 17,212(4) 11,576/66,000 $70,223/$400,373
</TABLE>
- ------------------------
(1) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at fiscal year end of $6.25 per share less the exercise price
payable for such shares.
(2) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at February 12, 1996, May 15, 1996, June 1, 1996, July 1, 1996
and August 16, 1996 of $0.18375 per share less the exercise price payable
for such shares.
(3) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at September 1, 1996, October 1, 1996 and October 14, 1996 of
$0.50 per share less the exercise price payable for such shares.
(4) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at October 14, 1996 of $0.50 per share less the exercise price
payable for such shares.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors who are not employees of the
Company currently receive annual cash compensation of $6,000 for their services
as directors. In addition, each of the directors was granted an option in 1996
to purchase 24,000 shares of Common Stock. All directors are reimbursed for
travel and other expenses incurred in attending meetings of the Board of
Directors.
EMPLOYEE STOCK PLAN
The Company's 1995 Employee Stock Plan (the "Employee Stock Plan") was
adopted by the Board of Directors and approved by the shareholders of the
Company in December 1995. The purposes of the Employee Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility in the Company, to provide additional incentives to officers,
employees and non-employee directors of the Company, and to promote the success
of the Company's business.
The Employee Stock Plan provides for the granting to officers and employees
of the Company of options that qualify as "incentive stock options" ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and options that do not so qualify ("NQSOs"). Non-employee
directors of the Company are eligible to receive NQSOs. As of the date of this
Prospectus, all grants of options under the Employee Stock Plan have been NQSOs.
The Employee Stock Plan is currently administered by the Board of Directors,
which has the discretion to determine, among other matters, the persons to whom
options will be granted; the number of shares purchasable upon exercise of each
option; whether options will be ISOs or NQSOs; the purchase price of the shares
issuable pursuant to options (which price for ISOs may not be less than 100% of
the fair market value of the Common Stock, as determined in good faith by the
Board of Directors, on the date the option is granted); and the period during
which each option may be exercised (not to exceed ten years for ISOs). The
purchase price of the shares issued pursuant to each option must be paid, as
determined by the Board of Directors, (i) in cash, (ii) by promissory note,
(iii) by surrender of shares of Common Stock held
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<PAGE>
by the participant or a combination of cash and shares, or (iv) any combination
of the foregoing methods of payment. The aggregate fair market value of the
shares of Common Stock for which ISOs may first be exercisable by a participant
during any one calendar year may not exceed $100,000.
Generally, upon termination of a participant's employment with the Company
by reason of the participant's death or "permanent and total disability" (as
defined in Section 22(e)(3) of the Code), each option held by the participant on
the date of termination shall terminate on the earlier of the fixed expiration
date of such option, or the date that is one year after the date of termination
of employment. Upon termination of a participant's employment with the Company
by reason of disability that is not permanent and total, each option held by the
participant on the date of termination shall terminate on the earlier of the
fixed expiration date of such option, or the date that is ninety (90) days after
the date of termination of employment. Upon termination of a participant's
employment with the Company by any reason other than death or disability, each
option held by the participant on the date of termination shall terminate on the
earlier of the date that is ninety (90) days after the date of termination of
employment, or the fixed expiration date of such option. In the case of Kevin J.
Hafer, the Company's President and Chief Executive Officer, Mr. Hafer continues
to vest in options for a period of one year so long as his termination is
without cause (as defined in his Employment Agreement), and options that vest
within such one-year period must be exercised within ninety (90) days following
the end of such one-year period. See "Certain Transactions."
In the event that the Company enters into an agreement to dispose of all or
substantially all of its assets or if the Company's shareholders dispose or
agree to dispose of 50% or more of the outstanding shares of Common Stock (an
"Acceleration Event"), each outstanding option will be exercisable immediately
preceding such Acceleration Event. Upon consummation of the Acceleration Event,
all outstanding options, whether or not so accelerated, will terminate and cease
to be exercisable, unless assumed by the successor corporation.
In 1996, the Company granted to Messrs. Hafer, Sirianni and Bevis options to
purchase 24,000, 132,000 and 103,000 shares of Common Stock, respectively, and
to each of its non-employee directors, except Mr. Harper, options to purchase
24,000 shares of Common Stock, in all cases at an exercise price of $0.18375 per
share. In 1996, Mr. Harper was granted options to purchase 24,000 shares of
Common Stock at an exercise price of $0.50 per share. In October 1996, the
Company accelerated the vesting of up to 50% of the options previously granted
by the Company to its employees and non-employee directors. In 1996, Messrs.
Hafer, Sirianni, Bevis, Crum, Harper and McAleer exercised options for 404,844,
54,424, 25,748, 12,000, 12,000 and 12,000 shares of Common Stock, respectively.
A total of 2,161,760 shares of Common Stock has been reserved for issuance
under the Employee Stock Plan. As of December 31, 1996, the Company had options
outstanding to purchase an aggregate of 683,864 shares at a weighted average
exercise price of $0.1893 per share pursuant to the Employee Stock Plan. If
options expire without having been exercised, the unused shares revert to the
pool available for future option grants.
EMPLOYMENT AGREEMENT
In December 1995, the Company entered into an Employment Agreement (the
"Employment Agreement") with Mr. Hafer for a term of one year, subject to
automatic one-year renewal thereafter. Under the Employment Agreement, Mr. Hafer
in 1996 was to receive a salary of $160,000 and was eligible to receive certain
bonus payments of up to fifty percent (50%) of his annual salary upon the
achievement by Mr. Hafer and the Company of certain performance objectives.
Pursuant to the Employment Agreement, Mr. Hafer also received a one-time cash
bonus in the aggregate amount of approximately $1.4 million and a one-time stock
bonus of 200,000 shares of the Company's Series B Redeemable Preferred Stock,
which shares were to vest and be redeemed upon the occurrence of certain events,
including the consummation of this offering. Mr. Hafer is entitled under the
Employment Agreement to a quarterly performance bonus of $17,500 in each quarter
that the Company makes the required payments of interest on the Company's Class
A and Class B Subordinated Promissory Notes. Pursuant to the Employment
Agreement, Mr. Hafer was also granted
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<PAGE>
options to purchase 705,880 shares of Common Stock at an exercise price of
$0.18375 per share. If Mr. Hafer is terminated without cause, as defined in the
Employment Agreement, he is entitled to receive his salary, benefits, bonus and
accelerated vesting of his stock options for a period of one year, during which
time and for an additional one year thereafter Mr. Hafer has agreed not to
compete, directly or indirectly, with the Company. See "Certain Transactions."
The Company is obligated to maintain, at its expense, a $1.0 million life
insurance policy on Mr. Hafer's life, payable to his wife or estate (or as
otherwise directed by Mr. Hafer), until all shares of Series B Redeemable
Preferred Stock are redeemed.
In December 1996, the Employment Agreement was amended to accelerate the
vesting of all 200,000 shares of Series B Redeemable Preferred Stock to January
1, 1997, and to require the Company to redeem 80,000 shares on January 1, 1997
for $5.00 per share (an aggregate of $400,000). The balance of the shares will
be redeemed for $5.00 per share upon the consummation of this offering.
401(k) PROFIT SHARING PLAN AND TRUST
In February 1993, the Company established the Apex PC Solutions, Inc. 401(k)
Profit Sharing Plan and Trust (the "401(k) Plan") under Section 401(k) of the
Code. Under the 401(k) Plan, employees may contribute up to $9,500 of their
compensation per year subject to the elective limits as defined by guidelines of
the Internal Revenue Service (the "IRS") and the Company may make matching
contributions in amounts not to exceed 5% of each employee's annual
compensation. The Company's contributions to the 401(k) Plan during the years
ended December 31, 1994, 1995 and 1996 aggregated $19,603, $35,217 and $58,968,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors adopted the Apex PC Solutions, Inc.
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") in December
1996, to be effective upon consummation of this offering. The Employee Stock
Purchase Plan is subject to approval by a majority of the Company's
shareholders. The Employee Stock Purchase Plan will offer 250,000 shares of the
Company's Common Stock for sale to employees at a discount. The Employee Stock
Purchase Plan is designed to comply with Section 423 of the Code and allows
participating employees to gain certain tax advantages, provided the participant
meets certain holding requirements.
All employees, including officers and employee-directors, will be eligible
to participate in the Employee Stock Purchase Plan if they are regularly
scheduled to work 20 or more hours per week, and customarily work for more than
five months each calendar year. Independent contractors (such as non-employee
directors) and consultants not considered Company "employees" for tax purposes
are not eligible to participate. In addition, the Employee Stock Purchase Plan
will exclude any employee who already owns 5% or more of the Company's stock.
Employees will participate by directing the Company to withhold a specified
amount from each of their regular paychecks (in no event more than 10% of pay).
At the end of each calendar quarter, the Company will use each participant's
withholdings to purchase Company Common Stock on behalf of the participant. The
purchase price for each share will be the lesser of (i) 85% of the fair market
value of a share on the first business day of the calendar quarter, or (ii) 85%
of the fair market value of a share on the last business day of the quarter. In
no event may a participant acquire more than $25,000 worth of Company Common
Stock in a calendar year.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Articles of Incorporation limit the
liability of its directors for monetary damages arising from their conduct as
directors, except for liability relating to acts or omissions that involve
intentional misconduct, a knowing violation of law or the authorization of
unlawful distributions, and liability relating to transactions in which the
directors derive a personal benefit to which they are not legally entitled. Such
limitation does not affect the availability of equitable remedies. The Company's
Amended and Restated Articles of Incorporation also provide that the Company
will indemnify its
44
<PAGE>
directors and officers to the fullest extent permitted by Washington law. In
particular, each officer and director of the Company is entitled to
indemnification against all liability, loss and expense reasonably incurred by
such officer or director in connection with any civil, criminal, administrative
or investigative proceeding in which he or she is involved (whether in his or
her official capacity or otherwise) by reason of the fact that he or she is or
was serving as an officer or director of the Company. Washington law currently
provides that a corporation may indemnify an officer or director against
liability if the individual acted in good faith and, in the case of a
non-criminal proceeding, if such individual reasonably believed he or she was
acting in the best interests of the corporation, or, in the case of a criminal
proceeding, if such individual had no reasonable cause to believe his or her
conduct was unlawful. In the case of a proceeding against an officer or director
brought by or on behalf of the corporation, Washington law does not permit a
corporation to indemnify an officer or director if he or she is found liable in
such proceeding. In all other proceedings, indemnification is not permitted
where the officer or director is found liable on the basis that he or she
improperly received a personal benefit. The Company maintains directors' and
officers' insurance. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
The Company operated as a division of Apex Computer Company through January
1993. In February 1993, the assets and liabilities of that division were spun
off as a dividend to Sterling Crum, who contributed those assets and liabilities
to the Company as its initial capitalization in return for the issuance by the
Company of 8.0 million shares of Common Stock. At that time, the assets were
valued by Mr. Crum, who was the sole director of the Company, at approximately
$776,000, and the liabilities were valued at approximately $189,000, for a net
value of approximately $587,000.
During 1994 and 1995, Mr. Crum advanced funds (by foregoing distributions)
for the operation of the Company in exchange for unsecured promissory notes
totaling approximately $225,000 for 1994 and $4.6 million for 1995. All of these
notes bore interest at the rate of 12% per annum except for two notes totaling
approximately $270,000 that bore interest at a rate equal to 100% of the
discounts taken by the Company for its early payments to suppliers (the "Net-10
Notes"). All principal and accrued and unpaid interest under these notes was
paid at or shortly after the closing of the Leveraged Recapitalization. At the
time of repayment, accrued interest on these notes (other than the Net-10 Notes)
totaled approximately $112,000, and accrued interest on the two Net-10 Notes
totaled less than $20,000.
During 1994 and 1995 when the Company was an S Corporation, the Company
distributed $792,279 and $992,815, respectively, to Mr. Crum as dividends. In
1993 and 1994 Mr. Crum received $101,534 and $3,000, respectively, as
compensation.
In December 1995, the Company sold to several entities affiliated with TA
Associates, Inc. (the "TA Group") 1.6 million shares of Common Stock at a price
of $0.18375 per share, 300,000 shares of Series A Redeemable and Convertible
Preferred Stock at a price of $7.35 per share, and $10.0 million in aggregate
principal amount of Class A Subordinated Promissory Notes, for an aggregate
purchase price of approximately $12.5 million. Jeffrey T. Chambers, a director
of the Company, is a Managing Director of TA Associates, Inc. The shares of
Series A Redeemable and Convertible Preferred Stock issued to the TA Group will
convert into 2.4 million shares of Common Stock upon the closing of this
offering. The Class A Subordinated Promissory Notes issued to the TA Group
provide for the quarterly payment of interest at 7% per annum, and the repayment
of the principal amount and any accrued and unpaid interest upon consummation of
certain "Qualified Liquidity Events," which include this offering. See "Use of
Proceeds." In connection with the Leveraged Recapitalization, the Company, the
TA Group, Sterling Crum, Kevin J. Hafer, the Chief Executive Officer and a
director of the Company, and Britannia Holdings Limited
45
<PAGE>
("Britannia"), a major shareholder of the Company, entered into a Shareholders'
Agreement pursuant to which, among other things, the TA Group was granted
certain preemptive rights, co-sale rights and rights of refusal on transfers of
shares by the other shareholder parties, and the Company granted the TA Group
certain registration rights pursuant to a Registration Rights Agreement. See
"Description of Capital Stock--Registration Rights." The Shareholders' Agreement
will terminate by its terms upon consummation of this offering.
In connection with the Leveraged Recapitalization, the Company redeemed from
Britannia 4.0 million shares of Common Stock for an aggregate price of
approximately $22.5 million, consisting of cash in the amount of $12.5 million
and the Class B Subordinated Promissory Note in the aggregate principal amount
of $10.0 million. The Class B Subordinated Promissory Note issued to Britannia
provides for the quarterly payment of interest at 7% per annum and the repayment
of the principal amount and any accrued and unpaid interest on the consummation
of certain "Qualified Liquidity Events," which include this offering. See "Use
of Proceeds." Of the approximately $12.5 million payable to Britannia, $2.5
million was placed in escrow by the Company to secure certain representations
and warranties made to the TA Group by the Company, Sterling Crum, the Company's
founder and a director, and Britannia in connection with the Venture
Transaction. This escrow arrangement will expire on the 30th day after audited
financial statements for the year ended December 31, 1996 are provided to the TA
Group.
Simultaneously with the Leveraged Recapitalization, Mr. Crum entered into an
S Corporation Indemnification Agreement with the Company indemnifying the
Company from and against any federal or state income tax liability resulting
from the Company's failure to qualify as an S Corporation under Internal Revenue
Code Section 1361(a)(1) for any taxable year ending or prior to October 31,
1995, the date on which the Company's status as an S Corporation was terminated.
In connection with the Leveraged Recapitalization, Kevin J. Hafer, the
Company's President and Chief Executive Officer, entered into an Employment
Agreement with the Company for calendar year 1996, subject to automatic one-year
renewals thereafter. See "Management--Employment Agreement." Pursuant to the
Employment Agreement, Mr. Hafer received, among other things, 200,000 shares of
nonvoting Series B Redeemable Preferred Stock. In December 1996, the Employment
Agreement was amended so that the Series B Redeemable Preferred Stock vested in
Mr. Hafer on January 1, 1997, and the Company was obligated to redeem 80,000 of
such shares on January 1, 1997 for $5.00 per share and to redeem the remaining
120,000 shares for $5.00 per share upon a "Qualified Public Offering," including
this offering. The Company is obligated to maintain, at its expense, a $1.0
million life insurance policy on Mr. Hafer's life, payable to his wife or estate
(or as otherwise directed by Mr. Hafer), until all shares of Series B Redeemable
Preferred Stock are redeemed.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of December 31, 1996, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby,
certain information with respect to the ownership of the Common Stock of the
Company (or shares of Common Stock into which the Company's Series A Redeemable
and Convertible Preferred Stock is convertible) by (i) each person (or group of
affiliated persons) known by the Company to be the beneficial owner of more than
5% of the Company's outstanding Common Stock, (ii) each director of the Company,
(iii) each of the Company's executive officers named under
"Management--Executive Officers and Directors" and (iv) all executive officers
and directors of the Company as a group. Unless otherwise noted, each person or
group identified possesses sole voting and investment power with respect to such
shares, subject to community property laws, where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- -------------------------
NAME OF BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE
- ---------------------------------------------------------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Sterling Crum(2)................................................ 4,012,000 46.3% 4,012,000 33.0%
TA Group(3) .................................................... 4,000,000 46.2 4,000,000 32.9
c/o TA Associates, Inc.
