<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 26, 1998 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from __________ to __________
Commission file number: 000-21959
APEX PC SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-1577634
(State or Other Jurisdiction (I.R.S. Employer
of Identification Number)
Incorporation or
Organization)
20031 142nd Avenue, N.E.
Woodinville, Washington 98072
(Address of Principal (Zip Code)
Executive Offices)
425-402-9393
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant has (1) filed all reports,
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X]Yes [_] No
As of July 24, 1998, the number of outstanding shares of the Company's
Common Stock was 13,465,178.
1
<PAGE>
APEX PC SOLUTIONS, INC.
FORM 10-Q
JUNE 26, 1998
INDEX
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations
(unaudited) for the Quarters and the Six Months
Ended June 26, 1998 and June 27, 1997 3
Consolidated Balance Sheets at June 26, 1998
(unaudited) and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended June 26,
1998 and June 27, 1997 5
Notes to Consolidated Financial Statements
(unaudited) 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-13
Part II Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APEX PC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $18,301,876 $12,094,483 $34,005,533 $23,681,366
Cost of sales 9,821,218 6,609,153 18,148,694 12,991,830
----------- ----------- ----------- -----------
Gross profit 8,480,658 5,485,330 15,856,839 10,689,536
----------- ----------- ----------- -----------
Research and development 698,197 494,192 1,344,567 935,986
Sales and marketing 1,394,369 990,801 2,604,605 1,876,528
General and administrative 1,579,660 922,539 2,637,363 1,703,320
----------- ----------- ----------- -----------
Total operating expenses 3,672,226 2,407,532 6,586,535 4,515,834
----------- ----------- ----------- -----------
Income from operations 4,808,432 3,077,798 9,270,304 6,173,702
Interest income (expense), net 607,960 117,059 1,174,816 (123,344)
Other income - - - 146,324
----------- ----------- ----------- -----------
Income from operations before income taxes
and extraordinary item 5,416,392 3,194,857 10,445,120 6,196,682
Provision for income taxes 1,816,852 1,089,454 3,501,476 2,114,954
----------- ----------- ----------- -----------
Income before extraordinary item 3,599,540 2,105,403 6,943,644 4,081,728
Extraordinary item -- loss on early
extinguishment of debt, net of applicable
income tax benefit of $72,511 - - - (140,763)
----------- ----------- ----------- -----------
Net income $ 3,599,540 $ 2,105,403 $ 6,943,644 $ 3,940,965
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share amounts:
Basic:
Income before extraordinary item $ 0.27 $ 0.17 $ 0.52 $ 0.38
Extraordinary item - - - (0.01)
----------- ----------- ----------- -----------
Net income $ 0.27 $ 0.17 $ 0.52 $ 0.37
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted:
Income before extraordinary item $ 0.26 $ 0.17 $ 0.50 $ 0.35
Extraordinary item - - - (0.01)
----------- ----------- ----------- -----------
Net income $ 0.26 $ 0.17 $ 0.50 $ 0.34
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares used in computing
net income per share:
Basic 13,448,779 12,161,363 13,443,533 10,536,547
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted 14,013,408 12,6119,555 13,987,206 11,651,464
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes accompanying these consolidated financial statements.
3
<PAGE>
APEX PC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 26, DECEMBER 31,
1998 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,706,571 $11,824,978
Investments 36,531,551 27,878,683
Accounts receivable, net of allowance
for doubtful accounts 9,799,337 9,843,716
Inventories 2,935,481 2,918,119
Interest receivable 593,044 378,730
Prepaid expenses 395,734 243,741
Deferred tax assets 610,766 554,664
---------- ----------
Total current assets 60,572,484 53,642,631
---------- ----------
Property and equipment, at cost:
Leasehold improvements 145,937 145,937
Furniture and office equipment 497,935 500,281
Computer and other equipment 677,387 655,581
---------- ----------
1,321,259 1,301,799
Less accumulated depreciation 604,474 432,847
---------- ----------
716,785 868,952
---------- ----------
Investments 1,393,140 741,538
---------- ----------
Other assets 107,822 17,672
---------- ----------
Total assets $62,790,231 $55,270,793
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 598,546 $ 326,619
Accrued wages and commissions 709,597 791,062
Accrued warranty costs 745,000 745,000
Accrued income taxes 25,541 -
Other accrued expenses 839,138 634,765
---------- ----------
Total current liabilities 2,917,822 2,497,446
Deferred taxes 40,000 35,000
---------- ----------
Total liabilities 2,957,822 2,532,446
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares
authorized; no shares issued and
outstanding - -
Common stock, no par value; 100,000,000
shares authorized; 13,453,164 and
13,434,384 shares issued and
outstanding, respectively 62,141,195 62,014,406
Deferred compensation (144,502) (168,131)
Retained earnings (deficit) (2,164,284) (9,107,928)
---------- ----------
Total shareholders' equity 59,832,409 52,738,347
---------- ----------
Total liabilities and shareholders' equity $62,790,231 $55,270,793
---------- ----------
---------- ----------
</TABLE>
See notes accompanying these consolidated financial statements.
4
<PAGE>
APEX PC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 27,
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net cash provided by operating activities $ 7,078,734 $ 3,831,463
----------- -----------
Cash flows from investing activities:
Purchases of investments (36,582,017) -
Maturities of investments 27,277,547 -
Purchases of property and equipment (19,460) (268,907)
----------- -----------
Net cash used in investing activities (9,323,930) (268,907)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt and capital lease - (25,614,898)
Proceeds from Initial Public Offering of
common stock - 28,866,741
Proceeds from issuance of common stock and
exercise of common stock options 126,789 22,886
Redemption of Series B redeemable preferred
stock (1,000,000)
----------- -----------
Net cash provided by financing activities 126,789 2,274,729
----------- -----------
Net increase (decrease) in cash and cash
equivalents (2,118,407) 5,837,285
Cash and cash equivalents at beginning of period 11,824,978 2,118,887
----------- -----------
Cash and cash equivalents at end of period $ 9,706,571 $7,956,172
----------- -----------
----------- -----------
</TABLE>
See notes accompanying these consolidated financial statements.
