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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER: 000-21959
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APEX INC.
(Exact name of registrant as specified in its charter)
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WASHINGTON 91-1577634
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
9911 WILLOWS ROAD N.E.
REDMOND, WASHINGTON 98052
(Address of Principal Executive (Zip Code)
Offices)
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425-861-5858
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value per share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __ X ____ No ____________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /X/
The aggregate market value of the voting common stock held by non-affiliates
of the registrant on March 3, 2000 was approximately $894,122,000.
The number of shares outstanding of the registrant's common stock as of
March 3, 2000 was 21,207,588.
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THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS RELATING TO THE APEX STRATEGY, BUSINESS PROSPECTS
AND FUTURE OPERATING RESULTS, PROSPECTS FOR INCREASING OEM AND BRANDED SALES,
COMPETITION, NEW PRODUCT INTRODUCTIONS, DEVELOPMENT OF ADDITIONAL SUPPLIER
RELATIONSHIPS, DEVELOPMENT OF RESELLER CHANNELS, PRODUCT RETURNS AND WARRANTY
CLAIMS, ABILITY TO OBTAIN AND PROTECT PROPRIETARY RIGHTS, CUSTOMER SERVICE,
DEVELOPMENT OF INTERNATIONAL SALES, FUTURE RESEARCH AND DEVELOPMENT
EXPENDITURES, FUTURE SALES AND MARKETING EXPENSES, FUTURE GENERAL AND
ADMINISTRATIVE EXPENSES, BACKLOG, AND FUTURE LIQUIDITY AND CAPITAL RESOURCES.
ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON INFORMATION AVAILABLE TO US
ON THE DATE OF THIS ANNUAL REPORT, AND WE ASSUME NO OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THIS ANNUAL REPORT. THE FORWARD-LOOKING STATEMENTS CONTAINED
IN THIS ANNUAL REPORT, AND OTHER WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
MADE BY US FROM TIME TO TIME, 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 "DESCRIPTION OF
BUSINESS--RISK FACTORS."
READERS SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH
REFLECT MANAGEMENT'S VIEW ONLY AS OF THE DATE OF THIS ANNUAL REPORT. WE
UNDERTAKE NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES. READERS SHOULD ALSO CAREFULLY REVIEW
THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS WE FILE FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS.
OVERVIEW
We design, manufacture, and sell stand-alone switching systems and remote
access products for the client/server computing market. Network administrators
in client/server environments have increasingly complex and growing server
populations, and our switching systems and remote access products help network
administrators manage multiple servers from a single keyboard, video monitor and
mouse configuration (a "console"), which may be at a remote location.
Specifically, our products reduce personnel, space, energy, depreciation and
maintenance costs that organizations face when adopting or expanding
client/server architecture.
We provide comprehensive "plug and play" switching systems for many network
administration, management and storage problems faced by customers using
client/server architecture. Our switching products, including
OUTLOOK-REGISTERED TRADEMARK-, VIEWPOINT-REGISTERED TRADEMARK- and EMERGE-TM-,
help network administrators access multiple servers from one or more centralized
or remote consoles, consolidate hardware requirements, and provide direct
hardwired connections between the switch and the attached servers to facilitate
access to those servers, even when the network is down. In addition, our
switching systems are able to work with heterogeneous server populations. Most
of our switching products use our patented On Screen
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Configuration And Reporting ("OSCAR") interface. OSCAR-Registered Trademark-
allows network administrators to immediately identify and access servers
according to the administrators' own naming conventions. We also sell integrated
server cabinet solutions to consolidate and store a variety servers and related
hardware in a single cabinet that makes physical access and hardware maintenance
tasks safer and more efficient.
We market and sell our products through a direct sales force and various
distribution channels. A substantial portion of our sales are concentrated among
a limited number of OEMs that purchase our switching systems on a private-label
basis. Apex supplies stand-alone switching systems to Compaq and others under
private-label arrangements for integration into their product offerings. Sales
to Compaq represented approximately 50% of our net sales for 1999, 43% of our
net sales for 1998, and 51% of our net sales for 1997. According to
International Data Corporation, a market research firm, Compaq shipped 31% of
all PC servers shipped worldwide in 1999. We also sell our branded switching
products to various manufacturers of servers and related networking products,
such as Dell, EMC, Gateway, IBM, SCI, Solectron and Unisys. These customers
integrate and sell our branded switches with their own products. Our end-user
branded sales customers for 1999 included Amazon.com, Disney, Comcast, Immunex,
Infoseek, Intel, Microsoft, Miller Brewing, Network Associates, Nordstrom,
Peoples Bank, Price Interactive and Starwave.
OSCAR, OUTLOOK, and VIEWPOINT are registered trademarks of ours. Apex and
EMERGE are trademarks of ours. This annual report also includes trademarks of
other companies.
INDUSTRY BACKGROUND
Information technology ("IT") is becoming more critical to most business
operations as computers perform multiple and diverse functions throughout
organizations. Many organizations are decentralizing computing power while
sharing technology resources and providing broad access to enterprise data. This
has resulted in the widespread adoption of distributed network computing
environments using a client/server architecture of interconnected PCs. The
typical client/server installation consists of a local area network ("LAN") with
multiple centralized PCs operating as "servers" dedicated to performing specific
functions for the many "client" PCs connected to the LAN. According to
Dataquest, worldwide shipments of PC servers are expected to grow 17% on a
compounded annual basis through 2003.
The increase in PC-based LANs and wide-area networks ("WANs") creates
significant network administration and space problems for organizations using
them. Network administrators, who may supervise thousands of servers, must
identify and access relevant servers, add or delete users, add, change or
upgrade applications, tune systems for better performance, and diagnose and
correct network failures. Client/server networks use servers designed to operate
as stand-alone systems, each with its own console. So, to perform network
administration and management tasks, network administrators must deal with a
large number of consoles, whether centrally located or dispersed throughout the
organization.
As network resources become more critical to organizations, constant
availability of the network is more important as well. The time that a network
is down or degraded can cause significant inconvenience, loss of productivity,
and financial loss. Because diagnosis and correction of abnormal network
behavior often requires the network staff to physically access each affected
server through its own console, quick and efficient "fault" management can be
difficult, especially when there are a large number of dispersed servers
involved. In addition, when a network fails, an administrator's ability to
quickly and efficiently diagnose and correct the problem is often hampered
because the administrator is not able to access the software tools that reside
on the network and that are normally used to manage network failures.
In addition to these network administration and management problems, as
organizations' network computing needs increase, the number of servers, consoles
and other peripherals grows. Without
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efficient storage and configuration, network hardware consumes substantial and
often expensive floor space, creates clutter that hampers network administration
and management, and increases the risk of physical damage to expensive hardware.
The space management solutions available to network administrators have
generally consisted of racks or cabinets designed to house only one type of
server, and most have not been technically designed for ease of access.
Organizations with distributed, heterogeneous client/server networks have often
been left with no customized solution.
PRODUCTS
We provide comprehensive solutions to many of the network administration,
management and storage problems inherent in client/server network environments
by offering a family of stand-alone switching systems in three product lines,
OUTLOOK, VIEWPOINT and EMERGE.
Our OUTLOOK, VIEWPOINT and EMERGE products consolidate the control and
monitoring of multiple network servers to a centralized command center
consisting of one or more consoles. Our console switching products work with
heterogeneous server populations that use different platforms, such as Intel,
Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc, and
different operating systems, such as Windows NT, Unix, NetWare and O/S 2. Most
of our console switching and remote access products use our patented OSCAR
interface that enables a network administrator to immediately identify and
access servers using the administrator's own naming convention, as opposed to
predesignated numbers. Our console switching and remote access products operate
out-of-band, meaning there is a direct hardwired connection between the console
and the attached servers through the switch. This direct connection enables
network administrators to access network servers and locate the problem server
even when the network is down.
OUTLOOK switches are designed for small-to-medium network configurations and
provide for unsurpassed ease-of-use, reliability, and server density. OUTLOOK
switches allow IT professionals to access and control multiple servers from a
single console or multiple consoles. By integrating multiple OUTLOOK switches,
access can be expanded to provide centralized control of up to 256 servers.
OUTLOOK switches offer reliability and extensive functionality, including
programmable naming, scanning, security, and system broadcast features. With our
patented OSCAR interface, OUTLOOK allows users to select and manage servers
using an intuitive, information-rich menu.
VIEWPOINT matrix switches are designed for medium-to-large scale,
multi-console server environments, and have become the de facto standard in data
centers and server farms worldwide. VIEWPOINT allows dozens of individual users
to independently access, view, manage and directly control server activities on
up to thousands of servers in our out-of-band and non-intrusive manner that
doesn't impact server or network performance. VIEWPOINT'S technology allows
access to servers up to 850 feet away, supports remote diagnostics via a serial
port, and includes our user-definable A.G.E.N.T.-TM- advanced security system.
EMERGE is the fastest and most reliable way to remotely control and manage
your entire server population--no matter where you are, and no matter where your
servers are. EMERGE allows you to diagnose, reconfigure, and reboot servers from
home, and avoid inconvenient travel at inconvenient times. EMERGE offers the
freedom and flexibility to access, switch, monitor, and control all of your
servers from any location--with no intrusion or performance hit on your servers
or corporate network. EMERGE can be accessed via dial-in, IP addressing, across
a LAN or WAN, or through multiple combinations. EMERGE is independent of network
topology or server operating system. EMERGE is designed for use alone, or in
conjunction with OUTLOOK or VIEWPOINT console switching.
SALES AND MARKETING
We market and sell our products through an internal sales force and various
distribution channels, including private-label OEM and reseller arrangements. We
market our products primarily through
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advertisements in trade publications, participation in major industry trade
shows, promotions with distributors and VARs, and our website. As of
December 31, 1999, we employed 29 people in sales and marketing. Our sales
personnel process written and telephone orders, support existing customers and
respond to telephone inquiries.
We currently sell various switching products to Compaq and others pursuant
to private-label arrangements. These private-label OEM customers integrate and
sell our switches with their own networking products, including network servers
and integrated server cabinets. We devote significant sales and customer service
resources to our OEM accounts. We also sell our branded switching products to
various other manufacturers of servers and related networking products, such as
Dell, EMC, Gateway, IBM, SCI, Solectron, and Unisys. These customers integrate
and sell our branded switches with their own products. We are continuing to
leverage our significant experience in working with our OEM and other server
manufacturer customers to enter into new relationships with other manufacturers
of servers in the United States and Europe. We believe that the architecture,
quality and reliability of our products, together with our commitment to
customer service, are attractive to server manufacturers.
We have relationships with a variety of resellers, including distributors
(including Tech Data and Ingram Micro), VARs, and systems integrators, for the
distribution and sale of Apex-brand switching and cabinet products in the United
States, Europe and elsewhere. We devote resources to educating our resellers as
to the benefits of our products and training them in the proper installation and
support of our products. We will continue devoting additional resources to
increase these branded sales, and we will pursue additional relationships with
resellers both domestically and internationally.
We have focused and expect to continue to focus on contracting with local,
regional and international resellers who have the technical capability and
market presence to assist end-user customers in developing network space
management and access and control solutions to meet their particular needs. Our
future success will depend in part on our ability to attract, train and motivate
such resellers.
We provide and will continue providing discounts and other special pricing
arrangements to our resellers. Because of such discounts and other arrangements,
we expect our gross margins on sales through resellers to be lower than gross
margins on direct sales. Our agreements with resellers generally are
nonexclusive and may be terminated on short notice by either party without
cause. Our resellers are not within our control, are not obligated to purchase
products from us and frequently offer products of several different
manufacturers, including products that compete with ours.
We believe Compaq and many other manufacturers of servers market and sell
their own branded server cabinets. Accordingly, we believe we have limited
opportunities to sell our own server cabinets to new purchasers of servers.
Instead, we believe that sales of our server cabinets have been and will
continue to be limited primarily to end-user customers who have a need to more
efficiently configure and manage existing network systems.
Our strategy with regard to international sales is to create an
international sales distribution network for our branded switching products
focusing initially on the network computing market in Europe because of its
large installed server base. We presently have relationships with 28
international distributors and resellers in 23 foreign countries as part of our
effort to build an international third-party distribution network. We are
currently shipping private-label switching products to OEMs with facilities in
Europe and Asia and branded switching products to other manufacturers of servers
and related networking products with facilities in Europe. To date our direct
end-user or VAR, integrator, and reseller channel sales into Europe are growing,
but have not been significant. We are continuing efforts to build a third-party
international distribution network.
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CUSTOMERS
To date, a substantial portion of our net sales have been generated from
private-label sales of switches to OEMs for integration into their product
offerings. Sales to our private-label OEM customers represented 63% of our net
sales for 1999, 60% of our net sales for 1998, and 65% of our net sales for
1997. While we have contracts with certain of our existing private-label OEM
customers, none of them are obligated to purchase products from us except
pursuant to binding purchase orders. Consequently, any OEM customer could cease
doing business with us at any time. We also sell our branded switching products
to various other manufacturers of servers and related networking products, who
integrate and sell Apex-brand switches with their own products. The loss or
material decline in orders from certain of our current private-label OEM
customers or certain of our other customers who manufacture servers and related
networking products could have a material adverse effect on our business,
financial condition and results of operations.
Sales to Compaq represented approximately 50% of our net sales in 1999, 43%
of our net sales in 1998, and 51% of our net sales in 1997.
Our private label arrangement with Hewlett-Packard Company ceased in the
fourth quarter of 1999. Hewlett-Packard represented less than 10% of our sales
in 1999.
BACKLOG
Our backlog was $30.4 million at December 31, 1999, $10.1 million at
December 31, 1998, and $7.9 million at December 31, 1997. Backlog consists of
purchase orders with delivery dates scheduled within the next six months. None
of our customers is obligated to purchase products from us except pursuant to
binding purchase orders. Because of the timing of orders and the possibility of
customer changes to delivery schedules, our 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, we view backlog as a less important indicator of future
results.
CUSTOMER SERVICE
We emphasize customer service by developing innovative, high quality
products, encouraging customer feedback through contact with key customers,
providing technical support and information on our website and providing a
customer hotline that offers technical support for the life of our products. As
of December 31, 1999, we employed six people in our customer service department.
Our switches have a "plug and play" design and do not typically require
extensive configuration. We respond quickly to our customers' requests for
technical support and service, and our engineering department often works with
individual customers to troubleshoot problems and develop custom solutions. We
offer warranties for parts and service on all of our products. To date, we have
not experienced significant product returns. We may, as a result of competitive
pressures, change our warranty policies in the future to provide coverage that
is greater in scope and duration than that currently offered. If we were to
increase our warranty coverage, our risk of warranty claims and therefore our
warranty reserves would likely increase.
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PRODUCT DEVELOPMENT
We believe that the continued, timely development of new products and
enhancements to our products is essential to building our competitive position.
The market for our switching products has experienced rapid technological
advances, frequent new product introductions and enhancements, and significant
price competition. The introduction of products incorporating superior or
alternative technologies (such as switching software), the emergence of new
industry standards or changes in the market's pricing structure could render our
existing products and products under development obsolete or unmarketable. Our
switching systems combine components, such as printed circuit boards,
connectors, cable assemblies, power supplies and enclosures, that are
manufactured by other companies and are generally available to our competitors
and potential competitors. Our future success will depend in large part upon
continued innovative application of such commercially available components to
the expansion and enhancement of our existing products and the development and
introduction of new products that address changing customer needs on a
cost-effective and timely basis.
Due to our significant reliance on private-label OEM relationships, our
product development efforts are often focused on developing new products or
enhancements for OEM customers. At times, these new products or enhancements may
not be readily marketable to other customers.
Our engineering and product development efforts focus on the needs of our
customers by providing practical, marketable products that have immediate
applications in their markets. By maintaining contact with customers throughout
the installation and technical support process, we are able to identify and test
potential design modifications and improvements as well as new applications and
extensions for existing products. We expect this process will enable us to
develop new product categories and applications based on existing technology
developed to meet specific customer needs. Many of our products are designed to
accommodate future modifications and additional features, which we believe
facilitates the development and integration of modifications and features if we
see a market need.
Our engineering and product development expenses were approximately
$6.5 million for 1999, $3.2 million for 1998, and $2.0 million for 1997. As of
December 31, 1999, we employed 26 people in our engineering department. In
addition, we use independent contractors from time-to-time. As of December 31,
1999, we were working with less than ten independent contractors on various
development projects. To meet the challenges of the rapidly changing technology
in the computer industry, we expect to make substantial investments in product
development in the future.
MANUFACTURING
We perform final assembly, quality assurance and testing of our products. In
order to avoid the capital investment required to establish and maintain
in-house manufacturing capabilities, we rely on subcontractors in the United
States for the assembly of printed circuit board assemblies, subassemblies,
chassis and equipment enclosures. We believe that such assembly can typically be
done by subcontractors at a lower cost than if we assembled such items
ourselves. Outsourcing manufacturing operations allows us to concentrate our
resources on research and development, product design, quality assurance, sales
and marketing and customer service. Prior to shipping, we subject our finished
products to quality and regulatory screenings and functional testing to assure
quality and reliability. We received ISO 9002 certification from Underwriters
Laboratories, Inc. in March 1999. At December 31, 1999, we employed 24 people in
our manufacturing department.