125 High Street
High Street Tower, Suite 2500
Boston, MA 02110
Britannia Holdings Limited(4) .................................. 2,800,000 32.3 2,800,000 23.0
P.O. Box 556
Main Street
Charleston, Nevis
Kevin J. Hafer(5)............................................... 404,844 4.7 404,844 3.3
Christopher L. Sirianni(6)...................................... 66,000 * 66,000 *
Douglas A. Bevis(7)............................................. 25,750 * 25,750 *
Jeffrey T. Chambers(8).......................................... 17,032 * 17,032 *
William McAleer................................................. 12,000 * 12,000 *
Edwin L. Harper................................................. 12,000 * 12,000 *
All directors and executive officers as a group (7
persons)(9)................................................... 4,549,626 52.4% 4,549,626 37.3%
</TABLE>
- ------------------------
* Less than 1%.
(1) Except as set forth herein the address of the directors and executive
officers set forth in the table is the address of the Company appearing
elsewhere in this Prospectus.
(2) Includes 2,800,000 shares beneficially owned by Britannia Holdings Limited,
whose sole shareholder is The Duvall Trust, an irrevocable trust for the
benefit of Mr. Crum and certain members of his family. Mr. Crum disclaims
beneficial ownership with respect to all of such 2,800,000 shares. See Note
(4) below.
(3) Includes (i) 2,400,976 shares of Common Stock owned by Advent VII L.P., (ii)
1,317,040 shares of Common Stock owned by Advent Atlantic and Pacific II
L.P., (iii) 240,104 shares of Common Stock owned by Advent New York L.P. and
(iv) 41,880 shares of Common Stock owned by TA Venture Investors Limited
Partnership. Advent VII L.P., Advent Atlantic and Pacific II L.P., Advent
New York L.P. and TA Venture Investors Limited Partnership are part of an
affiliated group of investment partnerships referred to, collectively, as
the TA Group. The general partner of Advent VII L.P. is TA
47
<PAGE>
Associates VII L.P. The general partner of Advent Atlantic and Pacific II
L.P. is TA Associates AAP II Partners L.P. The general partner of Advent New
York L.P. is TA Associates VI L.P. The general partner of each of TA
Associates VII L.P., TA Associates AAP II Partners L.P. and TA Associates VI
L.P. is TA Associates, Inc. In such capacity, TA Associates, Inc. exercises
sole voting and investment power with respect to all of the shares held of
record by the named investment partnerships, with the exception of those
shares held by TA Venture Investors Limited Partnership; individually, no
stockholder, director or officer of TA Associates, Inc. is deemed to have or
share such voting or investment power. Principals and employees of TA
Associates, Inc. (including Mr. Chambers, a director of the Company)
comprise the general partners of TA Venture Investors Limited Partnership.
In such capacity, Mr. Chambers may be deemed to share voting and investment
power with respect to the 41,880 shares of Common Stock held of record by TA
Venture Investors Limited Partnership. Mr. Chambers disclaims beneficial
ownership of such shares, except to the extent of the 5,032 shares as to
which he holds a pecuniary interest. If the Underwriters' over-allotment
option is exercised in full, collectively the TA Group will sell 226,000
shares of Common Stock and after this offering will beneficially own
3,774,000 shares or 31.0% of the total number of shares of Common Stock
outstanding.
(4) If the Underwriters' over-allotment option is exercised in full, Britannia
will sell 226,000 shares of Common Stock and after this offering will
beneficially own 2,574,000 shares or 21.2% of the total number of shares of
Common Stock outstanding.
(5) If the Underwriters' over-allotment option is exercised in full, Mr. Hafer
will sell 73,000 shares of Common Stock and after this offering will
beneficially own 331,844 shares or 2.7% of the total number of shares of
Common Stock outstanding.
(6) Includes 11,576 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share.
(7) Includes 2 shares of Common Stock issuable upon exercise of stock options
currently exercisable at $0.18375 per share.
(8) Includes 12,000 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share and 5,032 shares
beneficially owned by Mr. Chambers through TA Venture Investors Limited
Partnership, of which the 5,032 shares beneficially owned by Mr. Chambers
through TA Venture Investors Limited Partnership are included in the
4,000,000 shares described in Note (3) above. Does not include any shares
beneficially owned by Advent VII L.P., Advent Atlantic and Pacific II L.P.
or Advent New York L.P., of which Mr. Chambers disclaims beneficial
ownership.
(9) Includes 23,576 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share. Also includes 2,800,000
shares held by Britannia. See Notes (2), (6) and (7) above. If the
Underwriters' over-allotment option is exercised in full, all directors and
executive officers of the Company as a group will beneficially own 4,250,626
shares or 34.9% of the total number of shares of Common Stock outstanding
after this offering.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, no par value, and
1,000,000 shares of Preferred Stock, no par value.
COMMON STOCK
As of December 31, 1996, there were 8,660,016 shares of Common Stock
outstanding and held of record by 17 shareholders, after giving effect to the
conversion of all outstanding shares of Series A Redeemable and Convertible
Preferred Stock. Based upon such number of shares deemed outstanding as of that
date and giving effect to the issuance of the 3,500,000 shares of Common Stock
offered hereby, there will be 12,160,016 shares outstanding upon the
consummation of this offering.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the shareholders and do not
have cumulative voting rights. Subject to the preferences that may be applicable
to any outstanding shares of Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors of the Company out of funds legally available
therefor. All outstanding shares of Common Stock are, and the shares to be sold
in the offering when issued and paid for will be, fully paid and nonassessable.
In the event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after payment or provision for payment of all of the
Company's debts and obligations and liquidation payments to holders of
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to 1,000,000 shares of the Preferred Stock in one or more series. Each
series of Preferred Stock shall have such designations, preferences, powers and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof as the Board of Directors shall determine. The
preferences, powers, rights and restrictions of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for dis-tribution to holders of Common Stock or
affect adversely the rights and powers, including voting rights, of the holders
of Common Stock, and may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan or intent to
issue any shares of Preferred Stock. Upon consummation of this offering, there
will be no shares of Preferred Stock outstanding.
REGISTRATION RIGHTS
One hundred eighty (180) days after the closing of this offering, the
holders ("Holders") of an aggregate of approximately 4,000,000 shares of Common
Stock (3,774,000 if the Underwriters' over-allotment option is exercised in
full) (the "Registrable Shares") are entitled to certain rights with respect to
the registration of such shares for offer and sale to the public under the
Securities Act. Under these provisions, the Holders of at least 40% of the
Registrable Shares may request that the Company file up to two registration
statements under the Securities Act with respect to such shares. Upon receipt of
such a request, the Company is required to notify all other Holders and to use
all reasonable efforts to effect such registration, subject to certain
conditions. In addition, upon the request of holders of at least 20% of the
Registrable Shares, the Company may be required to effect an unlimited number of
registrations on Form S-3. Further, whenever the Company proposes to register
any of its securities under the Securities Act for its own account or for the
account of other security holders, the Company is required to notify each
49
<PAGE>
Holder of the proposed registration and include all Registrable Shares which
such Holder may request to be included in such registration, subject to certain
limitations. The Company has obtained a waiver of these rights to the extent
they would have applied to this offering. Generally, the Company is required to
bear all expenses (except underwriting discounts, selling commissions and stock
transfer taxes) of all registrations.
ANTITAKEOVER PROVISIONS
STATUTORY PROVISIONS. Washington law contains certain provisions that may
have the effect of delaying, deterring or preventing a change in control of the
Company. Chapter 23B.17 of the Washington Business Corporation Act (the "WBCA")
prohibits, subject to certain exceptions, a merger, sale of assets or
liquidation of the Company involving an "interested shareholder" (defined as a
person who owns beneficially 20% or more of the Company's voting securities)
unless the transaction is determined to be at a "fair price" or otherwise
approved by a majority of the Company's disinterested directors or is approved
by holders of two-thirds of the Company's outstanding voting securities, other
than those held by the interested shareholder. A Washington corporation may, in
its articles of incorporation, exempt itself from coverage of this provision,
but the Company has not done so. In addition, Chapter 23B.19 of the WBCA
prohibits the Company, with certain exceptions, from engaging in certain
significant business transactions with an "acquiring person" (defined as a
person who acquires 10% or more of the Company's voting securities without the
prior approval of the Company's Board of Directors) for a period of five years
after such acquisition. If the Company moves its principal executive offices
outside Washington State or if neither a majority nor 1,000 of the Company's
employees are residents of Washington State, the protections afforded by Chapter
23B.19 would no longer be available. The prohibited transactions include, among
others, a merger with, disposition of assets to, or issuance or redemption of
stock to or from, the acquiring person, or otherwise allowing the acquiring
person to receive any disproportionate benefit as a shareholder. The Leveraged
Recapitalization pursuant to which the TA Group became a greater-than-10%
shareholder was approved by the Company's Board of Directors, and as a result
the TA Group is not considered an "acquiring person" for purposes of Chapter
23B.19. The Company may not exempt itself from coverage of this statue. These
statutory provisions may have the effect of delaying, deterring or preventing a
change in control of the Company.
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS. The Company's Articles of
Incorporation authorize the Board of Directors to issue up to 1,000,000 shares
of Preferred Stock with such rights and preferences as the Board of Directors
may determine. The issuance of such shares may have the effect of delaying,
deterring or preventing a change in control of the Company. See "--Preferred
Stock."
The Articles of Incorporation provide that holders of the Company's voting
securities are not entitled to cumulate votes in the election of directors. As a
result, holders of a majority of the Company's voting securities may elect the
entire Board of Directors, subject to the voting rights of holders of Preferred
Stock. See "--Common Stock."
In addition, the Company's Amended and Restated Bylaws provide that
shareholders may not raise new matters or nominate directors at a meeting of
shareholders unless certain advance notice requirements are satisfied.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 12,160,016 shares of
Common Stock outstanding. Of these shares, all of the 3,500,000 shares sold in
the offering (4,025,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or
50
<PAGE>
further registration under the Securities Act, unless acquired by an "affiliate"
of the Company as that term is defined in Rule 144 ("Rule 144") under the
Securities Act, which shares will then be subject to the resale limitations of
Rule 144 described below. The remaining 8,660,016 shares (8,135,016 shares if
the Underwriters' over-allotment option is exercised in full) will be
"restricted securities" within the meaning of Rule 144.
Approximately 1,860,016 Restricted Shares (including 660,016 Restricted
Shares issued pursuant to Rule 701 of the Securities Act) will become eligible
for sale in the public market upon the expiration of lock-up agreements between
the Underwriters and the holders of such shares 180 days after the date of this
Prospectus, subject to compliance with certain provisions of Rule 144. The
remaining Restricted Shares will become eligible for resale under Rule 144 at
various times in 1997 and 1998. In addition, beginning 180 days after the date
of this Prospectus, the holders of 4,000,000 shares of Common Stock may require
that a portion of such shares be registered under the Securities Act. See
"Description of Capital Stock--Registration Rights."
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned for at least two years shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company who have acquired the shares in registered
transactions, will be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the outstanding shares of
the Common Stock (approximately 121,600 shares immediately after completion of
the offering); or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements relating to the manner and notice of sale
and the availability of current public information about the Company.
The Company and the holders of all of its outstanding securities have agreed
with the Underwriters not to offer, sell or otherwise dispose of any shares of
Common Stock or securities convertible into or exercisable or exchangeable for
such shares for a period of 180 days after the date of this offering without the
prior written consent of Montgomery Securities, except that the Company, without
such consent, may grant options or issue stock upon exercise of new or
outstanding options pursuant to the Employee Stock Plan.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding period restrictions, in each case commencing
upon the expiration of lock-up agreements between the Underwriters and the
holders of such shares 180 days after the date of this Prospectus.
The Company has reserved 2,161,760 shares of Common Stock for issuance under
the Employee Stock Plan and 250,000 shares of Common Stock for issuance under
the Employee Stock Purchase Plan. At appropriate times subsequent to completion
of the offering, the Company intends to file registration statements under the
Securities Act to register the Common Stock to be issued under the Employee
Stock Plan and the Employee Stock Purchase Plan. After the effective date of
such registration statements, shares issued under the Employee Stock Plan and
the Employee Stock Purchase Plan will be freely tradeable without restriction or
further registration under the Securities Act, unless acquired by affiliates of
the Company.
Prior to this offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales of
shares of the Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after the offering. Sales of substantial
amounts of Common Stock in the public market following the offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock or the ability of the Company to raise capital through sales of
its equity securities. See "Risk Factors--Shares Eligible for Future Sale."
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<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Montgomery
Securities and Dain Bosworth Incorporated (together, the "Representatives") have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Montgomery Securities.....................................................................
Dain Bosworth Incorporated................................................................
------------
Total............................................................................... 3,500,000
------------
------------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After this offering, the offering
price and other selling terms may be changed by the Representatives. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Selling Shareholders have granted the Underwriters an option exercisable
during the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 525,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 3,500,000 shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
over-allotment option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table.
The Company and the holders of all of its outstanding securities have agreed
that, for a period of 180 days following the date of this Prospectus, they will
not, without the prior written consent of Montgomery Securities, offer, sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock, except that
the Company, without such consent, may grant options or issue stock upon
exercise of new or outstanding options pursuant to the Employee Stock Plan.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock will
be determined by negotiations between the Company and the Representatives. Among
the factors to be considered in determining the initial public offering price of
the Common Stock are prevailing market conditions, the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the
52
<PAGE>
Company's management and the consideration of the above factors in relation to
market valuations of companies in related businesses.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the offering, including
liabilities under the Securities Act, or will contribute to payments that the
Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Davis Wright Tremaine LLP, Seattle, Washington. Certain
legal matters relating to this offering will be passed upon for the Underwriters
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
The balance sheets as of December 31, 1995 and 1996 and the statements of
operations, changes in shareholders' equity (deficit) and cash flows for the
years ended December 31, 1994, 1995 and 1996 included in this Prospectus have
been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form SB-2 (together with
any amendments thereto, the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") under the Securities Act with respect to
the Common Stock. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement and
reference is made to the Registration Statement and the exhibits and schedules
thereto for further information with respect to the Company and the Common Stock
offered hereby. This Prospectus contains summaries of the material terms and
provisions of certain documents and in each instance reference is made to the
copy of such document filed as an exhibit to the Registration Statement. Each
such summary is qualified in its entirety by such reference.
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by the Company with the
Commission may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York, and Chicago, Illinois, at prescribed rates.
The Registration Statement and such exhibits and schedules are also available at
the Commission's Web site (http://www.sec.gov).
Upon completion of the offering, the Company will be subject to the
informational reporting requirements of the Exchange Act and, in accordance
therewith, will file reports, proxy statements and other information with the
Commission. The Company intends to furnish to its shareholders annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
53
<PAGE>
APEX PC SOLUTIONS, INC.
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<PAGE>
APEX PC SOLUTIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Report of Independent Accountants................................................................... F-2
Financial Statements:
Balance Sheets.................................................................................... F-3
Statements of Operations.......................................................................... F-4
Statement of Changes in Shareholders' Equity (Deficit)............................................ F-5
Statements of Cash Flows.......................................................................... F-6
Notes to Financial Statements..................................................................... F-7 - F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Apex PC Solutions, Inc.
We have audited the accompanying balance sheets of Apex PC Solutions, Inc.