5
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
The accompanying unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements of Apex PC Solutions, Inc. ("Apex" or the "Company") for the
year ended December 31, 1997 and the notes thereto contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997, on file with the Securities and Exchange Commission.
The Company reports its annual results based on years ending
December 31. 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 financial statements of the Company are consolidated and
include the accounts of the Company and its wholly-owned subsidiary, Apex
PC Solutions, Ltd. (a foreign sales corporation). Significant intercompany
transactions and balances have been eliminated.
The Company is in the process of evaluating the impact of
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," on its financial statements
and does not expect the statement to have a material impact on its
financial position or results of operations. The statement will be
effective for all fiscal quarters of fiscal years beginning after June 15,
1999.
Note 2. Inventories.
Inventories consisted of the following at:
<TABLE>
<CAPTION>
JUNE 26, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $ 959,120 $ 979,438
Work-in-process 1,165,886 908,815
Finished goods 1,185,475 1,264,866
--------- ---------
3,310,481 3,153,119
Less reserve for obsolescence (375,000) (235,000)
--------- ---------
$2,935,481 $2,918,119
--------- ---------
--------- ---------
</TABLE>
Note 3. Leveraged Recapitalization and Initial Public Offering
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
6
<PAGE>
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.
Note 4. Follow-On Offering
A follow-on public offering of 4.6 million shares of the
Company's common stock (including 600,000 shares sold pursuant to the
underwriters' over-allotment option) was completed in August 1997, at a
price of $26 per share. Of the total, 1,250,000 shares were offered by
the Company and 3,350,000 shares were offered by certain selling
shareholders. The Company plans to use the approximately $30.3 million in
net proceeds for general corporate purposes.
Note 5. 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 for the six months
ended June 26, 1997, reflects an extraordinary loss for the write-off of
deferred financing costs of approximately $141,000, net of applicable
income taxes.
Note 6. Other Income
Other income for the six months ended June 26, 1997, includes
approximately $136,000 received by the Company in 1997 in connection with
the Leveraged Recapitalization.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE INFORMATION CONTAINED IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS RELATING TO FUTURE NET SALES, FUTURE GROSS MARGINS,
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 OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND IN THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997, AND IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 27, 1998, ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION.
7
<PAGE>
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 products, including OUTLOOK, OUTLOOK(4),
VIEWPOINT, and EL-40LC, enable network administrators to access multiple servers
from one or more centralized keyboard, monitor and mouse configurations
("consoles"), 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
solutions 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. For the quarter ended June 26, 1998, sales to the Company's
private-label OEM customers represented 61% of the Company's net sales. The
Company's private-label 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 private-label
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 business, financial condition and results of operations.
The Company's business and results of operations are becoming more
dependent upon the Company's sales of branded switching products to other
manufacturers of servers and related networking products, who integrate and sell
Apex-brand switches with their own products ("Apex-brand OEMs"). The Company
does not have contracts with any of these customers, who are obligated to
purchase products from the Company only pursuant to binding purchase orders, and
these customers could cease doing business with the Company at any time. The
Company's business with these customers is subject to risks such as short order
cycles and difficulty in predicting sales, reductions or delays in orders,
adoption of competing products developed by third parties of the customer or by
the customer's own internal development team, and change in corporate ownership,
financial condition, business direction or product mix of the customer. The
loss of, or material decline in orders from, certain of these customers could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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 private-label OEM and other large 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; competition and
price reductions by the Company's 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.
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.
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 private-label OEM customers
and expects this pattern to continue in the future. Although the Company's
private-label
8
<PAGE>
OEM customers typically place orders for products up to several months prior
to scheduled shipment dates, these orders are subject to cancellation up to
four to six 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 private-label 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 private-label 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 private-label 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 many 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.
With recent industry-wide initiatives to reduce all channel
inventories and to shorten lead times, trends with Apex's major customers are,
generally, to reduce the number of weeks of forward-committed firm orders. As a
result of these initiatives, which currently are affecting the Company's
business with certain private-label and Apex-brand OEMs, the Company believes
that its sales are becoming more difficult to predict.
Gross margins may vary significantly from period to period depending
on a number of factors, including: the ratio of private-label OEM sales to
branded sales, as private-label OEM sales typically have lower gross margins
than branded sales; product mix, including the percentage of integrated server
cabinet solution 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 that 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 third and fourth quarters generally have 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.
On February 24, 1998, the Company signed an agreement for a five-year
lease of approximately 117,000 square feet in an industrial office building
being built in Redmond, Washington for scheduled occupancy in February 1999.