We rely on several third party manufacturers, including Technical
Services, Inc. and ETMA, for subassembly of our products. These outsourcing
arrangements, and any future outsourcing arrangements, involve numerous risks,
including reduced control over product quality, delivery schedules,
manufacturing yields and costs. In addition, while these third party
manufacturers have
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arrangements for warranty obligations, we remain primarily responsible to our
customers for warranty obligations.
We purchase industry-standard parts and components, including power
supplies, cable assemblies, line filters, enclosures and printed circuit boards
for the assembly of our products from multiple vendors and suppliers through a
worldwide sourcing program. We buy components under purchase orders and
generally do not have long-term agreements with our suppliers. No custom
integrated circuits are currently used in any product in production, although
custom integrated circuits may be used in our products in the future. Circuit
boards are currently obtained from a number of sources, including Technical
Services, Inc., and ETMA. We believe that there are adequate alternative sources
for our product components. Any termination of or significant disruption in our
relationship with suppliers of our switching product components may prevent us
from filling customer orders in a timely manner since we generally do not
maintain large inventories of our products or components. Some of the components
for our products are available from a single supplier or a limited number of
suppliers. For example, Pioneer-Standard Electronics, Inc. and Reptron
Electronics, Inc. supply us with power supply components, Carlyle supplies us
with cable components and Kent Electronics, Inc. supplies us with various
electronic components. In addition, the frames for our server cabinets are
obtained from a single source, APW, and the sheet metal components are purchased
locally from a small number of manufacturers, including Northwest Manufacturing.
We maintain quality relationships and close contact with each of our suppliers.
COMPETITION
The market for our products is highly fragmented and competitive, and we
expect competition to increase in the future. In the market for switching
systems, we compete with independent third parties like Cybex, Raritan, Rose,
CCC, Minicom Advanced Systems, Aten International, CompuCable, Belkin and
StarTech, some of which have substantially greater financial, marketing and
technical resources than we have. Our OEM customers could decide to manufacture
their own switching products or offer those supplied by our competitors. In the
market for server cabinets, we compete with a significant number of regional and
international cabinet manufacturers including APW, Ergotron, Rittal, Hergo, and
Engineered Data Products, many of which have substantially greater financial,
marketing and technical resources than we have. In addition, Compaq and others
are OEM customers for certain of our switching products and sell their own
branded integrated server cabinets. Our cabinet systems also compete with other
types of lower density, unenclosed technology storage systems.
In the market for integrated switches, we compete primarily on the basis of
technological advances, performance in relation to price, quality, reliability,
development capabilities and customer service. In the market for server
cabinets, we compete primarily on the basis of available product features,
quality, reliability, development capabilities and customer service. In
addition, the market for server cabinets and other technology storage systems is
characterized by intense price competition, and many of our competitors in this
market offer products at significantly lower price points.
Our future success will be highly dependent upon timely completion and
introduction of new products and product features at competitive price and
performance levels which address the evolving needs of our customers. We are
currently experiencing increased price competition in both the market for
stand-alone switching systems and the market for integrated server cabinet
solutions and expect that pricing pressures will increase in the future.
PROPRIETARY TECHNOLOGY
Our future success is dependent in part upon our ability to protect the
proprietary rights in our products. We seek to protect our intellectual property
rights by invoking the benefits of the patent, trademark, copyright, trade
secret and unfair competition laws of the United States, which provide only
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limited protection. The PTO has issued Patent Number 5,721,842, Patent Number
5,884,096 and Patent Number 5,937,176 to us for various aspects of our OUTLOOK
and VIEWPOINT products and our OSCAR interface. We have various corresponding
patent applications pending under the provisions of the Patent Cooperation
Treaty (which permits the filing of corresponding foreign patent applications in
numerous foreign countries within a limited time period). We also have other
United States and foreign patent applications pending. There can be no assurance
that any additional patents will be issued from any of our pending applications,
that any patents will be issued in any additional countries where our products
can be sold, or that any claims allowed in our patents or in any pending patent
applications will be of sufficient scope or strength for, or provide any
meaningful protection or any commercial advantage to, us. Moreover, our
competitors may challenge the validity of, or be able to design around, these
patents or any other patents that may be issued to us. The laws of certain
foreign countries in which our products are or may be developed, manufactured or
sold may not protect our products or intellectual property rights to the same
extent as do the laws of the United States and thus increase the likelihood of
piracy of our technology and products.
We believe that certain products of certain competitors infringe one or more
of our U.S. patents. In early 1998, we filed lawsuits against certain companies,
which were dismissed without prejudice by the agreement of the parties in early
1999 to allow certain patent issues raised in the litigation to be initially
determined by the PTO Board of Appeals and Interpretations. We may file
additional lawsuits against other companies regarding the alleged infringement.
See "--Legal Proceedings." Patent litigation, and any other litigation relating
to our intellectual property to which we become a party, is subject to numerous
risks and uncertainties, and there can be no assurance that we will be
successful in any such litigation. See "--Risk Factors--Limited Protection of
Proprietary Rights; Risks of Third Party Infringement." Although we are not
currently aware of any infringement of our intellectual property rights, other
than the two U.S. patents, or any violation of our trade secrets, nondisclosure
or licensing arrangements, there can be no assurance that the steps we take to
protect our intellectual property rights will be adequate to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. See "--Risk Factors--Limited Protection of Proprietary
Rights; Risks of Third Party Infringement."
EMPLOYEES
As of December 31, 1999, we employed 110 persons, 25 of whom were in
administration and management, 26 of whom were in engineering and product
development, six of whom were in service and technical support, 24 of whom were
in manufacturing and 29 of whom were in sales and marketing. Our employees are
not covered by any collective bargaining agreements relating to their employment
by us. We believe that we have good relations with our employees.
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RISK FACTORS
AN INVESTMENT IN APEX COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING WHETHER TO PURCHASE OR
INVEST IN APEX COMMON STOCK:
OUR BUSINESS IS DEPENDENT UPON A LIMITED NUMBER OF CUSTOMERS THAT ARE NOT
OBLIGATED TO CONTINUE TO DO BUSINESS WITH US.
A substantial portion of our sales is concentrated among a limited number of
private-label OEM customers. Sales to these OEMs represented approximately 63%
of our net sales for 1999, 60% of our net sales for 1998, and 65% of our net
sales for 1997. Sales to Compaq represented approximately 50% of our net sales
for 1999, 43% of our net sales for 1998, and 51% of our net sales for 1997. Our
OEM business is subject to risks, including:
- 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
- Changes in corporate ownership, financial condition, business direction or
product mix by the OEM
Any of these risks could have a material adverse effect on our business,
financial condition and results of operations. We have experienced, and in the
future may experience, significant reductions or delays in orders from our OEM
customers, which may have a material adverse effect on our quarterly sales and
operating results.
The loss of one or more large OEM customers could materially harm our
business. For example, in September 1999, we received notice that our
private-label arrangement with Hewlett-Packard Corporation for the production of
switching products would terminate, and this arrangement with Hewlett-Packard
ceased in the fourth quarter of 1999. None of our OEM customers is obligated to
purchase our products except pursuant to binding purchase orders. Consequently,
any OEM customer could cease doing business with us at any time. Apex's
dependence upon certain OEMs also results in a significant concentration of
credit risk, thus a substantial portion of our trade receivables outstanding
from time to time may be concentrated among a limited number of customers.
Apex'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, are increasing. These manufacturers are not obligated to
purchase products from us except pursuant to binding purchase orders and could
cease doing business with us at any time. Our business with these customers is
subject to risks such as the following:
- Short order cycles and difficulty in predicting sales
- Reduced or delayed orders
- Adoption of competing products developed by third parties for the customer
or by the customer's own internal development team
- 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 our business, financial condition and
results of operations.
OUR REVENUE MAY NOT CONTINUE TO GROW AT THE SAME RATE IN THE FUTURE AS IT HAS IN
THE PAST.
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Although our revenue has grown substantially in recent quarters, we do not
expect our revenue to grow at such a rapid rate in the future, and our revenue
could decline. Apex's total revenue has grown from $55 million in fiscal 1997,
to $76 million in fiscal 1998, and to $107 million in fiscal 1999. As our
business matures, it is unlikely that revenue will continue to grow at the same
rapid pace as it has. If our revenue does not increase at or above the rate
equity research analysts expect, the trading price for our common stock may
decline. Our future growth rates will depend on our ability to expand sales of
our existing products, which will require significant expenses that we may not
have sufficient resources to undertake.
WE ARE LIKELY TO EXPERIENCE FLUCTUATIONS IN OPERATING RESULTS.
We have historically experienced substantial fluctuations in operating
results, on a quarterly and an annual basis. These fluctuations will likely
continue in the future. Our operating results will be affected by a number of
factors, including, but not limited to:
- 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 us and by our
competitors
- Changes in product or distribution channel mixes
- Changes in pricing policies or price reductions
- Competition and price reductions by 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
- Fluctuations in sales of servers due to changes in economic conditions or
capital spending levels
Our operating results are affected by seasonal trends and by general
conditions in the server market. We have experienced, and are likely to continue
to experience, some degree of seasonality due to customer buying cycles. 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 our business and operating results have depended 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
our business, financial condition and results of operations.
We believe that quarter-to-quarter comparisons of our historical financial
results are not necessarily meaningful indicators of our future operating
results, and you should not rely on them as an indication of our future
performance. If our quarterly operating results fail to meet the expectations of
equity research analysts, the price of our common stock could be negatively
affected.
A SUBSTANTIAL PORTION OF OUR BUSINESS CONSISTS OF SALES TO OEM CUSTOMERS, WHICH
VARY SIGNIFICANTLY FROM QUARTER TO QUARTER. A SUBSTANTIAL DROP IN OEM SALES
COULD GREATLY HARM OUR BUSINESS.
The majority of our sales are to OEM customers, and we have experienced, and
will continue to experience, period-to-period variability in sales to OEM
customers. Any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect our operating results.
Although our OEM customers typically place orders for products up to several
months prior to scheduled shipment dates, these orders are subject to
cancellation generally up to six weeks prior to the scheduled shipment date. We
use warehouses near these customers to fulfill orders under a
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"just-in-time" inventory management system, and we generally recognize revenue
when these customers take possession of our products. In the past, we have
generally been required to plan production, order components and undertake our
manufacturing activities prior to the time that these orders become firm or the
products are accepted. In addition, OEM customers have in the past requested,
and are likely in the future to request, that we delay shipment dates or cancel
orders for products that are subject to firm orders. Accordingly, sales to
OEMs for future quarters are increasingly difficult to predict. Moreover, any
cancellation, rescheduling or reduction of orders by OEM customers in the future
could materially adversely affect our operating results.
FAILURE TO ACCURATELY FORECAST OUR BRANDED SALES COULD LEAD TO COSTLY
OVERPRODUCTION OR PRODUCT SHORTAGES.
If we succeed in increasing our branded sales (i.e. sales to customers other
than our private-label OEM customers) as a percentage of net sales, 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 our branded products typically place orders shortly before their
requested shipment date, revenues from branded sales are difficult to forecast.
With recent industry-wide initiatives to reduce all channel inventories and to
shorten lead times, our major OEM customers are reducing the number of weeks of
forward-committed firm orders. Furthermore, many purchasers typically require
prompt delivery of products. This results in a limited backlog of orders for
these products and requires us to maintain sufficient inventory levels to
satisfy anticipated customer demand. The inability to accurately forecast the
timing and volume of orders for branded products during any given quarter could
adversely affect operating results for such quarter and, potentially, for future
periods. If we underestimate sales, we will not be able to timely fill orders.
This could cause customer dissatisfaction and loss of future business. If we
overestimate sales, we will experience increased costs from inventory storage,
waste and obsolescence.
OUR GROSS MARGINS ARE EXPECTED TO VARY AND MAY DECLINE.
Our gross margins may vary significantly from period-to-period depending on
a number of factors, including:
- The ratio of OEM sales to branded sales since OEM sales typically have
lower gross margins than branded sales
- Product mix, because sales of some of our products will have lower gross
margins than sales of other products
- Raw materials and labor costs
- New product introductions by us and by competitors
- The level of outsourcing of manufacturing and assembly services
Our gross margins may decline in the future primarily due to increased
competition and the introduction of new technologies that may affect product
prices.
INTENSE COMPETITION FROM NEW AND EXISTING COMPETITORS COULD IMPAIR OUR ABILITY
TO GROW OUR BUSINESS AND SELL OUR PRODUCTS.
The markets for our products are highly fragmented and intensely
competitive. Increased competition from both hardware and software products
could result in price reductions, which would materially harm our business. Our
business is becoming increasingly sensitive to new product introductions, price
changes and marketing efforts by competitors. Accordingly, our future success
will be highly dependent upon timely completion and introduction of new products
and product features at competitive price and performance levels that address
the evolving needs of our customers. Apex is
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currently experiencing increased price competition for stand-alone switching
systems, remote access products and integrated server cabinet solutions, and
pricing pressures on us will increase in the future. There can be no assurance
that we will be successful in gaining additional OEM or branded server
manufacturer customers. We compete for sales of switching systems and extension
products with independent third parties such as Cybex Computer Products
Corporation, Raritan, Rose Electronics, CCC Group, Minicom Advanced Systems,
Aten International, CompuCable Mfg. Group, Belkin, Lightwave Communications and
StarTech Computer Accessories. We compete for sales of server cabinets with a
significant number of regional and international manufacturers. We also face
competition from software providers who are able to offer software solutions at
a much lower cost or even bundled for free with other products, and these
software solutions address many of the problems our switching systems, extension
products and remote access products are designed to address.
Current and potential competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their products than
we are. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties that
enhance the ability of their products to address the needs of our prospective
customers. We may not be able to compete successfully against current and future
competitors and competitive pressure may materially harm our business.
Certain of Apex's OEM or other customers, such as Compaq or Microsoft, could
decide to manufacture their own switching or remote access products, enhance
their own internally-developed switching solutions or offer products supplied by
competitors. These customers could also offer other hardware and/or software
solutions to address the problems that our products address. Competition among
companies with network management products (many of which are substantially
larger than Apex and have significantly more financial resources) is intense.
Established companies with network management experience could offer new
products, new technologies, or new solutions that compete with our products.
Apex's server cabinets also compete with other types of lower density,
unenclosed technology storage systems. Sales of server cabinets and other
technology storage systems are characterized by intense price competition and
low barriers to entry, and many of our competitors offer products at
significantly lower price points. Moreover, our current OEM customers and
certain of our other branded server manufacturer customers sell their own
branded integrated server cabinets. Our ability to compete successfully will
depend in part upon our ability to continue to differentiate our cabinet systems
from competing products.
OUR FAILURE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE OR TO INTRODUCE NEW
PRODUCTS COULD IMPAIR OUR OPERATING RESULTS.
Sales of switching and remote access products are characterized by rapid
technological advances, frequent new product introductions and enhancements, and
significant price competition. If we do not keep pace with these changes, we
will lose customers, and our business will be harmed. The introduction of
products incorporating superior or alternative technologies (such as switching
software), the emergence of new industry standards or changes in the pricing
structure could render our existing products and products under development
obsolete or unmarketable. Our products combine components, such as printed
circuit boards, connectors, cable assemblies, power supplies and enclosures,
that are manufactured by other companies and are generally available to
competitors and potential competitors. Our future success will depend in large
part upon continued innovative application of such commercially available
components to the expansion and enhancement of existing products and the
development and introduction of new products that address changing customer
needs on a cost-effective and timely basis. If we fail to respond on a timely
basis to technological developments, changes in industry standards or customer
requirements or software innovations, we will
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lose customers, and our business will be greatly harmed. Similar results could
occur if we experience significant delays in new product development or
introduction.
Due to Apex's significant reliance on OEM relationships, our product
development efforts are often focused on developing new products or enhancements
for OEM customers. As a result, our OEM relationships may negatively affect our
ability to develop new and enhanced products for our non-OEM customers.
Moreover, these new products or enhancements for OEM customers may not be
available to or readily marketable to other customers without significant
modification and delay. The termination or significant disruption of our
relationship with certain OEMs or other customers for whom we have devoted
significant product development resources is likely to result in lost
opportunities with respect to the development of products or enhancements for
our other customers.
WE ARE DEPENDENT UPON SUPPLIERS AND OUTSOURCED MANUFACTURING. DISRUPTION OF OUR
ACCESS TO THESE SUPPLIES AND SERVICES, OR PROBLEMS WITH QUALITY OF THE SUPPLIES
OR SERVICES, COULD PREVENT US FROM FILLING CUSTOMER ORDERS AND HARM OUR
BUSINESS.
The principal components of Apex's products are power supplies, cable
assemblies, line filters, enclosures and printed circuit boards, all of which
are purchased from outside vendors. We generally buy components under purchase
orders and generally do not have long-term agreements with our suppliers. Also,
we do not maintain large inventories of products or components. Any termination
of, or significant disruption of, relationships with suppliers of product
components may prevent us from filling customer orders in a timely manner.
