<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 27, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the period from __________ to __________
Commission file number: 000-21959
APEX PC SOLUTIONS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Washington 91-1577634
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20031 142nd Avenue, N.E. 98072
Woodinville, Washington (Zip Code)
(Address of Principal Executive Offices)
425-402-9393
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No __
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding at July 11, 1997
- ------------------------------ ------------------------------
Common Stock 12,163,328
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PART I
ITEM 1. FINANCIAL STATEMENTS
APEX PC SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 27, JUNE 30, JUNE 27,
1996 1997 1996 1997
---------- ---------- ---------- -----------
Net sales $6,085,884 $12,094,483 $14,001,937 $23,681,366
Cost of sales 3,675,272 6,609,153 8,343,392 12,991,830
---------- ----------- ----------- -----------
Gross profit 2,410,612 5,485,330 5,658,545 10,689,536
---------- ----------- ----------- -----------
Research and development 205,662 494,192 463,622 935,986
Sales and marketing 539,747 990,801 1,117,036 1,876,528
General and administrative 482,153 922,539 931,175 1,703,320
---------- ----------- ----------- -----------
Total operating
expenses 1,227,562 2,407,532 2,511,833 4,515,834
---------- ----------- ----------- -----------
Income from operations 1,183,050 3,077,798 3,146,712 6,173,702
Interest income (expense),
net (474,937) 117,059 (946,875) (123,344)
Other income - - - 146,324
---------- ----------- ----------- -----------
Income from operations
before income taxes and
extraordinary item 708,113 3,194,857 2,199,837 6,196,682
Provision for income taxes (240,561) (1,089,454) (748,185) (2,114,954)
---------- ----------- ----------- -----------
Income before
extraordinary item 467,552 2,105,403 1,451,652 4,081,728
Extraordinary item --
loss on early
extinguishment of debt,
net of applicable
income taxes -- -- -- (140,763)
---------- ----------- ----------- -----------
Net income $ 467,552 $ 2,105,403 $ 1,451,652 $ 3,940,965
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Pro forma per share
amounts:
Income before
extraordinary item $0.05 $0.16 $0.16 $0.34
Extraordinary item -- -- -- (0.01)
---------- ----------- ----------- -----------
Pro forma income
per share $0.05 $0.16 $0.16 $0.33
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Pro forma weighted
average shares used in
computing per share
amounts 9,091,932 12,860,770 9,091,932 11,839,388
See notes accompanying these financial statements.
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APEX PC SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 27,
1996 1997
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,118,887 $ 7,956,172
Accounts receivable, net of
allowance for doubtful
accounts 6,170,193 6,983,029
Inventories 1,653,011 2,393,250
Prepaid expenses 130,218 382,695
Deferred tax assets 800,700 519,320
----------- -----------
Total current assets 10,873,009 18,234,466
----------- -----------
Property and equipment, at cost:
Leasehold improvements 4,677 12,239
Furniture and office equipment 273,831 359,030
Computer and other equipment 380,334 556,480
----------- -----------
658,842 927,749
Less accumulated depreciation 195,959 283,812
----------- -----------
462,883 643,937
----------- -----------
Other assets 617,255 17,672
----------- -----------
Total assets $11,953,147 18,896,075
----------- -----------
----------- -----------
(Continued on next page)
See notes accompanying these financial statements.