The initial base rent under the lease, portions of which will be allocable to
cost of sales and to general and administrative expense, is approximately
$90,000 per month, plus taxes, insurance and maintenance. Consequently,
beginning in 1999, the Company's gross margin and net income may be adversely
affected by the Company's increased rent expense.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected unaudited statement of operations
data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . 53.7 54.6 53.4 54.9
---- ---- ---- ----
Gross margin . . . . . . . . . . . . . . . . 46.3 45.4 46.6 45.1
---- ---- ---- ----
Operating expenses:
Research and development. . . . . . . . 3.8 4.1 4.0 4.0
Sales and marketing . . . . . . . . . . 7.6 8.3 7.7 7.9
General and administrative. . . . . . . 8.6 7.6 7.7 7.2
---- ---- ---- ----
Total operating expenses . . . . . . 20.0 20.0 19.4 19.1
---- ---- ---- ----
Income from operations . . . . . . . . . . . 26.3 25.4 27.2 26.0
Interest income (expense), net . . . . . . . 3.3 1.0 3.5 (0.5)
Other income . . . . . . . . . . . . . . . . - - - 0.6
---- ---- ---- ----
Income before income taxes
and extraordinary item. . . . . . . . . 29.6 26.4 30.7 26.1
Provision for income taxes . . . . . . . . . 9.9 9.0 10.3 8.9
---- ---- ---- ----
Income before extraordinary item . . . . . . 19.7 17.4 20.4 17.2
Extraordinary item -- loss on early
extinguishment of debt, net of
applicable income tax benefit . . . . . - - - (0.6)
---- ---- ---- ----
Net income . . . . . . . . . . . . . . . . . 19.7% 17.4% 20.4% 16.6%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet solutions. Net sales increased 51% to
$18.3 million for the second quarter of 1998 from $12.1 million for the second
quarter of 1997, due to increased demand for both private-label OEM and
Apex-brand products. Private-label OEM product sales increased 60% to $11.2
million in the second quarter of 1998 from $7.0 million a year ago. Apex-brand
product sales increased 40% to $7.1 million in the second quarter of 1998 from
$5.1 million a year ago. Private-label OEM sales and sales of Apex-brand
products represented 61% and 39%, respectively, of net sales for the second
quarter of 1998, compared to 58% and 42%, respectively, of net sales for the
second quarter of 1997. 1998 year-to-date net sales increased 44% to $34.0
million from $23.7 million year-to-date in 1997 primarily due primarily to
growth in sales of Apex-brand products and, to a lesser extent, increased sales
to private-label OEM customers. 1998 year-to-date private-label OEM sales and
sales of Apex-brand products represented 58% and 42%, respectively, of net
sales, compared to 66% and 34%, respectively, year-to date in 1997. Any
cancellation, rescheduling or reduction of orders by certain of the Company's
private-label OEM customers or other major customers could materially adversely
affect the Company's future operating results.
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
integrated server cabinet solution 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 increased to 46.3% for the second quarter of 1998 from 45.4% for
the second quarter of 1997 due to higher margins resulting from increased sales
volume and to a higher percentage of stand-alone switch sales in the Company's
product mix. 1998 year to date gross margin increased to 46.6% from 45.1% due
to the same reason. Increased 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 $698,000 for the
second quarter of 1998 from $494,000 for the second quarter of 1997. As a
percentage of net sales, research and development expenses decreased to 3.8% for
the second
10
<PAGE>
quarter of 1998 from 4.1% for the second quarter of 1997. The increase in
absolute dollars was due primarily to increased project spending and, to a
lesser extent, increased compensation expense associated with increased staffing
levels. 1998 year-to-date research and development expenses increased to $1.3
million from $936,000 year-to-date in 1997, due to the same reasons noted for
the second quarter. As a percentage of net sales, year-to-date research and
development expenses remained constant at 4.0%. 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 continue to increase in absolute
dollars.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
advertising, promotional material, trade show expenses and sales and
marketing personnel costs, including sales commissions and travel. Sales and
marketing expenses increased to $1.4 million for the second quarter of 1998
from $991,000 for the second quarter of 1997. As a percentage of net sales,
sales and marketing expenses decreased to 7.6% for the second quarter of 1998
from 8.3% for the second quarter of 1997. The increase in absolute dollars
was due primarily to increased advertising and trade show expenses, including
expenses relating to market entry and advertising strategies for Europe and
increased compensation expense associated with increased staffing levels.
1998 year-to-date sales and marketing expenses increased to $2.6 million from
$1.9 million year-to-date in 1997. As a percentage of net sales,
year-to-date sales and marketing expenses decreased to 7.7% from 7.9%. The
Company expects sales and marketing expenditures to increase in absolute
dollars as it continues its efforts to increase branded sales and
international sales. In early 1998, the Company hired a new Vice President of
Marketing, and the Company expects to restructure its sales and marketing
staff as it increasingly relies on resellers, including distributors,
value-added resellers and system integrators, for the distribution and sale
of its branded products. The Company's strategy contemplates the expansion
of its reseller channel both domestically and internationally. As part of
this restructuring and the Company's expansion of its reseller channel, the
Company expects to enhance and expand the management of its sales and
marketing efforts and its sales and marketing staff both domestically and
internationally, and the Company has also engaged an executive search firm to
assist the Company in recruiting a senior level executive to head the
Company's sales and marketing efforts in Europe. The Company will be
required to invest significant resources in its domestic and international
sales and marketing efforts, and there can be no assurance that the Company
will be successful in expanding its reseller channel or its international
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 $1.6 million for the second quarter
of 1998 from $923,000 for the second quarter of 1997. As a percentage of net
sales, general and administrative expenses increased to 8.6% for the second
quarter of 1998 from 7.6% for the second quarter of 1997. The increase in
absolute dollars was due primarily to increased personnel related costs, costs
associated with the Company's patent infringement lawsuits against certain
competitors, costs associated with engaging an executive search firm to assist
in the recruitment of a new Chief Financial Officer, and costs associated with
being a public company (i.e. the preparation and printing of the Annual
Report and the proxy materials for the annual meeting of the Company's
shareholders). 1998 year-to-date general and administrative expenses
increased to $2.6 million from $1.7 million year-to-date in 1997. As a
percentage of net sales, year-to-date general and administrative expenses
increased to 7.7% from 7.2%. The increase in absolute dollars and as a
percentage of net sales is due primarily to the factors described above for
the second quarter, and to a lesser extent, increased occupancy costs
associated with the expansion of facilities in mid 1997. The Company has
traditionally operated with a very lean management structure and a very small
management staff. In recent periods, the Company has experienced rapid
revenue and customer growth and expansion in its product offerings, its sales
and marketing efforts, and its operations and logistical needs in dealing
with suppliers. The Company's rapid growth has put a significant strain on
the Company's management, operational, and financial personnel, and the
Company is actively seeking to expand and enhance its executive and
management team and to increase the size of its operational and financial
departments. The Company expects general and administrative expenses to
increase in absolute dollars to support the growth of the management,
operational, and financial functions, but there can be no assurance that the
Company's efforts will be successful or that the Company's general and
administration expenses as a percentage of net sales will decline.