We purchase a number of the components for products from a single supplier
or a limited number of suppliers. We have occasionally experienced, and may in
the future experience, delays in delivery of such components. Although alternate
suppliers are available for most of the components and services needed to
produce our products, the number of suppliers of some components is limited, and
qualifying a replacement supplier and receiving components from alternate
suppliers could take several months.
We depend upon suppliers to deliver components that are free from defects,
competitive in functionality and cost and in compliance with specifications and
delivery schedules. Disruption in supply, a significant increase in the cost of
one or more components, failure of a third party supplier to remain competitive
in functionality or price, or the failure of a supplier to comply with any of
our procurement needs could delay or interrupt our ability to manufacture and
deliver our products to customers on a timely basis, thereby adversely affecting
our business, financial condition and results of operations.
We rely on third party manufacturers for subassembly of our products. These
outsourcing arrangements and any future outsourcing arrangements involve
numerous risks, including reduced control over product quality, delivery
schedules, manufacturing yields and costs. Moreover, although arrangements with
such manufacturers may contain provisions for warranty obligations on the part
of such manufacturers, we will remain primarily responsible to our customers for
warranty obligations.
IF THE CLIENT/SERVER MARKET DOES NOT CONTINUE TO GROW OR IF NETWORK RELIABILITY
AND TOOLS DO NOT CONTINUE TO DEVELOP, OUR BUSINESS WILL BE GREATLY HARMED.
Our business is dependent on the continued acceptance of the client/server
model of network computing. Although distributed network computing utilizing
client/server architecture has gained increasing acceptance, use of this
networking model may not continue to grow or may be replaced by new technologies
for network computing. This would render our products obsolete. In addition,
sales of switching and remote access products are driven in part by the inherent
unreliability of client/server networks. As client/server networks continue to
proliferate, however, server manufacturers and software developers or providers
may develop greater reliability and better tools for managing networks. To the
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extent that greater reliability and better network management tools are
successfully developed, our products could be rendered obsolete, which could
materially harm our business.
WE WILL NEED TO EXPAND OUR RESELLER CHANNEL IN ORDER TO DEVELOP OUR BUSINESS AND
INCREASE REVENUE.
Apex expects to rely increasingly on resellers, including distributors, VARs
and systems integrators, for the distribution and sale of branded products. Our
strategy contemplates the expansion of our reseller network both domestically
and internationally. Our future success will depend in part on our ability to
attract, train and motivate new resellers and expand our relationships with
current distributors. We may not be successful in expanding our reseller
channel. We will be required to invest significant additional resources in order
to expand our reseller channel, and the cost of this investment may exceed the
revenues generated from this investment.
We provide and expect to continue to provide discounts and other special
pricing arrangements to resellers. As a result of these discounts and other
arrangements, We expect gross margins on sales through resellers to be lower
than gross margins on direct sales. Although our existing reseller arrangements
generally do not allow significant rights of return, as we expand our reseller
channel, we expect that certain resellers will have significant rights of
return. There can be no assurance that actual returns in the future will not
have a material adverse effect on our business, financial condition and results
of operations.
Our agreements with resellers are generally nonexclusive and may be
terminated on short notice by either party without cause. These resellers are
not obligated to purchase products from us and frequently offer products of
several different manufacturers, including competitor's products. These
resellers may give higher priority to the sale of other products. A reduction in
sales efforts by our resellers could lead to a reduction in our sales and could
materially adversely affect our business, financial condition and results of
operations.
APEX EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL MAY NOT REMAIN WITH APEX, WHICH
COULD HARM OUR ABILITY TO GROW THE BUSINESS.
Apex has been greatly dependent on the ability to retan key management and
technical personnel. Our future success will be highly dependent upon the
personal efforts of management and technical personnel, and the loss of services
of any one of them could have a material adverse effect on our business,
financial condition and results of operations. Mr. Kevin J. Hafer, our Chairman,
Chief Executive Officer and President, is the only executive officer or employee
with whom we currently have an employment agreement in effect and the only
executive officer upon whom we maintain "key-man" life insurance. Our success
will also be dependent in part upon our ability to attract, retain and motivate
highly skilled employees. Competition for employees with the skills required,
particularly engineering and other technical personnel, is intense, and there
can be no assurance that we will be able to attract and retain highly skilled
employees in sufficient numbers to sustain our current business or to support
future growth.
DIFFICULTIES ENCOUNTERED MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS.
In recent periods, Apex has experienced rapid revenue and customer growth
and expansion in the number of employees, product offerings and the scope and
complexity of our financial systems. This growth has placed significant strain
on our management, operational and financial resources and has resulted in new
and increased responsibilities for management personnel. Apex expects these
strains to continue, and possibly worsen in the future. There can be no
assurance that management, personnel, systems, procedures and controls will be
adequate to support our existing and future operations.
Our ability to effectively manage this recent growth and any future growth
will require us to continue to implement and improve our operational, financial
and information systems and will likely require additional management personnel.
In addition, we believe that we must continue to develop
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greater engineering, marketing, sales and customer service capabilities in order
to develop new products and product enhancements, secure new customers at a rate
necessary to achieve desired growth and effectively serve the evolving needs of
present and future customers. There can be no assurance that we will be
successful in strengthening these capabilities. Without adequate management,
engineering, product development, marketing and sales and customer service
capabilities, our ability to effectively manage growth, expand and enhance our
product line, further penetrate existing markets and develop new markets will be
significantly limited. If Apex's management is unable to effectively manage this
growth, our business, financial condition and results of operations could be
materially adversely affected.
OUR PRODUCTS ARE SUBJECT TO WARRANTY CLAIMS AND RETURNS. INCREASED WARRANTY
CLAIMS OR RETURNS COULD HARM OUR BUSINESS.
We have typically offered a one to three year limited warranty for all of
our products and allowed additional rights of return to certain of our
customers. Although our historical return experience has not been significant,
an increase in returns could have an adverse effect on our sales and could
negatively affect our financial results. Furthermore, maintaining sufficient
inventory levels to assure prompt delivery of our products increases the amount
of inventory that may become obsolete and increases the risk that the
obsolescence of such inventory may have a material adverse effect on our
business and operating results.
APEX HAS LIMITED PROTECTION OF PROPRIETARY RIGHTS AND FACE RISKS OF THIRD PARTY
INFRINGEMENTS.
Apex's future success is dependent in part upon our ability to protect
proprietary rights in our products. Apex has sought to protect intellectual
property rights by invoking the benefits of the patent, trademark, copyright,
trade secret and unfair competition laws of the United States. These laws afford
only limited protection. There can be no assurance that the steps we have taken
to protect our intellectual property rights, or that the steps we take in the
future, will be adequate to prevent misappropriation of our technology or that
our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology.
The United States Patent and Trademark Office has issued several patents to
us for various aspects of our products. Apex has various corresponding patent
applications pending under the provisions of the Patent Cooperation Treaty
(which permits the filing of corresponding foreign patent applications in
numerous foreign countries within a limited time period). We also have other
United States and foreign patent applications pending. There can be no assurance
that any additional patents will be issued from any of those pending
applications or that any patents will be issued in any additional countries
where our products can be sold. Also, claims allowed in our patents or in any
pending patent applications may not be of sufficient scope or strength for, or
provide meaningful protection or any commercial advantage to us. Moreover,
competitors may challenge the validity of, or be able to design around, the U.S.
patents or any other patents that may be issued. The laws of certain foreign
countries in which our products are or may be developed, manufactured or sold
may not protect our products or intellectual property rights to the same extent
as do the laws of the United States and thus increase the likelihood of piracy
of our technology and products.
We may initiate claims or litigation against third parties for infringement
of proprietary rights or to establish the validity of proprietary rights.
Existing litigation, and any other litigation relating to intellectual property
to which we become a party, is subject to numerous risks and uncertainties, and
we may not be successful in any such litigation. Existing litigation or other
litigation by or against us could result in significant expense and divert the
efforts of technical and management personnel, whether or not such litigation
results in a favorable determination. In the event of an adverse result in any
such litigation, we could be required to pay substantial damages, suspend or
cease the manufacture, use and sale of any infringing products, expend
significant resources to develop non-infringing
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technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that we would be successful in
such development or that such licenses would be available on reasonable terms,
or at all, and any such development or license could require us to expend
substantial time and other resources. In the event that any third party makes a
successful claim against us, or our customers, and a license is not made
available on commercially reasonable terms, our business, financial condition
and results of operations could be adversely affected.
The network server, electronics and related industries are characterized by
vigorous pursuit and protection of intellectual property rights or positions,
which has resulted in significant and often protracted and expensive litigation.
Apex has in the past been, and may from time to time in the future be, a party
in proceedings alleging infringement of intellectual property rights owned by
third parties. If necessary or desirable, we may seek licenses under such
intellectual property rights. However, licenses may not be offered on terms
acceptable to us, or at all. The failure to obtain a license from a third party
for technology we use could cause us to incur substantial liabilities and to
suspend or cease the manufacture of products requiring such technology.
WE MUST MEET THE INCREASED DEMANDS ON CUSTOMER SERVICE OPERATIONS OR CUSTOMER
SATISFACTION AND SALES COULD SUFFER.
Continued growth of our branded sales is likely to be accompanied by
increasing demands on customer service operations. As a result of our commitment
to a high level of customer service, we will need to invest significant
resources in the maintenance and improvement of our customer service resources.
Any failure to maintain adequate customer service could cause customer
dissatisfaction, result in reduced sales of products and, accordingly,
materially adversely affect business, financial condition and results of
operations.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE OUR INTERNATIONAL DISTRIBUTION
NETWORKS AND INTERNATIONAL SALES EFFORTS, RESULTS OF OPERATIONS MAY SUFFER.
We will have to develop, integrate and expand our international distribution
network in an effort to increase international sales of switching, remote access
and other products. There can be no assurance that we will be successful in
developing, integrating or expanding the international distribution network or
in marketing and selling products in foreign markets. If the revenues generated
by international sales are not adequate to recover the expense of establishing,
expanding, integrating and maintaining an international distribution network,
our business, financial condition and results of operations could be materially
adversely affected.
If international sales become a more significant component of net sales, our
business could become more vulnerable to the risks inherent in doing business on
an international level, including:
- Difficulties in managing foreign resellers
- Longer payment cycles and problems in collecting accounts receivable
- The effects of seasonal customer demand
- Changes in regulatory requirements
- Risks relating to intellectual property rights
- Export restrictions, tariffs and other trade barriers
- Fluctuations in currency exchange rates
- Potentially adverse tax consequences and political instability
The existence or occurrence of any one of these factors could have a
material adverse effect on our business, financial condition and results of
operations.
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FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
EXCHANGE LOSSES.
Currently, a majority of our international business is conducted in U.S.
dollars. However, as we expand international operations, it is likely that
international business will increasingly be conducted in foreign currencies.
Fluctuations in the value of foreign currencies relative to the U.S. dollar have
caused, and are expected to increasingly cause, currency translation gains and
losses. We cannot predict the effect of exchange rate fluctuations upon future
quarterly and annual operating results. We may experience currency losses in the
future. To date, we have not adopted a hedging program to protect us from risks
associated with foreign currency fluctuations.
WE MAY ACQUIRE TECHNOLOGIES OR COMPANIES IN THE FUTURE THAT COULD CAUSE
DISRUPTION OF BUSINESS OR EXPOSURE TO OTHER RISKS.
We may acquire technologies or companies or make investments in
complementary companies, products or technologies. These acquisitions entail
many risks, any of which could materially harm our business. These risks
include:
- Difficulty assimilating the acquired company's personnel and operations
- Diversion of management's attention
- Loss of key personnel
- Dilution of existing stockholders as a result of issuing equity securities
- Assumption of liabilities of the acquired company
- Incurring substantial expenses as a result of the transaction
Any failure to manage these integration challenges, could materially harm
our business, financial condition and results of operations.
PROVISIONS IN OUR CHARTER DOCUMENTS AND IN WASHINGTON LAW MAY DISCOURAGE
POTENTIAL ACQUISITION BIDS FOR APEX AND PREVENT CHANGES IN MANAGEMENT THAT
SHAREHOLDERS MAY FAVOR.
Provisions in Apex's charter documents could discourage potential
acquisition proposals and could delay or prevent a change in control transaction
that shareholders may favor. These provisions could have the effect of
discouraging others from making tender offers for shares, and as a result, these
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover attempts and may prevent shareholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in management that
shareholders may favor. Our charter documents do not permit stockholders to act
by written consent and limit the ability of shareholders to call a shareholders
meeting. Furthermore, the board of directors has the authority to issue up to
one million shares of preferred stock in one or more series. The board of
directors can fix the price, rights, preferences, privileges and restrictions of
such preferred stock without any further vote or action by Apex's shareholders.
The issuance of shares of preferred stock may delay or prevent a change in
control transaction without further action by Apex shareholders.
In addition, Washington law may inhibit potential acquisition bids for Apex.
With certain exceptions, Washington law prohibits a target corporation from
engaging in certain significant business transactions with a person or group of
persons that beneficially owns 10% or more of the voting securities of the
target corporation (an acquiring person) for a period of 5 years after such
acquisition, unless the transaction or acquisition of shares is approved by a
majority of the members of the target corporation's board of directors prior to
the time of acquisition. These prohibited transactions include, among other
things, a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person, termination of 5% or more
of the employees of the target
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corporation as a result of the acquiring person's acquisition of 10% or more of
the shares or allowing the acquiring person to receive any disproportionate
benefit as a shareholder. After the 5-year period, a significant business
transaction may take place as long as it complies with certain fair price
provisions of the statute. A corporation may not opt out of this statute, and
these statutory provisions may discourage potential acquisition proposals.
APEX'S STOCK IS SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS THAT MAY
PREVENT SHAREHOLDERS FROM RESELLING THEIR SHARES AT OR ABOVE THE PRICE AT WHICH
THEY PURCHASED THEIR SHARES.
Fluctuations in the price and trading volume of our common stock may prevent
shareholders from reselling their shares above the price at which they purchased
their shares. Stock prices and trading volumes for many technology companies
fluctuate widely for a number of reasons, including some reasons which may be
unrelated to their businesses or results of operations. This market volatility,
as well as general domestic or international economic, market and political
conditions, could materially adversely affect the market price of our common
stock without regard to operating performance. In addition, operating results
may be below the expectations of public market analysts and investors. If this
were to occur, the market price of our common stock would likely significantly
decrease.
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ITEM 2. PROPERTIES.
On March 8, 1999, we began a five-year lease of approximately 117,000 square
feet in an industrial office building in Redmond, Washington. The initial base
rent under this lease is approximately $90,000 per month, plus taxes, insurance
and maintenance. The 117,000 square foot leased premises has approximately
35,000 more square feet than we currently need, and we have subleased the excess
space until we need it for planned expansion.
ITEM 3. LEGAL PROCEEDINGS.
We filed complaints for infringement of U.S. Patent Number 5,721,842 in
United States District Court for the Western District of Washington at Seattle
against Cybex and Rose on February 25, 1998, and against CCC on June 1, 1998.
The complaints allege that the products manufactured and sold by each defendant
embody the inventions claimed in U.S. Patent Number 5,721,842 and sought
injunctive relief, damages, attorneys' fees and costs.
The defendants in the Cybex and Rose lawsuits each filed counterclaims
seeking to recover the expenses of the litigation (including fees and costs) and
to obtain a declaratory judgment that their respective products do not infringe
the 5,721,842 patent and that the 5,721,842 patent was invalid and
unenforceable. The Cybex and Rose lawsuits were consolidated for discovery but
not for trial, and trial dates were set for November, 1999. In early 1999, Cybex
filed multiple motions for partial summary judgment, and brought a patent
interference proceeding with the U.S. Patent and Trademark Office ("PTO")
seeking to invalidate the 5,721,842 patent and claim ownership of the invention
claimed by the 5,721,842 patent as a result of a prior patent, United States
Patent No. 5,732,212, which was formerly owned by Fox Network Systems
Corporation, a company Cybex recently acquired.
Rather than proceeding simultaneously in two different forums (with the
attendant duplicative expenses), we agreed with Cybex to seek expedited
consideration by the PTO of the patent issues raised in the District Court
litigation, reserving our right to reinstate the District Court lawsuit at the
conclusion of that process. Pursuant to a mutual agreement and stipulation
between us and Cybex, the District Court lawsuit was dismissed without
prejudice, and the parties agreed that the patent issues raised in connection
with the District Court lawsuit should be initially determined by the Board of
Appeals and Interpretations of the PTO. The parties also jointly requested the
District Court to urge accelerated consideration of these issues by the PTO. We
also entered into a mutual agreement and stipulation with Rose dismissing the
Rose lawsuit without prejudice pending the PTO's decision. At the conclusion of
the PTO proceeding, the District Court lawsuits can be reinstated upon the
request of any party.