(the "Company") as of December 31, 1995 and 1996 and the related statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Apex PC Solutions, Inc. as
of December 31, 1995 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Seattle, Washington
January 17, 1997
F-2
<PAGE>
APEX PC SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 2,676,290 $ 2,118,887
Accounts receivable, net of allowance for doubtful accounts.......................... 4,499,404 6,170,193
Inventories.......................................................................... 1,257,772 1,653,011
Prepaid expenses..................................................................... 124,047 130,218
Deferred tax assets.................................................................. 60,000 800,700
----------- -----------
Total current assets............................................................... 8,617,513 10,873,009
----------- -----------
Property and equipment, at cost:
Leasehold improvements............................................................... -- 4,677
Furniture and office equipment....................................................... 125,846 273,831
Computer and other equipment......................................................... 159,330 380,334
----------- -----------
285,176 658,842
Less accumulated depreciation........................................................ 86,089 195,959
----------- -----------
199,087 462,883
----------- -----------
Other assets........................................................................... 231,400 617,255
----------- -----------
$ 9,048,000 $11,953,147
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt.................................................... $ 674,125 $ 504,349
Accounts payable..................................................................... 930,265 530,525
Accrued wages and commissions........................................................ 1,739,703 554,352
Accrued warranty costs............................................................... -- 630,000
Other accrued expenses............................................................... 343,337 282,040
Deferred revenue..................................................................... 280,302 --
----------- -----------
Total current liabilities.......................................................... 3,967,732 2,501,266
Subordinated debt.................................................................... 20,000,000 20,000,000
Long-term debt, less current portion................................................. 5,614,988 5,110,549
Deferred taxes....................................................................... 8,000 16,500
----------- -----------
Total liabilities.................................................................... 29,590,720 27,628,315
----------- -----------
Commitments and contingencies
Preferred stock, Series A redeemable and convertible, no par value, 300,000 shares
authorized, issued and outstanding................................................. 2,205,000 2,205,000
Preferred stock, Series B redeemable, no par value; 200,000 shares authorized, issued
and outstanding.................................................................... 1,000,000 1,000,000
----------- -----------
Shareholders' equity (deficit:)
Preferred stock, 100,000 shares authorized, no shares issued and outstanding
Common stock, no par value; 10,000,000 shares authorized; 5,600,000 and 6,260,016
shares issued and outstanding........................................................ 295,000 648,260
Deferred compensation................................................................ (1,000,000) (93,431)
Accumulated deficit.................................................................. (23,042,720) (19,434,997)
----------- -----------
Total shareholders' equity (deficit)................................................. (23,747,720) (18,880,168)
----------- -----------
Total liabilities and shareholders' equity (deficit)................................. $ 9,048,000 $11,953,147
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net sales............................................................ $ 7,310,565 $ 19,670,619 $ 33,621,936
Cost of sales........................................................ 4,493,275 10,635,672 19,238,965
------------ ------------- -------------
Gross profit..................................................... 2,817,290 9,034,947 14,382,971
------------ ------------- -------------
Research and development............................................. 277,878 913,027 965,030
Sales and marketing.................................................. 370,264 1,631,075 2,481,356
General and administrative........................................... 1,235,657 2,753,763 3,608,897
------------ ------------- -------------
Total operating expenses......................................... 1,883,799 5,297,865 7,055,283
------------ ------------- -------------
Income from operations........................................... 933,491 3,737,082 7,327,688
------------ ------------- -------------
Interest income (expense), net....................................... 7,023 (186,302) (1,859,170)
------------ ------------- -------------
Income from continuing operations before income taxes................ 940,514 3,550,780 5,468,518
Benefit (provision) for income taxes................................. -- 52,000 (1,860,795)
------------ ------------- -------------
Income from continuing operations................................ 940,514 3,602,780 3,607,723
Discontinued operations:
Income from discontinued service operations........................ 601,064 -- --
------------ ------------- -------------
Net income....................................................... $ 1,541,578 $ 3,602,780 $ 3,607,723
------------ ------------- -------------
------------ ------------- -------------
Pro forma data (Note 1):
Historical net income.............................................. $ 1,541,578 $ 3,550,780 $ 5,468,518
Pro forma provision for income taxes............................... 524,137 1,207,265 1,860,795
------------ ------------- -------------
Pro forma net income............................................... $ 1,017,441 $ 2,343,515 $ 3,607,723
------------ ------------- -------------
------------ ------------- -------------
Pro forma income per share......................................... $ 0.20 $ 0.40
------------- -------------
------------- -------------
Weighted average shares used in computing pro forma net income per
share............................................................ 11,519,527 9,119,527
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
-------------------------- DEFERRED EARNINGS
SHARES AMOUNT COMPENSATION (DEFICIT) TOTAL
----------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994................... 8,000,000 586,075 -- 371,108 957,183
Net income.................................. -- -- -- 1,541,578 1,541,578
Distribution to shareholder................. -- -- -- (1,037,124) (1,037,124)
----------- ------------- ------------- -------------- --------------
Balances, December 31, 1994................. 8,000,000 586,075 -- 875,562 1,461,637
Net income.................................. -- -- -- 3,602,780 3,602,780
Distributions (cash and notes) to
shareholder............................... -- (585,075) -- (5,022,062) (5,607,137)
Deferred compensation related to issuance of
Series B redeemable preferred stock....... -- -- (1,000,000) -- (1,000,000)
Issuance of common stock.................... 1,600,000 294,000 -- -- 294,000
Redemption of common stock.................. (4,000,000) -- -- (22,499,000) (22,499,000)
----------- ------------- ------------- -------------- --------------
Balances, December 31, 1995................. 5,600,000 295,000 (1,000,000) (23,042,720) (23,747,720)
Net income.................................. -- -- -- 3,607,723 3,607,723
Issuance of common stock options............ -- 170,574 (170,574) -- --
Tax benefit of common stock options
exercised................................. -- 56,002 -- -- 56,002
Exercise of common stock options............ 660,016 126,684 -- -- 126,684
Amortization of deferred
compensation.............................. -- -- 1,077,143 -- 1,077,143
----------- ------------- ------------- -------------- --------------
Balances, December 31, 1996................. 6,260,016 $ 648,260 $ (93,431) $ (19,434,997) $ (18,880,168)
----------- ------------- ------------- -------------- --------------
----------- ------------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................. $1,541,578 $3,602,780 $3,607,723
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 43,530 60,288 154,225
Amortization of deferred compensation.................................... -- -- 1,077,143
Loss on disposal of equipment............................................ 2,583 10,614 --
Deferred taxes........................................................... -- (52,000) (732,200)
Tax benefit of common stock options exercised............................ -- -- 56,002
Provision for obsolete and slow moving inventory......................... -- -- 215,000
Provision for doubtful accounts.......................................... -- 30,000 305,893
Changes in:
Accounts receivable.................................................... (163,136) (3,052,603) (1,976,682)
Inventories............................................................ (197,083) (919,748) (610,239)
Prepaid expenses....................................................... (45,346) (71,579) (6,171)
Other assets........................................................... -- (10,922) (69,231)
Accounts payable....................................................... 294,061 543,079 (399,740)
Accrued wages and commissions.......................................... 19,796 1,592,713 (1,185,351)
Accrued warranty costs................................................. -- -- 630,000
Other accrued expenses................................................. (52,495) 226,028 (61,297)
Deferred revenue....................................................... -- 280,302 (280,302)
--------- ---------- ---------
Total adjustments.................................................... (98,090) (1,363,828) (2,882,950)
--------- ---------- ---------
Net cash provided by operating activities............................ 1,443,488 2,238,952 724,773
--------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment............................................ 1,839 -- --
Purchases of equipment..................................................... (25,718) (166,217) (373,666)
--------- ---------- ---------
Net cash used in investing activities................................ (23,879) (166,217) (373,666)
--------- ---------- ---------
Cash flows from financing activities:
Distributions paid......................................................... (792,279) (992,815) --
Principal payments on notes to shareholder................................. (249,845) (4,569,322) (270,000)
Proceeds from the issuance of long-term debt............................... -- 16,000,000 --
Payment of long-term debt.................................................. -- (1,347) (404,215)
Payment of loan fees....................................................... -- (220,478) (45,000)
Proceeds from issuance of Series A redeemable and convertible preferred
stock.................................................................... 2,205,000 --
Proceeds from issuance of common stock and exercise of common stock
options.................................................................. -- 294,000 126,684
Payment of deferred offering costs......................................... -- (315,979)
Redemption of common stock................................................. -- (12,499,000) --
--------- ---------- ---------
Net cash provided by (used in) financing activities.................. (1,042,124) 216,038 (908,510)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents......................... 377,485 2,288,773 (557,403)
Cash and cash equivalents at beginning of period............................. 10,032 387,517 2,676,290
--------- ---------- ---------
Cash and cash equivalents at end of period................................... $ 387,517 $2,676,290 $2,118,887
--------- ---------- ---------
--------- ---------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest..................................... $ 23,295 $ 186,817 $1,912,583
--------- ---------- ---------
--------- ---------- ---------
Cash paid for Federal income taxes......................................... $ -- $ -- $2,531,962
--------- ---------- ---------
--------- ---------- ---------
Equipment obtained through capital lease................................... $ -- $ 20,460 $ --
--------- ---------- ---------
--------- ---------- ---------
Distributions to shareholder evidenced by notes payable.................... $ 244,845 $4,614,322 $ --
--------- ---------- ---------
--------- ---------- ---------
Redemption of common stock evidenced by note payable....................... $ -- $10,000,000 $ --
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Apex PC Solutions, Inc. (the "Company") was incorporated in December 1992.
Through January of 1993, the Company operated as a division of another entity
owned by the Company's shareholder. In February 1993, $586,075 in net assets
were spun off from the related entity and represent the Company's initial
capitalization. The predecessor bases of assets and liabilities contributed in
the initial capitalization and recorded as contributed capital (common stock)
were as follows:
<TABLE>
<S> <C>
Cash............................................................. $ 131,200
Accounts receivable.............................................. 410,340
Inventories...................................................... 165,938
Plant and equipment.............................................. 68,044
Accounts payable................................................. (143,472)
Accrued liabilities.............................................. (45,975)
---------
$ 586,075
---------
---------
</TABLE>
The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company's switching systems enable client/ server network administrators to
manage multiple servers from a single keyboard, monitor and mouse configuration,
facilitating more efficient network management and administration. The Company
purchases material component parts for the manufacture of switching systems and
integrated server cabinets from domestic suppliers, and generally contracts with
third parties for the subassembly of products.
RECAPITALIZATION OF THE COMPANY
During 1995, the Company was recapitalized through a series of transactions
whereby a portion of the interest of one of its shareholders was redeemed for
cash and a note. Concurrently, new shareholders purchased shares of common and
preferred stock and provided additional financing to the Company. Immediately
prior to the recapitalization, the Company declared dividends to the shareholder
of $992,815 (including redemption of common stock with a basis of $585,075). The
significant components of the leveraged recapitalization were as follows:
The Company split its common stock 1000 shares for 1.
A shareholder of the Company received $4,569,322 from the Company for
repayments of existing notes.
The Company redeemed 4,000,000 shares (adjusted for all stock splits)
from a shareholder through payment of $12,499,000 in cash and issuance of a
$10,000,000 subordinated note ("Class B Subordinated Promissory Note").
The Company issued 1,600,000 shares (adjusted for all stock splits) of
common stock and 300,000 shares of Series A Redeemable and Convertible
Preferred Stock for $294,000 and $2,205,000, respectively, to a group of
investors. At the same time, the investors loaned the Company $10,000,000
evidenced by Class A Subordinated Notes.
F-7
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
The Company issued 200,000 shares of Series B Redeemable Preferred Stock
to an Officer of the Company.
The new investors did not acquire substantially all of the shares
representing voting interests of the Company. The voting interests of new
investors represented 50% of the voting interests of the Company after the
leveraged capitalization. Accordingly, the transaction has been recorded as a
recapitalization with amounts distributed to the selling shareholder recorded as
charges to shareholders' equity (deficit). The transaction did not result in a
new basis of accounting for the assets and liabilities of the Company because it
would not have been appropriate under EITF Issue No. 88-16, "Basis in Leveraged
Buyout Transactions" or pushdown accounting guidelines of the Securities and
Exchange Commission ("SEC").
CASH AND CASH EQUIVALENTS
The Company considers cash and short-term investments which are highly
liquid, with maturities of three months or less, to be cash equivalents.
INVENTORIES
Inventories are recorded at the lower of cost (as determined by the
first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed on the basis of estimated
useful lives ranging from three to seven years using the straight-line method.
Maintenance and repairs are charged to expense as incurred. Significant
betterments are capitalized. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in the statement of
operations.
OTHER ASSETS
Other assets consist primarily of financing costs and costs incurred in
connection with the Company's initial public offering. Financing costs are
amortized using the effective interest method.
REVENUE RECOGNITION
Revenue on equipment sales is recognized upon shipment, net of allowances
for potential returns. Certain customer contracts require equipment installation
at the customer's location and in those circumstances, revenue is recognized
after completion of the installation.
INCOME TAXES
On October 31, 1995, the Company's status as an S Corporation for Federal
income tax purposes was automatically terminated due to a sale of stock to an
entity not eligible to be a shareholder of a subchapter S Corporation. Taxable
income prior to the change in status was taxed directly to the former sole
shareholder and financial statements for periods through this date reflected no
provision for income taxes. Subsequent to October 31, 1995 the Company has been
taxed as a C Corporation for Federal income tax purposes. The Company has
provided for these income taxes under the principles of Statement of Financial
Accounting Standards No. 109 (SFAS No. 109).
F-8
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PRO FORMA INCOME PER SHARE
The pro forma income per share is based on the weighted average number of
shares of common stock and common equivalent shares outstanding, adjusted for
stock splits retroactively applied to all periods presented (see Note 8).
Pursuant to certain SEC Staff Accounting Bulletins, common stock and common
stock equivalents issued at prices below the assumed initial public offering
("IPO") price of $10 during the 12 months immediately preceding the date of the
initial filing of the Registration Statement have been included in the
calculation of income per share, using the treasury stock method based on the
assumed IPO price, as if the common stock equivalents were outstanding for all
periods presented.
PRO FORMA DATA
Pro forma provisions for income taxes, net income and per share data
represent the results of operations for the two years ended December 31, 1994
and 1995, adjusted to reflect a provision for income taxes, calculated as if the
Company had been taxed as a C Corporation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate market value.
The estimated fair value of notes payable approximates their recorded
amounts because these instruments bear interest either at market rates or at
floating rates which approximate market rates for similar instruments.
CONCENTRATIONS OF CUSTOMER BASE AND CREDIT RISK
A major customer accounted for 36%, 54%, and 30% of the Company's net sales
(excluding service sales) for the years ended December 31, 1994, 1995 and 1996,
respectively. The receivable from this customer totaled approximately 67% and
57% of trade receivables at December 31, 1995 and 1996, respectively. For the
year ended December 31, 1996, the Company had sales to two other major customers
which accounted for 18% and 15% of net sales. The aggregate receivables from
these three customers totaled 18% of trade accounts receivable at December 31,
1996. The customer which accounted for 18% of net sales for the year ended
December 31, 1996 accounted for 1% of the Company's sales in 1995 and cancelled
its 1996 OEM arrangement with the Company in mid-1996.
For the remaining customers, management believes concentrations of credit
risk with respect to trade receivables are limited due to the nature of the
customers comprising the Company's customer base. The Company performs credit
reviews on major new customers, but rarely requires collateral.
The Company maintains its cash in a bank in amounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
F-9
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MAJOR VENDORS
The Company purchases all server cabinets from one vendor and has another
vendor sub-assemble its switching systems. Although there are a limited number
of vendors able to assemble concentrator switches, management believes that
other vendors could provide similar services on comparable terms. A change in
vendors, however, could cause a delay in manufacturing and possible loss of
sales, which would adversely affect operating results.
WARRANTY COSTS
The Company provides, by a current charge to operations, an amount it
estimates will be needed to cover future warranty obligations for products sold
during the year.
