<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 26, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the period from __________ to __________
Commission file number: 000-21959
APEX PC SOLUTIONS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Washington 91-1577634
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
20031 142 nd Avenue, N.E.
Woodinville, Washington 98072
(Address of Principal Executive Offices) (Zip Code)
425-402-9393
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
-- --
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at October 10, 1997
----- -------------------------------
Common Stock 13,431,173
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PART I
ITEM 1. FINANCIAL STATEMENTS
APEX PC SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $9,265,181 $15,276,397 $23,267,118 $38,957,763
Cost of sales 5,172,408 8,482,006 13,515,800 21,473,836
------------- ------------- ------------- -------------
Gross profit 4,092,773 6,794,391 9,751,318 17,483,927
------------- ------------- ------------- -------------
Research and development 191,906 460,758 655,528 1,396,744
Sales and marketing 640,596 1,130,695 1,757,632 3,007,223
General and administrative 772,903 1,005,128 1,704,078 2,708,448
------------- ------------- ------------- -------------
Total operating expenses 1,605,405 2,596,581 4,117,238 7,112,415
------------- ------------- ------------- -------------
Income from operations 2,487,368 4,197,810 5,634,080 10,371,512
Interest income (expense), net (472,419) 287,899 (1,419,294) 164,555
Other income - - - 146,324
------------- ------------- ------------- -------------
Income from operations before income
taxes and extraordinary item 2,014,949 4,485,709 4,214,786 10,682,391
Provision for income taxes 686,677 1,525,820 1,434,862 3,640,774
------------- ------------- ------------- -------------
Income before extraordinary item 1,328,272 2,959,889 2,779,924 7,041,617
Extraordinary item -- loss on early
extinguishment of debt, net of applicable
income taxes - - - (140,763)
------------- ------------- ------------- -------------
Net income $ 1,328,272 $ 2,959,889 $ 2,779,924 $ 6,900,854
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma per share amounts:
Income before extraordinary item $0.15 $0.22 $0.31 $0.57
Extraordinary item - - - (0.01)
------------- ------------- ------------- -------------
Pro forma income per share $0.15 $0.22 $0.31 $0.56
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma weighted average shares used in
computing per share amounts
9,091,932 13,553,725 9,091,932 12,410,213
</TABLE>
See notes accompanying these financial statements.
2
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APEX PC SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 26,
1996 1997
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,118,887 $ 37,422,705
Accounts receivable, net of allowance for
doubtful accounts 6,170,193 10,210,066
Inventories 1,653,011 2,512,007
Interest receivable - 208,246
Prepaid expenses 130,218 302,553
Deferred tax assets 800,700 524,700
------------ -------------
Total current assets 10,873,009 51,180,277
------------ -------------
Property and equipment, at cost:
Leasehold improvements 4,677 33,865
Furniture and office equipment 273,831 443,205
Computer and other equipment 380,334 623,141
------------ -------------
658,842 1,100,211
Less accumulated depreciation 195,959 350,340
------------ -------------
462,883 749,871
------------ -------------
Other assets 617,255 17,672
------------ -------------
Total assets $11,953,147 $51,947,820
------------ -------------
------------ -------------
(Continued on next page)
See notes accompanying these financial statements.