3
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APEX PC SOLUTIONS, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, JUNE 27,
1996 1997
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term debt $ 504,349 $ --
Accounts payable 530,525 1,206,589
Accrued wages and commissions 554,352 525,166
Accrued warranty costs 630,000 745,000
Other accrued expenses 282,040 546,175
------------ -----------
Total current liabilities 2,501,266 3,022,930
Subordinated debt 20,000,000 --
Long-term debt, less current portion 5,110,549 --
Deferred taxes 16,500 21,250
------------ -----------
Total liabilities 27,628,315 3,044,180
------------ -----------
Preferred stock, Series A redeemable
and convertible, no par value;
300,000 shares authorized,
issued and outstanding at
December 31, 1996 2,205,000 --
Preferred stock, Series B redeemable,
no par value; 200,000 shares
authorized, issued and
outstanding at December 31, 1996 1,000,000 --
------------ -----------
Shareholders' equity (deficit):
Preferred stock; 100,000 shares
authorized at December 31,
1996 and 1,000,000 shares
authorized at June 27, 1997;
no shares issued and
outstanding -- --
Common stock, no par value;
10,000,000 shares authorized
at December 31, 1996, and
100,000,000 shares authorized
at June 27 1997; 6,260,016
and 12,163,328 shares issued
and outstanding 648,260 31,526,508
Deferred compensation (93,431) (180,581)
Accumulated deficit (19,434,997) (15,494,032)
------------ -----------
Total shareholders' equity
(deficit) (18,880,168) 15,851,895
------------ -----------
Total liabilities and shareholders'
equity (deficit) $11,953,147 $18,896,075
------------ -----------
------------ -----------
See notes accompanying these financial statements.
4
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APEX PC SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 27,
1996 1997
------------ -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 769,533 $ 3,831,463
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (231,141) (268,907)
------------ -----------
Net cash used by investing
activities (231,141) (268,907)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes to
shareholder (270,000) --
Repayments of long-term debt (2,074) (25,614,898)
Payment of loan fees (45,000) --
Proceeds from initial public
offering of common stock (1) -- 28,866,741
Proceeds from issuance of common
stock and exercise of common
stock options 9,508 22,886
Redemption of Series B redeemable
preferred stock -- (1,000,000)
------------ -----------
Net cash provided (used) by
investing activities (307,566) 2,274,729
------------ -----------
Net increase in cash and cash
equivalents 230,826 5,837,285
Cash and cash equivalents at
beginning of period 2,676,290 2,118,887
------------ -----------
Cash and cash equivalents at
end of period $2,907,116 $7,956,172
------------ -----------
------------ -----------
(1) Total net proceeds from the initial public offering of common stock
were $28,550,762, after reduction of $315,979 for prepaid offering
expenses incurred in 1996.
See notes accompanying these financial statements.
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APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles and reflect all
adjustments consisting of normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the
results for the periods shown. The results of operations for such periods
are not necessarily indicative of the results expected for the full fiscal
year or for any future period. The preparation of 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
The accompanying financial statements should be read in conjunction with
the audited financial statements of Apex PC Solutions, Inc. (the
"Company") for the year ended December 31, 1996 and the notes thereto
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996 and the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 28, 1997 on file with the Securities and Exchange
Commission.
The Company reports its annual results based on years ending December 31.
Interim periods in years prior to 1997 are reported on a calendar quarter
basis. Commencing in 1997, the Company reports its quarterly results for
the first three interim periods ending on the last Friday of March, June
and September and for the fourth interim period ending on December 31.
The difference between quarterly results reported on this basis and
quarterly results reported on the basis of calendar quarters for years
prior to 1997 is not material.
The Company formed a foreign sales corporation subsidiary in the first
quarter of 1997. Consequently, beginning in 1997, the Company's financial
statements are presented on a consolidated basis.
2. Leveraged Recapitalization
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 subordinated promissory notes issued by the Company in
connection with the Leveraged Recapitalization were repaid upon
consummation of the Company's initial public offering in February 1997
(the "IPO"). In connection with 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 redeemed the balance of such shares for $5.00 per share (an aggregate
of $600,000) upon the consummation of the Company's IPO. In connection
with the Leveraged Recapitalization, the Company incurred approximately
$5.6 million of long-term bank indebtedness in December 1995, which was
repaid using the net proceeds of the Company's IPO.
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3. Extraordinary Item
Because of the early retirement of the long-term bank indebtedness and
subordinated promissory notes upon consummation of the Company's IPO, the
Company's statement of operations in the first quarter of 1997 reflects an
extraordinary loss for the write-off of deferred financing costs of
approximately $141,000, net of applicable income taxes.