RESEARCH AND DEVELOPMENT
The Company makes significant investments in research for the development of
new technologies and products, including both switching systems and server
cabinets. Research and development costs are charged to expense as incurred.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense was
$309,936, $772,484 and $1,044,737 for the years ended December 31, 1994, 1995
and 1996, respectively.
RECLASSIFICATIONS
Because redemption of the Series A Redeemable and Convertible Preferred
Stock and Series B Redeemable Preferred Stock is controlled by the holders of
the stock, in accordance with certain financial statement requirements of the
SEC, such stock has been reclassified from shareholders' equity (deficit).
Certain other reclassifications were made to the 1994 and 1995 financial
statements to conform with the 1996 presentation. The reclassifications do not
affect net income, shareholders' equity (deficit) or cash flows as previously
reported.
2. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Trade receivables................................................. $ 4,529,404 $ 6,506,086
Less allowance for doubtful accounts.............................. (30,000) (335,893)
------------ ------------
$ 4,499,404 $ 6,170,193
------------ ------------
------------ ------------
</TABLE>
F-10
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. INVENTORIES:
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 688,855 $ 1,086,142
Work-in-process................................................... 243,790 260,356
Finished goods.................................................... 325,127 521,513
------------ ------------
1,257,772 1,868,011
Less reserve for obsolescence..................................... -- (215,000)
------------ ------------
$ 1,257,772 $ 1,653,011
------------ ------------
------------ ------------
</TABLE>
4. LINE OF CREDIT AND LETTERS OF CREDIT:
Under the terms of a credit agreement with a bank (Note 5), the Company has
an operating line of credit allowing it to borrow up to a specified amount based
upon eligible accounts receivable, as defined in the agreement. The agreement
also states that the bank will issue commercial letters of credit on the
Company's behalf such that the aggregate amount of borrowings under the
operating line and letter of credit arrangements does not exceed $3,000,000. The
operating line and letter of credit facility expire on April 15, 1997 and bear
interest at prime (8.25% at December 31, 1996) plus 1.5%. There were no
borrowings on the line of credit facility as of December 31, 1996, nor at any
time during 1996.
5. SUBORDINATED AND LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Note payable to bank, collateralized by substantially all of
the Company's assets, interest payable monthly at prime
(8.25%, at December 31, 1996) plus 1.5%, principal payment of
$500,000 is required at December 31, 1997, matures December
2002.......................................................... $ 6,000,000 $ 5,600,000
Uncollateralized notes payable to shareholder, interest payable
monthly at 12%, paid in full in January, 1996................. 270,000 --
Notes payable to shareholders subordinated to borrowings from
the bank under note payable and line of credit and letter of
credit facility, principal payments of $10,000,000 in December
2000 and $10,000,000 in December 2001, and interest payable
quarterly at 7.0%. Unpaid interest and principal payable in
full on the consummation of a Qualified Liquidity Event as
defined in note agreements.................................... 20,000,000 20,000,000
Capital lease obligation for the purchase of equipment totaling
$20,460, interest at 6.28%, monthly principal and interest
payments of $442, due in 1999................................. 19,113 14,898
------------- -------------
26,289,113 25,614,898
Less current portion........................................... 674,125 504,349
------------- -------------
$ 25,614,988 $ 25,110,549
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. SUBORDINATED AND LONG-TERM DEBT, CONTINUED:
The aggregate amount of required principal payments as of December 31, 1996
were as follows:
<TABLE>
<S> <C>
Period Ended December 31:
1997......................................................... $ 504,349
1998.........................................................
1999......................................................... 5,772
2000......................................................... 10,000,000
2001......................................................... 10,000,000
Thereafter................................................... 5,100,000
----------
$25,614,898
----------
----------
</TABLE>
The Company is party to an agreement with a bank for short-term (Note 4) and
long-term credit facilities, all as described above. Borrowings are
collateralized by substantially all assets of the Company. The agreement
includes various restrictive covenants which, among other things, restrict the
payment of dividends and indebtedness and require the Company to maintain
minimum debt service coverage ratios, minimum working capital amounts and limit
capital expenditures. The agreement also specifies that, so long as there are
amounts outstanding pursuant to the credit facility, on May 1 of each year,
beginning in 1997, the Company will pay the bank 25% of its excess cash flow, as
defined in the agreement, unless the ratio of cash flow to debt service is
greater than 1:1.
6. OPERATING LEASE COMMITMENTS:
The Company leases its facilities for $18,074 per month under an operating
lease expiring September 30, 1998. The Company pays taxes, insurance, normal
maintenance and certain other operating expenses. The lease includes provisions
for rent escalation based on increases in the consumer price index. The Company
has two consecutive two year renewal options on this lease.
Future minimum payments as of December 31, 1996 under the non-cancelable
operating lease were as follows:
<TABLE>
<S> <C>
Year Ended December 31:
1997............................................................ $ 216,888
1998............................................................ 162,666
---------
$ 379,554
---------
---------
</TABLE>
Rent expense totaled $53,397, $125,238 and $216,888 for the years ended
December 31, 1994, 1995 and 1996, respectively.
7. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) plan that covers eligible full-time employees.
Employer matching contributions are made at the discretion of the Board of
Directors. Employer contributions totaled $19,603, $35,217 and $58,968 for the
years ended December 31, 1994, 1995 and 1996, respectively.
F-12
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. SHAREHOLDERS' EQUITY (DEFICIT):
The Company is authorized to issue 10,000,000 shares of voting common stock,
no par value. At its discretion, the Board of Directors may declare dividends on
shares of common stock. Upon liquidation or dissolution, holders of common stock
will be paid only after Series A and Series B Preferred Stock preferences have
been satisfied.
On December 27, 1995 all outstanding shares of common stock were split 1,000
for one. On January 22, 1996 all outstanding shares of common stock were split
two for one. On December 9, 1996, all outstanding shares of common stock were
split four for one. All common stock share amounts have been restated to reflect
these stock splits.
During 1995 the Company authorized and issued 300,000 shares of Series A
Redeemable and Convertible Preferred Stock, no par value. All holders of Series
A Redeemable and Convertible Preferred Stock are entitled to vote on all matters
except election of directors with the holders of the common stock on an "as if
converted" basis. The holders of the Series A Redeemable and Convertible
Preferred Stock are entitled to elect two directors voting separately as a
class, the holders of the common stock are entitled to elect two directors,
voting separately as a class and the holders of the Series A Redeemable and
Convertible Preferred Stock and the holders of the common stock vote together to
elect the fifth director. The holders of the Series A Redeemable and Convertible
Preferred Stock are entitled to receive any dividends on an "as if converted"
basis when, as and if dividends are declared by the Board of Directors on the
common stock or the Company's Series B Redeemable Preferred Stock and to such
additional dividends payable only to the holders of the Series A Redeemable and
Convertible Preferred Stock as may be declared by the Board of Directors. Each
share of Series A Redeemable and Convertible Preferred Stock is convertible into
that number of shares as is determined by dividing the original per share
purchase price by a conversion price. The Series A Redeemable and Convertible
Preferred Stock is convertible at the option of the holder or automatically upon
sale of the Company's common stock in a Qualified Public Offering as defined in
the Restated Articles of Incorporation or upon the vote of the holders of 2/3 of
the outstanding Series A Redeemable and Convertible Preferred Stock in favor of
conversion. The conversion price is subject to weighted average anti-dilution
protection and proportional adjustments in the event of stock splits and similar
events. Consequently, as a result of the common stock splits in 1996, the shares
of Series A Redeemable and Convertible preferred Stock are convertible into
2,400,000 shares of common stock. The Series A Redeemable and Convertible
Preferred Stock is redeemable, at the option of the holders of 50% of the
outstanding shares thereof, either upon a change in control of the Company or in
two installments on the fifth and sixth anniversaries of the original issue date
of such stock. To the extent that the Series A Redeemable and Convertible
Preferred Stock is not redeemed when required, the Company is obligated to
redeem such shares when, as and if permitted by law, and the shares not so
redeemed are entitled to cumulative preferred dividends at an annual rate equal
to the greater of (i) 12% or (ii) prime plus 4% until redeemed or converted. The
redemption price for each share of Series A Redeemable and Convertible Preferred
Stock shall be the original issue price plus all accrued and unpaid dividends.
Upon liquidation or dissolution, holders of Series A Redeemable and Convertible
Preferred Stock will receive preference over holders of common stock and Series
B Redeemable Preferred Stock.
During 1995, the Company authorized and issued 200,000 shares of Series B
Redeemable Preferred Stock, no par value, to an officer as compensation for
future service. The Series B Redeemable Preferred Stock has no voting rights. At
its discretion, the Board of Directors can declare dividends on shares of Series
B Redeemable Preferred Stock. Upon liquidation or dissolution, after payment in
full of the liquidation preferences to holders of Series A Redeemable and
Convertible Preferred Stock, the holder of Series B Redeemable Preferred Stock
is entitled to the redemption value of the shares plus all accrued and
F-13
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED:
unpaid dividends. Under the terms of the officer's employment agreement, the
shares vested ratably over a period of six years. On December 9, 1996, the
employment agreement was modified whereby all 200,000 shares become fully vested
on January 1, 1997. Under the terms of the amendment, 80,000 shares became
redeemable at a price of $5 per share on January 1, 1997. The remaining 120,000
shares become redeemable at a price of $5 per share on the earlier of the
closing of a qualified public offering of the Company's stock, or if no such
qualified public offering has occurred, 60,000 shares in each of December 2000
and 2001. The Series B Redeemable Preferred Stock has been recorded at its
redemption price of $5 per share with a corresponding charge to shareholders'
equity (deficit) for deferred compensation. Pursuant to the amendment, deferred
compensation of $1,000,000 was fully amortized to expense in 1996.
9. STOCK OPTIONS:
The Company has adopted an employee stock option plan (the "Plan"), which
provides for nonqualified and incentive stock options for officers, directors,
employees, and consultants, and reserved a total of 2,161,760 shares of common
stock for issuance pursuant to the Plan. Options under the Plan will generally
expire 10 years from the date of grant, or 5 years in the case of an optionee
owning more than 10% of the voting power of all classes of stock. Under the
Plan, the Plan administrator will fix the conditions for the exercise of the
options. Purchase prices for common stock subject to options issued under the
Plan generally approximate fair market value of the related shares at the date
of grant. Generally, options vest over four years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation" for the year ended December 31, 1996. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
F-14
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTIONS, CONTINUED:
Information regarding activity of the option plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Options outstanding, January 1, 1995............................ -- --
Options granted--December 29, 1995.............................. 705,880 $0.184
----------
Options outstanding, December 31, 1995.......................... 705,880 $0.184
Options granted--February 1996.................................. 405,000 $0.184
Options granted--June 1996...................................... 106,000 $0.184
Options granted--September 1996................................. 103,000 $0.184
Options granted--October 1996................................... 24,000 $0.500
Options exercised............................................... (660,016) $0.184 - $0.50
----------
Options outstanding, December 31, 1996.......................... 683,864 $0.195
----------
----------
Options available for grant at December 31, 1996................ 817,880
----------
----------
Weighted average fair value of options granted in 1996 whose
exercise price was equal to the fair value of the stock on the
date of grant.................................................. $0.078
------
------
Weighted average fair value of options granted in 1996 whose
exercise price was less than the fair value of the stock on the
date of grant.................................................. $1.450
------
------
</TABLE>
No compensation expense has been recorded for options granted in December
1995, February, June 1996 because the options granted during these periods were
for prices equal to the fair value of the related shares, based on the price of
the shares of common stock purchased by investors in December 1995 (see Note 1)
and independent appraisals of the Company's common stock. For options issued in
September and October, 1996, deferred compensation expense of $32,574 and
$138,000 respectively was recorded in the amounts of the excess of the values of
the underlying common stock based on an independent appraisal, over the option
prices. Vesting of 25% of the options granted in September 1996 was accelerated
in October 1996. In addition, 50% of the options granted in October 1996 were
immediately exercisable. Remaining options granted in September and October 1996
vest over four years. Deferred compensation expense is amortized as the related
options vest or become exercisable.
The following table summarizes information about fixed-price options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 9/30/96 LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.184 671,864 9 Years $ 0.184 $ 109,408 $ 0.184
0.500 12,000 10 Years 0.500 -- --
</TABLE>
F-15
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTIONS, CONTINUED:
The following table presents net income and per share amounts for the year
ended December 31, 1995 and 1996, as if the Company accounted for compensation
expense related to stock options under the fair value method prescribed by SFAS
123:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEAR ENDED
1995 DECEMBER 31,
PROFORMA 1996 PROFORMA
------------ -------------
<S> <C> <C>
Net income--as reported......................................... $2,343,515 $ 3,607,723
------------ -------------
------------ -------------
Net income--pro forma........................................... $2,343,515 $ 3,476,338
------------ -------------
------------ -------------
Earnings per share--as reported................................. $ 0.20 $ 0.40
------------ -------------
------------ -------------
Earnings per share--pro forma................................... $ 0.20 $ 0.38
------------ -------------
------------ -------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions used
for grants in 1995 and 1996:
<TABLE>
<S> <C>
Risk free interest rate.................................... 5.38% to 6.77%
Expected lives............................................. 10 years
</TABLE>
10. EMPLOYEE STOCK PURCHASE PLAN:
On December 9, 1996, the Company adopted an employee stock purchase plan
(the "Plan"), through which employees of the Company may participate in stock
ownership of the Company. Shares of common stock reserved for the Plan total
250,000. Employees who have worked for the Company longer than five months and a
minimum of 20 hours per week are eligible to participate in the Plan.
Participants shall become ineligible if employment with the Company terminates
or the participant owns greater than 5% of the combined voting power or value of
all classes of stock of the Company. The price of shares purchased under the
Plan will be the lower of 85% of the fair market value of the shares on the
first day of each quarterly offering period or, 85% of the fair market value of
the shares on any purchase date in the offering period. Under the Plan, the Plan
administrator will administer and interpret all rules and regulations applicable
to the Plan. No shares were issued pursuant to this Plan in 1996.
11. INCOME TAXES:
The Company's status as an S Corporation was automatically terminated on
October 31, 1995 as a result of the sale by the former sole shareholder of stock
to an entity that is not eligible to be a shareholder in a subchapter S
Corporation. For the period from January 1, 1995 through October 31, 1995 the
former sole shareholder was taxed on the Company's taxable income. The sole
shareholder of the Company for the periods in which the Company was taxed as an
S Corporation has indemnified and agreed to hold the Company harmless from any
federal or state income tax liability, including interest and penalties (if
any), resulting from the Company failing to qualify as an S Corporation from
inception through October 31, 1995.
For the income earned after the termination of its status as an S
Corporation, the Company will provide for income taxes under the principles of
SFAS No. 109. This statement requires that income taxes be provided for taxes
currently due and for expected future tax effects of the temporary differences
F-16
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
between the book and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Deferred tax assets are reduced by valuation allowances when
management determines that their realization is not likely.
The significant components of the Company's deferred tax assets and
liabilities were as follows on December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards............................................... $ 28,000 $ --
Allowance for doubtful accounts...................................... 10,200 114,200
Inventory capitalization............................................. 9,500 40,400
Inventory reserve.................................................... -- 73,100
Accrued warranty costs............................................... -- 214,200
Amortization of deferred compensation................................ -- 340,000
Other accrued liabilities............................................ 12,300 18,800
--------- ----------
Deferred income tax assets......................................... 60,000 800,700
--------- ----------
Deferred income tax liability:
Depreciation......................................................... 8,000 16,500
--------- ----------
Deferred income tax liability...................................... 8,000 16,500
--------- ----------
Net deferred tax asset............................................. $ 52,000 $ 784,200
--------- ----------
--------- ----------
</TABLE>
Although realization is not assured, management believes that it is more
likely than not that all of the net deferred tax asset will be realized through
future taxable income.