The complaint in the CCC lawsuit was filed but has not been formally served
on CCC. In 1999, the case was stayed by the District Court, and we were directed
to file status updates every six months. In early 2000, the District Court,
while retaining full jurisdiction, removed the case from the Court's active
caseload and directed us to continue to file status reports with the Court every
six months.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of the shareholders in the fourth
quarter of 1999.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK; HOLDERS OF RECORD
Our Common Stock is quoted on The Nasdaq National Market System under the
symbol "APEX." The following table shows the high and low sales prices for the
Common Stock for the periods indicated, as reported by the Nasdaq National
Market System.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Quarter ended December 31, 1999............................. $34.00 $14.50
Quarter ended October 1, 1999............................... $35.38 $11.88
Quarter ended July 2, 1999.................................. $21.88 $12.25
Quarter ended April 2, 1999................................. $26.75 $11.00
Quarter ended December 31, 1998............................. $20.83 $ 7.58
Quarter ended September 25, 1998............................ $23.50 $10.50
Quarter ended June 26, 1998................................. $20.83 $15.00
Quarter ended March 27, 1998................................ $21.17 $14.00
</TABLE>
As of March 3, 2000, there were 66 holders of record of our Common Stock.
All prices above reflect a three-for-two stock split effective March 4, 1999.
DIVIDEND POLICY
We did not declare or pay any cash dividends in 1999, 1998 or 1997, and for
the foreseeable future, we expect to retain earnings to finance the expansion
and development of our business. The payment of dividends is within the
discretion of our Board of Directors and will depend on our earnings, capital
requirements and operating and financial condition, among other factors. In
addition, our line of credit facility prohibits the payment of dividends if any
loans are outstanding under such facility.
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data. Income before extraordinary item
and per share data pro forma for 1995.)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................................... $107,288 $75,640 $55,390 $33,622 $19,671
Income before extraordinary item.............. $ 21,243 $15,710 $10,468 $ 3,608 $ 2,344
Basic per share income before extraordinary
item........................................ $ 1.03 $ 0.78 $ 0.59 $ 0.42 $ 0.20
Diluted per share income before extraordinary
item........................................ $ 0.99 $ 0.75 $ 0.55 $ 0.29 $ 0.20
Total assets.................................. $104,314 $73,375 $55,271 $11,953 $ 9,048
Long-term obligations and preferred stock..... -- -- -- $28,316 $28,819
Cash dividends declared per share............. -- -- -- -- $ 0.08
</TABLE>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE INFORMATION IN THIS ITEM 7--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING
STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR REVENUES,
EXPENSES, MARGINS, LIQUIDITY AND CAPITAL NEEDS. THESE 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 "DESCRIPTION OF BUSINESS--RISK FACTORS."
OVERVIEW
We design, manufacture and market stand-alone switching systems and
integrated server cabinet solutions for the client/server computing market. We
operated as a division of Apex Computer Company (the "Predecessor") through
January 1993, providing computer maintenance services to Microsoft and selling
integrated server cabinets and, to a limited extent, stand-alone switching
systems, primarily to Microsoft. In February 1993, the assets of that division
were spun off as a dividend to the sole shareholder of the Predecessor, who
contributed those assets as our initial capital. Throughout 1993, we derived
revenue primarily from the provision of computer maintenance services to
Microsoft. In May 1994, we began selling stand-alone switching systems to Compaq
for integration into server cabinets. In June 1994, we discontinued our computer
maintenance service business and decided to concentrate on sales of stand-alone
switching products and server cabinets, including server cabinets with
integrated switching systems.
A substantial portion of our sales are concentrated among a limited number
of original equipment manufacturers that purchase our switching systems on a
private-label basis ("OEMs" and "OEM customers"). Sales to our OEM customers
represented approximately 63% of our net sales for 1999, 60% of our net sales
for 1998, and 65% of our net sales for 1997.
We are increasing the mix of 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. We do not have contracts with any
of these customers, who are obligated to purchase products from us only pursuant
to binding purchase orders.
With recent industry-wide initiatives to reduce all channel inventories and
to shorten lead times, trends with our major customers are, generally, to reduce
the number of weeks of forward-committed firm orders. This factor is currently
affecting our business with certain OEMs and other server manufacturers, and we
believe that it will make our sales more difficult to predict.
We are currently experiencing increased price competition in both the market
for stand-alone switching systems and the market for integrated server cabinet
systems and expect that pricing pressures will increase in the future.
On March 8, 1999, we began a five-year lease of approximately 117,000 square
feet in an industrial office building in Redmond, Washington. The initial base
rent under this lease is approximately $90,000 per month, plus taxes, insurance
and maintenance. Portions of the rent are allocated to cost of sales and to
general and administrative expense. The 117,000 square foot leased premises has
approximately 35,000 more square feet than we currently need and we have
subleased the excess space until we need it for planned expansion.
Kevin J. Hafer, our Chairman, President and Chief Executive Officer has
exercised stock options for our Common Stock and he now holds 304,104 shares of
our Common Stock as of March 3, 2000. Since November 1997, Mr. Hafer has been
selling (and/or making gifts of) approximately 30,000 to
22
<PAGE>
100,000 shares of our Common Stock each quarter. Mr. Hafer has informed us that
he intends to continue this disciplined selling (and/or gifting) program on a
regular quarterly basis. Mr. Hafer has also informed us that, in order to
diversify his investments and to provide liquidity, on one or more occasions
over the next year or two he is likely to substantially increase the number of
shares of our Common Stock that he sells over and above the number he sells on a
regular quarterly basis. Some of our other executive officers have vested in
significant amounts of our Common Stock and continue to vest in additional
shares on a monthly basis. These officers have informed us that they have sold
and may sell additional shares of our Common Stock to provide liquidity and
diversify their respective portfolios.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 53.5 53.1 55.0
----- ----- -----
Gross margin.............................................. 46.5 46.9 45.0
----- ----- -----
Operating expenses:
Research and development.................................. 6.1 4.2 3.7
Sales and marketing....................................... 7.5 7.6 8.0
General and administrative................................ 5.6 7.3 6.8
----- ----- -----
Total operating expenses................................ 19.2 19.1 18.5
----- ----- -----
Income from operations...................................... 27.3 27.8 26.5
Interest income and other................................... 2.8 3.5 1.7
----- ----- -----
Income before income taxes and extraordinary item........... 30.1 31.3 28.2
Provision for income taxes.................................. 10.3 10.5 9.3
----- ----- -----
Income before extraordinary item............................ 19.8 20.8 18.9
Extraordinary item--loss on early extinguishment of debt,
net of applicable income tax benefit...................... -- -- (0.3)
----- ----- -----
Net income.................................................. 19.8% 20.8% 18.6%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31 1999 AND 1998
NET SALES. Our net sales consist of sales of stand-alone switching systems
and integrated server cabinet solutions. Net sales increased 42% to
$107.3 million for 1999 from $75.6 million for 1998. This increase was due
primarily to increased demand for stand-alone switching systems from
private-label OEM customers, and, to a lesser extent, to increased demand for
Apex-brand products. On a percentage basis, private-label OEM sales for 1999
increased 50% over 1998, and sales of Apex-brand switching systems and
integrated server cabinet solutions for 1999 increased 29% over 1998. Private-
label OEM sales represented 63% of sales for 1999, as compared to 60% of sales
for 1998, while sales of Apex-brand products represented 37% of sales for 1999,
as compared to 40% of net sales for 1998.
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
23
<PAGE>
introductions by us and our competitors; and the level of manufacturing and
assembly services we outsource. Gross margin decreased slightly to 46.5% for
1999 from 46.9% for 1998, due primarily to the higher percentage of
private-label OEM sales in 1999 compared to 1998.
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 were $6.5 million, or 6.1% of
net sales, for 1999 as compared to $3.2 million, or 4.2% of net sales, for 1998.
The increases in absolute dollars and as a percentage of net sales were due
primarily to increased product development spending and, to a lesser extent,
more compensation expense associated with increased staffing. We believe that
the timely development of innovative new products and enhancements to existing
products is essential to maintaining our competitive position and we expect
research and development expenditures 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 were $8.1 million, or 7.5% of net sales, for 1999 as compared to
$5.7 million, or 7.6% of net sales, for 1998. The increase in absolute dollars
was due primarily to increased sales commissions and personnel costs associated
with increased staffing levels, and higher expenses for advertising tradeshow
and other distribution expenses. We expect these expenditures to increase in
absolute dollars as we seek to increase our branded and 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 were $6.0 million, or 5.6% of net sales, for 1999 as compared to
$5.6 million, or 7.3% of net sales, for 1998. The increase in absolute dollars
was due to increases in rent at our new facility in Redmond, Washington, and
personnel costs associated with increased staffing levels, partially offset by
decreased legal expense associated with patent litigation. We expect that
general and administrative expenses will continue to increase to support the
growth of the business.
INTEREST INCOME AND OTHER, NET. Interest income was $3.1 million for 1999,
up from $2.6 million for 1998. The increase related primarily to increased cash
and investments provided by 1999 operations.
PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $11.1 million for 1999. The effective federal tax rate for 1999
was approximately 34.3%, compared to 33.5% for 1998.
NET INCOME. Net income increased to $21.2 million for 1999 from
$15.7 million for 1998, as a result of the above factors. As a percentage of net
sales, net income decreased to 19.8% for 1999 from 20.8% for 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 37% to $75.6 million for 1998 from
$55.4 million for 1997. This increase was due primarily to increased demand for
stand-alone switching systems from private-label OEM customers, and, to a lesser
extent, to increased demand for Apex-brand products. On a percentage basis,
private-label OEM sales for 1998 increased 25% over 1997, and sales of
Apex-brand switching systems and integrated server cabinet solutions for 1998
increased 58% over 1997. Private-label OEM sales represented 60% of sales for
1998, as compared to 65% of sales for 1997, while sales of Apex-brand products
represented 40% of sales for 1998, as compared to 35% of net sales for 1997.
GROSS MARGIN. Gross margin increased to 46.9% for 1998 from 45.0% for 1997,
due primarily to growth in our branded switch sales, and to a lesser extent,
higher overall sales levels which absorb fixed expenses.
24
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$3.2 million, or 4.2% of net sales, for 1998 as compared to $2.0 million, or
3.7% of net sales, for 1997. The increases in absolute dollars and as a
percentage of net sales were due primarily to increased product development
spending and, to a lesser extent, more compensation expense associated with
increased staffing.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
$5.7 million, or 7.6% of net sales, for 1998 as compared to $4.4 million, or
8.0% of net sales, for 1997. The increase in absolute dollars was due primarily
to increased sales commissions and personnel costs associated with increased
staffing levels, and higher advertising and tradeshow expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.6 million, or 7.3% of net sales, for 1998 as compared to $3.7 million,
or 6.8% of net sales, for 1997. The increases in absolute dollars and as a
percentage of net sales were due to increases in incentive compensation, legal
and accounting costs.
INTEREST INCOME AND OTHER, NET. Interest income was $2.6 million for 1998,
up from $0.9 million for 1997. Our cash and short-term investments increased
significantly as a result of our 1998 operations and from our IPO in
February 1997, and follow-on offering in August 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $7.9 million for 1998. The effective federal tax rate for 1998 was
approximately 33.5%, compared to 32.9% for 1997.
NET INCOME. Net income increased to $15.7 million for 1998 from
$10.3 million net income for 1997, as a result of the above factors. As a
percentage of net sales, net income increased to 20.8% in 1998 from 18.6% in
1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 our principal sources of liquidity consisted of
approximately $61 million in cash, cash equivalents, and investments.
In addition, we have 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, we may borrow up to a specified amount based upon our
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 has a maturity date of September 30, 2000. There were
no borrowings under the line of credit and the letter of credit facility from
January 1, 1997 through March 3, 2000, and all $5.0 million was available.
Our operating activities generated cash of approximately $5.9 million for
1999, $11.7 million for 1998, and $6.6 million for 1997. For 1999, the growth in
net income was more than offset by increases in accounts receivable and
inventories. The growth in accounts receivable is the result of the timing of
sales and of our collections. The growth in inventory is the result of increased
product positioned in remote warehouses supporting sales to large OEM customers.
At December 31, 1999, our OEM customers accounted for approximately 65% of the
accounts receivable.
We believe that existing cash balances, cash generated from operations and
the funds available under our credit facilities will be sufficient to fund our
operations through 2000.
YEAR 2000
We experienced no material impact from the Year 2000 problem. Our products
performed without fault with respect to the Year 2000 problem, and we
experienced no issues with our internal computing and IT systems. We are also
not aware of any Year 2000 issues experienced by our customers, suppliers,
vendors or service providers that may have a material effect on us.
25
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The market risk inherent in our financial instruments represents the
potential loss arising from adverse changes in interest rates. We are exposed to
market risk in the area of interest rate changes impacting the fair value of our
investment securities. Our investment policy is to manage our investment
portfolio to preserve principal and liquidity while maximizing the return on the
investment portfolio through the investment of available funds. We diversify the
investment portfolio by investing in a variety of highly-rated investment-grade
securities and through the use of different investment managers. Our marketable
securities portfolio is primarily invested in short-term securities with at
least an investment grade rating to minimize interest rate and credit risk as
well as to provide for an immediate source of funds. Market risk is estimated as
the potential change in fair value in the investment portfolio resulting from a
hypothetical 10 percent change in interest rates, which is not material at
December 31, 1999. We generally hold investments until maturity and carry the
securities at amortized cost, which approximates fair market value.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... 28
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
1998.................................................... 29
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997........................ 30
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the years ended December 31, 1999, 1998
and 1997................................................ 31
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................ 32
Notes to Consolidated Financial Statements................ 33-41
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Apex Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Apex Inc. and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
January 24, 2000
28
<PAGE>
APEX INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,786 $34,585
Investments maturing within one year...................... 35,716 17,339
-------- -------
Total cash and investments.............................. 51,502 51,924
Accounts receivable, less allowance for doubtful
accounts................................................ 28,168 14,647
Inventories............................................... 11,483 3,733
Prepaid expenses.......................................... 676 285
Deferred tax assets....................................... 777 679
-------- -------
Total current assets.................................... 92,606 71,268
Investments maturing in 2001................................ 9,464 1,393
Property and Equipment, net................................. 1,906 604
Other....................................................... 338 110
-------- -------
Total assets................................................ $104,314 $73,375
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,696 $ 1,416
Accrued wages and commissions............................. 1,546 814
Accrued warranty costs.................................... 545 745
Income taxes.............................................. 3,107 278
Other accrued expenses.................................... 1,027 715
-------- -------
Total current liabilities............................... 9,921 3,968
-------- -------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000 shares authorized at December 31,
1999 and 1998; no shares issued and outstanding......... -- --
Common stock, no par value; 100,000 shares authorized at
December 31, 1999 and 1998; 20,794 and 20,315 shares
issued and outstanding, respectively.................... 66,583 62,901
Deferred compensation..................................... (35) (96)
Retained earnings......................................... 27,845 6,602
-------- -------
Total shareholders' equity.............................. 94,393 69,407
-------- -------
Total liabilities and shareholders' equity.................. $104,314 $73,375
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
APEX INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $107,288 $75,640 $55,390
Cost of sales............................................... 57,374 40,168 30,488
-------- ------- -------
Gross profit.............................................. 49,914 35,472 24,902
-------- ------- -------
Research and development.................................... 6,544 3,167 2,044
Sales and marketing......................................... 8,076 5,739 4,446
General and administrative.................................. 5,998 5,573 3,744
-------- ------- -------
Total operating expenses.................................. 20,618 14,479 10,234
-------- ------- -------
Income from operations...................................... 29,296 20,993 14,668
Interest income and other................................... 3,053 2,646 928
-------- ------- -------
Income before income taxes and extraordinary item........... 32,349 23,639 15,596
Provision for income taxes.................................. 11,106 7,929 5,128
-------- ------- -------
Income before extraordinary item.......................... 21,243 15,710 10,468
Extraordinary item--loss on early extinguishment of debt,
net of related income tax benefit of $72.................. -- -- (141)
-------- ------- -------
Net income.................................................. $ 21,243 $15,710 $10,327
======== ======= =======
Per share data:
Basic:
Income before extraordinary item.......................... $ 1.03 $ 0.78 $ 0.59
Extraordinary item........................................ -- -- (.01)
-------- ------- -------
Net income................................................ $ 1.03 $ 0.78 $ 0.58
======== ======= =======
Diluted:
Income before extraordinary item.......................... $ 0.99 $ 0.75 $ 0.55
Extraordinary item........................................ -- -- (.01)
-------- ------- -------
Net income................................................ $ 0.99 $ 0.75 $ 0.54
======== ======= =======
Weighted average shares used in computing per share data:
Basic..................................................... 20,618 20,215 17,781
======== ======= =======
Diluted................................................... 21,564 21,011 18,977
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
APEX INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- DEFERRED RETAINED
SHARES AMOUNT COMPENSATION EARNINGS (DEFICIT) TOTAL
-------- -------- ------------ ------------------ --------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996.............. 9,390 $ 648 $(93) $(19,435) $(18,880)
Net income............................... -- -- -- 10,327 10,327
Proceeds from offerings of common
stock.................................. 7,125 58,844 -- -- 58,844
Conversion of Series A redeemable and
convertible preferred stock to common
stock.................................. 3,600 2,205 -- -- 2,205
Issuance of common stock options......... -- 99 (99) -- --
Proceeds from employee stock plans and
related tax benefit.................... 36 218 -- -- 218
Amortization of deferred compensation.... -- -- 24 -- 24
------ ------- ---- -------- --------
Balances, December 31, 1997.............. 20,151 62,014 (168) (9,108) 52,738
Net income............................... -- -- -- 15,710 15,710
Cancellation of common stock options..... -- (15) 15 -- --
Proceeds from employee stock plans and
related tax benefit.................... 164 902 -- -- 902
Amortization of deferred compensation.... -- -- 57 -- 57
------ ------- ---- -------- --------
Balances, December 31, 1998.............. 20,315 62,901 (96) 6,602 69,407
Net income............................... -- -- -- 21,243 21,243
Proceeds from employee stock plans and
related tax benefit.................... 479 3,682 -- -- 3,682
Amortization of deferred compensation.... -- -- 61 -- 61
------ ------- ---- -------- --------
Balances, December 31, 1999.............. 20,794 $66,583 $(35) $ 27,845 $ 94,393
====== ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
APEX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 21,243 $15,710 $ 10,327
-------- ------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 626 348 243
Amortization of deferred compensation................... 61 57 24
Extraordinary loss on early extinguishment of debt...... -- -- 213
Deferred taxes.......................................... (98) (159) 264
Changes in:
Accounts receivable, net.............................. (13,521) (4,803) (3,674)
Inventories, net...................................... (7,750) (815) (1,265)
Prepaid expenses...................................... (391) (42) (113)
Other assets.......................................... (227) (93) 64
Accounts payable...................................... 2,280 1,089 (204)
Accrued wages and commissions......................... 732 (130) 390
Accrued warranty costs................................ (200) -- 115
Income taxes.......................................... 2,829 278 6
Other accrued expenses................................ 312 233 196
-------- ------- --------
Total adjustments................................... (15,347) (4,037) (3,741)
-------- ------- --------
Net cash provided by operating activities........... 5,896 11,673 6,586
-------- ------- --------
Cash flows from investing activities:
Purchases of investments.................................. (93,526) (38,081) (28,886)
Sales of investments...................................... 67,078 48,236 --
Purchases of property and equipment....................... (1,929) (83) (643)
-------- ------- --------
Net cash provided by (used in) investing
activities........................................ (28,377) 10,072 (29,529)
-------- ------- --------
Cash flows from financing activities:
Proceeds from Public Offerings of common stock............ -- -- 59,159
Repayments of long-term debt and capital lease............ -- -- (25,615)
Redemption of Series B redeemable preferred stock......... -- -- (1,000)
Proceeds from employee stock plans and related tax
benefit................................................. 3,682 902 218
-------- ------- --------
Net cash provided by financing activities........... 3,682 902 32,762
-------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (18,799) 22,647 9,819
Cash and cash equivalents at beginning of period............ 34,585 11,938 2,119
-------- ------- --------
Cash and cash equivalents at end of period.................. $ 15,786 $34,585 $ 11,938
======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ -- $ -- $ 287
======== ======= ========
Cash paid for Federal income taxes........................ $ 6,100 $ 7,262 $ 4,630
======== ======= ========
Conversion of Series A preferred stock into common
stock................................................... $ -- $ -- $ 2,205
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Apex Inc. (formerly Apex PC Solutions, Inc.) designs, manufactures, and
markets stand-alone switching systems for the client/server computing market.