4. Other Income
The statement of operations includes other income of approximately
$136,000 received by the Company in the first quarter of 1997 in
connection with the Leveraged Recapitalization.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THE INFORMATION CONTAINED IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION" CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED
IN THE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING TO FUTURE NET
SALES, FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE SALES AND
MARKETING EXPENDITURES, FUTURE GENERAL AND ADMINISTRATIVE EXPENDITURES,
BACKLOG AND FUTURE LIQUIDITY AND CAPITAL RESOURCES. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS ITEM 2 -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996,
AND IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED
MARCH 28, 1997, ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
The Company designs, manufactures and markets stand-alone switching
systems and integrated server cabinet systems for the client/server computing
market. The Company's switching products, including OUTLOOK, OUTLOOK(4) and
VIEWPOINT, enable network administrators to access multiple servers from a
single, centralized keyboard, monitor and mouse configuration (a "console"),
consolidate hardware and provide direct hardwired connections between the
switch and the attached servers to facilitate access to servers even when the
network is down. The Company also offers integrated server cabinet systems to
consolidate and store heterogeneous servers and related hardware in one or more
cabinets to facilitate 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. A substantial portion of the Company's
sales are concentrated among a limited number of original equipment
manufacturers which purchase the Company's switching systems on a private
label basis ("OEMs"). For the six months ended June 27, 1997, sales to the
Company's OEM customers represented 66% of the Company's net sales. 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. In the past, 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. The
failure of any of the Company's private label OEMs to continue to place
orders at current or anticipated levels would likely have a material adverse
effect on the Company's
7
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business, financial condition and results of operations.
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and annual basis, and 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, and,
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 relating to
entering 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. 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.
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 integrated server 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 increased competition and the
introduction of new technologies may affect pricing of the Company's products
and therefore erode the Company's gross margins in the future. 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.
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.
8
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RESULTS OF OPERATIONS
The following table sets forth selected unaudited statement of operations
data expressed as a percentage of net sales:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 27, JUNE 30, JUNE 27,
1996 1997 1996 1997
------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.4 54.6 59.6 54.9
---- ---- ---- ----
Gross margin 39.6 45.4 40.4 45.1
---- ---- ---- ----
Operating expenses:
Research and development 3.4 4.1 3.3 4.0
Sales and marketing 8.9 8.3 8.0 7.9
General and administrative 7.9 7.6 6.6 7.2
---- ---- ---- ----
Total operating
expenses 20.2 20.0 17.9 19.1
---- ---- ---- ----
Income from operations 19.4 25.4 22.5 26.0
Interest income (expense),
net (7.8) 1.0 (6.8) (0.5)
Other income 0.0 0.0 0.0 0.6
---- ---- ---- ----
Income from operations
before income taxes
and extraordinary item 11.6 26.4 15.7 26.1
Provision for income taxes 3.9 9.0 5.3 8.9
---- ---- ---- ----
Income before extraordinary
item 7.7 17.4 10.4 17.2
Extraordinary item -- loss on
early extinguishment of
debt, net of applicable
income taxes 0.0 0.0 0.0 (0.6)
---- ---- ---- ----
Net income 7.7% 17.4% 10.4% 16.6%
---- ---- ---- ----
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet systems. Net sales increased 99% to
$12.1 million for the second quarter of 1997 from $6.1 million for the
second quarter of 1996, due primarily to increasing demand for Apex branded
products. Branded sales increased to $5.1 million in the second quarter of
1997 from $2.2 million a year ago. Private label OEM sales and sales of Apex
branded products represented 58% and 42%, respectively, of net sales for the
second quarter of 1997, compared to 64% and 36%, respectively, of net sales
for the second quarter of 1996. 1997 year-to-date net sales increased 69% to
$23.7 million from $14.0 million year-to-date in 1996, due primarily to
absolute growth in sales of stand-alone switching systems to private label
OEM customers and, to a lesser extent, to increased sales of Apex branded
switching systems and integrated server cabinet systems. 1997 year-to-date
private label OEM sales and sales of Apex branded products represented 66%
and 34%, respectively, of net sales, compared to 68% and 32%, respectively,
year-to-date in 1996. Any cancellation, rescheduling or reduction of orders
by any of the Company's private label OEM customers could materially
adversely affect the Company's future operating results.