INTEREST INCOME (EXPENSE), NET. Net interest income was $608,000 for
the second quarter of 1998, compared to net interest income of $117,000 for the
second quarter of 1997. This increase resulted 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 February 1997 IPO, and to interest
11
<PAGE>
earned on the approximately $30.3 million of net proceeds from the Company's
follow-on offering completed in August 1997. 1998 year-to-date net interest
income of $1.2 million compares to net interest expense of $123,000 for 1997.
This $1.3 million net change was due to the same reasons.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
to $1.8 million for the second quarter of 1998, from $1.1 million for the second
quarter of 1997. The effective federal tax rate declined to approximately 33.5%
for the second quarter of 1998 from approximately 34% for the second quarter of
1997 due primarily to the benefits associated with implementing a foreign sales
corporation. 1998 year-to-date provision for income taxes increased to $3.5
million from $2.1 million year-to-date in 1997. The 1998 year-to-date effective
federal tax rate declined to approximately 33.5% from approximately 34% for the
year-to-date 1997 for the same reason.
NET INCOME. Net income increased 71% to $3.6 million for the second
quarter of 1998 from $2.1 million for the second quarter of 1997. As a
percentage of net sales, net income increased to 19.7% for the second quarter of
1998 from 17.4% for the second quarter of 1997. 1998 year-to-date net income
increased 76% to $6.9 million from $3.9 million year-to-date in 1997. As a
percentage of net sales, 1998 year-to-date net income increased to 20.4% from
16.6% year-to-date in 1997. The increases in net income and net income as a
percentage of net sales for the second quarter and for 1998 year-to-date were
due primarily to increased net sales and related gross profits and, to a lesser
extent, to increased net interest income, partially offset by increased
operating expenses.
BACKLOG
As of June 26, 1998, the Company's backlog was $10.5 million,
compared to $10.9 million at the end of the second quarter of 1997. 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. Moreover,
with recent industry-wide initiatives to reduce all channel inventories and
shorten lead times, the Company views backlog as a less important indicator of
future results than may have been the case in prior years.
LIQUIDITY AND CAPITAL RESOURCES
As of June 26, 1998, the Company's principal sources of liquidity
consisted of approximately $46.2 million in cash, cash equivalents and current
investments, an increase of $6.5 million from the December 31, 1997 balances.
In addition, the Company has a combined line of credit and letter of credit
facility with a bank with aggregate borrowing capacity of $5.0 million at prime.
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 an aggregate of $5.0 million (less
any amounts outstanding under the line of credit). The combined line of credit
and letter of credit facility was renewed in April 1998, with an aggregate
borrowing capacity of $5.0 million, under the same terms and provides a final
maturity date of April 30, 1999. There were no borrowings under the line of
credit and the letter of credit facility from January 1, 1996 through July 24,
1998, and all $5.0 million was available.
Cash generated from operating activities increased to $7.1 million for
the first half of 1998 compared to $3.8 million for the first half of 1997.
This increase in cash flow was primarily due to increased net income.
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 $315,979 in prepaid offering expenses and $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
12
<PAGE>
Redeemable Preferred Stock. See Note 3 to Consolidated 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 was expensed in 1997 as a period cost), the remaining proceeds
from the IPO were approximately $2.2 million. Further, in August 1997 the
Company completed a follow-on offering, which yielded net proceeds of
approximately $30.3 million.
The Company believes that existing cash and investment balances, cash
generated from operations and the funds available to it under credit facilities,
together with the remaining proceeds from the IPO and the follow-on offering,
will be sufficient to fund its operations for at least the next 12 months.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The statement will be effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. This
statement should not be applied retroactively to financial statements for prior
periods. The Company is currently evaluating the impact SFAS No. 133 will have
on its financial statements; however the Company does not expect the statement
to have a material impact on its financial position or results of operations.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 1, 1998, the Company filed a complaint for patent infringement
against CCC Group plc and its subsidiaries (cause number C98-0739Z) in United
States District Court for the Western District of Washington at Seattle in
connection with United States Patent Number 5,721,842, which was issued to the
Company on February 24, 1998. The complaint alleges that the products
manufactured and sold by the defendants in the lawsuit embody the inventions
claimed in U.S. Patent Number 5,721,842, and seek injunctive relief, damages,
attorneys' fees, interest and costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Shareholders on June 25, 1998.
At the Annual Meeting, the shareholders elected each of the six nominees for
director by the following votes:
<TABLE>
<CAPTION>
DIRECTOR: VOTES FOR: VOTES AGAINST:
<S> <C> <C>
Jeffrey T. Chambers 12,544,588 32,045
Sterling Crum 12,544,363 32,270
Franz Fichtner 12,544,428 32,205
Kevin J. Hafer 12,441,653 134,980
Edwin L. Harper 12,544,628 32,005
William McAleer 12,545,903 30,730
</TABLE>
The shareholders voted to ratify the appointment of Coopers & Lybrand L.L.P.
as the company's independent accountants for the current fiscal year with
12,571,490 votes in favor, 2,282 votes against, and 2,861 abstentions. The
shareholders also voted to amend the Apex PC Solutions, Inc. 1995 Employee
Stock Plan (the "Plan") to increase by 1,500,000 the number of shares that
may be issued under the Plan with 8,686,792 votes in favor, 2,312,267 votes
against, and 1,577,574 abstentions (including broker non-votes).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.16.1 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 (Registration No. 333-31697).)