Our switching systems enable client/server network administrators to manage
multiple servers from a single keyboard, monitor and mouse configuration,
facilitating more efficient network management and administration. We purchase
material component parts for the manufacture of switching systems from domestic
suppliers, and generally contract with third parties for the subassembly of our
products. Our financial statements are consolidated and include the accounts of
Apex Inc. and our wholly owned subsidiaries. Significant intercompany
transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
We consider all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
INVESTMENTS
Investments generally consist of highly rated commercial paper and corporate
debt which have original maturities between three months and two years, are
classified as held-to-maturity and are recorded at amortized cost, which
approximates market value. At December 31, 1999 one security with a market value
of $2,042 is classified as available-for-sale. The current portion of
investments mature within 12 months of the balance sheet date.
INVENTORIES
Inventories are recorded at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives ranging from three to seven
years.
REVENUE RECOGNITION
Revenue on equipment sales is generally recognized upon shipment, net of
allowances for potential returns. Revenue on goods shipped FOB destination is
recorded when the customer takes possession of the goods. Certain customer
contracts require equipment installation at the customer's location and in those
circumstances, revenue is recognized after completion of the installation.
INCOME TAXES
We provide for income taxes under the principles of SFAS No. 109. This
statement requires that income taxes be provided for taxes currently due and for
expected future tax effects of the temporary differences between the book and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Deferred
tax assets are reduced by valuation allowances when management determines that
their realization is not likely.
33
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPREHENSIVE INCOME
Net income and comprehensive income are the same for all periods presented.
STOCK SPLITS
On January 22, 1996 all outstanding shares of common stock were split
two-for-one. On December 9, 1996, all outstanding shares of common stock were
split four-for-one. On March 4, 1999, we effected a three-for-two stock split in
the form of a stock dividend. Share and per share data for all periods presented
herein have been adjusted to give effect to the splits.
STOCK-BASED COMPENSATION
We adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation." We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair value of our stock at the date of
the grant over the amount an employee must pay to acquire the stock.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders (net income, in our case) by the weighted average common shares
outstanding. Diluted earnings per share is computed in a manner similar to
computing basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential stock option common shares had been issued. The number
of dilutive common shares is computed using the treasury stock method.
The following table summarizes the computation of shares for basic and
diluted earnings per share for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Basic weighted average shares use in computing basic
earnings per share................................ 20,618 20,215 17,781
Dilutive effect of:
Potential additional common shares (treasury stock
method):
Stock options................................... 946 796 713
Series A preferred stock........................ -- -- 483
------ ------ ------
Diluted weighted average shares use in computing
diluted earnings per share........................ 21,564 21,011 18,977
====== ====== ======
</TABLE>
USE OF ESTIMATES
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements
34
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including investments, accounts
receivable, accounts payable and accrued liabilities, recorded amounts
approximate market value.
CONCENTRATIONS OF CUSTOMER BASE AND CREDIT RISK
One of our OEM customers accounted for 50% of our net sales for 1999, 43% of
our net sales for 1998 and 51% of our net sales for the 1997. The receivable
from this customer totaled approximately 60% of trade receivables at
December 31, 1999, and 45% of trade receivables at December 31, 1998.
We sell a significant portion of our products to a small number of computer
industry customers: 63% of total sales for the year ended December 31, 1999 were
derived from four customers. Our operating results could be adversely affected
if the financial condition and results of operations of these key customers
decline.
For the remaining customers, management believes concentrations of credit
risk with respect to trade receivables are limited due to the nature of the
customers comprising our customer base. The Company performs credit reviews on
major new customers, but rarely requires collateral.
We sell our products internationally, and export sales were approximately
$38,450 for 1999, $24,035 for 1998 and $17,356 for 1997. These sales were
primarily to customers in Europe.
We place cash and investments in high quality financial institutions and
limit the credit exposure from any one institution or instrument. To date, we
have not experienced losses on any of these investments.
MAJOR VENDORS
We purchase all server cabinets from one vendor and have two vendors
sub-assemble our switching systems. Although there are a limited number of
vendors able to assemble concentrator switches, we believe that other vendors
could provide similar services on comparable terms. A change in vendors,
however, could cause a delay in manufacturing and possible loss of sales, which
could adversely affect operating results.
WARRANTY COSTS
We provide, by a current charge to operations, the estimated cost of future
warranty obligations for products sold to date.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
ADVERTISING
We expense advertising costs as incurred. Advertising expense was $921 for
1999, $1,097 for 1998 and $1,426 for 1997.
35
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
RECLASSIFICATIONS
Certain reclassifications have been made to prior year reported amounts to
conform to current year presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because we currently
hold no derivative instruments and do not engage in hedging activities, we
expect that the adoption of SFAS No. 133 will not have a material impact on our
financial position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for our fiscal year ending December 31, 2001.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
This pronouncement summarizes certain of the SEC staff's views on applying
generally accepted accounting principles to revenue recognition. We have
reviewed the requirements of SAB 101 and expect that the adoption of SAB 101
will not have a material impact on our financial position, results of operations
or cash flows. We will be required to implement SAB 101 for our fiscal year
ending December 31, 2001.
ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Trade receivables........................................... $28,703 $15,068
Less allowance for doubtful accounts........................ (535) (421)
------- -------
$28,168 $14,647
======= =======
</TABLE>
INVENTORIES:
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials............................................... $ 1,126 $ 922
Work-in-process............................................. 2,633 1,139
Finished goods.............................................. 7,724 1,672
------- ------
$11,483 $3,733
======= ======
</TABLE>
LINE OF CREDIT AND LETTERS OF CREDIT:
Under the terms of a credit agreement with a bank, we have a combined line
of credit and letter of credit facility with a bank with aggregate borrowing
capacity of $5,000 at prime. Under the line of credit, we may borrow up to a
specified amount based upon our accounts receivable. Under the letter of credit
arrangement, the bank will issue commercial letters of credit up to an aggregate
of $5,000
36
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(less any amounts outstanding under the line of credit). The agreement includes
various restrictive covenants which, among other things require us to maintain
certain minimum working capital and net worth amounts. We are and have been in
compliance with all such covenants. The combined line of credit and letter of
credit facility has a maturity date of September 2000. There were no borrowings
under the line of credit and the letter of credit facility from January 1, 1997
through December 31, 1999.
OPERATING LEASE COMMITMENTS:
On March 8, 1999, we began a five-year lease of approximately 117 square
feet in an industrial office building in Redmond, Washington. The initial base
rent under this lease is approximately $90 per month, plus taxes, insurance and
maintenance. The lease includes stated provisions for rent escalation, as
reflected in the schedule of future minimum rents. Future minimum payments as of
December 31, 1999 under this non-cancelable operating lease were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
- -----------------------
<S> <C>
2000........................................................ $1,100
2001........................................................ 1,100
2002........................................................ 1,192
2003........................................................ 1,210
2004........................................................ 202
------
$4,804
======
</TABLE>
The 117 square foot leased premises has approximately 35 more square feet than
we currently need, and we have subleased the excess space to an unrelated
company for approximately $23 per month, including taxes, insurance and
maintenance, until we need it for planned expansion, or until the sublease
expires in June 2002.
EMPLOYEE BENEFIT PLAN:
We sponsor a 401(k) plan that covers eligible full-time employees. Employer
matching contributions are made at the discretion of the Board of Directors.
Employer contributions totaled $162 for 1999, $121 for 1998, and $84 for 1997.
STOCK OPTION AND PURCHASE PLANS:
On December 9, 1996, we adopted an employee stock purchase plan (the
"ESPP"), through which our qualified employees may participate in common stock
ownership. The ESPP qualifies as a non-compensatory plan under section 423 of
the Internal Revenue Code. We have reserved 375 shares of common stock for
issuance by the ESPP. The price of shares purchased under the ESPP is the lower
of 85% of the fair market value of the shares on the first day of each quarterly
offering period, or 85% of the fair market value of the shares on the last day
of the quarterly offering period. Under the ESPP, the ESPP administrator will
administer and interpret all rules and regulations applicable to the ESPP.
Pursuant to the ESPP, 21 shares were issued at a weighted average price of
$12.99 per share for the year ended December 31, 1999, and 18 shares were issued
at a weighted average price of $11.80 per share for the year ended December 31,
1998.
37
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
We have adopted an employee stock option plan (the "Plan"), which provides
for nonqualified and incentive stock options for officers, directors and
employees, and reserved a total of 5,493 shares of common stock for issuance
pursuant to the Plan. Options under the Plan will generally expire 10 years from
the date of grant, or 5 years in the case of an optionee owning more than 10% of
the voting power of all classes of stock. Under the Plan, the Plan administrator
will fix the conditions for the exercise of the options. Purchase prices for
common stock subject to options issued under the Plan generally approximate fair
market value of the related shares at the date of grant. Generally, options vest
over four years.
Information regarding activity of the option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Options outstanding, December 31, 1996...................... 1,026 $ 0.13
Options granted............................................. 523 12.08
Options cancelled........................................... (3) 6.00
Options exercised........................................... (17) 0.12
-----
Options outstanding, December 31, 1997...................... 1,529 4.21
Options granted............................................. 2,000 14.93
Options cancelled........................................... (152) 4.94
Options exercised........................................... (146) 0.60
-----
Options outstanding, December 31, 1998...................... 3,231 10.98
Options granted............................................. 676 11.90
Options cancelled........................................... (146) 10.69
Options exercised........................................... (459) 2.31
-----
Options outstanding, December 31, 1999...................... 3,302 12.38
=====
Options available for grant at December 31, 1999............ 579
=====
</TABLE>
The following table summarizes the weighted average fair values of stock
options granted for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Weighted average fair value of options granted whose
exercise price was equal to the fair value of the stock on
the date of grant......................................... $8.48 $10.13 $8.08
Weighted average fair value of options granted whose
exercise price was less than the fair value of the stock
on the date of grant...................................... -- -- $3.40
</TABLE>
For options issued in September and October 1996, and January 1997, deferred
compensation expense was recorded in the amounts of the excess of the values of
the underlying common stock based on an independent appraisal, over the option
prices. No compensation expense has been recorded for options granted since
January 1997 because the options granted were for prices equal to the fair value
of the related shares, based on the closing sales price on the date of the
grant.
38
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about fixed-price options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE WEIGHTED NUMBER OF WEIGHTED
RANGE OF OPTIONS REMAINING AVERAGE EXERCISE OPTIONS AVERAGE EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.12--$ 6.00 419 6.2 Years $ 0.40 378 $ 0.30
$11.41--$11.56 1,039 9.0 Years 11.50 11 11.42
$11.67--$15.75 1,056 8.1 Years 14.48 344 14.95
$16.75--$17.33 788 8.9 Years 17.11 75 16.75
----- ---
3,302 8.3 Years 12.38 808 8.21
===== ===
</TABLE>
As of December 31, 1998, there were 461 options exerciseable at a weighted
average exercise price of $2.51, and as of December 31, 1997, there were 32
options exerciseable at a weighted average exercise price of $3.15.
The following table presents net income and per share amounts as if we
accounted for compensation expense related to stock options and the ESPP under
the fair value method prescribed by SFAS 123 for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income as reported...................................... $21,243 $15,710 $10,327
======= ======= =======
Net income pro forma........................................ $16,366 $14,316 $ 9,955
======= ======= =======
Basic earnings per share as reported........................ $ 1.03 $ 0.78 $ 0.58
======= ======= =======
Diluted earnings per share as reported...................... $ 0.99 $ 0.75 $ 0.54
======= ======= =======
Basic earnings per share pro forma.......................... $ 0.79 $ 0.71 $ 0.56
======= ======= =======
Diluted earnings per share pro forma........................ $ 0.76 $ 0.68 $ 0.53
======= ======= =======
</TABLE>
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes single option method. The following weighted average
assumptions were used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
Assumption: -------- -------- --------
<S> <C> <C> <C>
Risk free interest rate........................... 5.51% 5.61% 5.98%
Expected holding period........................... 5 years 5 years 5 years
Dividend yield.................................... 0.0% 0.0% 0.0%
Expected volatility............................... 87.0% 80.0% 70.0%
</TABLE>
39
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME TAXES:
The significant components of our deferred tax assets and liabilities were as
follows on December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred income tax assets:
Receivable valuation...................................... $187 $147
Inventory valuation....................................... 337 220
Accrued warranty costs.................................... 191 261
Other..................................................... 62 51
---- ----
$777 $679
==== ====
</TABLE>
Although realization is not assured, management believes that it is more
likely than not that all of the net deferred tax asset will be realized through
future taxable income.
The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current............................................ $11,204 $8,088 $4,791
Deferred........................................... (98) (159) 264
------- ------ ------
$11,106 $7,929 $5,055
======= ====== ======
</TABLE>
Reconciliations of the effective income tax rate on income before taxes with
the Federal statutory rates were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory rate.............................................. 35.0% 35.0% 35.0%
Tax benefit of foreign sales corporation.................... (1.8) (1.7) (1.4)
Other....................................................... 1.1 0.2 (0.7)
---- ---- ----
Effective tax rate.......................................... 34.3% 33.5% 32.9%
==== ==== ====
</TABLE>
Tax benefits realized upon exercise of common stock options were $2,374 for
1999, $598 for 1998, and $99 for 1997, and have been accounted for as an
increase to shareholders' equity.
PATENT DISPUTE:
We filed complaints for infringement of U.S. Patent Number 5,721,842 in
United States District Court for the Western District of Washington at Seattle
against Cybex and Rose on February 25, 1998, and against CCC on June 1, 1998.
The complaints allege that the products manufactured and sold by each defendant
embody the inventions claimed in U.S. Patent Number 5,721,842 and sought
injunctive relief, damages, attorneys' fees and costs.