GROSS MARGIN. Gross margin increased to 45.4% for the second quarter of
1997 from 39.6% for the second quarter of 1996, due primarily to a
significant increase in the percentage of Apex branded sales, which generally
have higher gross margins than OEM sales. 1997 year-to-date gross margin
increased to 45.1% from 40.4% year-to-date in 1996, due primarily to shifts
in the Company's product mix to a larger percentage of branded switch and
integrated cabinet system sales. The Company expects that increased price
competition may affect pricing and therefore erode the Company's gross
margins in the future.
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 $494,000 for the
second quarter of 1997 from $206,000 for the second quarter of 1996, due
primarily to increased compensation expenses associated with increased staffing
levels and, to a
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lesser extent, to increased project spending. Research and development
expenses as a percentage of net sales were 4.1% for the second quarter of
1997, compared to 3.4% for the second quarter of 1996. 1997 year-to-date
research and development expenses increased to $936,000 from $464,000
year-to-date in 1996, due to the same reasons noted for the second quarter.
As a percentage of net sales, 1997 year-to-date research and development
expenses were 4.0%, compared to 3.3% year-to-date in 1996. The Company
believes that the timely development of innovative products and enhancements
to existing products is essential to maintaining its competitive position
and, therefore, expects research and development expenditures to increase in
absolute dollars.
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 $991,000 for the second quarter of 1997 from $540,000 for the
second quarter of 1996, but decreased as a percentage of net sales to 8.3%
from 8.9%. The increase in absolute dollars was due primarily to increased
compensation expense associated with increased staffing levels and increased
advertising and trade show expenses, including expenses relating to market
entry and advertising strategies for Europe. 1997 year-to-date sales and
marketing expenses increased to $1.9 million from $1.1 million year-to-date
in 1996, but decreased as a percentage of net sales to 7.9% from 8.0%. The
increase in absolute dollars was due to the same reasons noted above for the
second quarter. The Company expects sales and marketing expenditures to
increase in absolute dollars as it seeks to increase branded sales, in
general, and international sales, in particular.
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 $923,000 for the second quarter of
1997 from $482,000 for the second quarter of 1996, but decreased to 7.6% from
7.9% of net sales. The increase in absolute dollars was due primarily to
increased personnel costs, including the addition of a Chief Financial
Officer and Corporate Controller, and, to a lesser extent, to increased costs
relating to the Company's transition to a public company. General and
administrative expenses increased to $1.7 million year-to-date for 1997 from
$931,000 for year-to-date 1996, increasing to 7.2% from 6.6% of net sales.
The increase in absolute dollars was due to the same reasons noted above for
the second quarter. The Company expects general and administrative expenses
to increase in absolute dollars to support the growth of the operations and
sales functions.
NET INTEREST EXPENSE (INCOME). The Company had net interest income of
$117,000 for the second quarter of 1997, compared to net interest expense of
$475,000 for the second quarter of 1996. This $592,000 net change resulted
primarily from the elimination of all indebtedness incurred in the Leveraged
Recapitalization, as well as the elimination of all long-term bank
indebtedness, using the proceeds of the Company's initial public offering in
February 1997 ("IPO"). 1997 year-to-date net interest expense decreased to
$123,000 from $947,000 year-to-date 1996. This $824,000 net change was due to
the same reasons noted above for the second quarter.
PROVISION FOR INCOME TAXES. The provision for income taxes was $1.1
million for the second quarter of 1997, compared to $241,000 for the second
quarter of 1996. The 1997 year-to-date provision for income taxes increased to
$2.1 million from $748,000 year-to-date in 1996. The effective federal tax
rate for each of these periods was approximately 34%.