10.16.2 Alternative Rate Options Promissory Note dated as of May 1, 1998, by
and between the Company and U.S. Bank of Washington, National
Association.
11.1 Statement re: Computation of Net Income Per Share
27.1 Financial Data Schedule
ITEMS 2, 3 and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
14
<PAGE>
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)
Date: August 4, 1998 /s/ Kevin J. Hafer
------------------------
Kevin J. Hafer
President and Chief Executive Officer
and Acting Chief Financial Officer
15
<PAGE>
Exhibit 10.16.2
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)
$5,000,000.00 Dated as of: MAY 1, 1998
APEX PC SOLUTIONS, INC. ("Borrower")
U.S. BANK NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
/ / single disbursement loan. Amounts loaned to Borrower hereunder will
be disbursed in a single Advance in the amount shown in Section 2.
/X/ revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be borrowed,
repaid and reborrowed, and the aggregate Advances loaned hereunder from
time to time may exceed such maximum amount.
/ / non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principal Balance") at one time shall not exceed
$5,000,000.00.
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender
or order at 10800 NE 8TH STREET, SUITE 1000, BELLEVUE, WA 98004 the Principal
Balance of this note, with interest thereon at the rate(s) specified in Sections
4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding
may vary from time to time pursuant to the provisions of this note. Subject to
the provisions of this note, Borrower shall have the option from time to time of
choosing to pay interest at the rate or rates and for the applicable periods of
time based on the rate options provided herein; PROVIDED, however, that once
Borrower notifies Lender of the rate option chosen in accordance with the
provisions of this note, such notice shall be irrevocable. The rate options
are the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as defined
herein.
(a) DEFINITIONS. The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that commercial banks in Seattle, Washington, Portland, Oregon or New
York City are authorized or required by law to close; provided, however that
when used in connection with a LIBOR Rate, LIBOR Amount or LIBOR Interest Period
such term shall also exclude any day on which dealings in U.S. dollar deposits
are not carried on in the London interbank market.
"LIBOR Amount" means each principal amount for which Borrower
chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR Interest
Period.
"LIBOR Interest Period" means as to any LIBOR Amount, a period
of 1, 2, 3, 6, AND 12 months commencing on the date the LIBOR Borrowing Rate
becomes applicable thereto; PROVIDED, however, that: (i) the first day of each
LIBOR Interest Period must be a Business Day; (ii) no LIBOR Interest Period
shall be selected which would extend beyond APRIL 30, 1999; (iii) no LIBOR
Interest Period shall extend beyond the date of any principal payment required
under Section 6 of this note, unless the sum of the Prime Rate Amount, plus
LIBOR Amounts with LIBOR Interest Periods ending on or before the scheduled date
of such principal payment, plus principal amounts remaining unborrowed under a
line of credit, equals or exceeds the amount of such principal payment; (iv) any
LIBOR Interest Period which would otherwise expire on a day which is not a
Business Day, shall be extended to the next succeeding Business Day, unless the
result of such extension would be to extend such LIBOR Interest Period into
another calendar month, in which event the LIBOR Interest Period shall end on
the immediately preceding Business Day; and (v) any LIBOR Interest Period that
begins on the last Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at the end of such
LIBOR Interest Period) shall end on the last Business Day of a calendar month.
"LIBOR Rate" means, for any LIBOR Interest Period, the rate
per annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender as
its LIBOR Rate, based on Lender's determination, on the basis of such factors as
Lender deems relevant, of the rate of interest at which U.S. dollar deposits
would be offered to U.S. Bank National Association in the London interbank
market at approximately 11 a.m. London time on the date which is two Business
Days prior to the first day of such LIBOR Interest Period for delivery on the
first day of such LIBOR Interest Period for the number of months therein;
provided, however, that the LIBOR Rate shall be adjusted to take into account
the maximum reserves required to be maintained for Eurocurrency liabilities by
banks during each such LIBOR Interest Period as specified in Regulation D of the
Board of Governors of the Federal Reserve System or any successor regulation.
"Prime Rate" means the rate of interest which Lender from time
to time establishes as its prime rate and is not, for example, the lowest rate
of interest which Lender collects from any borrower or class of borrowers. When
the Prime Rate is applicable under Section 4(b) or 11(b), the interest rate
hereunder shall be adjusted without notice effective on the day the Prime Rate
changes, but in no event shall the rate of interest be higher than allowed by
law.
"Prime Rate Amount" means any portion of the Principal Balance
bearing interest at the Prime Borrowing Rate.
(b) THE PRIME BORROWING RATE.
(i) The Prime Borrowing Rate is a per annum rate equal to the
Prime Rate plus 0.00 % per annum.
(ii) Whenever Borrower desires to use the Prime Borrowing Rate
option, Borrower shall give Lender notice orally or in writing in accordance
with Section 15 of this note, which notice shall specify the requested effective
date (which must be a Business Day) and principal amount of the Advance or
increase in the Prime Rate Amount, and whether Borrower is requesting a new
Advance under a line of credit or conversion of a LIBOR Amount to the Prime
Borrowing Rate.
(iii) Subject to Section 11 of this note, interest shall accrue on
the unpaid Principal Balance at the Prime Borrowing Rate unless and except to
the extent that the LIBOR Borrowing Rate is in effect.
(c) THE LIBOR BORROWING RATE.
(i) The LIBOR Borrowing Rate is the LIBOR Rate plus 1.90% per
annum.
(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business Day.