3
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APEX PC SOLUTIONS, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, SEPTEMBER 26,
1996 1997
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 504,349 $ -
Accounts payable 530,525 619,550
Accrued wages and commissions 554,352 720,155
Accrued warranty costs 630,000 745,000
Accrued offering expenses - 145,511
Other accrued expenses 282,040 536,082
------------ -------------
Total current liabilities 2,501,266 2,766,298
Subordinated debt 20,000,000 -
Long-term debt, less current portion 5,110,549 -
Deferred taxes 16,500 26,950
------------ -------------
Total liabilities 27,628,315 2,793,248
------------ -------------
Preferred stock, Series A redeemable and
convertible, no par value; 300,000 shares
authorized, issued and outstanding at
December 31, 1996 2,205,000 -
Preferred stock, Series B redeemable, no par
value; 200,000 shares authorized, issued and
outstanding at December 31, 1996 1,000,000 -
------------ -------------
Shareholders' equity (deficit):
Preferred stock; no shares authorized at
December 31, 1996 and 1,000,000 shares
authorized at September 26, 1997; no shares
issued and outstanding - -
Common stock, no par value; 10,000,000 shares
authorized at December 31, 1996 and 100,000,000
shares authorized at September 26, 1997;
6,260,016 and 13,431,173 shares issued and
outstanding 648,260 61,863,071
Deferred compensation (93,431) (174,356)
Accumulated deficit (19,434,997) (12,534,143)
------------ -------------
Total shareholders' equity (deficit) (18,880,168) 49,154,572
------------ -------------
Total liabilities and shareholders' equity
(deficit) $11,953,147 $51,947,820
------------ -------------
------------ -------------
See notes accompanying these financial statements.
4
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APEX PC SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (548,509) $2,988,384
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (263,293) (441,369)
------------- -------------
Net cash used by investing activities (263,293) (441,369)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes to shareholder (270,000) -
Repayments of long-term debt (3,136) (25,614,898)
Payment of loan fees (45,000) -
Proceeds from initial public offering of common stock (1) - 28,866,741
Proceeds from follow-on public offering of common stock (2) - 30,438,634
Proceeds from issuance of common stock and exercise of
common stock options 16,789 66,326
Redemption of Series B redeemable preferred stock - (1,000,000)
------------- -------------
Net cash provided (used) by financing activities (301,347) 32,756,803
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,113,149) 35,303,818
Cash and cash equivalents at beginning of period 2,676,290 2,118,887
------------- -------------
Cash and cash equivalents at end of period $1,563,141 $37,422,705
------------- -------------
------------- -------------
</TABLE>
(1) Total net proceeds from the initial public offering of common stock were
$28,550,762, after reduction of $315,979 for prepaid offering expenses
incurred in 1996.
(2) Total net proceeds from the follow-on public offering of common stock were
$30,293,123, after reduction of $145,511 for offering expenses accrued at
September 26, 1997.
See notes accompanying these financial statements.
5
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APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles and reflect all
adjustments consisting of normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the results
for the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or
for any future period. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
The accompanying financial statements should be read in conjunction with
the audited financial statements of Apex PC Solutions, Inc. (the "Company")
for the year ended December 31, 1996 and the notes thereto contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1996, the unaudited financial statements contained in the Company's
Quarterly Reports on Form 10-QSB for the quarters ended March 28, 1997, and
June 27, 1997, on file with the Securities and Exchange Commission.
The Company reports its annual results based on years ending December 31.
Interim periods in years prior to 1997 are reported on a calendar quarter
basis. Commencing in 1997, the Company reports its quarterly results for
the first three interim periods ending on the last Friday of March, June
and September and for the fourth interim period ending on December 31. The
difference between quarterly results reported on this basis and quarterly
results reported on the basis of calendar quarters for years prior to 1997
is not material.
The Company formed a foreign sales corporation subsidiary in the first
quarter of 1997. Consequently, beginning in 1997, the Company's financial
statements are presented on a consolidated basis.
2. Leveraged Recapitalization and Initial Public Offering
In December 1995, the Company effected a leveraged recapitalization (the
"Leveraged Recapitalization") pursuant to which (i) the Company redeemed
from one of its shareholders Common Stock representing a 50% voting
interest in the Company prior to the Leveraged Recapitalization for
approximately $12.5 million in cash and a Class B Subordinated Promissory
Note in the principal amount of $10.0 million, and (ii) the Company sold to
a group of entities affiliated with TA Associates, Inc. (the "TA Group")
Common Stock and Series A Redeemable and Convertible Preferred Stock
representing a 50% voting interest in the Company after the Leveraged
Recapitalization for $2.5 million and sold to the TA Group Class A
Subordinated Promissory Notes in the aggregate principal amount of
$10.0 million. The subordinated promissory notes issued by the Company in
connection with the Leveraged Recapitalization were repaid upon
consummation of the Company's initial public offering in February 1997 (the
"IPO"). In connection with the Leveraged Recapitalization, Kevin J. Hafer,
the Company's President and Chief Executive Officer, received
200,000 shares of the Company's Series B Redeemable Preferred Stock. This
Series B Redeemable Preferred Stock was fully vested on January 1, 1997.