The defendants in the Cybex and Rose lawsuits each filed counterclaims
seeking to recover the expenses of the litigation (including fees and costs) and
to obtain a declaratory judgment that their respective products do not infringe
the 5,721,842 patent and that the 5,721,842 patent was invalid and
unenforceable. The Cybex and Rose lawsuits were consolidated for discovery but
not for trial, and trial dates were set for November, 1999. In early 1999, Cybex
filed multiple motions for partial summary judgment, and brought a patent
interference proceeding with the U.S. Patent and Trademark Office
40
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
("PTO") seeking to invalidate the 5,721,842 patent and claim ownership of the
invention claimed by the 5,721,842 patent as a result of a prior patent, United
States Patent No. 5,732,212, which was formerly owned by Fox Network Systems
Corporation, a company Cybex recently acquired.
Rather than proceeding simultaneously in two different forums (with the
attendant duplicative expenses), we agreed with Cybex to seek expedited
consideration by the PTO of the patent issues raised in the District Court
litigation, reserving our right to reinstate the District Court lawsuit at the
conclusion of that process. Pursuant to a mutual agreement and stipulation
between us and Cybex, the District Court lawsuit was dismissed without
prejudice, and the parties agreed that the patent issues raised in connection
with the District Court lawsuit should be initially determined by the Board of
Appeals and Interpretations of the PTO. The parties also jointly requested the
District Court to urge accelerated consideration of these issues by the PTO. The
Company also entered into a mutual agreement and stipulation with Rose
dismissing the Rose lawsuit without prejudice pending the PTO's decision. At the
conclusion of the PTO proceeding, the District Court lawsuits can be reinstated
upon the request of any party.
The complaint in the CCC lawsuit was filed but has not been formally served
on CCC. In 1999, the case was stayed by the District Court, and we were directed
to file status updates every six months. In early 2000, the District Court,
while retaining full jurisdiction, removed the case from the Court's active
caseload and directed us to continue to file status reports with the Court every
six months.
SUBSEQUENT EVENT (UNAUDITED):
On March 8, 2000, we entered into a merger agreement with Cybex Computer
Products Corporation, a leading manufacturer of console switching equipment. The
agreement calls for each share of Apex Common Stock to be converted into 1.0905
shares of a newly formed company, and for each share of Cybex Common Stock to be
converted into one share of that newly formed company. Cybex has approximately
21,000 shares of Common Stock outstanding on a diluted basis. The transaction
will be accounted for as a purchase with an expected cost of approximately $728
million. We expect this transaction to close by the end of the third quarter of
2000, subject to customary conditions including approval by various regulatory
agencies and approval by shareholders of both companies.
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POTITION
- ---- -------- --------
<S> <C> <C>
Kevin J. Hafer............................ 42 Chairman of the Board, President, Chief
Executive Officer and Director
Barry L. Harmon........................... 46 Chief Operating Officer, Chief Financial
Officer and Treasurer
C. David Perry............................ 44 Vice President of Worldwide Sales
Samuel F. Saracino........................ 48 Vice President of Business Development,
General Counsel and Secretary
Franz Fichtner............................ 48 Director
Edwin L. Harper........................... 55 Director
William McAleer........................... 48 Director
</TABLE>
Kevin J. Hafer has been our President since June 1995, and has served as our
Chief Executive Officer since December 1995 and as one of our Directors since
January 1996. In January 2000, Mr. Hafer was appointed Chairman of the Board, in
addition to his duties as President and Chief Executive Officer. From February
1993 to June 1995, Mr. Hafer served as our General Manager, and from December
1989 to January 1993 he served as the Manager and Technical Operations Director
of our Predecessor. Prior to joining our Predecessor, Mr. Hafer was employed at
Harris Corporation from May 1979 to September 1989, serving in various
management capacities.
Barry L. Harmon has been our Vice President, Chief Financial Officer and
Treasurer since January 1999. In January 2000, Mr. Harmon was appointed Chief
Operating Officer, in addition to his duties as Chief Financial Officer and
Treasurer. From February 1992 to January 1999, Mr. Harmon was employed at
Electro Scientific Industries, Inc., and served as Vice President and Chief
Financial Officer from January 1994 to January 1995, and as Senior Vice
President and Chief Financial Officer from January 1995 to January 1999. Prior
to 1992, Mr. Harmon spent six years with Citibank Global Private Bank as a
Divisional Controller and Chief Financial Officer. Mr. Harmon also worked for
Arthur Andersen LLP for seven years, serving as an Audit Manager for three
years.
C. David Perry has been our Vice President of Worldwide Sales since November
1998. From March 1997 through September 1998, he served as Acer America
Corporation's Vice President of Sales--Commercial Division. Mr. Perry was
employed by Texas Instruments from 1979 until March 1997 and served as Director
of North American channel sales for Texas Instruments from 1993 until 1997.
Samuel F. Saracino has been our Vice President of Business Development and
General Counsel since February 1998, and our Secretary since March 1998. From
January 1984 to February 1998, Mr. Saracino was a partner at the Seattle law
firm of Davis Wright Tremaine LLP.
Franz Fichtner has served as one of our Directors since March 1998. Mr.
Fichtner has been President of S3 Europe, a computer hardware company since
October 1999. From October 1997 to October 1999, Mr. Fichtner was President of
Diamond Multimedia Europe, a computer hardware
42
<PAGE>
company. From January 1995 to October 1997, Mr. Fichtner was President of 3Com
Europe, a computer network company, and from January 1991 to January 1995, was
Managing Director of 3Com GmbH.
Edwin L. Harper has served as one of our Directors since October 1996.
Mr. Harper has served as President and Chief Operating Officer of Manufacturing
Technology, Inc., a privately held company that manufactures slicing and dicing
equipment for the thin film head and semiconductor industries, since September
1999. From June 1996 through December 1998, Mr. Harper served as President and
Chief Executive Officer of SyQuest Technology, a computer hardware company that
filed a petition under Chapter 11 of the Bankruptcy Code in November 1998. From
July 1993 to June 1996, Mr. Harper was employed as President and Chief Executive
Officer of ComByte, Inc., and from June 1988 to May 1993, Mr. Harper served in
various capacities, including President and Chief Executive Officer, at Colorado
Memory Systems, Inc. Mr. Harper is also a Director of Network Associates, a
network security management company.
William McAleer has served as one of our Directors since June 1996. Mr.
McAleer is currently Managing Director of Voyager Capital, which provides
venture financing to private information technology companies. From 1988 through
1994, he was Vice President Finance, Chief Financial Officer and Secretary with
Aldus Corporation, a publicly held software company. Prior to joining Aldus, he
was Vice President, Finance and Administration from 1987 to 1988 of Ecova
Corporation and also served as a Vice President with Westin Hotels Company from
1984 through 1987. Mr. McAleer is also a director of ClearCommerce Corp., an
e-commerce company, currently in registration with the SEC.
All members of the Board of Directors are elected to serve until their
respective successors have been elected and qualified or until their earlier
death, resignation or removal in the manner specified in our Bylaws. The
officers hold their respective offices until their respective successors have
been elected, or their earlier death, resignation or removal in the manner
specified by our Bylaws.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons owning more than ten percent
of a registered class of our equity securities, to file reports of ownership of,
and transactions in, our securities with the Securities and Exchange Commission
and The Nasdaq Stock Market, Inc. These directors, executive officers and ten-
percent shareholders are also required to furnish us with copies of all Section
16(a) forms that they file.
Based solely on our review of the copies of such forms received by us, or
written representations from certain reporting persons, we believe that during
fiscal 1999, all Section 16(a) filing requirements applicable to our directors,
executive officers and ten-percent shareholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors (comprised of two
non-employee directors) reviews and approves individual officer salaries,
incentive performance goals, and stock option grants. We also review guidelines
for compensation, bonus, and stock option grants for non-officer employees.
Our overall compensation philosophy is to provide competitive levels of
total compensation that will enable us to attract, motivate, reward, and retain
qualified employees. We believe that compensation should promote continued
performance of corporate and personal goals and that any long-term incentive
should be aligned with the interest of our stockholders. Our executive
compensation policies are designed to provide competitive levels of compensation
to motivate officers
43
<PAGE>
to achieve Apex's business objectives and to reward these officers based on
their achievements. The executive compensation program primarily consists of (i)
base salary, (ii) incentive compensation in the form of an annual bonus, and
(iii) stock options awarded under our Employee Stock Plan.
Compensation for our executive officers (including the Named Executive
Officers as defined below) consists of the following components:
BASE SALARY. In setting compensation levels for executive officers, we
review several salary surveys detailing information relating to competitive
compensation levels at other technology companies in the Pacific Northwest and,
to a lesser extent, in California. We examine recommendations by management in
the light of this reported information. Officer base compensation may vary based
on tenure with us, experience, assessment of individual performance, duties and
responsibilities, and other factors of importance to our success.
INCENTIVE BONUSES. The incentive bonus program provides a variable
compensation opportunity for the executive officers. Bonus payments are
discretionary and based on a combination of Apex's financial performance and
individual officer performance relative to achievement of the pre-established
specified management and strategic objectives. Target bonuses for executive
officers range up to seventy-five percent of the base salary of the individual
executive officer.
STOCK OPTIONS. We believe that stock ownership provides significant
incentive to employees by providing an opportunity to receive additional
compensation by increasing shareholder value. This compensation element aligns
the interests of employees with those of the stockholders. The long-term
incentive is realized through the granting of stock options to employees and
eligible Named Executive Officers. Stock options have value for the employee
only if the price of our stock increases above the exercise price, which is
typically set at the fair market value of the Common Stock on the date the stock
option is granted. The number of shares awarded with each stock option grant is
based on the employee's current and anticipated future performance and ability
to promote achievement of strategic corporate goals and anticipated future
performance. We review Named Executive Officers' stock option holdings annually
to determine whether additional grants are appropriate. Initial stock options
granted generally vest over a four-year period commencing one year after the
option grant, and subsequent grants are generally exercisable at the end of the
initial vesting period, thus providing an incentive to remain employed with us.
OTHER. In addition to the compensation paid to the Named Executive Officers
as described above, executive officers and all of our other participating
regular employees are eligible to receive an annual matching contribution up to
a specified percentage (which is determined annually by the Board of Directors)
of their eligible compensation under the Company's 401(k) plan. For 1999, we
matched 100% of an employee's or officer's elective contribution up to 5% of
eligible compensation. Executive officers, subject to plan provisions, and all
other regular employees are also eligible to participate in our Employee Stock
Purchase Plan (which qualifies as a non-compensatory plan under Section 423 of
the Internal Revenue Code).
We annually review and approve the compensation of Kevin J. Hafer, the
Company's President and Chief Executive Officer. In setting the compensation
level for the Chief Executive Officer, we review competitive information
reflecting compensation practices for technology companies and examine his
performance relative to Apex's financial performance and his specific strategic
objectives and goals. We also consider the Chief Executive Officer's
achievements against the same pre-established objectives and determine whether
his base salary, bonus, and total compensation approximate the competitive range
of compensation for chief executive officer positions in the technology
industry. In establishing Mr. Hafer's 1999 compensation, the Committee reviewed
Mr. Hafer's experience and past performance and compared them with chief
executive officers of other companies.
44
<PAGE>
COMPENSATION COMMITTEE:
Edwin L. Harper (Chairman)
William McAleer
SUMMARY COMPENSATION TABLE. The following table summarizes all compensation
earned by the Company's Chief Executive Officer and by our other most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 (collectively, the "Named Executive Officers") for services rendered in
all capacities during the fiscal years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Kevin J. Hafer........................... 1999 $300,000 $ 75,000(1) 199,500 $ 8,000(2)
Chairman of the Board, President and 1998 $278,402 $120,313(3) 199,500 $ 8,000(2)
Chief Executive Officer 1997 $200,000 $167,500(4) 240,375 $10,119(2)
Barry L. Harmon.......................... 1999 $186,538 $ 75,000(1) 75,000 $15,092(7)
Vice President, Chief Operating 1998 -- -- 300,000 --
Officer and Chief Financial Officer
C. David Perry........................... 1999 $180,000 $222,304(1) 75,000 $73,146(8)
Vice President of Worldwide Sales 1998 $ 20,769 -- 300,000
Samuel F. Saracino....................... 1999 $196,145 $ 50,000(1) 75,000 $ 8,000(2)
Vice President of Business 1998 $157,296 $ 66,828(6) 300,000 $ 2,577(2)
Development, General Counsel and
Secretary
Thomas M. Buiocchi(9).................... 1999 $193,269 $ -- 75,000 $ 8,000(2)
Former Vice President of Marketing 1998 $128,077 $ 53,633(5) 300,000 $ 2,241(2)
</TABLE>
- ------------------------
(1) Includes bonus earned in 1999 and paid in 2000.
(2) Includes matching contributions made by Apex in 1999, 1998 and 1997 to its
401(k) Profit Sharing Plan and Trust and, on behalf of Mr. Hafer, premium
payments in the aggregate amount of $2,119 paid by the Company in 1997
towards Mr. Hafer's life insurance policy.
(3) Includes $120,313 bonus earned in 1998 and paid in 1999.
(4) Includes $150,000 bonus earned in 1997 and paid in 1998.
(5) Includes $32,783 bonus earned in 1998 and paid in 1999.
(6) Includes $36,278 bonus earned in 1998 and paid in 1999.
(7) Includes moving expense reimbursement for Mr. Harmon of $12,400 and matching
contributions made by Apex to its 401(k) Profit Sharing Plan and Trust in
the amount of $2,692.
(8) Includes moving expense reimbursement for Mr. Perry of $68,646 and matching
contributions made by Apex to its 401(k) Profit Sharing Plan and Trust in
the amount of $4,500.
(9) Mr. Buiocchi resigned as Vice President of Marketing in January, 2000.
45
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth certain
information with respect to individual grants made to the Named Executive
Officers of options to purchase our Common Stock during the fiscal year ended
December 31, 1999:
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE OPTION TERM
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE PER EXPIRATION -----------------------------
NAME GRANTED IN FISCAL YEAR SHARE DATE 5% 10%
- ---- -------------------- -------------------- --------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kevin J. Hafer....... 187,500 27.8% $11.56 3/12/09 $1,363,424 $3,455,184
12,000 1.8% 14.94 10/1/09 112,729 285,678
Barry L. Harmon...... 75,000 11.1% $11.56 3/12/09 $ 545,370 $1,382,074
C. David Perry....... 75,000 11.1% $11.56 3/12/09 $ 545,370 $1,382,074
Samuel F. Saracino... 75,000 11.1% $11.56 3/12/09 $ 545,370 $1,382,074
Thomas M. Buiocchi... 75,000 11.1% $11.56 3/12/09 $ 545,370 $1,382,074
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth information with respect to option
exercises during the fiscal year ended December 31, 1999 by the Named Executive
Officers and 1999 year-end option values:
<TABLE>
<CAPTION>
VALUE REALIZED NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF SHARES (MARKET PRICE AT UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED EXERCISE LESS YEAR END AT FISCAL YEAR END
NAME ON EXERCISE EXERCISE PRICE) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- ---- ---------------- ---------------- ------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Kevin J. Hafer....... 186,250 $2,751,434 293,495/564,684 $8,122,396/$11,501,448
Barry L. Harmon...... -- -- --/375,000 --/$6,026,562
C. David Perry....... -- -- 75,000 /300,000 $1,162,500/$5,039,063
Samuel F. Saracino... 20,000 $ 333,743 105,000 /250,000 $1,817,809/$4,581,244
Thomas M. Buiocchi... 25,000 $ 358,562 100,000/250,000 $1,731,247/$4,581,244
</TABLE>
- --------------------------
(1) Based upon the fair market value of the Company's Common Stock at fiscal
year end of $32.25 per share less the exercise price payable for such
shares.
COMPENSATION OF DIRECTORS
Directors are reimbursed for their out-of-pocket expenses for attendance at
meetings. Effective April 1, 1999, the compensation for outside directors was
increased from $6,000 per year to $15,000 per year. During the fiscal year ended
December 31, 1999, Mr. Fichtner, Mr. Harper and Mr. McAleer each received
$12,750 for their services as directors. Each individual who was a Director of
the Company in October 1999 was also granted options at that time to purchase
12,000 shares of the Company's Common Stock at $14.94 per share. These options
vest monthly over a one-year period after the expiration of the vesting period
for currently outstanding options.
46
<PAGE>
TEN-YEAR OPTION/SAR REPRICING
The following table sets forth information regarding the cancellation of and
a replacement grant of a stock option to an executive officer:
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL OPTION
SECURITIES UNDERLYING MARKET PRICE OF EXERCISE PRICE TERM REMAINING
NUMBER OF STOCK AT TIME OF AT TIME OF NEW AT DATE OF
OPTIONS/SARS REPRICED REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE OR AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- ---- -------- --------------------- ---------------- -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Samuel F. Saracino(1)........ 3/9/98 300,000 $14.94 $17.75 $14.94 10 Years
Vice President of Business
Development, General
Counsel and
Secretary
</TABLE>
- --------------------------
(1) Mr. Saracino was originally expected to join the Company in February 1998,
and on February 18, 1998, was initially awarded options to purchase 300,000
shares of our Common Stock at $17.75 per share exercisable over 36 months
commencing March 1, 1999. Because of continuing obligations to his prior
employer, Mr. Saracino was not able to begin full-time employment until
after the end of February, and as a result, his original stock option grant
was cancelled. Subsequently, on March 9, 1998 (at a time when the
Compensation Committee granted a number of other stock options),
Mr. Saracino was awarded options for the purchase of 300,000 shares at
$14.94 per share exercisable over 36 months beginning April 1, 1999.