Borrower may request an Advance, conversion of any portion of the Prime Rate
Amount to a LIBOR Amount or a new LIBOR Interest Period
Page 1 of 4
<PAGE>
for an existing LIBOR Amount, at such rate only by giving Lender notice in
accordance with Section 4 (c) (iii) before 10:00 a.m. (Portland, Oregon time) on
such day.
(iii) Whenever Borrower desires to use the LIBOR Borrowing Rate
option, Borrower shall give Lender irrevocable notice (either in writing or
orally and promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m.
(Portland, Oregon time) two (2) Business Days prior to the desired effective
date of such rate. Any oral notice shall be given by, and any written notice or
confirmation of an oral notice shall be signed by, the person(s) authorized in
Section 15 of this note, and shall specify the requested effective date of the
rate, LIBOR Interest Period and LIBOR Amount, and whether Borrower is requesting
a new Advance at the LIBOR Borrowing Rate under a line of credit, conversion of
all or any portion of the Prime Rate Amount to a LIBOR Amount, or a new LIBOR
Interest Period for an outstanding LIBOR Amount. Notwithstanding any other term
of this note, Borrower may elect the LIBOR Borrowing Rate in the minimum
principal amount of $1,000,000.00 and in multiples of $100,000.00 above such
amount; PROVIDED, however, that no more than 5 separate LIBOR Interest Periods
may be in effect at any one time.
(iv) If at any time the LIBOR Rate is unascertainable or
unavailable to Lender or if LIBOR Rate loans become unlawful, the option to
select the LIBOR Borrowing Rate shall terminate immediately. If the LIBOR
Borrowing Rate is then in effect, (A) it shall terminate automatically with
respect to all LIBOR Amounts (i) on the last day of each then applicable LIBOR
Interest Period, if Lender may lawfully continue to maintain such loans, or
(ii) immediately if Lender may not lawfully continue to maintain such loans
through such day, and (B) subject to Section 11, the Prime Borrowing Rate
automatically shall become effective as to such amounts upon such termination.
(v) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending office
to any tax, duty, or other charge, or change the basis of taxation of payments
to Lender with respect to any loans bearing interest based on the LIBOR Rate, or
(ii) shall impose or modify any reserve, insurance, special deposit, or similar
requirements against assets of, deposits with or for the account of, or credit
extended by Lender or its Eurodollar lending office, or impose on Lender or its
Eurodollar lending office any other condition affecting any such loans, and
(B) the result of any of the foregoing is (i) to increase the cost to Lender of
making or maintaining any such loans or (ii) to reduce the amount of any sum
receivable under this note by Lender or its Eurodollar lending office, Borrower
shall pay Lender within 15 days after demand by Lender such additional amount as
will compensate Lender for such increased cost or reduction. The determination
hereunder by Lender of such additional amount shall be conclusive in the absence
of manifest error. If Lender demands compensation under this Section 4(c)(v),
Borrower may upon three (3) Business Days' notice to Lender pay the accrued
interest on all LIBOR Amounts, together with any additional amounts payable
under Section 4(c)(vi). Subject to Section 11, upon Borrower's paying such
accrued interest and additional costs, the Prime Borrowing Rate immediately
shall be effective with respect to the unpaid principal balance of such LIBOR
Amounts.
(vi) Borrower shall pay to Lender, on demand, such amount as Lender
reasonably determines (determined as though 100% of the applicable LIBOR Amount
had been funded in the London interbank market) is necessary to compensate
Lender for any direct or indirect losses, expenses, liabilities, costs, expenses
or reductions in yield to Lender, whether incurred in connection with
liquidation or re-employment of funds or otherwise, incurred or sustained by
Lender as a result of: (A) Any payment or prepayment of a LIBOR Amount,
termination of the LIBOR Borrowing Rate or conversion of a LIBOR Amount to the
Prime Borrowing Rate on a day other than the last day of the applicable LIBOR
Interest Period (including as a result of acceleration or a notice pursuant to
Section 4 (c) (v)); or (B) Any failure of Borrower to borrow, continue or
prepay any LIBOR Amount or to convert any portion of the Prime Rate Amount to a
LIBOR Amount after Borrower has given a notice thereof to Lender.
(vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall
pay interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the London interbank market. Lender's determination of
the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive in
the absence of manifest error.
(viii) Notwithstanding any other term of this note, Borrower may not
select the LIBOR Borrowing Rate if an event of default hereunder has occurred
and is continuing.
(ix) Nothing contained in this note, including without limitation
the determination of any LIBOR Interest Period or Lender's quotation of any
LIBOR Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11
will be computed at the applicable rate based on a 360-day year and applied to
the actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) PRINCIPAL. Principal shall be paid:
/ / on demand.
/ / on demand, or if no demand, on .
/X/ on APRIL 30, 1999.
/ / subject to Section 8, in installments of
/ / each, plus accrued interest, beginning on and on the
same day of
each thereafter until when the entire Principal Balance
plus interest thereon shall be
due and payable.
/ / each, including accrued interest, beginning on and on
the same day of
each thereafter until when the entire Principal Balance
plus interest thereon shall be due and payable.
/ / .
(b) INTEREST.
(i) Interest on the Prime Rate Amount shall be paid:
/X/ on the LAST day of MAY, 1998 and on the same day of each
MONTH thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at
maturity.
/ / .
(ii) Interest on all LIBOR Amounts shall be paid:
/ / on the last day of the applicable LIBOR Interest Period,
and if such LIBOR Interest Period is longer than three
months, on the last day of each three month period
occurring during such LIBOR Interest Period, and at
maturity.
/X/ on the LAST day of MAY, 1998 and on the same day of each
MONTH thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at
maturity.
/ / .
7. PREPAYMENT.
(a) Prepayments of all or any part of the Prime Rate Amount may be made at
any time without penalty.