The Company redeemed 80,000 shares of such Series B Redeemable Preferred
Stock on January 1, 1997 for $5.00 per share (an aggregate of $400,000) and
redeemed the balance of such
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shares for $5.00 per share (an aggregate of $600,000) upon the consummation
of the Company's IPO. In connection with the Leveraged Recapitalization,
the Company incurred approximately $5.6 million of long-term bank
indebtedness in December 1995, which was repaid using the net proceeds of
the Company's IPO.
3. Follow-On Offering
A follow-on public offering of 4.6 million shares of the Company's common
stock (including 600,000 shares sold pursuant to the underwriters' over-
allotment option) was completed in August 1997, at a price of $26 per
share. Of the total, 1,250,000 shares were offered by the Company and
3,350,000 shares were offered by certain selling shareholders. The Company
plans to use the approximately $30.3 million in net proceeds for general
corporate purposes. Following this offering, the Company had 13,413,328
shares of common stock outstanding as of August 8, 1997, and 13,431,173
shares of common stock outstanding as of September 26, 1997.
4. Extraordinary Item
Because of the early retirement of the long-term bank indebtedness and
subordinated promissory notes upon consummation of the Company's IPO, the
Company's statement of operations in the first quarter of 1997 reflects an
extraordinary loss for the write-off of deferred financing costs of
approximately $141,000, net of applicable income taxes.
5. Other Income
The statement of operations includes other income of approximately $136,000
received by the Company in the first quarter of 1997 in connection with the
Leveraged Recapitalization.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THE INFORMATION CONTAINED IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION" CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED
IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING
TO FUTURE NET SALES, FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE
SALES AND MARKETING EXPENDITURES, FUTURE GENERAL AND ADMINISTRATIVE
EXPENDITURES, BACKLOG AND FUTURE LIQUIDITY AND CAPITAL RESOURCES. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS ITEM 2 -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996,
THE COMPANY'S QUARTERLY REPORTS ON FORM 10-QSB FOR THE QUARTERS ENDED MARCH 28,
1997, AND JUNE 27, 1997, AND THE COMPANY'S REGISTRATION STATEMENT ON FORM SB-2
(REGISTRATION NO. 333-31697), ALL AS ON FILE WITH THE SECURITIES AND EXCHANGE
COMMISSION.
OVERVIEW
The Company designs, manufactures and markets stand-alone switching
systems and integrated server cabinet systems for the client/server computing
market. The Company's switching products, including OUTLOOK, OUTLOOK(4) and
VIEWPOINT, enable network administrators to access multiple servers from a
single, centralized keyboard, monitor and mouse configuration (a "console"),
consolidate hardware
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and provide direct hardwired connections between the switch and the attached
servers to facilitate access to servers even when the network is down. The
Company also offers integrated server cabinet systems to consolidate and
store heterogeneous servers and related hardware in one or more cabinets to
facilitate more efficient physical access and safer performance of hardware
maintenance tasks.