The income tax (benefit) provision consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Current.......................................................... $ -- $2,592,995
Deferred......................................................... (25,000) (732,200)
Change in tax status............................................. (27,000) --
------------ ------------
$ (52,000) $1,860,795
------------ ------------
------------ ------------
</TABLE>
F-17
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
Reconciliations of the effective income tax rate on income before taxes with
the Federal statutory rate of 34% were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996
------------ -----------
<S> <C> <C>
Statutory Rate........................................................... 34.0% 34.0%
Change in tax status:
Effect of earnings attributable to S Corporation shareholder........... (35.0) --
Effect of establishment of deferred taxes.............................. (0.76) --
Other.................................................................... 0.30 --
----- ---
Effective tax rate....................................................... (1.46)% 34.0%
----- ---
----- ---
</TABLE>
The 1994 statement of operations does not reflect a provision for income
taxes due to the Company's status as an S Corporation. The pro forma provision
for income taxes was based on the statutory tax rate of 34%. In accordance with
generally accepted accounting principles, a tax benefit realized upon exercise
of common stock options of $56,002 for the year ended December 31, 1996 has been
accounted for as an increase to shareholders' equity (deficit).
12. COMMITMENTS AND CONTINGENCIES:
PURCHASE COMMITMENT
In October 1996, the Company signed a 12-month commitment to purchase
certain product components. The total commitment will range from $600,000 to
$950,000. Although future prices and demand for these components cannot be
predicted in advance with certainty, management does not anticipate that this
commitment will result in the recognition of gross losses for the Company.
13. DISCONTINUED OPERATIONS:
In June 1994, the Company discontinued its computer maintenance service
business. Revenues from the discontinued operation were $1,776,070 for the year
ended December 31, 1994. There were no net gains or losses recorded on
disposition of the segment.
14. SUBSEQUENT EVENT:
Subsequent to December 31, 1996, 24,000 options to purchase common stock
were issued at an exercise price of $2.10 per share. The Company recorded
deferred compensation of $99,600 related to those options in January 1997.
F-18
<PAGE>
FOR INSIDE BACK COVER:
The phrase "Innovation & Technology by Design" appears at the top of this
page, off center left.
The middle third of this page consists of the Company Logo, beneath which
the following text (the "Apex Value Statement") is centered:
"The Company provides "plug and play" stand-alone switching systems and
integrated server cabinet solutions for many of the network
administration, management and storage problems faced by organizations
with client/server networks."
Photographs depicting the Company's branded products, each with accompanying
text, are on either side of the Company Logo and Apex Value Statement. On the
left side, top, the product name "SunDial" and a photograph of a SunDial switch
with a keyboard, video monitor and mouse console appear, accompanied by the
following text:
"Single-user, Sun keyboard, monitor and mouse switch
10-port capacity (1 switch)
Operates 2--100 systems from one console (using multiple switches)
Integrates with OutLook and ViewPoint
Sundial allows administrators to control up to 10 Sun SPARC workstations
from a single console."
On the left side, middle, the product name "OutLook" and a photograph of an
OutLook switch with a keyboard, video monitor and mouse console appear,
accompanied by the following text:
"Single-user, PC keyboard, monitor and mouse switch
Multi-platform capability
Operates 2--64 systems from one console (using multiple switches)
OutLook utilizes Apex's proprietary On-Screen Configuration And
Reporting ("OSCAR") interface that allows administrators to use their
own naming conventions for individual servers, as opposed to
predesignated numbers. OutLook can be configured to enable
administrators to control up to 64 servers from a single console."
On the left side, bottom, the product name "OutLook4" and a photograph of an
OutLook4 switch with a keyboard, video monitor and mouse console appear,
accompanied by the following text:
"Multi-user, PC keyboard, monitor and mouse switch
Multi-platform capability
Operates 2--64 systems from one to four consoles
OutLook4 includes the same features as OutLook, except that this
multi-user system allows network administrators to operate multiple
servers from up to four console positions."
On the right side, top, the product name "ViewPoint" and a photograph of a
ViewPoint switch with a keyboard, video monitor and mouse console and other
hardware appear, accompanied by the following text:
"Sixteen-user, command center switching system
Multi-platform capability
1000 ft. extension
ViewPoint includes all of the attributes of OutLook except that it
enables network administration staff to control as many as 256 servers
by integrating the ViewPoint switch with multiple OutLook switches.
ViewPoint's technology allows 'out of band' access to servers up to
1,000 feet away."
On the right side, middle, the product name "DensePack" and a photograph of
four integrated DensePack cabinet systems appear, accompanied by the following
text:
"Customized server cabinet systems for network administration
<PAGE>
DensePack cabinets incorporate Apex's switching technology, as well as
built-in ventilator fans, large rear doors and optional slide-out
shelves to facilitate access to cables, connectors and servers.
DensePack Model RS is a scaled-down version of DensePack and can be used
in combination with full-sized DensePack cabinets or on a stand-alone
basis in remote office applications."
On the right side, bottom, the product name "SwitchBack" and a photograph of
a SwitchBack switch, consisting of a remote unit and a local unit, each of which
is paired with a keyboard, video monitor and mouse console, appear, accompanied
by the following text:
"500 ft. extension product
Remote lock-out feature
SwitchBack consists of a local unit and a remote unit that allow users
to control the attached server from either a primary or a remote console
position linked by a single cable. The SwitchBack system includes a
lock-out feature that prevents system capture. SwitchBack integrates
with OutLook and OutLook4."
<PAGE>
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS.THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................................................................................... 3
RISK FACTORS..................................................................................................... 6
USE OF PROCEEDS.................................................................................................. 14
DIVIDEND POLICY.................................................................................................. 14
CAPITALIZATION................................................................................................... 15
DILUTION......................................................................................................... 16
SELECTED FINANCIAL DATA.......................................................................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 19
BUSINESS......................................................................................................... 27
MANAGEMENT....................................................................................................... 39
CERTAIN TRANSACTIONS............................................................................................. 45
PRINCIPAL SHAREHOLDERS........................................................................................... 47
DESCRIPTION OF CAPITAL STOCK..................................................................................... 49
SHARES ELIGIBLE FOR FUTURE SALE.................................................................................. 50
UNDERWRITING..................................................................................................... 52
LEGAL MATTERS.................................................................................................... 53
EXPERTS.......................................................................................................... 53
ADDITIONAL INFORMATION........................................................................................... 53
INDEX TO FINANCIAL STATEMENTS.................................................................................... F-1
</TABLE>
----------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
- -------------------------------------------
- -------------------------------------------
3,500,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MONTGOMERY SECURITIES
DAIN BOSWORTH
INCORPORATED
, 1997
- -------------------------------------------
- -------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 23B.08.320 of the Washington Business Corporation Act provides that
a corporation's articles of incorporation may contain provisions that provide
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Company's Amended and Restated Articles
of Incorporation (Exhibit 3.1 hereto) limit the liability of its directors for
monetary damages arising from their conduct as directors, except for liability
relating to acts or omissions that involve intentional misconduct, a knowing
violation of law or the authorization of unlawful distributions, and liability
relating to transactions in which the directors derive a personal benefit to
which they are not legally entitled. Such limitation does not affect the
availability of equitable remedies. The Company's Amended and Restated Articles
of Incorporation also provide that the Company will indemnify its directors and
officers to the fullest extent permitted by Washington law. In particular, each
officer and director of the Company is entitled to indemnification against all
liability, loss and expense reasonably incurred by such officer or director in
connection with any civil, criminal, administrative or investigative proceeding
in which he or she is involved (whether in his or her official capacity or
otherwise) by reason of the fact that he or she is or was serving as an officer
or director of the Company. Washington law currently provides that a corporation
may indemnify an officer or director against liability if the individual acted
in good faith and, in the case of a non-criminal proceeding, if he or she
reasonably believed they were acting in the best interests of the corporation,
or, in the case of a criminal proceeding, if he or she had no reasonable cause
to believe their conduct was unlawful. In the case of a proceeding against an
officer or director brought by or on behalf of the corporation, Washington law
does not permit a corporation to indemnify an officer or director if he or she
is found liable in such proceeding. In all other proceedings, indemnification is
not permitted where the officer or director is found liable on the basis that he
or she improperly received a personal benefit. Reference is also made to the
Underwriting Agreement (Exhibit 1.1 hereto) which provides that the Underwriters
will indemnify officers and directors of the Company against certain
liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the registration of the Common Stock. To the extent
the Underwriters' over-allotment option is exercised, the Company will pay any
expenses of the Selling Shareholders.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 13,417
NASD Filing Fee................................................. 4,928
Nasdaq Stock Market Fee......................................... 47,900
Legal Fees and Expenses......................................... 180,000
Auditing and Accounting Fees and Expenses....................... 190,000
Blue Sky Fees and Expenses...................................... 3,000
Printing and Engraving Expenses................................. 135,000
Transfer Agent and Registrar Fees and Expenses.................. 14,000
Directors and Officers Insurance Policy Premium................. 190,000*
Miscellaneous................................................... 71,755
---------
Total....................................................... $ 850,000
---------
---------
</TABLE>
- ------------------------
* For accounting purposes, the cost of the Company's Directors and Officers
Insurance policy premium will be expensed as a period cost and not as a cost
of the offering.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Company issued and/or sold the following securities within the past
three years that were not registered under the Securities Act since each such
transaction was, in the opinion of the Company, exempt from registration under
the Securities Act by virtue of Section 4(2) thereof and, where noted, other
exemptions. No underwriters participated in the offer or sale of any of these
securities, and no underwriters' fees or commissions were paid.
The share and per-share numbers presented below have been adjusted to
reflect the 1,000-for-one stock split of the Company's Common Stock effected in
December 1995, the two-for-one stock split of the Company's Common Stock
effected in January 1996, and the four-for-one stock split of the Company's
Common Stock effected in December 1996.
COMMON STOCK
(a) On December 29, 1995 the Company issued 1,600,000 shares of Common Stock
to certain accredited investors at a price of $0.18375 per share pursuant to
that certain Stock and Subordinated Note Purchase Agreement dated December 29,
1995. The Company relied on the exemption provided by Rule 506 under Regulation
D and Section 4(2) of the Securities Act. All purchasers were accredited
investors.
(b) From February 1996 through November 1996, the Company sold an aggregate
of 660,016 shares of its Common Stock to 12 employees and directors under the
Company's 1995 Employee Stock Plan at a weighted average exercise price of
$0.1895 per share. The Company relied on the exemption provided by Rule 701 of
the Securities Act.
SERIES A CONVERTIBLE PREFERRED STOCK
On December 29, 1995 the Company issued 300,000 shares of Series A
Convertible Preferred Stock to certain accredited investors at a price of $7.35
per share pursuant to the Stock and Subordinated Note Purchase Agreement. The
Company relied on the exemption provided by Rule 506 under Regulation D and
Section 4(2) of the Securities Act. All purchasers were accredited investors.
SERIES B REDEEMABLE PREFERRED STOCK
On December 29, 1995 the Company issued 200,000 shares of Series B
Redeemable Preferred to Mr. Hafer subject to certain restrictions pursuant to an
employment agreement dated December 29, 1995. The Company relied on the
exemption provided by Section 4(2) of the Securities Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships or by disclosure by the Company, to
information about the Company.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation*
3.2 Amended and Restated Bylaws*
4.1 See Article III of Exhibit 3.1 and Articles II, IV and IX of Exhibit 3.2
5.1 Opinion of Davis Wright Tremaine LLP*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Registration Rights Agreement dated December 29, 1995*
10.2 S Corporation Indemnification Agreement dated December 29, 1995*
10.3 Employment Agreement dated December 29, 1995 by and between the Company and Kevin J. Hafer*
10.4 Credit Agreement dated December 28, 1995 by and between the Company and U.S. Bank of Washington,
National Association*
10.5 Lease Agreement dated March 22, 1995 by and between the Company and Christopher L. Clark*
10.6 Purchase Agreement dated September 19, 1994 by and between the Company and Compaq Computer Corporation+
10.7 Private Label Agreement dated September 8, 1994 by and between the Company and Wright Line, Inc.+*
10.8 Form of the Company's Proprietary Information and Noncompetition Agreement*
10.9 1995 Employee Stock Plan*
10.10 Form of Nonstatutory Stock Option Letter Agreement related to 1995 Employee Stock Plan*
10.11 Employee Stock Purchase Plan*
10.12 Letter Agreements dated October 16, 1996 and October 24, 1996 by and between the Company and Pioneer
Standard Electronics, Inc.+*
10.13 Stock and Subordinated Note Purchase Agreement dated December 29, 1995*
10.14 Class A Subordinated Promissory Notes dated December 29, 1995*
10.15 Class B Subordinated Promissory Note dated December 29, 1995*
11.1 Computation of Pro Forma Income Per Share
23.1 Consent of Davis Wright Tremaine LLP (contained in Exhibit 5.1)*
23.2 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney*
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
+ Confidential treatment requested for portions of these agreements.
ITEM 28. UNDERTAKINGS.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Company hereby undertakes that it will: (1) for determining any
liability under the Securities Act, treat the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Company under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective; and (2) for
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the
II-3
<PAGE>
securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and it will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment to be
signed on its behalf by the undersigned, in the City of Woodinville, State of
Washington, on February 6, 1997.
APEX PC SOLUTIONS, INC.
By: /s/ KEVIN J. HAFER
------------------------------------------
Kevin J. Hafer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ KEVIN J. HAFER President, Chief Executive
------------------------------------------- Officer and Director (Principal February 6, 1997
Kevin J. Hafer Executive Officer)
/s/ DOUGLAS A. BEVIS Vice President, Chief Financial
------------------------------------------- Officer (Principal Financial February 6, 1997
Douglas A. Bevis and Accounting Officer)
*
------------------------------------------- Director February 6, 1997
Jeffrey T. Chambers
*
------------------------------------------- Director February 6, 1997
Sterling Crum
*
------------------------------------------- Director February 6, 1997
Edwin L. Harper
*
------------------------------------------- Director February 6, 1997
William McAleer
</TABLE>
By: /s/ KEVIN J. HAFER
------------------------------
Kevin J. Hafer
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*.................................................................
3.1 Amended and Restated Articles of Incorporation*.................................................
3.2 Amended and Restated Bylaws*....................................................................
4.1 See Article III of Exhibit 3.1 and Articles II, IV and IX of Exhibit 3.2........................
5.1 Opinion of Davis Wright Tremaine LLP*...........................................................
10.1 Registration Rights Agreement dated December 29, 1995*..........................................
10.2 S Corporation Indemnification Agreement dated December 29, 1995*................................
10.3 Employment Agreement dated December 29, 1995 by and between the Company and Kevin J. Hafer*.....
10.4 Credit Agreement dated December 28, 1995 by and between the Company and U.S. Bank of Washington,
National Association*.........................................................................
10.5 Lease Agreement dated March 22, 1995 by and between the Company and Christopher L. Clark*.......
10.6 Purchase Agreement dated September 19, 1994 by and between the Company and Compaq Computer
Corporation+..................................................................................
10.7 Private Label Agreement dated September 8, 1994 by and between the Company and Wright Line,
Inc.+*........................................................................................
10.8 Form of the Company's Proprietary Information and Noncompetition Agreement*.....................
10.9 1995 Employee Stock Plan*.......................................................................
10.10 Form of Nonstatutory Stock Option Letter Agreement related to 1995 Employee Stock Plan*.........
10.11 Employee Stock Purchase Plan*...................................................................
10.12 Letter Agreements dated October 16, 1996 and October 24, 1996 by and between the Company and
Pioneer Standard Electronics, Inc.+*..........................................................
10.13 Stock and Subordinated Note Purchase Agreement dated December 29, 1995*.........................
10.14 Class A Subordinated Promissory Notes dated December 29, 1995*..................................
10.15 Class B Subordinated Promissory Note dated December 29, 1995*...................................
11.1 Computation of Pro Forma Income Per Share.......................................................
23.1 Consent of Davis Wright Tremaine LLP (contained in Exhibit 5.1)*................................
23.2 Consent of Coopers & Lybrand L.L.P..............................................................
24.1 Power of Attorney*..............................................................................
27.1 Financial Data Schedule.........................................................................
</TABLE>
- ------------------------
* Previously filed.