PERFORMANCE GRAPH
The following graph compares the total stockholder return (stock price
appreciation) on the Company's Common Stock with the cumulative total return
(including reinvested dividends) on the NASDAQ US Index ("NASDAQ US") and the
NASDAQ Computer Index ("NASDAQ Computer") for the period beginning February 1,
1997, the first day of the month in which the Company became a public company,
and ending on December 31, 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
APEX NASDAQ COMPUTER NASDAQ US
<S> <C> <C> <C>
2/1/1997 100 100 100
12/31/1997 245.83 106.14 114.51
12/31/1998 320.83 194.59 161.37
12/31/1999 537.50 398.89 291.52
</TABLE>
47
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 3, 2000, certain information with
respect to the ownership of our Common Stock by (i) each person (or group of
affiliated persons) known by us to be the beneficial owner of more than 5% of
our outstanding Common Stock, (ii) each of our directors, (iii) each of our
executive officers named under "Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act Executive
Officers and Directors" and (iv) all of our executive officers and directors as
a group. Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to such shares, subject to community
property laws, where applicable.
<TABLE>
<CAPTION>
NAMES OF BENEFICIAL OWNER(1) SHARES PERCENTAGE
- ---------------------------- --------- ----------
<S> <C> <C>
J. & W. Seligman & Co., Inc............................ 4,106,020 19.4%
100 Park Avenue, Eighth Floor
New York, NY 10006
Alliance Capital Management L. P....................... 4,005,995 18.9
1290 Avenue of the Americas
New York, NY 10104
Capital Research & Management.......................... 1,285,000 6.1
333 South Hope Street, 55th Floor
Los Angeles, CA 90071
Kevin J. Hafer(2)...................................... 627,943 2.9
Samuel F. Saracino(3).................................. 82,850 *
Barry L. Harmon(4)..................................... 68,750 *
C. David Perry(5)...................................... 27,975 *
William McAleer(6)..................................... 29,000 *
Franz Fichtner(7)...................................... 26,000 *
Edwin L. Harper(8)..................................... 22,400 *
All directors and executive officers as a group (7
persons) (9)......................................... 884,918 4.1%
</TABLE>
- ------------------------
* Less than 1%.
(1) Except as set forth herein the address of the directors and executive
officers set forth in the table is the address of Apex Inc., 9911 Willows
Road, N.E., Redmond, Washington 98052.
(2) Includes 318,678 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at a
weighted average exercise price of $6.54 per share. Also includes 5,100
shares owned by an irrevocable trust for the benefit of Mr. Hafer's
children, and 61 shares owned by Mr. Hafer as custodian under various
Uniform Transfer to Minors Accounts for the benefit of his nieces and
nephews, and Mr. Hafer disclaims beneficial ownership of all such 5,161
shares.
(3) Includes 76,250 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at
$14.94 per share. Also includes 5,100 shares owned by an irrevocable trust
for the benefit of Mr. Hafer's children, of which Mr. Saracino is trustee,
and Mr. Saracino disclaims beneficial ownership of all such 5,100 shares.
(4) Includes 68,750 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at
$17.33 per share.
(5) Includes 26,250 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at
$16.75 per share.
48
<PAGE>
(6) Includes 23,500 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at
$3.02 per share.
(7) Includes 26,000 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at
$14.94 per share.
(8) Includes 21,500 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at
$2.31 per share.
(9) Includes 560,928 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at a
weighted average exercise price of $9.57 per share. See Notes (2), (3), (4),
(5), (6), (7) and (8) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Apex Inc.
Report of Independent Accountants........................... 28
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 29
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997......................... 30
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the years ended December 31, 1999, 1998, and
1997...................................................... 31
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997......................... 32
Notes to Consolidated Financial Statements.................. 33-41
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted, as the required information is inapplicable or
not significant.
49
<PAGE>
(a)(3) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------------------- -------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation.
(Incorporated by reference to our Registration Statement on
Form SB-2 (Registration No. 333-17753).)
3.2 Amended and Restated Bylaws. (Incorporated by reference to
our Registration Statement on Form SB-2 (Registration
No. 333-31697).)
3.3 Certificate of Amendment of Bylaws of Apex Inc., dated
January 28, 2000
4.1 See Article III of Exhibit 3.1 and Articles II, IV and IX of
Exhibit 3.2
10.3.1 Employment Agreement dated December 29, 1995, by and between
the Company and Kevin J. Hafer. (Incorporated by reference
to our Registration Statement on Form SB-2 (Registration
No. 333-17753).)
10.3.2 First Amendment to Employment Agreement dated December 1996,
by and between Apex Inc. and Kevin J. Hafer. (Incorporated
by reference to our Registration Statement on Form SB-2
(Registration No. 333-31697).)
10.3.3 Amendment Agreement dated March 7, 2000, by and between Apex
Inc. and Kevin J. Hafer.
10.6.1 Purchase Agreement dated September 19, 1994, by and between
Apex Inc. and Compaq Computer Corporation, as amended
(incorporated by reference to our Registration statement on
Form SB-2 (Registration No. 333-31697)).+
10.6.2 Amendment to Purchase Agreement effective as of August 6,
1998, by and between Apex Inc. and Compaq Computer
Corporation. (Incorporated by reference to our quarterly
report on form 10-Q for the quarter ended September 25,
1998.)+
10.8 Form of our Proprietary Information and Noncompetition
Agreement. (Incorporated by reference to our Registration
Statement on Form SB-2 (Registration No. 333-17753).)
10.9 Employee Stock Plan. (Incorporated by reference to our
Registration Statement on Form SB-2 (Registration
No. 333-17753).)
10.10 Form of Nonstatutory Stock Option Letter Agreement related
to Employee Stock Plan. (Incorporated by reference to our
Registration Statement on Form SB-2 (Registration
No. 333-17753).)
10.11 Employee Stock Purchase Plan. (Incorporated by reference to
our Registration Statement on Form SB-2 (Registration
No. 333-17753).)
10.16.1 Business Loan Agreement dated March 27, 1997 by and between
Apex Inc. and U.S. Bank of Washington, National Association
(Incorporated by reference to our Registration Statement on
Form SB-2 (Registration No. 333-31697).)
10.16.4 Alternative Rate Options Promissory Note dated as of
April 20, 1999, by and between Apex Inc. and U.S. Bank of
Washington, National Association.
21.1 Subsidiaries of Apex Inc.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (set forth on pages 51 and 52 and
incorporated herein by reference).
27.1 Financial Data Schedule
</TABLE>
- ------------------------
+ Portions of these agreements are subject to confidential treatment.
(b) REPORTS ON FORM 8-K.
None.
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
ca used this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
<TABLE>
<S> <C> <C>
APEX INC.
By: /s/ KEVIN J. HAFER
-----------------------------------------
Kevin J. Hafer
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 30, 2000
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Apex Inc. do hereby
constitute and appoint Kevin J. Hafer the lawful attorney and agent with power
and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable Apex Inc. to comply with the
Securities Exchange Act of 1934, as amended, and any rules or regulations or
requirements of the Securities Exchange Act of 1934, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Form 10-K Report. Without limiting the generality of the
foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Form 10-K Report of amendments or supplements
thereto, and each of the undersigned hereby ratifies and confirms all that said
attorneys and agents or either of them, shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.
51
<PAGE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board,
/s/ KEVIN J. HAFER President, Chief Executive
-------------------------------------- Officer and Director March 30, 2000
Kevin J. Hafer (Principal Executive Officer)
Chief Operating Officer, Chief
/s/ BARRY L. HARMON Financial Officer and
-------------------------------------- Treasurer (Principal March 30, 2000
Barry L. Harmon Financial and Accounting
Officer)
/s/ FRANZ FICHTNER
-------------------------------------- Director March 30, 2000
Franz Fichtner
/s/ EDWIN L. HARPER
-------------------------------------- Director March 30, 2000
Edwin L. Harper
/s/ WILLIAM MCALEER
-------------------------------------- Director March 30, 2000
William McAleer
</TABLE>
52
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
APEX INC.
The undersigned Secretary of Apex Inc., hereby certifies that Article
II, Section 10 of the Bylaws of this corporation was amended on January 28,
2000, by the Board of Directors of this corporation such that such Section now
reads in its entirety as follows:
Section 10 NOMINATIONS AND PROPOSALS. Nominations of persons for
election to the Board and the proposal of business to be considered by the
shareholders may be made at any meeting of shareholders only (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board, or (c)
by any shareholder of the Corporation who was a shareholder of record at the
time of giving of notice provided for in these Bylaws, who is entitled to vote
at the meeting and who complies with the notice procedures set forth in this
Article II, Section 10.
In addition to any other applicable legal or regulatory requirements,
for nominations or other business to be properly brought before a shareholders
meeting by a shareholder pursuant to clause (c) of the preceding sentence, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation, and such other business must otherwise be a proper matter for
shareholder action. To be timely, a shareholder's notice must be given either by
personal delivery or by United States mail, postage prepaid, to the Secretary of
the Corporation and received by the Secretary not later than 60 days prior to
the first anniversary of the date on which notice of the prior year's annual
meeting was first mailed to shareholders. In no event shall the public
announcement of an adjournment of a shareholders meeting commence a new time
period for the giving of a shareholder's notice as described above. Such
shareholder's notice shall set forth (a) as to each person, if any, whom the
shareholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Exchange
Act (or any successor thereto) and Rule 14a-11 thereunder (or any successor
thereto) (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected), (b) as to any
other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting, and any material interest
in such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made, and (c) as to the shareholder giving notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made (i)
the name and address of such shareholder, as they appear on the Corporation's
books, and of such beneficial owners, and (ii) the class and number of shares of
the Corporation which are owned beneficially and of record by such shareholder
and such beneficial owner. Notwithstanding any provision herein to the contrary,
no business shall be conducted at a shareholders meeting except in accordance
with the procedures set forth in this Article II, Section 10. The person
presiding over the shareholders meeting shall, if the facts warrant, determine
and declare at the meeting that the nomination was not properly made or that the
business was not properly brought before the meeting, as the case may be, in
accordance with the provisions of this Article II, Section 10, and, if he should
so determine, he shall so declare at the meeting that any such person not
properly nominated shall not be eligible to receive votes in the election of
directors at the meeting or that any such business not properly brought before
the meeting shall not be transacted, as the case may be.
This Certificate of Amendment of Bylaws shall be effective as of this
28th day of January, 2000.
/s/ Samuel F. Saracino
----------------------------------------
Samuel F. Saracino, Secretary
<PAGE>
AMENDMENT AGREEMENT
This Amendment Agreement (the "Amendment Agreement") is dated this 7th
day of March, 2000, and is between Apex Inc., a Washington corporation (the
"Company"), and Kevin J. Hafer ("Employee"), and among other things, amends (i)
that certain Employment Agreement by and between the Company and Employee dated
December 29, 1995, as amended on December __, 1996 (collectively, the
"Employment Agreement"), and (ii) those certain Nonqualified Stock Option Letter
Agreements between the Company an Employee dated December 29, 1995 (two grants),
June 10, 1996, June 19, 1997 (two grants), October 27, 1997, August 1, 1998 (two
grants), March 12, 1999, and October 1, 1999 (collectively, the "Option
Agreements").
RECITALS
WHEREAS, on the date of this Amendment Agreement, the Company, Cybex
Computer Products Corporation, an Alabama corporation, and Aegean Sea Inc., a
Delaware corporation ("Holdco"), are entering into an Agreement and Plan of
Reorganization (the "Reorganization Agreement").
WHEREAS, pursuant to the Reorganization Agreement, (i) Apex Sub, Inc.,
a Washington corporation and a wholly-owned subsidiary of Holdco, will merge
with and into the Company (the "Apex Merger"), and upon the Apex Merger, the
Company will become a wholly-owned subsidiary of Holdco, and (ii) Cybex Sub,
Inc., an Alabama corporation and a wholly-owned subsidiary of Holdco will merge
with and into Cybex (the "Cybex Merger"), and upon the Cybex Merger, Cybex will
also become a wholly-owned subsidiary of Holdco.
WHEREAS, effective immediately prior to the closing of the Apex Merger
as defined in the Reorganization Agreement, the Company and Employee wish to
amend the Employment Agreement and the Option Agreements on the terms and
conditions set forth in this Amendment Agreement.
WHEREAS, the Company and Employee also wish to enter into certain other
agreements regarding releases, indemnification, and other matters.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained in this Amendment, the Company and Employee agree as follows:
1. DEFINED TERMS. All capitalized terms in this Amendment, to the
extent not otherwise defined herein, shall have the meanings assigned to such
terms in the Employment Agreement.
2. AMENDMENT OF OPTION AGREEMENTS.
(a) TERMINATION OF OPTIONS. Effective immediately prior to the
closing of the Apex Merger described in the Reorganization Agreement, Section 4
of each Option Agreement is hereby amended by deleting the existing language in
Section 4 of each such Letter Agreement and substituting therefor in each such
Option Agreement the following new language:
<PAGE>
4. TERMINATION. Except as set forth in your Employment
Agreement with the Company dated December 29, 1995, as amended December
__, 1996 (collectively, the "Employment Agreement"), vested portions of
outstanding options (including any options that become vested as a
result of any acceleration provisions in your Employment Agreement,
this Agreement, or the Plan) may be exercised for up to three years
following the closing of the Apex Merger described in that certain
Agreement and Plan of Reorganization dated March 7, 2000, by and among
the Company, Cybex, and Holdco.
(b) ACCELERATED VESTING. Effective immediately prior to the
closing of the Apex Merger described in the Reorganization Agreement, Section 6
of each Option Agreement is hereby amended by deleting the existing language and
substituting therefor the following new language:
6. VESTING. To the extent not yet vested, your option shall
vest and become exercisable in full immediately prior to the closing of
the Apex Merger described in that certain Agreement and Plan of
Reorganization dated March 7, 2000, by and among the Company, Cybex,
and Holdco. Specifically, immediately prior to the closing of the Apex
Merger (as defined in such Agreement and Plan of Reorganization), your
entire option grants under this Agreement will, to the extent not yet
vested, become fully vested and immediately available for exercise. You
may exercise your option on vested option shares; however, you may only
exercise your option for whole shares.
(c) REMAINING TERMS UNCHANGED. Except as specifically set
forth in this Section 1, the remaining terms and conditions of each Option
Agreement shall remain unchanged and in full force and effect.
3. TERMINATION AND SEVERANCE. The parties agree that the closing of the
Apex Merger will constitute a termination of the Employment Agreement without
Cause within the meaning of Section 1.6 of the Employment Agreement, and that,
provided Employee satisfies (and continues to satisfy) all of his obligations
relating to the termination of his employment under the Employment Agreement
(including his obligations under Sections 2, 3, and 4.1 of the Employment
Agreement), then so long as Employee does not breach Sections 2, 3, or 4.1 of
the Employment Agreement, Employee shall be entitled to continue through the
first anniversary of the closing of the Apex Merger described in the
Reorganization Agreement:
(a) to receive a biweekly base salary of $11,538.46 (less
required withholding and deductions);
(b) to be eligible for employee and dependent coverage under
the Company's (or Holdco's) medical and dental plans, and to have
access to Apex email, Apex voicemail, a portable computer, and a pager,
to the same extent as available to other Company employees;
(c) to be insured under the Company's (or Holdco's) insurance
policies (including its directors and officers policies) to the same
extent other officers and employees are insured;
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<PAGE>
(d) to be entitled to indemnification under the Company's
Articles of Incorporation to the same extent other officers and
employees are indemnified for acts during employment with the Company;
and
(e) to be reimbursed by the Company for all ordinary and
necessary documented business expenses incurred by Employee in
connection with the performance of duties requested by the Chief
Executive Officer of Holdco.
In addition, the Company will pay to Employee on or before the next payroll date
following the closing of the Apex Merger an amount representing his accrued but
unused vacation and personal time (less required withholding and deductions)
through such closing date. Employee further acknowledges that he will not accrue
any additional vacation or personal time after such closing date or be eligible
for any other incentive or other bonus payments or stock option grants from the
Company or from Holdco for 2000 or thereafter other than bonuses accrued by the
Company prior to the closing of the Apex Merger the payment of which is approved
by the Apex Compensation Committee. Employee and the Company further agree that,
to the extent the provisions of this Section 3 are inconsistent with Sections
1.2 and/or 1.3 of the Employment Agreement, the provisions of this Section 3
shall be deemed to amend Sections 1.2 and 1.3 of the Employment Agreement, and
the remaining terms and conditions of the Employment Agreement shall remain
unchanged and in full force and effect. Employee acknowledges and agrees that
his confidentiality, non-solicitation, and noncompete obligations described in
Section 2 and 3 of the Employment Agreement shall continue until the third
anniversary of the closing of the Apex Merger, and Employee further acknowledges
that he will be entitled to receive the benefits specified in this Section 3
only if he is not in material breach of this Amendment Agreement or his
Employment Agreement (including his confidentiality and noncompete obligation
described in Sections 2 and 3 of the Employment Agreement). Employee understands
and agrees that, as an additional condition to receiving or retaining the
benefits described in this Agreement (including Section 2 and this Section 3),
Employee must execute and deliver to the Company immediately prior to the
closing of the Apex Merger described in the Reorganization Agreement the
Confirmation of Resignation and General Release Agreement attached as ATTACHMENT
A. Employee also understands and agrees that, as a further condition to
receiving or retaining the benefits described in this Section 3, Employee must
execute and deliver to the Company the Confirmation of Resignation and General
Release Agreement attached as ATTACHMENT B, which may not be signed any earlier
than one day after the termination of Employee's employment with the Company.