The Company markets and sells its products through a direct sales force
and various distribution channels. A substantial portion of the Company's
sales are concentrated among a limited number of original equipment
manufacturers which purchase the Company's switching systems on a private
label basis ("OEMs"). For the nine months ended September 26, 1997, sales to
the Company's OEM customers represented 67% of the Company's net sales. The
Company's OEM business is subject to risks such as contract termination,
reduced or delayed orders, adoption of competing products developed by third
parties for the OEM or by the OEM's internal development team, and change in
corporate ownership, financial condition, business direction or product mix
by the OEM, any of which could have a material adverse effect on the
Company's results of operations. In the past, the Company has experienced,
and may continue to experience, significant reductions or delays in orders
from its OEM customers which have had and may in the future have a material
adverse effect on the Company's quarterly sales and operating results. The
failure of any of the Company's private label OEMs to continue to place
orders at current or anticipated levels would likely have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and annual basis, and expects such fluctuations to
continue in the future. The Company's operating results are affected by a
number of factors, including: the volume and timing of orders, and,
particularly from OEM customers, the timing of shipments; the timing of new
product introductions and enhancements by the Company and its competitors;
changes in product or distribution channel mixes; changes in pricing policies
or price reductions by the Company or its competitors; the availability and
cost of supplies and components; sales and marketing expenses relating to
entering new markets, introducing new products and retaining current OEM and
other large customers; seasonal customer demand; and fluctuations in sales of
servers due to changes in economic conditions or capital spending levels.
The Company is currently experiencing increased price competition in both the
market for stand-alone switching systems and the market for integrated server
cabinet systems and expects that pricing pressures will increase in the
future. Increased competition could result in price reduction and loss of
market share which would adversely affect the Company's business, financial
condition and results of operations.
Gross margins may vary significantly from period to period depending on
a number of factors, including: the ratio of OEM sales to branded sales, as
OEM sales typically have lower gross margins than branded sales; product mix,
including the percentage of integrated server cabinet system sales, which
generally have lower gross margins than sales of stand-alone switching
systems; raw materials and labor costs; new product introductions by the
Company and its competitors; and the level of outsourcing of manufacturing
and assembly services by the Company. The Company expects that increased
competition and the introduction of new technologies may affect pricing of
the Company's products and therefore erode the Company's gross margins in
the future. The Company expects that its operating results will be affected
by seasonal trends and by general conditions in the server market. The
Company believes that it has experienced and will continue to experience some
degree of seasonality due to customer buying cycles. The Company believes
that the fourth quarter has generally higher net sales levels due to customer
budgeting and procurement cycles, which correspondingly may depress net sales
in other quarters. Because the Company's business and operating results
depend to a significant extent on the general conditions in the server
market, any adverse change in the server market due to adverse economic
conditions, declining capital spending levels or other factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In general, the Company's sales cycle varies substantially and may be
lengthy, making revenues difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and
expects this pattern to continue in the future. Although the Company's OEM
customers
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typically place orders for products several months prior to scheduled
shipment dates, these orders are subject to cancellation up to eight weeks
prior to the scheduled shipment date. The Company generally must plan
production, order components and undertake its manufacturing activities prior
to the time that these orders become firm. In addition, the Company's OEM
customers have in the past requested, and will likely continue to request
from time to time, that the Company delay shipment dates or cancel orders for
products that are subject to firm orders. Further, OEMs may change their
channel inventory and distribution patterns. Accordingly, sales to OEMs for
future quarters are difficult to predict. Moreover, any cancellation,
rescheduling or reduction of orders by OEM customers in the future could
materially adversely affect the Company's operating results. If the Company
succeeds in increasing branded sales as a percentage of net sales, the
Company's quarterly sales and operating results will become more dependent
upon the volume and timing of branded product orders received during the
quarter. Because customers of the Company's branded products (including
resellers) typically place orders shortly before their requested shipment
date, revenues from branded sales are difficult to forecast. The failure of
the Company to accurately forecast the timing and volume of orders for
branded products during any given quarter could adversely affect the
Company's operating results for such quarter and, potentially, for future
periods.