NET INCOME. Net income increased 350% to $2.1 million for the second
quarter of 1997 from $468,000 for the second quarter of 1996 due primarily to
increased net sales and related gross profits and decreased interest expense
resulting from the elimination of long-term indebtedness using the proceeds of
the Company's IPO and, to a lesser extent, to increased percentage gross
margin. As a percentage of net sales, net income increased to 17.4% for the
second quarter of 1997 from 7.7% for the second quarter of
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1996. The increase as a percentage of net sales was due to the factors
discussed above. 1997 year-to-date net income increased 171% to $3.9 million
from $1.45 million year-to-date in 1996 due to the same reasons noted above
for the second quarter. As a percentage of net sales, 1997 year-to-date net
income increased to 16.6% from 10.4% year-to-date in 1996, and for the same
reasons noted above.
BACKLOG
As of June 27, 1997, the Company's backlog was $10.9 million, compared to
$4.2 million at the end of the second quarter of 1996. 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. Generally, purchase orders
are subject to cancellation up to eight weeks prior to the scheduled shipment
date. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 27, 1997 the Company's principal sources of liquidity
consisted of approximately $7.9 million in cash and cash equivalents, an
increase of $5.8 million from the December 31, 1996 balances. In addition,
since December 1995, the Company has maintained a combined line of credit and
letter of credit facility with a bank. In early April 1997, this facility
was renewed, providing a final maturity date of April 30, 1998 and increasing
the aggregate borrowing capacity from $3.0 million to $5.0 million. Under the
line of credit, the Company may borrow up to a specified amount based upon
its accounts receivable. Under the letter of credit arrangement, the bank
will issue commercial letters of credit up to $5.0 million (less any amounts
outstanding under the line of credit) at prime. There were no borrowings
under the line of credit and the letter of credit facility from December 1995
through June 1997. Thus, all $3.0 million was available through March 1997,
and all $5.0 million thereafter.
Cash generated from operating activities increased to $3.8 million
year-to-date for 1997 from $770,000 year-to-date for 1996. This increase in
cash flow was primarily due to increased net income, decreased bonus payments
and an increase in accounts payable, partially offset by increases in
accounts receivable and inventories.
In February 1997, the Company consummated its IPO. The net proceeds to
the Company from the IPO were approximately $28.4 million, after deducting
approximately $190,000 of directors and officers insurance premium. Of that
amount, $20.0 million was used to repay the indebtedness evidenced by the
Class A and Class B Subordinated Promissory Notes issued in the Leveraged
Recapitalization, approximately $5.6 million was used to repay long-term bank
debt incurred by the Company in December 1995, and $600,000 was used to
redeem shares of Series B Redeemable Preferred Stock. See Note 2 to
Financial Statements. After application of the net proceeds of the IPO to the
foregoing items, and payment of IPO expenses (including $190,000 of directors
and officers insurance premium which is being expensed in 1997 as a period
cost), the remaining proceeds from the IPO were approximately $2.2 million.
The Company believes that existing cash balances, cash generated from
operations and the funds available to it under credit facilities, together
with the remaining proceeds from the IPO, will be sufficient to fund its
operations through 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." This statement specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"), to simplify the existing
computational guidelines and increase comparability on an international
basis. The statement will be effective for interim and annual reporting
periods ending after December 15, 1997. This statement will replace
"primary" EPS with "basic" EPS, the principal difference being the exclusion
of common stock equivalents in the computation of basic EPS. In addition,
this statement will require the dual presentation of
11
<PAGE>
basic and diluted EPS on the face of the consolidated statements of
operations. Basic EPS computed pursuant to this statement will differ from
historical net income per share previously reported due to the exclusion of
common stock equivalents from the computation. Diluted EPS computed pursuant
to this statement is not expected to be materially different from the
historical net income per share previously presented.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The statement will be effective for fiscal years beginning after
December 15, 1997. Reclassification for earlier periods is required for
comparative purposes. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the
statement requires only additional disclosure, the Company does not expect
the statement to have a material impact on its financial position or results
of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and
services, major customers, and the material countries in which the entity
holds assets and reports revenues. The statement will be effective for
fiscal years beginning after December 15, 1997. Reclassification for earlier
periods is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the Company does not expect the statement to have a material
impact on its financial position or results of operations.