4. RESIGNATIONS; LIFE INSURANCE. Effective on the closing of the Apex
Merger, (i) Employee hereby resigns as an officer and a director of the Company
and all of its affiliates, and (ii) the Company will, at Employee's election,
cancel or transfer as Employee designates in writing all life insurance policies
owned by Company insuring the life of Employee.
5. MUTUAL NONDISPARAGEMENT. Employee agrees that he will not make any
disparaging or derogatory remarks about the Company, Cybex, or Holdco or their
affiliates or any of their officers, directors, or employees. The Company,
Cybex, and Holdco and each of their affiliates and their officers, directors,
and employees agree not to make any disparaging or derogatory remarks about
Employee or his performance at the Company.
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<PAGE>
6. STANDSTILL AGREEMENT. Employee agrees that, for the period beginning
on the closing of the Apex Merger and ending at the close of business on the
earlier of (a) the third anniversary of the closing of the Apex Merger or (b)
six months after Employee exercises all of his stock options for Apex common
stock (whether or not the vesting of such stock options was accelerated by
virtue of the amendment of Employee's Option Agreements as described in Section
1 of this Amendment Agreement), neither Employee nor any of his affiliates (as
such term is defined under the Securities Exchange Act of 1934, as amended (the
"1934 Act")) will in any manner, directly or indirectly, (a) effect or seek,
offer or propose (whether publicly or otherwise) to effect or cause or
participate in or in any way assist any other person to affect to seek, offer or
propose (whether publicly or otherwise) to effect or cause or participate in (i)
any acquisition of any securities (or beneficial ownership thereof) or assets
(other than non-material assets) of the Company or Holdco; (ii) any tender or
exchange offer, merger, consolidation or other business combination involving
the Company or Holdco; (iii) any recapitalization, restructuring, liquidation,
dissolution or other extraordinary transaction with respect to the Company or
Holdco or any material portion of the Company's or Holdco's business; or (iv)
any "solicitation" of "proxies" (as such terms are used in the proxy rules of
the Securities and Exchange Commission) or consents to vote any voting
securities of Holdco or the Company; (b) form, join or in any way participate in
a "group" (as defined under the 1934 Act) with respect to the securities of
Holdco or the Company; (c) otherwise act, alone or in concert with others, to
seek to control or influence the management, Board of Directors or policies of
the Company or Holdco or propose any matter for submission to a vote of
stockholders of the Company or Holdco; (d) take any action to which, to the
knowledge of Employee requires the Company or Holdco to make a public
announcement regarding any of the types of matters set forth in (a) above; or
(e) enter into any discussions or arrangements with any third party with respect
to any of the foregoing or advise, assist, encourage, finance or seek to
persuade others to take any action with respect to the foregoing.
Notwithstanding anything to the contrary contained in this Amendment Agreement,
nothing in this Amendment Agreement shall prohibit Employee or his affiliates
from purchasing any debt, or up to an aggregate of not more than 1.5% of any
class of publicly traded equity securities of the Company or of Holdco.
7. COVENANT NOT TO SUE. Employee represents that he has not filed any
complaints, charges, or lawsuits against the Company, and Employee agrees that
he will not do so at any time hereafter other than to enforce the terms of this
Amendment Agreement, the Employment Agreement, or the Option Agreements. The
Company represents that it has not filed any complaints, charges, or lawsuits
against Employee and that, on the date of this Amendment Agreement, its
executive officers have no actual knowledge of any basis for doing so.
8. COMPLETE RELEASE OF THE COMPANY. In consideration for the
acceleration of options described in Section 2 and the continued benefits to be
paid to Employee as described in Section 3 and other benefits set forth in this
Amendment Agreement, which Employee is not otherwise entitled to receive and
which are given to him specifically in exchange for this release as a result of
negotiations between himself and the Company, Employee, on behalf of himself,
his marital community, and his and their heirs, successors, and assigns,
releases and discharges the Company, its affiliated and predecessor
organizations, its affiliates, their employee benefit plans, their current and
former directors, officers, agents, employees, and attorneys, and each of their
respective successors and assigns (the "Released Parties"), from any and all
claims, charges, causes of action,
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<PAGE>
and damages (including attorneys' fees and costs actually incurred of any type),
known and unknown, arising prior to the date of this Amendment Agreement
("Claims"), including such Claims related in any way to Employee's employment
with the Company, service as an officer or director of the Company or any of its
affiliates, or the termination of his employment relationship with the Company
on the first anniversary of the closing of the Apex Merger.
For the purposes of implementing a full and complete release and
discharge of the Company and the other Released Parties, and each of them,
Employee expressly acknowledges that this Amendment Agreement is intended to
include in its effect, without limitation, all Claims which he does not know or
suspect to exist in his favor at the time he signs this Amendment Agreement, and
that this Amendment Agreement is intended to fully and finally resolve any such
Claim or Claims.
This release specifically includes but is not limited to rights and
claims under the local, state or federal laws prohibiting discrimination in
employment, including the Civil Rights Acts, the Americans with Disabilities
Act, the Washington Law Against Discrimination, the Age Discrimination in
Employment Act, the Family and Medical Leave Act, the Employee Retirement Income
Security Act, as well as any other state or federal laws or common law theories
relating to discrimination in employment, the termination of employment, or
personal injury, including without limitation all claims for breach of contract,
fraud, defamation, loss of consortium, infliction of emotional distress,
additional compensation, back pay or benefits (other than as provided for in
this Amendment Agreement).
9. INDEMNIFICATION FOR SECTION 4999 EXCISE TAXES. In the event that it
shall be determined that any payment or other benefit by the Company to or for
the benefit of the Employee under the Employment Agreement, pursuant to Section
2 of this Amendment or otherwise, but determined without regard to any
additional payments required under this Section 9 (the "Payments") would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
(the "Excise Tax"), then the Company shall indemnify Employee for such Excise
Tax in accordance with the following:
(c) Employee shall be entitled to receive an additional
payment from the Company equal to (i) one hundred percent (100%) of any Excise
Tax actually paid or payable by the Employee in connection with the Payments,
plus (ii) an additional payment in such amount that after all taxes, interest
and penalties incurred in connection with all payments under this Section 3(a),
Employee retains an amount equal to one hundred percent (100%) of the Excise
Tax.
(d) All determinations required to be made under this Section
shall be made by the Company's primary independent public accounting firm, or
any other nationally recognized accounting firm reasonably acceptable to the
Company and the Employee (the "Accounting Firm"). The Company shall cause the
Accounting Firm to provide detailed supporting calculations of its
determinations to the Company and the Employee. All fees and expenses of the
Accounting Firm shall be borne solely by the Company. For purposes of making the
calculations required by this Section, the Accounting Firm may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999 of the Code, provided the Accounting Firm's determinations must be
made
-5-
<PAGE>
with substantial authority (within the meaning of Section 6662 of the Code). The
payments to which Employee is entitled pursuant to this Section shall be paid by
the Company to Employee in cash and in full not later than thirty (30) calendar
days following the date Employee becomes subject to the Excise Tax.
10. MISCELLANEOUS.
(a) WITHHOLDING. All compensation and benefits to the Employee
hereunder shall be reduced by all federal, state, local, and other withholdings
and similar taxes and payments required by applicable law.
(b) WAIVER. The waiver of the breach of any provision of this
Amendment Agreement shall not operate or be construed as a waiver of any
subsequent breach of the same or other provision hereof.
(c) ENTIRE AGREEMENT; MODIFICATION. Except as otherwise
provided herein, this Amendment Agreement represents the entire understanding
among the parties with respect to the subject matter hereof, and this Amendment
Agreement supersedes any and all prior understandings, agreements, plans and
negotiations, whether written or oral with respect to the subject matter hereof
including without limitation, any understandings, agreements or obligations
respecting any past or future compensation, bonuses, reimbursements or other
payments to the Employee from the Company. In the event of any conflict between
this Amendment Agreement and any other agreement (including, without limitation,
the Employment Agreement or the Option Agreements), this Amendment Agreement
shall control and govern. All modifications to the Agreement must be in writing
and signed by the party against whom enforcement of such modification is sought.
(d) NOTICES. All notices and other communications under this
Amendment Agreement shall be in writing and shall be given by hand delivery or
first class mail, certified or registered with return receipt requested, and
shall be deemed to have been duly given upon hand delivery to an officer of the
Company or the Employee, as the case may be, or upon three (3) days after
mailing to the respective persons named below:
If to the Company: Apex Inc.
9911 Willows Road NE
Redmond, WA 98052-2531
Attn: Chief Operating Officer
With copy to: General Counsel
Fax: ________________________________
If to the Employee: Kevin J. Hafer
_____________________________________
_____________________________________
Fax: ________________________________
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<PAGE>
Any party may change such party's address for notices by notice duly given
pursuant to this Section
(e) HEADINGS. The Section headings herein are intended for
reference and shall not by themselves determine the construction or
interpretation of this Amendment.
(f) GOVERNING LAW; VENUE. This Agreement shall be governed by
and construed in accordance with the laws of the State of Washington. The
Employee and the Company each hereby expressly consents to the exclusive venue
of the state and federal courts located in Seattle, King County, Washington, for
any lawsuit arising from or relating to this Amendment Agreement.
(g) ARBITRATION. Any controversy or claim arising out of or
relating to this Amendment Agreement, or breach thereof, shall be settled by
arbitration in Seattle, Washington, in accordance with the Rules of the American
Arbitration Association, and judgment upon any proper award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. There shall
be three (3) arbitrators, one (1) to be chosen directly by each party at will,
and the third arbitrator to be selected by the two (2) arbitrators so chosen. To
the extent permitted by the Rules of the American Arbitration Association, the
selected arbitrators may grant equitable relief. Each party shall pay the fees
of the arbitrator selected by him and of his own attorneys, and the expenses of
his witnesses and all other expenses connected with the presentation of his
case. The cost of the arbitration including the cost of the third arbitrator,
the cost of the record or transcripts thereof, if any, administrative fees, and
all other fees and costs shall be borne equally by the parties.
(h) SEVERABILITY. If a court or other body of competent
jurisdiction determines that any provision of this Amendment Agreement is
excessive in scope or otherwise invalid or unenforceable, such provision shall
be adjusted rather than voided, if possible, and all other provisions of this
Agreement shall be deemed valid and enforceable to the extent possible.
(i) COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which taken together shall constitute one and the same
Amendment Agreement
[Signature pages follow.]
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<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Amendment
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year set forth below.
DATE: APEX INC.
----------------------
By: /s/ BARRY L. HARMON
--------------------------------------
Title: COO, CFO & Treasurer
------------------------------------
KEVIN J. HAFER:
/s/ KEVIN J. HAFER
-----------------------------------------
-8-
<PAGE>
ATTACHMENT A
CONFIRMATION OF RESIGNATION AND GENERAL RELEASE
By signing below, I hereby acknowledge and confirm my agreement to all
the terms of the Amendment Agreement ("Agreement"). I also agree that, as of the
date I sign this document, I release and waive any and all additional employment
claims (E.G., statutory employment claims, wrongful discharge types of claims or
related claims, breach of employment contract types of claims, but not claims
for breach of the Agreement itself) I may have relating to my employment with
Apex Inc. and/or the termination of my role as an officer or director of
Apex Inc. which I would not have but for my being an officer, director, or
employee of Apex Inc. since the time I signed the Agreement, as well as
releasing and waiving any and all other claims referenced in Paragraph 8 of
the Agreement to the extent permitted by law.
-----------------------------
Kevin J. Hafer
*TO BE DELIVERED IMMEDIATELY PRIOR
TO THE CLOSING OF THE APEX MERGER AS DESCRIBED IN THE
REORGANIZATION AGREEMENT
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<PAGE>
ATTACHMENT B
CONFIRMATION OF RESIGNATION AND GENERAL RELEASE
By signing below, I hereby acknowledge and confirm my agreement to all
the terms of the Amendment Agreement ("Agreement"). I also agree that, as of the
date I sign this document, I release and waive any and all additional employment
claims (E.G., statutory employment claims, wrongful discharge types of claims or
related claims, breach of employment contract types of claims, but not claims
for breach of the Agreement itself) I may have relating to my employment with
Apex Inc. and/or the termination of that relationship which I would not have but
for my being an employee of Apex Inc. since the time I signed the Agreement, as
well as releasing and waiving any and all other claims referenced in Paragraph 8
of the Agreement to the extent permitted by law.
----------------------------
Kevin J. Hafer
*DO NOT SIGN, DATE, OR RETURN THIS DOCUMENT BEFORE THE
FIRST ANNIVERSARY OF THE APEX MERGER AS DESCRIBED IN THE
REORGANIZATION AGREEMENT
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<PAGE>
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)
$5,000,000.00 DATED AS OF: 04-20-99
- ------------------------------------------------------ --------
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 COMMERCIAL LOAN SERVICE CENTER WEST, 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 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
ONE, TWO, THREE, SIX AND TWELVE 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 SEPTEMBER 30, 2000;
(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 1.75% 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 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.
Page 1 of 4
<PAGE>
(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 THREE 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.
/X/ on demand, or if no demand, on SEPTEMBER 30, 2000.
/ / on ___.
/ / 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:
on the ___ day of ___ and on the same day of each ___.
thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at
maturity.
x ON THE 31ST DAY OF MARCH, 1999 AND ON THE SAME DAY OF EACH
MONTH THEREAFTER PRIOR TO MATURITY AND AT MATURITY.
(ii) Interest on all LIBOR Amounts shall be paid:
/X/ 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.
/ / on the ___ day of __ and on the same day of each ___
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.
Page 2 of 4
<PAGE>
(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.
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 153500998882 at ANY
BRANCH. 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 ayment 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 19 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 ___ of the following individuals to
request Advances and to select interest rate options:
___ unless Lender is otherwise instructed in writing.
(c) All Advances shall be disbursed by deposit directly to Borrower's account
number ___ at ___ 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
Page 3 of 4
<PAGE>
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 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. YEAR 2000. Borrower has reviewed and assessed its business operations
and computer systems and applications to address the "year 2000 problem" (that
is, that computer applications and equipment used by Borrower, directly or
indirectly through third parties, may be unable to properly perform date-
sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower is in
the process of implementing a plan to remediate year 2000 problems and will
complete implementation of such plan with respect to any material year 2000
problems, and testing thereof, by September 30, 1999. Borrower agrees that
this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any advance under this Agreement or
Note or delivers any information to Lender. Borrower will promptly deliver to
Lender such information relating to this representation and covenant as Lender
requests from time to time.
25. RENEWAL AND EXTENSION. This Note is given in renewal and extension and
not in novation of the following described indebtedness: That certain Promissory
Note dated May 1, 1998, in the amount of $5,000,000.00, executed by Borrower
payable to Lender. It is further agreed that all liens and security interest
securing said indebtedness are hereby renewed and extended to secure the Note
and all renewals, extensions and modifications thereof.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FOREBEAR
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/ Barry L. Harmon
-----------------------------
Title: Vice President
--------------------------
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: 3/16/99
--------------------------------------
Page 4 of 4
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF APEX INC.
AS OF DECEMBER 31, 1999
Apex Incorporated Parent Company
A Washington Corporation
Apex International, Inc.
A Washington Corporation
Apex PC Solutions, LTD
A Barbados Corporation
Apex.com Incorporated
A Washington Corporation
Apex Solutions Texas, L.P.
A Texas Limited Partnership
Apex Solutions Texas I, LLC
A Washington LLC
Apex Solutions Texas II, LLC
A Washington LLC
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (No. 333-24011, No. 333-24013 and No. 333-09146) of
Apex Inc. of our report dated January 24, 2000, relating to the financial
statements, which appear in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Seattle, Washington
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,786
<SECURITIES> 35,716
<RECEIVABLES> 28,703
<ALLOWANCES> 535
<INVENTORY> 11,483
<CURRENT-ASSETS> 92,606
<PP&E> 2,839
<DEPRECIATION> 933
<TOTAL-ASSETS> 104,314
<CURRENT-LIABILITIES> 9,921
<BONDS> 0
0
0
<COMMON> 66,583
<OTHER-SE> 27,810
<TOTAL-LIABILITY-AND-EQUITY> 104,314
<SALES> 107,288
<TOTAL-REVENUES> 107,288
<CGS> 57,374
<TOTAL-COSTS> 57,374
<OTHER-EXPENSES> 20,618
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 3,053
<INCOME-PRETAX> 32,349
<INCOME-TAX> 11,106
<INCOME-CONTINUING> 21,243
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,243
<EPS-BASIC> 1.03
<EPS-DILUTED> .99
</TABLE>