RESULTS OF OPERATIONS
The following table sets forth selected unaudited statement of operations
data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . . . . 55.8 55.5 58.1 55.1
---- ---- ---- ----
Gross margin . . . . . . . . . . . . . . . . . . . . . 44.2 44.5 41.9 44.9
---- ---- ---- ----
Operating expenses:
Research and development . . . . . . . . . . . . . . . 2.1 3.0 2.8 3.6
Sales and marketing. . . . . . . . . . . . . . . . . . 6.9 7.4 7.6 7.7
General and administrative . . . . . . . . . . . . . . 8.4 6.6 7.3 7.0
---- ---- ---- ----
Total operating expenses . . . . . . . . . . . . . . . 17.4 17.0 17.7 18.3
---- ---- ---- ----
Income from operations . . . . . . . . . . . . . . . . 26.8 27.5 24.2 26.6
Interest income (expense), net . . . . . . . . . . . . (5.1) 1.9 (6.1) 0.4
Other income . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0 0.4
---- ---- ---- ----
Income from operations before income
taxes and extraordinary item . . . . . . . . . . . 21.7 29.4 18.1 27.4
Provision for income taxes . . . . . . . . . . . . . . 7.4 10.0 6.2 9.3
---- ---- ---- ----
Income before extraordinary item . . . . . . . . . . . 14.3 19.4 11.9 18.1
Extraordinary item -- loss on early extinguishment of
debt, net of applicable income taxes. . . . . . . 0.0 0.0 0.0 (0.4)
---- ---- ---- ----
Net income . . . . . . . . . . . . . . . . . . . . . . 14.3% 19.4% 11.9% 17.7%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet systems. Net sales increased 65% to
$15.3 million for the third quarter of 1997 from $9.3 million for the third
quarter of 1996, 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 branded switching systems. Branded sales increased
to $4.9 million in the third quarter of 1997 from $3.1 million a year ago.
Private label OEM sales and sales of Apex branded products represented 68%
and 32%, respectively, of net sales for the third quarter of 1997, compared
to 66% and 34%, respectively, of net sales for the third quarter of 1996.
1997 year-to-date net sales increased
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67% to $39.0 million from $23.3 million year-to-date in 1996, due to the same
reasons noted above for the third quarter. 1997 year-to-date private label
OEM sales and sales of Apex branded products represented 67% and 33%,
respectively, of net sales, compared to 68% and 32%, respectively,
year-to-date in 1996. Any cancellation, rescheduling or reduction of orders
by any of the Company's private label OEM customers could materially
adversely affect the Company's future operating results.
GROSS MARGIN. Gross margin increased to 44.5% for the third quarter of
1997 from 44.2% for the third quarter of 1996. 1997 year-to-date gross
margin increased to 44.9% from 41.9% year-to-date in 1996, due primarily to
shifts in the Company's product mix to a larger percentage of switch sales,
and lower levels of warranty expense. The Company expects that increased
price competition may affect pricing and therefore erode the Company's gross
margins in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation for engineers and materials costs and are expensed as
they are incurred. Research and development expenses increased to $461,000
for the third quarter of 1997 from $192,000 for the third quarter of 1996,
due primarily to increased project spending and, to a lesser extent, to
increased compensation expenses associated with increased staffing levels.
Research and development expenses as a percentage of net sales were 3.0% for
the third quarter of 1997, compared to 2.1% for the third quarter of 1996.
1997 year-to-date research and development expenses increased to $1.4 million
from $655,000 year-to-date in 1996, due to the same reasons noted above for
the third quarter. As a percentage of net sales, 1997 year-to-date research
and development expenses were 3.6%, compared to 2.8% year-to-date in 1996.
The Company believes that the timely development of innovative products and
enhancements to existing products is essential to maintaining its competitive
position and, therefore, expects research and development expenditures to
increase in absolute dollars.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
promotional material, trade show expenses and sales and marketing personnel
costs, including sales commissions and travel. Sales and marketing expenses
increased to $1.1 million for the third quarter of 1997 from $641,000 for the
third quarter of 1996, and increased as a percentage of net sales to 7.4%
from 6.9%. The increase in absolute dollars and as a percentage of net sales
was due primarily to increased compensation expense associated with increased
staffing levels and increased advertising and trade show expenses, including
expenses relating to market entry and advertising strategies for Europe.