+ Confidential treatment requested for portions of these agreements.
<PAGE>
COMPAQ COMPUTER CORPORATION
PURCHASE AGREEMENT
This Purchase Agreement ("Agreement") is made by Compaq Computer
Corporation ("Buyer") and Apex PC Solutions, Inc. a Washington Corporation
("Seller"). The terms and conditions contained in this Agreement shall
govern the purchase and sale of Product listed in Exhibit A ("Products and
Pricing").
1. INTENT
A. Buyer intends to enter into a long-term relationship with Seller. As such,
Seller is willing to cooperate with Buyer to further mutual long term goals
by sharing Product road map and technology directions. Seller agrees to
cooperate to achieve Buyer's long term program goals such as shortening
Product lead-times, increasing volume flexibility, achieving Just-in-Time
delivery, achieving ongoing cost reductions and specific quality goals, and
continuous quality improvement.
B. This Agreement is not a requirements contract and does not obligate Buyer
to purchase any minimum quantity of Product but only establishes the terms
and conditions for such purchases if and when they occur.
2. PURCHASE ORDERS
A. Buyer will purchase Products only by issuing purchase orders ("Order or
Orders") to Seller. Orders shall contain such things as quantity, price,
delivery date, part number, and revision level. Buyer shall make
commercially reasonable efforts to send written confirmation (except by
mutual agreement) of Orders within one (1) week after Issuance. If Seller
fails to return the acknowledgment, Seller will be deemed to have accepted
any Order which conforms with the terms of this Agreement. No additional
or different provisions proposed by Seller shall apply unless expressly
agreed to in writing by Buyer. Buyer hereby gives notice of its objection
to any additional or different terms.
B. Seller agrees that all Buyer sites, subsidiaries, affiliated companies and
subcontractors, wherever located, shall be entitled to make purchases under
this Agreement.
3. TERM OF AGREEMENT
A. The term of this Agreement shall be twelve (12) months, commencing on the
date Buyer executes this Agreement ("Effective Date"). This Agreement will
be automatically renewed at the conclusion of the initial twelve (12) month
period
1
<PAGE>
for successive twelve (12) month periods unless one of the parties
indicates by written notice to the other party not less than thirty (30)
days prior to the end of any such twelve (12) month period that it does not
intend to renew the Agreement. Notwithstanding the foregoing, the
Agreement shall remain in full force and effect and shall be applicable to
any Order(s) issued by Buyer to Seller during the term of this Agreement
until any and all obligations of the parties under such Order(s) have been
fulfilled.
4. PRICING
A. The prices for the Products shall be set forth in Exhibit A and shall be
fixed for the period set forth therein (the "Pricing Period").
B. Prices shall include all charges such as packaging, packing, crating,
storage, forwarding agent or brokerage fees, freight shipping charges,
document fees, duties, and any and all sales, use, excise and similar
taxes. F.O.B. point specified in Exhibit A.
C. Seller represents that the prices charged for Products are * .In the
event Seller provides prices and/or terms for Products * , Buyer shall
be entitled to * .
D. Seller shall maintain a vigorous cost reduction program to ensure that
pricing is competitive at times. In the event that Buyer does not consider
Seller's pricing aggressive relative to the market during any Pricing
Period, Buyer shall have the right to request an immediate meeting with
Seller to renegotiate pricing.
5. DELIVERY
A. Time shall be of the essence in meeting Buyer's requirements. Delivery
performance shall be measured by on-dock date at Buyer's specified ship-to
location.
B. Unless otherwise set forth in the Order, title and risk of loss shall pass
to Buyer at Buyer's specified ship-to location.
C. If Seller delivers Product in advance of the specified delivery date, Buyer
may either return such Product at Seller's risk and expense for subsequent
delivery on the specified delivery date or retain such material and make
payment when it would have been due based on the specified delivery date.
2
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
D. Changes to delivery dates may only be made by Buyer's authorized purchasing
representatives. Buyer may, without cost or liability, issue change
requests for Product quantities and schedule dates in accordance with the
Flexibility Agreement attached as Exhibit D ("Flexibility Agreement").
Written confirmation will be sent by Seller to Buyer within two (2) work
days of receiving a change request, and Buyer shall provide a confirming
Order change within ten (10) working days of receiving Seller's
confirmation.
E. Seller shall notify Buyer in writing immediately if Seller has knowledge of
any event which could result in any change to the agreed delivery plan.
F. In the event that Product scheduled for delivery is more than one (1)
business day late, Buyer may request such Product to be shipped and
delivered via a different mode of transportation at sellers expense.
Alternatively, Buyer may purchase substitute Product elsewhere without
affecting other remedies Buyer may have and charge Seller any additional
cost incurred as a result.
6. PACKING, MARKING, AND SHIPPING INSTRUCTIONS
A. All Product shall be prepared and packed in a commercially reasonably
manner so as to secure the lowest transportation rates and meet carrier's
requirements or those set forth in the Product specification attached as
Exhibit B ("Specification").
B. Each shipping container shall be marked to show Buyer's Order number, part
number, revision level, lot number, and quantity contained therein. A
packing list showing the Order number shall be included in each container.
C. Seller agrees to standardize the count multiples used in shipments.
7. QUALITY
A. Seller shall establish and/or maintain a quality improvement plan
acceptable to Buyer. Seller's Quality improvement Plan is attached to this
Agreement as Exhibit C ("Quality Plan").
B. At Buyer's request, Seller will facilitate on-site visits and inspections
by Buyer during normal business hours. Buyer's inspections shall In no way
relieve Seller of its obligation to deliver conforming Product or waive
Buyer's right of inspection and acceptance at the time the Products are
delivered.
C. Seller agrees to provide relevant outgoing inspection, quality, and
reliability data upon Buyer's request.
3
<PAGE>
D. Seller agrees to conform to the revision level stated on Buyer's Order.
E. Seller agrees to advise Buyer of any changes to process, materials, or
sources of supply and ensure that such changes do not compromise
specifications, quality, or reliability of Products ordered by Buyer.
8. INSPECTION AND ACCEPTANCE
A. Products purchased pursuant to this Agreement shall be subject to
inspection and test by Buyer at all times and places, including the period
of manufacture or development. Unless otherwise specified in the Order,
final inspection and acceptance of Product by Buyer shall be at Buyer's
facilities. Buyer reserves the right to reject Product which does not
conform to the specifications, drawings, samples or other descriptions
specified by Buyer. Buyer may, at its option, either return defective or
nonconforming Product for full credit of the purchase price plus any
transportation charges paid by Buyer, or require prompt correction or
replacement of defective or nonconforming Product, which rights shall be in
addition to such other rights as Buyer may have in law or in equity.
Product required to be corrected or replaced shall be subject to the same
inspection and warranty provisions of this Agreement as Product originally
delivered under any Order. Buyer may charge Seller for costs of any above
normal level of inspection.
B. In the event Buyer returns Product back to Seller for correction or
replacement, Seller shall repair or replace all defective Product within
* of receipt of such Product. Seller will issue a "Return Material
Authorization" within twenty-four (24) hours of receipt. Seller shall bear
all risk and costs such as labor, material, inspection, and shipping to and
from Buyer's facilities. If Buyer incurs any such costs, it may either
recover them directly from Seller or set off via a credit note any amounts
due to Seller. Seller agrees to provide failure analysis of rejected
material within * after receipt of reject materials. Seller will also
provide a written corrective action report addressing the steps that will
be taken to eliminate the cause of the problem. Buyer and Seller will
negotiate in good faith any cost incurred by Seller on product returned
where failure cannot be found.
9. WARRANTY
A. Seller warrants that title to all Products delivered to Buyer under this
Agreement shall be free and clear of all liens, encumbrances, security
interests or other claims and that for a period of * from date of
acceptance of material by Buyer, that all Product shall be free from
defects in material, workmanship, and design. Seller further warrants that
all Product shall conform to applicable specifications, drawings, samples,
and descriptions referred to in this
4
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
Agreement. The warranty for replaced or repaired Product will be the same
as the original Product.
B. Defective material discovered during Buyer's manufacturing or assembly
processes are not considered to be a warranty repair and shall be corrected
in accordance with paragraph 8.B.
C. Seller agrees that in case of epidemic failure (greater than * failure
for the same cause in any * period), Seller shall provide correction or
replacement in accordance with Paragraph 8.B.
D. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 9, NO WARRANTIES, EXPRESS OR
IMPLIED, STATUTORY OR OTHERWISE, ARE MADE WITH RESPECT TO THE PRODUCT
DELIVERED BY SELLER TO BUYER UNDER THIS AGREEMENT.
10. OUT OF WARRANTY REPAIRS and SPARE PARTS AVAILABILITY
A. Seller agrees to refurbish to a "like new" condition any out of warranty
Product at the refurbishment prices listed in Exhibit E ("Service, Repair,
and Refurbishment"). In addition, Seller agrees to make available for
purchase by Buyer replacement and repair parts for Products ("Spares") in
accordance with Exhibit E.
11. PAYMENT AND SETOFF
A. Terms of payment shall be net 45 from the date of Seller's invoice provided
that Product has been received by Buyer. Payment of invoices shall not
constitute final acceptance of the Product.
B. Buyer retains the right to setoff rejections of Product or discrepancies on
paid invoices against future invoices.
C. Unless otherwise specified in Exhibit A or agreed to in writing by the
parties, payment shall be in U.S. dollars.
12. CHANGES
A. Buyer may from time to time change the specifications for the Products and
Seller agrees to make best efforts to comply. If changes result in a
change in Seller's costs or in the time for performance, an adjustment will
be made. Any adjustment must be in writing and must be requested within
ten (10) days of receipt by Seller of the notice of change.
5
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
B. No changes shall be made by Seller in the form, fit, or function of
Products purchased hereunder without Buyer's prior written approval.
13. TERMINATION FOR CAUSE
A. Seller may terminate this Agreement and/or any Order issued hereunder at
any time by written notice in the event Buyer:
1. Fails to comply with any material provision of this Agreement or any
Order issued hereunder, and, in the case of a breach which is capable
of remedy, falls to remedy same within thirty (30) days of
notification of said breach, or
2. Becomes insolvent or makes an assignment for the benefit of creditors,
or a receiver or similar officer is appointed to take charge of all or
a part of the Buyer's assets and such condition is not cured within
thirty (30) days.
B. Buyer may terminate this Agreement and/or any Order issued hereunder at any
time by written notice in the event Seller:
1. Fails to comply with any material provision of this Agreement or any
Order issued hereunder, and in the case of a breach which is capable
of remedy, fails to remedy same within thirty (30) days of
notification of said breach, or
2. Becomes insolvent or makes an assignment for the benefit of creditors,
or a receiver or similar officer is appointed to take charge of all or
a part of Seller's assets and such condition is not cured within
thirty (30) days, or
3. Assigns or attempts to assign, or subcontracts or attempts to
subcontract, any or all of its rights or obligations under this
Agreement or any Orders issued hereunder to a third party without
Buyer's prior written approval, or
4. Failure to agree on pricing for any Pricing Period.
C. Upon termination by Seller of the Agreement and/or any Order issued under
13A above, Buyer's entire liability shall be to purchase all finished
goods, work in progress, and Buyer unique materials that have been
purchased within lead time by Seller to fulfill Buyer's Order(s).
D. Upon termination by Buyer of the Agreement and/or any Order issued under
13B above:
6
<PAGE>
1. Buyer shall have the option to purchase any materials or work in
progress which Seller may have purchased or processed for the
fulfillment of any Order at Seller's cost plus a reasonable amount for
any value already added by Seller,
2. Buyer shall have no liability beyond payment for any balance due for
Products delivered by Seller before notice of termination.
14. TERMINATION FOR CONVENIENCE
A. Buyer may terminate this Agreement and/or any Order issued hereunder at any
time for any reason upon giving written notice of termination to the
Seller. Upon receipt of such notice, Seller shall immediately cease to
incur expenses pursuant to this Agreement and/or the Order that has been
terminated unless otherwise directed in the termination notice. Seller
shall also take all reasonable steps to mitigate the cost to Buyer for
terminating this Agreement and/or any Order. Within sixty (60) days from
the date of notice, Seller shall notify Buyer of costs incurred up to the
date of termination. In no event shall such cost exceed the unpaid
balance:
1. Due for conforming material delivered prior to receipt of Buyer's
termination notice; and
2. Due on purchase orders previously issued in conformance with this
Agreement.
B. In addition to the foregoing, in the event that this Agreement is
terminated pursuant to this Paragraph, Buyer's entire liability shall be to
purchase all finished goods, work in progress, and Buyer unique materials
that have been purchased within lead time by Seller to fulfill Buyer's
Order(s).
15. LIMITATION OF LIABILITY
A. EXCEPT FOR A BREACH OF SECTION 19, 23 OR 24 OF THIS AGREEMENT, NEITHER
PARTY SHALL BE LIABLE FOR ANY CONSEQUENTIAL (INCLUDING, WITHOUT LIMITATION,
LOST PROFITS, UNLIQUIDATED INVENTORY, ETC.), INCIDENTAL, INDIRECT, SPECIAL,
ECONOMIC, OR PUNITIVE DAMAGES ARISING OUT OF OR RESULTING FROM THIS
AGREEMENT EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. SELLER'S LIABILITY TO BUYER FOR DIRECT DAMAGES UNDER THIS
AGREEMENT SHALL BE LIMITED TO THE AMOUNTS
7
<PAGE>
PAID BY BUYER UNDER THIS AGREEMENT, INCLUDING ANY OTHER AMOUNTS PAID BY
BUYER SUCH AS FREIGHT AND STORAGE.
16. FORCE MAJEURE
A. Neither party shall be liable for its failure to perform any of its
obligations hereunder during any period in which performance is delayed by
earthquake, fire, flood, war, embargo, riot or the intervention of any
government authority ("Force Majeure"), provided that the party suffering
such delay immediately notifies the other party of the delay. If, however,
Seller's performance is delayed for reasons set forth above for a
cumulative period of thirty (30) calendar days or more, the Buyer,
notwithstanding any other provision of this Agreement to the contrary. may
terminate this Agreement and/or any Order issued hereunder by notice to
Seller. In the event of such termination, Buyer's sole liability hereunder
will be for the payment to Seller of any balance due and owing for
conforming Product delivered by Seller prior to Seller's notification of
delay to Buyer. In the event the parties do not terminate this Agreement
and/or Order due to a Force Majeure, the time for performance or cure will
be extended for a period equal to the duration of the Force Majeure.
17. PRODUCT NOTICES
A. Any notice given under this Agreement shall be in writing and will be
effective when delivered personally or deposited in the mail, postage
prepaid and addressed to the parties at their respective addresses set
forth below, or at any new address subsequently designated in writing by
either party to the other:
If to Seller: If to Buyer:
APEX PC SOLUTIONS, INC. COMPAQ COMPUTER CORPORATION
4580 150TH AVENUE, NE P.O. BOX 692000
REDMOND, WA 98052 20555 S.H. 249
HOUSTON, TEXAS 77269-2000
ATTN.: CHRIS SlRIANNI ATTN.: JOHN BRADSHAW
with a copy to:
COMPAQ COMPUTER CORPORATION
P.O. BOX 692000
20555 S.H. 249
HOUSTON, TX 77269-2000
ATTN.: Division Counsel-Operations
8
<PAGE>
18. COMPLIANCE WITH LAWS
A. All Product supplied and work performed under this Agreement shall comply
with all applicable laws and regulations in effect. In particular, Seller
agrees that its performance under this Agreement shall comply with all laws
governing its relationship with its employees, agents or subcontractors and
with the chlorofluorocarbon labeling requirements of the U.S. Clean Air Act
of 1990. Upon request, Seller agrees to certify compliance with such
applicable laws and regulations.
19. PATENT, COPYRIGHT AND TRADEMARK INDEMNITY
A. Seller shall defend, at its expense, any claim against Buyer alleging that
Products furnished under this Agreement (other than claims related to the
Buyer's logo and/or trademark) infringe any patent, copyright or trademark
and shall pay all costs and damages awarded, provided Seller is notified in
writing of such claim and permitted to defend and compromise such claim.