12
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Meeting of Shareholders on June 26, 1997. At
the Annual Meeting, the shareholders elected each of the five nominees for
director, Kevin J. Hafer, Sterling Crum, Jeffrey T. Chambers, William McAleer
and Edwin L. Harper, with 11,673,887 votes in favor and 1,250 votes against
each nominee. The shareholders voted to ratify the appointment of Coopers &
Lybrand LLP as the Company's auditors with 11,674,707 votes in favor and 430
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.2 Amended and Restated Bylaws (incorporated by reference to the Company's
Registration Statement on Form SB-2 filed with the Securities and
Exchange Commission on July 21, 1997)
10.3.2 First Amendment to Employment Agreement dated December 1996 by
and between the Company and Kevin J. Hafer (incorporated by
reference to the Company's Registration Statement on Form SB-2
filed with the Securities and Exchange Commission on July 21, 1997)
10.5.2 Second Amendment to Lease dated March 13, 1997 by and between
the Company and Christopher L. Clark (incorporated by reference
to the Company's Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on July 21, 1997)
10.6 Purchase Agreement dated September 19, 1994 by and between
the Company and Compaq Computer Corporation, as amended+ ++
(incorporated by reference to the Company's Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on
July 21, 1997)
10.16 Business Loan Agreement dated March 27, 1997 by and between the
Company and U.S. Bank of Washington, National Association
(incorporated by reference to the Company's Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on
July 21, 1997)
11.1 Statement re Computation of Earnings Per Share
21.1 Subsidiaries of Registrant (incorporated by reference to the Company's
Registration Statement on Form SB-2 filed with the Securities and
Exchange Commission on July 21, 1997)
27.1 Financial Data Schedule
+ Confidential treatment requested for portions of this agreement.
++ Portions of this agreement are subject to confidential treatment.
ITEMS 1, 2, 3, and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
APEX PC SOLUTIONS, INC.
(Registrant)
/s/ Kevin J. Hafer
Date: July 21, 1997 -----------------------
Kevin J. Hafer
President and Chief Executive Officer
/s/ Douglas A. Bevis
Date: July 21, 1997 -----------------------
Douglas A. Bevis
Vice President, Chief Financial Officer
13
<PAGE>
EXHIBIT 11.1 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
APEX PC SOLUTIONS, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 27, JUNE 30, JUNE 27,
1996 1997 1996 1997
---------- ---------- ---------- -----------
Net income $ 467,552 $2,105,403 $1,451,652 $ 3,940,965
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Pro forma weighted
average common
shares outstanding 5,600,000 12,161,362 5,600,000 10,536,546
Pro forma common
stock equivalents -
Series A redeemable
and convertible
preferred stock 2,155,000 -- 2,155,000 607,813
Pro forma common stock
equivalents - stock
options 1,336,932 699,408 1,336,932 695,029
---------- ---------- ---------- -----------
Pro forma weighted
average shares used
in computing net
income per share 9,091,932 12,860,770 9,091,932 11,839,388
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Pro forma income per
share $0.05 $0.16 $0.16 $0.33
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10QSB
FOR THE QUARTER ENDED JUNE 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-27-1997
<CASH> 7,956,172
<SECURITIES> 0
<RECEIVABLES> 7,318,932
<ALLOWANCES> 335,903
<INVENTORY> 2,393,250
<CURRENT-ASSETS> 18,234,466
<PP&E> 927,749
<DEPRECIATION> 283,812
<TOTAL-ASSETS> 18,896,075
<CURRENT-LIABILITIES> 3,022,930
<BONDS> 0
0
0
<COMMON> 31,526,508
<OTHER-SE> (15,674,613)
<TOTAL-LIABILITY-AND-EQUITY> 18,896,075
<SALES> 23,681,366
<TOTAL-REVENUES> 23,681,366
<CGS> 12,991,830
<TOTAL-COSTS> 12,991,830
<OTHER-EXPENSES> 4,515,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,344
<INCOME-PRETAX> 6,196,682
<INCOME-TAX> 2,114,954
<INCOME-CONTINUING> 4,081,728
<DISCONTINUED> 0
<EXTRAORDINARY> (140,763)
<CHANGES> 0
<NET-INCOME> 3,940,965
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