1997 year-to-date sales and marketing expenses increased to $3.0 million from
$1.8 million year-to-date in 1996, and increased as a percentage of net sales
to 7.7% from 7.6%. The increase in absolute dollars and as a percentage of
net sales was due to the same reasons noted above for the third quarter. The
Company expects sales and marketing expenditures to increase in absolute
dollars as it seeks to increase branded sales, in general, and international
sales, in particular.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include personnel costs for administration, finance, human resources
and general management, as well as rent, utilities and legal and accounting
expenses, and provision for Washington State's gross receipts tax. General
and administrative expenses increased to $1.0 million for the third quarter
of 1997 from $773,000 for the third quarter of 1996, but decreased as a
percentage of net sales to 6.6% from 8.4%. The increase in absolute dollars
was due primarily to increased personnel costs, including the addition of a
Chief Financial Officer and Corporate Controller, and, to a lesser extent, to
increased costs relating to the Company's transition to a public company.
General and administrative expenses increased to $2.7 million year-to-date
for 1997 from $1.7 million for year-to-date 1996, but decreased as a
percentage of net sales to 7.0% from 7.3%. The increase in absolute dollars
was due to the same reasons noted above for the third quarter. The Company
expects general and administrative expenses to increase in absolute dollars
to support the growth of the operations and sales functions.
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INTEREST INCOME (EXPENSE), NET. Net interest income was $288,000 for the
third quarter of 1997, compared to net interest expense of $472,000 for the
third quarter of 1996. This $760,000 net change resulted primarily from the
elimination of all indebtedness incurred in the Leveraged Recapitalization,
as well as the elimination of all long-term bank indebtedness, using the
proceeds of the Company's February 1997 IPO, and, to a lesser extent, from
interest earned on the approximately $30.3 million of net proceeds from the
Company's follow-on offering completed in August 1997. 1997 year-to-date,
net interest income was $165,000, compared to net interest expense of
$1,419,000 year-to-date 1996. This $1,584,000 net change was due to the same
reasons noted above for the third quarter.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$1.5 million for the third quarter of 1997, from $687,000 for the third
quarter of 1996. The 1997 year-to-date provision for income taxes increased
to $3.6 million from $1.4 million year-to-date in 1996. The effective
federal tax rate for each of these periods was approximately 34%.
NET INCOME. Net income increased 123% to $3.0 million for the third
quarter of 1997 from $1.3 million for the third quarter of 1996 due primarily
to increased net sales and related gross profits and, to a lesser extent, to
decreased net interest expense. As a percentage of net sales, net income
increased to 19.4% for the third quarter of 1997 from 14.3% for the third
quarter of 1996 due to the same factors. 1997 year-to-date net income
increased 148% to $6.9 million from $2.8 million year-to-date in 1996 due to
the same reasons noted above for the third quarter. As a percentage of net
sales, 1997 year-to-date net income increased to 17.7% from 11.9%
year-to-date in 1996, and for the same reasons noted above.
BACKLOG
As of September 26, 1997, the Company's backlog was $9.5 million,
compared to $8.3 million at the end of the third quarter of 1996. Backlog
consists of purchase orders with delivery dates scheduled within the next six
months. None of the Company's customers is obligated to purchase products
from the Company except pursuant to binding purchase orders. Generally,
purchase orders are subject to cancellation up to eight weeks prior to the
scheduled shipment date. Because of the timing of orders and the possibility
of customer changes to delivery schedules, the Company's backlog as of any
particular date may not be representative of actual sales for any succeeding
period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 26, 1997 the Company's principal sources of liquidity
consisted of approximately $37.4 million in cash and cash equivalents, an
increase of $35.3 million from the December 31, 1996 balances. In addition,
since December 1995, the Company has maintained a combined line of credit and
letter of credit facility with a bank. In early April 1997, this facility
was renewed, providing a final maturity date of April 30, 1998 and
increasing the aggregate borrowing capacity from $3.0 million to $5.0
million. Under the line of credit, the Company may borrow up to a specified
amount based upon its accounts receivable. Under the letter of credit
arrangement, the bank will issue commercial letters of credit up to $5.0
million (less any amounts outstanding under the line of credit) at prime.