(b) Except as otherwise specifically set forth herein, Borrower may not
prepay all or any part of any LIBOR Amount or terminate any LIBOR Borrowing
Rate, except on the last day of the applicable LIBOR Interest Period.
(c) Principal prepayments will not postpone the date of or change the amount
of any regularly scheduled payment. At the time of any principal prepayment,
all accrued interest, fees, costs and expenses shall also be paid.
Page 2 of 4
<PAGE>
8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note
changes the holder of this note may, from time to time, in holder's sole
discretion, increase or decrease the amount of each of the installments
remaining unpaid at the time of such change in rate to an amount holder in its
sole discretion deems necessary to continue amortizing the Principal Balance at
the same rate established by the installment amounts specified in Section 6(a),
whether or not a "balloon" payment may also be due upon maturity of this note.
Holder shall notify the undersigned of each such change in writing. Whether or
not the installment amount is increased under this Section 8, Borrower
understands that, as a result of increases in the rate of interest the final
payment due, whether or not a "balloon" payment, shall include the entire
Principal Balance and interest thereon then outstanding, and may be
substantially more than the installment specified in Section 6.
9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if
in any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of that
month.
10. PAYMENT BY AUTOMATIC DEBIT.
/X/ Borrower hereby authorizes Lender to automatically deduct the amount of
all principal and interest payments from account number 0287037238 at
BELLEVUE HIGHLANDS. If there are insufficient funds in the account to pay the
automatic deduction in full, Lender may allow the account to become overdrawn,
or Lender may reverse the automatic deduction. Borrower will pay all the fees
on the account which result from the automatic deductions, including any
overdraft and non-sufficient funds charges. If for any reason Lender does not
charge the account for a payment, or if an automatic payment is reversed, the
payment is still due according to this note. If the account is a Money Market
Account, the number of withdrawals from that account is limited as set out in
the account agreement. Lender may cancel the automatic deduction at any time in
its discretion.
Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic debit.
11. DEFAULT .
(a) Without prejudice to any right of Lender to require payment on demand or
to decline to make any requested Advance, each of the following shall be an
event of default: (i) Borrower fails to make any payment when due. (ii)
Borrower fails to perform or comply with any term, covenant or obligation in
this note or any agreement related to this note, or in any other agreement or
loan Borrower has with Lender. (iii) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this note or
perform Borrower's obligations under this note or any related documents. (iv)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (v) Borrower dies, becomes insolvent, liquidates
or dissolves, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (vi) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender. (vii) Any of the events described in
this default section occurs with respect to any general partner in Borrower or
any guarantor of this note, or any guaranty of Borrower's indebtedness to
Lender ceases to be, or is asserted not to be, in full force and effect. (viii)
There is any material adverse change in the financial condition or management of
Borrower or Lender in good faith deems itself insecure with respect to the
payment or performance of Borrower's obligations to Lender. If this note is
payable on demand, the inclusion of specific events of default shall not
prejudice Lender's right to require payment on demand or to decline to make any
requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand,
upon the occurrence of an event of default, Lender may declare the entire unpaid
Principal Balance on this note and all accrued unpaid interest immediately due
and payable, without notice. Upon default, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under applicable law,
increase the interest rate on this note to a rate equal to the Prime Borrowing
Rate plus 5%. The interest rate will not exceed the maximum rate permitted by
applicable law. In addition, if any payment of principal or interest is 15 or
more days past due, Borrower will be charged a late charge of 5% of the
delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records
shall, at any time, be conclusive evidence of the unpaid Principal Balance and
interest owing on this note. Notwithstanding any other provisions of this note,
in the event holder makes Advances hereunder which result in an unpaid Principal
Balance on this note which at any time exceeds the maximum amount specified in
Section 2, Borrower agrees that all such Advances, with interest, shall be
payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1
is a revolving line of credit or a non-revolving line of credit, Borrower agrees
that Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges
and agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited to,
provisions relating to defaults, rights of cure, default rate of interest,
installment payments, late charges, periodic review of Borrower's financial
condition, and covenants) nor any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment in
full of all amounts owing hereunder immediately upon Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the
request of Borrower (if an individual), any of the undersigned (if Borrower
consists of more than one individual), any person or persons authorized in
subsection (b) of this Section 15, and any person or persons otherwise
authorized to execute and deliver promissory notes to Lender on behalf of
Borrower.
(b) Borrower hereby authorizes any ONE of the following individuals to
request Advances and to select interest rate options:
KEVIN HAFER, PRESIDENT/CHIEF EXECUTIVE OFFICER, DOUGLAS BEVIS, VICE
PRESIDENT/CHIEF FINANCIAL OFFICER unless Lender is otherwise instructed in
writing.
(c) All Advances shall be disbursed by deposit directly to Borrower's
account number 0287-037238 at BELLEVUE HIGHLANDS branch of Lender, or by
cashier's check issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to this Section 15, and
Borrower assumes all risks of the validity and authorization of such requests.
In consideration of Lender agreeing, at its sole discretion, to make Advances
upon such requests, Borrower promises to pay holder, in accordance with the
provisions of this note, the Principal Balance together with interest thereon
and other sums due hereunder, although any Advances may have been requested by a
person or persons not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrower's financial condition and business
operations that Lender requests. This information may include but is not
limited to, financial statements, tax returns, lists of assets and liabilities,
agings of receivables and payables, inventory schedules, budgets and forecasts.