If a final injunction against Buyer's use of the Products results from such
a claim (or, if Buyer reasonably believes such a claim is likely) Seller
shall, at its expense, and at Buyer's request, either use commercially
reasonable efforts to obtain for Buyer the right to continue using the
Product or replace or modify the Product so that it becomes noninfringing.
In the event that Seller cannot obtain such right for Buyer, Seller shall
repurchase all finished Products which Buyer has unsold in its warehouse at
that time. The foregoing states the sole and exclusive liability of Seller
for infringement of proprietary rights.
B. Seller warrants that there are no claims of infringement with respect to
the Product.
C. Seller is authorized to use Compaq logo and trademark only to the extent
necessary to meet the required specification for the Product(s). No other
rights with respect to Buyer's trademarks, trade names or brand names are
conferred, other expressly or by implication, upon Seller.
20. CAPACITY PLANNING
A. Seller agrees to review forecasts provided by Buyer and advise Buyer if
Seller anticipates that he will be unable to achieve the requested volumes.
Buyer volume forecasts will be provided to Seller in accordance with
Exhibit A. Seller may from time to time request Buyer to review Buyer's
forecast and advise of any changes.
9
<PAGE>
21. GRATUITIES
A. Each party represents that it has not offered nor given and will not offer
nor give any employee, agent, or representative of the other party any
gratuity with a view toward securing any business from the other party or
influencing such person with respect to the business between the parties.
22. INSURANCE AND STATUTORY OBLIGATIONS
A. If Seller's work under this Agreement requires access by Seller to any of
Buyer's premises or the premises of Buyer's customers or locations where
Buyer conducts business, or with material or equipment furnished by Buyer,
Seller shall take all necessary precautions to prevent the occurrence of
any injury to persons or property during the progress of such work and,
except to the extent that such injury is due solely and directly to Buyer's
acts or negligence, Seller shall indemnify Buyer against all loss which may
result in any way from any act or negligence of Seller; its employees,
servants, agents or subcontractors, and Seller shall maintain such
insurance as shall protect Buyer from such risks and from any statutory
liabilities arising therefrom and shall provide evidence of such insurance
to Buyer upon request.
23. INDEMNIFICATION
Seller agrees to protect, defend, indemnify and save Buyer harmless from
all sums, costs and expense which Buyer may incur or be obliged to pay as a
result of any loss, expense, damage, liability, claims, demands in favor of
any person, as a result of personal injury or death resulting from the use
of the Products where the personal injury or death is solely and directly
the result of the gross negligence or willful misconduct of Seller.
24. CONFIDENTIAL INFORMATION
A. Each party recognizes that it may have previously entered or will in the
future enter into various agreements with the other party which obligates
it to maintain as confidential certain information disclosed to it by the
other party. To the extent that such information or any further
confidential information, which might include but is not limited to
business plans, forecasts, capacity, pricing, inventory levels, etc.
(collectively referred to hereinafter as "Information"), is disclosed in
furtherance of this Agreement or any Order issued hereunder, such
information shall be so disclosed pursuant to the minimum terms and
conditions listed below; provided, however, the minimum terms and
conditions listed below shall in no way relieve the parties from any
obligation or modify such obligations previously agreed to in other
agreements. Both parties agree that this Agreement and any
10
<PAGE>
other agreements regarding confidential information shall hereafter be
considered as coterminous, and shall expire no earlier than the date of
expiration or termination of this Agreement.
B. Both parties agree that the party receiving Information will maintain such
Information in confidence for a period of three (3) years from the date of
disclosure of such information.
C. Each party shall protect the other party's information to the same extent
that it protects it own confidential and proprietary information and shall
take all reasonable precautions to prevent unauthorized disclosure to third
parties.
D. The parties acknowledge that the unauthorized disclosure of such
Information will cause irreparable harm. Accordingly, the parties agree
that the injured party shall have the right to seek immediate injunctive
relief enjoining such unauthorized disclosure.
E. This provision shall not apply to information (1) known to the receiving
party at the time of receipt from the other party, (2) generally known or
available to the public through no act or failure to act by the receiving
party, (3) furnished to third parties by the disclosing party without
restriction on disclosure, or (4) furnished to the receiving party by a
third party as a matter of right and without restriction on disclosure.
F. Immediately upon termination of this Agreement or at the request of the
other party, each of the parties shall promptly return all materials in its
possession containing Information of the other party.
25. COUNTRY OF ORIGIN
A. For each Product purchased under this Agreement, Seller shall furnish Buyer
with country of origin (manufacture), by quantity and part number (Buyer's
and Seller's) if necessary.
B. Seller agrees to provide necessary export documents and to facilitate
export of Product. Seller further agrees to assist Buyer's import of
Product as reasonably requested by Buyer.
26. PROPERTY FURNISHED BY BUYER
A. Any tools, drawings, specifications, or other materials furnished by Buyer
for use by Seller in its performance under this Agreement or any Order
issued hereunder shall be identified and shall remain the property of Buyer
and shall be used by
11
<PAGE>
Seller only in its performance hereunder. Such property shall be
delivered, upon request, to destination specified by Buyer in good
condition, except for normal wear and tear.
27. GENERAL
A. Any obligations and duties which by their nature extend beyond the
expiration or earlier termination of this Agreement shall survive any such
expiration or termination and remain in effect.
B. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, such provision shall be enforced to the
fullest extent permitted by applicable law and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
C. No action, except those regarding claims by third parties, or claims with
respect to patents, copyrights, trademarks or trade names or the
unauthorized disclosure of Confidential Information, regardless of form,
arising out of this Agreement may be brought by either party more than two
(2) years after the cause of action has arisen, or, in the case of
nonpayment, more than two (2) years from the date the payment was due.
D. Any waiver of any kind by a party of a breach of this Agreement must be in
writing, shall be effective only to the extent set forth in such writing
and shall not operate or be construed as a waiver of any subsequent breach.
Any delay or omission in exercising any right, power or remedy pursuant to
a breach or default by a party shall not impair any right, power or remedy
which either party may have with respect to a future breach or default.
E. Seller hereby gives assurance to Buyer that it shall not export, re-export
or otherwise disclose, directly or indirectly, technical data received from
Buyer or the direct product of such technical data to any person or
destination when such export, re-export or disclosure is prohibited by the
laws of the United States or regulations of a Department of the United
States.
F. This Agreement is considered to be Compaq Confidential.
G. The entire Agreement between the parties is incorporated in this Agreement
and Appendices attached hereto, and it supersedes all prior discussions and
agreements between the parties relating to the subject matter hereof. This
Agreement can be modified only by a written amendment duly signed by
persons authorized to sign agreements on behalf of both parties, and shall
not be supplemented or modified by any course of dealing or trade usage.
Variance
12
<PAGE>
from or addition to the terms and conditions of this Agreement in any
Order, or other written notification from Seller will be of no effect.
H. THE CONSTRUCTION, VALIDITY, AND PERFORMANCE OF THIS AGREEMENT AND ANY ORDER
ISSUED UNDER IT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF WASHINGTON,
U.S.A.
IN WITNESS, THE AUTHORIZED REPRESENTATIVES OF THE PARTIES HAVE EXECUTED THIS
AGREEMENT.
For the Buyer For the Seller
/s/ Grover Edmiston for Ron Hughes /s/ Kevin J. Hafer
- ---------------------------------- ------------------------------
9/19/94 9-8-94
- ---------------------------------- ------------------------------
Signature (date) Signature (date)
Ronald J. Hughes Kevin J. Hafer
- ---------------- ------------------------------
Name Name
Vice-president Corporate Procurement General Manager
- ------------------------------------ ------------------------------
Title Title
13
<PAGE>
CORPORATE PURCHASE AGREEMENT AMENDMENT
EXHIBIT A
PRODUCTS AND PRICING
ITEM SELLER REFERENCE COMPAQ REFERENCE LEAD-TIME PRICE TIME
- --------------------------------------------------------------------------------
1 242694-001 242694-001 8 weeks *
*
*
*
2. 242695-001 242695-001 8 weeks *
*
*
*
3. 242778-001 242778-001 8 weeks *
*
*
*
Seller agrees that the price is firm for the period of 90 days and that
price will be renegotiated prior to the end of the firm pricing period.
Seller agrees to furnish a non-binding price forecast for the following
three calendar quarters.
Seller further agrees to provide price in US.
This Appendix A is effective October 11, 1996 and amends the Corporate
Purchase Agreement (the "Agreement") between Apex PC Solutions and Compaq
Computer Corporation executed on September 19, 1994. The EXHIBIT A in
the original Agreement shall be replaced in its entirety by this Exhibit
A. Except as expressly amended by this Amendment, the Agreement shall
continue in full force and effect in accordance with its terms.
APEX PC SOLUTIONS COMPAQ COMPUTER CORPORATION
By: /s/ Christopher L. Sirianni By: /s/ Daniel M. Rosckes
-------------------------------- -------------------------------------
Name: Christopher L. Sirianni Name: Daniel M. Rosckes
------------------------------ -----------------------------------
Title: Vice President Title: Director
----------------------------- ----------------------------------
Date: 10-9-96 Date: 10-16-96
------------------------------ -----------------------------------
14
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
EXHIBIT B
SPECIFICATION
Buyer's specification number 169953-001/-002 and 169954-001/-002 is incorporated
by reference.
15
<PAGE>
EXHIBIT C
QUALITY AGREEMENT
16
<PAGE>
COMPAQ COMPUTER CORPORATION
AND
APEX PC SOLUTIONS, INC.
QUALITY PLAN
APPROVALS:
/s/ Jose Antonio Rodriguez
- ----------------------------------- ------------------------------------
Jose Antonio Rodriguez
17
<PAGE>
REVISION HISTORY
Revision A (9/23/96) Original
18
<PAGE>
TABLE OF CONTENTS
1.0 Purpose
2.0 Scope
3.0 References
4.0 Quality Systems Survey
5.0 Quality Planning
6.0 Quality Assurance Methodology
7.0 Design/Process Change Requirements
8.0 Inspection Requirements
9.0 Performance Reports
10.0 Traceability Identification
11.0 Reliability
12.0 Supplier obligations
13.0 COMPAQ's obligations
19
<PAGE>
1.0 Purpose:
This plan documents the specific systems of process and product controls
required to provide defect free product to our customers, on time, and at
a mutually beneficial price.
2.0 Scope:
This plan documents the specific system of process and product controls
required to prevent incidents of non-conforming product. It is
understood that the manufacturing subcontractor (TSI, Inc.) is
responsible for insuring quality objectives for the product are met, and
APEX PC SOLUTIONS, INC. having control of the design is responsible for
the reliability as well as ultimate responsibility for the final quality
of the product. Reliability is defined as the demonstrated field
performance and MTBF of the *** . This plan identifies
actions necessary to assure conformance of:
A. Documentation
B. Equipment Qualification
C. Correlation (functional/nonfunctional)
D. Workmanship
E. Process Capability
F. Critical Parameters
This document is a supplement to Compaq Computer Corporation's contractual
agreements and engineering specifications. In any case of conflicting
requirements, purchasing and engineering documents shall take precedence.
3.0 References:
A. Compaq *** Specifications (part number
*** )
B. Compaq *** Specification (part number
*** )
C. World Class Supplier Process Handbook (WCSP)
4.0 Quality Systems Survey:
In accordance with the requirements of WCSP handbook FM1 001, a full
quality system survey will be completed.
*** Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
20
<PAGE>
The results of the survey will be used to establish a baseline from which
an improvement plan may be launched and results measured. Based upon the
survey results, a classification will be assigned to APEX PC SOLUTIONS,
INC.
5.0 Quality Planning:
APEX PC SOLUTIONS, INC. shall be responsible for a controlled and capable
process to ensure the product is in total compliance with the product
specifications. ( *** )
5.1 Documentation Review:
As a part of the product evaluation process, members of the
Compaq/APEX PC SOLUTIONS, INC. team will review the current
engineering specification package to assure:
A. All documentation is present and legible
B. Specified tolerances are defined and APEX PC SOLUTIONS, INC.
and/or subtier supplier manufacturing process capabilities
known
C. Specified dimensions must not conflict with other
documentation
D. Clarity of workmanship standards
Any discrepancies or issues shall be noted on the WCSP Print
Acceptance Form, PAF. The items will be assigned to the project team
for resolution. The project team will be accountable for completing
the items within a specified time frame. The project team may consist
of the Compaq/APEX PC SOLUTIONS, INC. team. When changes to any
content within the Kit have occurred then; Each *** , Compaq
Procurement Engineering will be responsible for issuing APEX PC
SOLUTIONS, INC. Quality Assurance Manager all new released and ECN
documentation. This documentation distribution will include the
assembly, reference specifications, Receiving Inspection Procedures,
and Compaq manufacturing diagnostics. Each *** , APEX PC SOLUTIONS,
INC. shall send Compaq Procurement Engineer ***
. This information is
required for Compaq documentation control.
5.2 Work Instruction:
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
21
<PAGE>
The process document should be a controlled procedure which includes:
scope, equipment/materials requirements, detail process methods, and
inspection. APEX PC SOLUTIONS, INC. shall issue Compaq Procurement
Engineer the final assembly process documentation before
pre-production.
Each work station (final assembly and mold shop) should have a
cosmetic inspection work aid. The work aid must meet or exceed Compaq
requirements.
5.3 Training:
Personnel performing assembly, fabrication, inspection, and tests of
any activity affecting quality shall have appropriate experience and
training. Appropriate records of training shall be maintained.
5.4 Process Flow Diagrams:
APEX PC SOLUTIONS, INC. shall submit a process flow diagram from raw
material receipt to product shipment. The process diagram identifies
the main steps, branches, and eventual outcome of the process. The
following information should be included within the diagram:
***
***
***
***
***
***
***
***
5.5 Product Flow Diagrams:
APEX PC SOLUTIONS, INC. shall submit a product flow diagram. The
product flow diagram is a pictorial document of the actual path of the
product throughout the manufacturing facility.
5.6 Process Critical Parameter Review
The Compaq/APEX PC SOLUTIONS, INC. team will develop a control plan
for critical product parameters and critical operations. Critical
parameters are features, properties, attributes, or performance that
render the product unacceptable if found to be beyond the
specification limits. Critical
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
22
<PAGE>
operations are those control areas within the manufacturing process
that create critical parameters. These systems insure that all
requirements and processes meet or exceed customer expectations.
The critical parameters must be defined in the following plans:
***
***
***
The Process Management Plan (PMP) shall be completed for all
operations at APEX PC SOLUTIONS, INC. and subtier suppliers where
critical parameters are affected in the process. The PMP will contain
the following details:
***
***
***
***
***
***
***
***
6.0 Quality Assurance Methodology:
Compaq's objective is to eliminate the function of performing receiving
inspection to accept incoming material for manufacturing. The intent of
this section is to identify specific actions, improvement plans, goals,
and responsibilities to assure product quality and continuous improvement.
The data collected must be available to the operator in a timely manner
so it can be used for process improvements. Each operator should know why
they are collecting the data, what the requirements are, and the operation
trend.
6.1 Process Capability Studies: TSI, Inc. Manufacturing Facility Attribute
features shall be recorded with *** and variable characteristics shall
be monitored *** . This method will identify
*** .
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
23
<PAGE>
Also, these critical parameters must be evaluated to establish a
*** . Identification of the critical parameters are defined
in the Supplier Process Management Plan in the WCSP Manual.
Critical parameters are considered capable if the *** .
Any parameter that results in a *** will result in a
corrective action or equivalent containment plan.
The process capability results shall be documented and available for
review by both organizations. Subcontractor (TSI, Inc.) and APEX PC
SOLUTIONS, INC. engineering are responsible for evaluating this
information. Each *** the APEX PC SOLUTIONS, INC. Process
Parameter Control Plan (see form in FMI 001) will be sent to Compaq
Procurement Engineer along with the improvement plan.