If upon review, Lender, in its sole discretion, determines that there has been a
material adverse change in Borrower's financial condition, Borrower will be in
default. Upon default, Lender shall have all rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage
paid and addressed to Borrower at the last known address of Borrower as shown on
holder's records. If Borrower consists of more than one person, notification of
any of said persons shall be complete notification of all.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney regarding
the enforcement of any of its rights under this note or any document securing
the same, or if this note is placed in the hands of an attorney for collection
or if suit or litigation is brought to enforce this note or any document
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court or arbitrator(s) may adjudge reasonable as attorney
fees, including without limitation, costs and attorney fees incurred in any
appellate court, in any proceeding under the bankruptcy code, or in any
receivership and post-judgment attorney fees incurred in enforcing any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor
or otherwise, waives diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations hereunder,
Lender may deal in any manner with any person who at
Page 3 of 4
<PAGE>
any time is liable for, or provides any real or personal property collateral
for, any indebtedness of Borrower to Lender, including the indebtedness
evidenced by this note. Without limiting the foregoing, Lender may, in its sole
discretion: (a) make secured or unsecured loans to Borrower and agree to any
number of waivers, modifications, extensions and renewals of any length of such
loans, including the loan evidenced by this note; (b) impair, release (with or
without substitution of new collateral), fail to perfect a security interest in,
fail to preserve the value of, fail to dispose of in accordance with applicable
law, any collateral provided by any person; (c) sue, fail to sue, agree not to
sue, release, and settle or compromise with, any person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned
Borrowers are joint and several and are binding upon any marital community of
which any of the undersigned are members. Holder's rights and remedies under
this note shall be cumulative.
21. SEVERABILITY. If any term or provision of this note is declared by a
court of competent jurisdiction to be illegal, invalid or unenforceable for any
reason whatsoever, such illegality, invalidity or unenforceability shall not
affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable, and this note shall be
construed as if such illegal, invalid or unenforceable provision had not been
contained herein.
22. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to the
statutes of limitation applicable if they were litigated. This provision is
void if the Loan, at the time of the proposed submission to arbitration, is
secured by real property located outside of Oregon or Washington, or if the
effect of the arbitration procedure (as opposed to any Claims of Borrower) would
be to materially impair Lender's ability to realize on any collateral securing
the Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will be
active Washington State Bar members in good standing. All arbitration hearings
will be held in Seattle, Washington. In addition to all other powers, the
arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability. Judgment on any arbitration award may be entered in any court
with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver, attachment,
claim and delivery and replevin.
23. GOVERNING LAW. This note shall be governed by and construed and
enforced in accordance with the laws of the State of Washington without regard
to conflicts of law principles; PROVIDED, however, that to the extent that
Lender has greater rights or remedies under Federal law, this provision shall
not be deemed to deprive Lender of such rights and remedies as may be available
under Federal law.
24. DISCLOSURE.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.
APEX PC SOLUTIONS, INC.
Borrower Name (Corporation, Partnership or other Entity)
BY: /s/ Douglas A. Bevis
- --------------------------------------------------
DOUGLAS BEVIS
TITLE: VICE PRESIDENT/CHIEF FINANCIAL OFFICER
- --------------------------------------------------
- --------------------------------------------------------------------------------
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. Bank National Association
By: /s/ Tony W. Chalfant
------------------------------------------
Title: Vice President
---------------------------------------
Date: 4/22/98
----------------------------------------
Page 4 of 4
<PAGE>
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
APEX PC SOLUTIONS, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 3,599,540 $ 2,105,403 $ 6,943,644 $ 4,081,728
Extraordinary item -- loss on early
extinguishment of debt, net of applicable
income tax benefit of $72,511 - - - (140,763)
----------- ---------- ---------- ----------
Net income $ 3,599,540 $ 2,105,403 $ 6,943,644 $ 3,940,965
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Per share amounts:
Basic:
Income before extraordinary item $ 0.27 $ 0.17 $ 0.52 $ 0.38
Extraordinary item - - - (0.01)
----------- ---------- ---------- ----------
Net income $ 0.27 $ 0.17 $ 0.52 $ 0.37
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted:
Income before extraordinary item $ 0.26 $ 0.17 $ 0.50 $ 0.35
Extraordinary item - - - (0.01)
----------- ---------- ---------- ----------
Net income $ 0.26 $ 0.17 $ 0.50 $ 0.34
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average shares used in computing
net income per share:
Basic:
Weighted average common shares 13,448,779 12,161,363 13,443,533 10,536,547
Effect of nominal shares - - - -
----------- ---------- ---------- ----------
Weighted average shares used in
computing basic net income per
share 13,448,779 12,161,363 13,443,533 10,536,547
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted:
Weighted average common shares 13,448,779 12,161,363 13,443,533 10,536,547
Potential additional common shares:
Stock options (treasury stock
method) 564,629 458,192 543,673 454,243
Series A preferred stock - - - 660,674
Effect of nominal shares - - - -
----------- ---------- ---------- ----------
Weighted average shares used in
computing diluted net income per
share 14,013,408 12,619,555 13,987,206 11,651,464
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTER ENDED JUNE 26, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-26-1998
<CASH> 9,706,571
<SECURITIES> 36,531,551
<RECEIVABLES> 10,165,240
<ALLOWANCES> 365,903
<INVENTORY> 2,935,481
<CURRENT-ASSETS> 60,572,484
<PP&E> 1,321,259
<DEPRECIATION> 604,474
<TOTAL-ASSETS> 62,790,231
<CURRENT-LIABILITIES> 2,917,822
<BONDS> 0
0
0
<COMMON> 62,141,195
<OTHER-SE> (2,308,786)
<TOTAL-LIABILITY-AND-EQUITY> 62,790,231
<SALES> 34,005,533
<TOTAL-REVENUES> 34,005,533
<CGS> 18,148,694
<TOTAL-COSTS> 18,148,694
<OTHER-EXPENSES> 6,586,535
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> (1,174,816)
<INCOME-PRETAX> 10,445,120
<INCOME-TAX> 3,501,476
<INCOME-CONTINUING> 6,943,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,943,644
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.50
</TABLE>