NOTE: ATTRIBUTES DATA COLLECTED TO INCLUDE***.
6.2 Measurement Precision:
Measurement Precision is the extent to which a repeated measurement
gives the same result. Variations may arise from inherent capabilities
of the instrument, from variations of the operators use of the
equipment, or from changes in operating conditions.
All instruments, gages, test equipment, and inspectors/operators shall
be evaluated for Repeatability and Reproductibility.
6.3 Measurement Correlation:
All major inspection techniques and equipment must be correlated in
order to prevent disagreements about product attributes.
Correlation of visual attributes indicate both Compaq and APEX PC
SOLUTIONS, INC. agree in the accept/reject criteria for generic types of
non-conformance. Techniques for documentation include:
***
. Both Compaq and APEX PC SOLUTIONS, INC.
shall be utilizing the same accept/reject criteria.
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
24
<PAGE>
The method to calculate and evaluate a correlation coefficient is in the
WCSP manual. A correlation action is requested if the correlation
coefficient, *** .
6.4 First Article Inspection:
APEX PC SOLUTIONS, INC. must submit samples of *** .
The samples should be representative of a capable process.
If Compaq deems that APEX PC SOLUTION, INC.'s measuring equipment is
capable, Compaq will use APEX PC SOLUTIONS, INC. FAI reports and test
results for qualifying a design/process change.
Compaq Procurement Engineer shall evaluate all samples for
qualification. Compaq will provide APEX PC SOLUTIONS, INC. with written
documentation on all reviews within *** of receipt.
6.5 Supplier Corrective Action Request (SCAR):
Compaq Procurement Engineer will initiate Supplier Corrective Action
Request whenever system or material deficiencies are identified. If
Compaq receives non-conforming material, the part and SCAR will be
*** to APEX PC SOLUTIONS, INC. APEX PC SOLUTIONS, INC.
shall reply within *** acknowledging the receipt of
the SCAR. Corrective action shall be submitted within *** from
*** first reported. If the corrective action can not be answered within
*** , APEX PC SOLUTIONS, INC. must notify Compaq prior to the
due date.
The intent of the SCAR is to eliminate potential problems or recurrence.
APEX PC SOLUTIONS, INC. shall be responsible to answer the following
concerns:
***
***
***
***
***
***
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
25
<PAGE>
***
6.6 Experimental Design:
Design of Experiments will be used throughout the program where
applicable.
7.0 Design/Process Change Requirements:
All Engineering changes to the Assembly that effect the ***
must be approved by Compaq prior to production implementation. The
change request form is located in the WCSP manual.
7.1 Sample Submittal:
APEX PC SOLUTIONS, INC. should send purpose of change request (Form G),
the FAI report, qualification test results, and six sample parts to Compaq
Procurement Engineer for sustaining product or the Program Manager for new
product development. The sample parts should be a result of a capable
process, with documentation available to show capability. If the
qualification results are in-process, this should be noted during the
submittal. Compaq will evaluate this information within ***
.
If the APEX PC SOLUTIONS, INC. measuring and/or test equipment is not
compatible to Compaq, Compaq will initiate test qualification. Otherwise
evaluations will be given from the APEX PC SOLUTIONS, INC. results.
7.2 Capability Evaluation:
***
7.3 Design/Process Change Summary List:
APEX PC SOLUTIONS, INC. will be responsible for recording all major
process and design changes. The following information must be
recorded: ***
. This product updated listing should be sent to Compaq
after each production cut-in.
8.0 Inspection Requirements:
Unless otherwise specified in the contract or purchase order, APEX PC
SOLUTIONS, INC. shall be responsible for performing inspections that are
sufficient to assure
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
26
<PAGE>
that the parts supplied meet the requirements specified in the product
assembly documentation.
8.1 Lot Acceptance:
All lots shall be capable of passing a sampling inspection of ***
AQL (Acceptable Quality Level); C=O (Rejected lots at supplier shall
be re-inspected ***).
***
.
8.2 Electrical Criteria:
Electrical assemblies and components shall comply with the APEX PC
SOLUTIONS, INC. " *** ." Each PCA
will be *** visual inspected and *** tested. The inspector
shall mark conforming PCB.
Compaq must approve changes to all critical components before production
release ( ***
)
8.3 Record Retention:
APEX PC SOLUTIONS, INC. inspection/test records should be recorded and
thereby maintained for a minimum duration of *** from the
date of shipment or Compaq approved alternate. Incoming inspection
records shall be capable of tracking receipt history. Quality status
for each process shall be reported to departments concerned on a
regular basis.
8.4 Nonconforming Product:
Rejected assemblies will be verified by Compaq MRB team. If verified
as defective, the material/lot will be disposition as RTV, UAI, Scrap
or Rework. Supplier Corrective Action will be initiated for each
unit defect (Section 6.6).
8.5 Out of Box Audit
Lot sampling of Finished goods should be conducted on an audit basis
employing a C=O sampling plan using a *** *** sampling rate. The
audit should include the following visual checks:
***
***
***
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
27
<PAGE>
*** . The
lot disposition will be to check *** of the lot for non-conformity
before shipping the lot to Compaq. All audit failures require ***
analysis by the supplier.
9.0 Performance Reports:
Compaq will issue *** performance reports. This information will trend
*** . The reports are as follows:
***
***
Each *** APEX PC SOLUTIONS, INC. will compile final assembly production
yield and functional test yield consisting of the number of units produced
and number of failures by product. If the lots are shipped by air freight,
APEX PC SOLUTIONS, INC. shall compile *** reports. These reports shall
identify *** and *** . The APEX PC SOLUTIONS, INC. information
will be collected by inspection function:
***
***
***
***
The APEX PC SOLUTIONS, INC./Compaq team shall use this information for
identifying trends and developing improvement plans.
10.0 Traceability Identification:
10.1 Major Piece Parts:
The major piece parts shall have traceability identification.
The PCB and assembly are examples of major components. The Assembly,
and PCB require the following marking:
***
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
28
<PAGE>
The PCB should also include a Vendor Final QA marking
*** .
Additional marking is allowed including manufacture S/N, manufacture
order, flammability rating, etc.
10.2 Assembly.
The final test (Functional Tester) acceptance marking shall be placed
on the underside of assembly. This marking shall be traceable to the
tester and operator. Each assembly will be serialized. The label and
or marking will identify: ***
.
11.0 Reliability:
Reliability audits shall be performed at least *** or after any
major design or production change.
11.1 Field Return Verification & Failure Analysis:
APEX PC SOLUTIONS, INC. shall verify field return product and identify
reason for the return. If the defect is verified, APEX PC SOLUTIONS,
INC. will identify cause and initiate corrective action.
The field return information should be compiled in *** reports.
This information shall be used to improve design, workmanship,
quality, and reliability.
12.0 Supplier Obligations:
*** Cognizant Required
Personnel Due Date
*** APEX PC SOLUTIONS, INC. Eng. ***
- Final Assembly
- Sub Assembly
*** APEX PC SOLUTIONS, INC. Eng. ***
- Final Assembly
- Sub Assembly
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
29
<PAGE>
*** APEX PC SOLUTIONS, INC. Eng. ***
- Final Assembly
- Sub Assembly
- Critical Components
*** APEX PC SOLUTIONS, INC. Mfg. Eng. ***
- Final Test
- Mechanical Inspection Equipment
- Gaging
*** APEX PC SOLUTIONS, INC. QA Eng. ***
- Procedure
- AQL Specifications
- out-of-Box Disposition
***
*** APEX PC SOLUTIONS, INC. ***
*** QA Eng ***
- Final Inspection
- Out-Going Inspection
- Field Return Pareto QA Eng. ***
- ORT Reports Rel Eng. ***
*** QA Eng. ***
13.0 Compaq Obligations: Date Required
- Site Survey Rating: ***
- Specification Release to A ***
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
30
<PAGE>
- Business Reviews ***
- Quality Performance Reviews ***
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
31
<PAGE>
SUPPLIER APPROVAL
Supplier: APEX
Manufacturing Site: REDMOND, WASHINGTON
Commodity: ***
This supplier has been evaluated and approved by the methods and personnel
listed below.
Refer to document 410-05-Q01 for qualification options.
QUALIFICATION METHOD: COMPLETION OF CORPORATE MATERIALS *** SUPPLIER
DEVELOPMENT (5 Step, past performance, other)
RESTRICTIONS: CURRENT AGENCY APPROVALS: *** . ALL REMAINING AGENCY
APPROVALS ARE IN PROCESS.
APPROVED BY:
Purchasing JOHN R. BRADSHAW 5/26/94 /s/ John R. Bradshaw
Purchasing Eng. STEPHANIE A. JONES 5/20/94 /s/ Stephanie A. Jones
Other (as required)
*** Confidential treatment request; filed separately with the
Securities and Exchange Commission.
32
<PAGE>
EXHIBIT D
FLEXIBILITY AGREEMENT
The following changes to volumes on existing purchase orders may be made without
cost or liability to Buyer.
NUMBER OF WEEKS PRIOR % INCREASE
TO SCHEDULED DELIVERY DATES
8 weeks or more *
6 weeks *
5 weeks *
4 weeks *
3 weeks or less *
Schedule Decrease/Cancellation
Based on our current * lead time, the following table establishes
Compaq's commitment to accept finished inventory and work in process in the
event of an outright order cancellation. In general, orders become *
prior to schedule ship date. In addition, * prior scheduled ship date,
Apex WIP becomes subject to assembly and shipment according to order
schedule.
Vendor WIP * determined to be * complete shall be completed and
delivered to Apex for assembly and subsequent shipment to Compaq. Vendor
WIP determined to be less than * complete * will be scrapped and
invoiced to Compaq at vendor cost. Also, vendor raw materials * that
can not be absorbed by the vendor * .
33
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
*
- --------------------------------------------------------------------------------
WEEK/ORDER * * * * * * * * * *
- --------------------------------------------------------------------------------
Apex Inventory * * * * * * * * * *
- --------------------------------------------------------------------------------
Apex WIP * * * * * * * * * *
- --------------------------------------------------------------------------------
Vendor WIP * C * * * * * * * * * *
- --------------------------------------------------------------------------------
Vendor WIP * C * * * * * * * * * *
- --------------------------------------------------------------------------------
Vendor Raw Material * * * * * * * * * *
- --------------------------------------------------------------------------------
*
- --------------------------------------------------------------------------------
WEEK/ORDER * * * * * * * * * *
- --------------------------------------------------------------------------------
Apex Inventory * * * * * * * * * *
- --------------------------------------------------------------------------------
Apex WIP * * * * * * * * * *
- --------------------------------------------------------------------------------
Vendor WIP * C * * * * * * * * * *
- --------------------------------------------------------------------------------
Vendor WIP * C * * * * * * * * * *
- --------------------------------------------------------------------------------
Vendor Raw Material * * * * * * * * * *
- --------------------------------------------------------------------------------
*
34
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
Schedule Decrease/Reschedule
Orders and or individual scheduled releases are * prior to
shipment. Any order * may be rescheduled * for a period not
to exceed * .
If schedule delays exceed * , Compaq has the option to purchase * .
- --------------------------------------------------------------------------------
Week/Order * * * * * * * * * * * *
- --------------------------------------------------------------------------------
Compaq Option * * * * * * * * * * * *
*
- --------------------------------------------------------------------------------
* * * * * * * * * * * *
- --------------------------------------------------------------------------------
*
In addition, supplier agrees to maintain * and * switch boxes
of buffer stock in finished goods inventory for shipment at buyer's
request.
Seller agrees to reduce product lead times to * by * and *
by * .
35
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
EXHIBIT E
SERVICE, REPAIR, AND REFURBISHMENT
A. OUT OF WARRANTY REPAIRS
1. Seller agrees to refurbish to "like new" condition any out of warranty
Product at the prices listed below. This obligation shall be
satisfied by either refurbishing Product submitted by Buyer or
replacing such Product with refurbished Product of the same part
number. Returned Product shall be at the latest revision level.
"Like new" condition means refurbished to meet the electrical and
mechanical requirements of the Buyer's applicable specifications
including the replacement of non-functioning parts.
2. Product submitted by Buyer for refurbishment will be in reasonably
good condition and repairable. In the event Product submitted for
refurbishment has been tampered with in an attempt to repair it or has
been damaged beyond repair, Seller will not be obligated to make out
of warranty repairs.
3. Seller agrees to provide monthly status reports indicating quantities
of units returned, units which aren't repairable, and units for which
no trouble was found.
4. Seller agrees, upon Buyer request, to provide repair training,
documentation, and spare parts to local service providers. Local
service providers will be selected by mutual agreement.
5. Fair and equitable repair pricing to be negotiated in good faith at a
later date.
B. SPARE PARTS AVAILABILITY
No spare parts. Whole unit replacement.
C. DOCUMENTATION
In addition to warranty service, Apex agrees to provide out of warranty
service for a period of up to * . Apex also agrees that if for any
reason Apex is unable to perform out of warranty service, bills of
material, wiring schematics and other pertinent documentation will be
provided to Compaq, or its designated
36
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission
<PAGE>
representative. It is understood that this information is and will remain
the property of Apex PC Solutions and will be used under license by Compaq
Computer Corporation and or its designated representative.
D. LOCAL SERVICE SUPPORT
Seller will, at buyer's request, and by mutual consent, provide spare parts
and training for Buyer's local service providers in Buyer's geographic
sales regions.
37
<PAGE>
EXHIBIT F
LOCAL SITE REQUIREMENTS
HOUSTON
to be determined
SCOTLAND
to be determined
SINGAPORE
to be determined
38
<PAGE>
Exhibit 11.1
Apex PC Solutions, Inc.
Computation of Pro Forma Income Per Share
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1996
(Pro Forma) (Pro Forma)
------------ ------------
<S> <C> <C>
Net income $ 2,343,515 $ 3,607,723
------------ ------------
------------ ------------
Shares used in calculating pro forma
income per share
Weighted average common shares
outstanding 8,000,000 5,600,000
Net effect of conversion of Series A
Convertible Stock to Common Stock,
calculated using the treasury stock
method at the offering price of $10
per share, and treated as outstanding
for the entire period 2,179,500 2,179,500
Net effect of stock options granted
during the 12 months prior to this
offering at less than the offering
price, calculated using the treasury
stock method at the offering price of
$10 per share, and treated as
outstanding for the entire period 1,340,027 1,340,027
------------ ------------
Total shares 11,519,527 9,119,527
------------ ------------
------------ ------------
Pro forma income per share $0.20 $0.40
------------ ------------
------------ ------------
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Amendment No.
3 to Form SB-2 (File No. 333-17753) of our report dated January 17, 1997 on our
audits of the financial statements of Apex PC Solutions, Inc. We also consent to
the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Seattle, Washington
February 6, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APEX PC SOLUTIONS INC. FOR THE YEAR ENDED DECEMBER 31,
1995 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 2,676 2,119
<SECURITIES> 0 0
<RECEIVABLES> 4,529 6,506
<ALLOWANCES> 30 336
<INVENTORY> 1,258 1,653
<CURRENT-ASSETS> 8,618 10,873
<PP&E> 285 659
<DEPRECIATION> 86 196
<TOTAL-ASSETS> 9,048 11,953
<CURRENT-LIABILITIES> 3,968 2,501
<BONDS> 25,615 25,111
1,000 1,000
2,205 2,205
<COMMON> 295 648
<OTHER-SE> (24,043) (19,528)
<TOTAL-LIABILITY-AND-EQUITY> 9,048 11,953
<SALES> 19,671 33,622
<TOTAL-REVENUES> 19,671 33,622
<CGS> 10,636 19,239
<TOTAL-COSTS> 5,298 7,055
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 30 306
<INTEREST-EXPENSE> 216 1,922
<INCOME-PRETAX> 3,551 5,469
<INCOME-TAX> (52) 1,861
<INCOME-CONTINUING> 3,603 3,608
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,603 3,608
<EPS-PRIMARY> .20 .40
<EPS-DILUTED> .20 .40
</TABLE>