There were no borrowings under the line of credit and the letter of credit
facility from December 1995 through September 1997. Thus, all $3.0 million
was available through March 1997, and all $5.0 million thereafter.
Cash generated from operating activities increased to $3.0 million
year-to-date for 1997 from a use of ($549,000) year-to-date for 1996. This
increase in cash flow was primarily due to increased net income, decreased
bonus payments, decreased deferred taxes and an increase in accounts payable,
partially offset by increases in accounts receivable and inventories.
In February 1997, the Company consummated its IPO. The net proceeds to
the Company from the IPO were approximately $28.4 million, after deducting
approximately $190,000 of directors and officers insurance premium. Of that
amount, $20.0 million was used to repay the indebtedness evidenced by the
Class A and Class B Subordinated Promissory Notes issued in the Leveraged
Recapitalization,
11
<PAGE>
approximately $5.6 million was used to repay long-term bank debt incurred by
the Company in December 1995, and $600,000 was used to redeem shares of
Series B Redeemable Preferred Stock. See Note 2 to Financial Statements.
After application of the net proceeds of the IPO to the foregoing items, and
payment of IPO expenses (including $190,000 of directors and officers
insurance premium which is being expensed in 1997 as a period cost), the
remaining proceeds from the IPO were approximately $2.2 million. Further, in
August 1997 the Company completed a follow-on offering, which yielded net
proceeds of approximately $30.3 million. The Company believes that existing
cash balances, cash generated from operations and the funds available to it
under credit facilities, together with the remaining proceeds from the IPO
and the follow-on offering, will be sufficient to fund its operations through
1998.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." This statement specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS"), to simplify the
existing computational guidelines and increase comparability on an
international basis. The statement will be effective for interim and annual
reporting periods ending after December 15, 1997. This statement will
replace "primary" EPS with "basic" EPS, the principal difference being the
exclusion of common stock equivalents in the computation of basic EPS. In
addition, this statement will require the dual presentation of basic and
diluted EPS on the face of the consolidated statements of operations. Basic
EPS computed pursuant to this statement will differ from historical net
income per share previously reported due to the exclusion of common stock
equivalents from the computation. Diluted EPS computed pursuant to this
statement is not expected to be materially different from the historical net
income per share previously presented.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The statement will be effective for fiscal years beginning after
December 15, 1997. Reclassification for earlier periods is required for
comparative purposes. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the
statement requires only additional disclosure, the Company does not expect
the statement to have a material impact on its financial position or results
of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and
services, major customers, and the material countries in which the entity
holds assets and reports revenues. The statement will be effective for
fiscal years beginning after December 15, 1997. Reclassification for earlier
periods is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the Company does not expect the statement to have a material
impact on its financial position or results of operations.
12
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.1 Statement re: Computation of Earnings Per Share
27.1 Financial Data Schedule
ITEMS 1, 2, 3, 4 and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
APEX PC SOLUTIONS, INC.
(Registrant)
Date: November 7, 1997 /s/ Kevin J. Hafer
--------------------------
Kevin J. Hafer
President and Chief Executive Officer
Date: November 7, 1997 /s/ Douglas A. Bevis
--------------------------
Douglas A. Bevis
Vice President, Chief Financial Officer
14
<PAGE>
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
APEX PC SOLUTIONS, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 26, SEPTEMBER 30, SEPTEMBER 26,
1996 1996 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $1,328,272 $2,959,889 $2,779,924 $6,900,854
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma weighted average common 5,600,000 12,763,591 5,600,000 11,289,934
shares outstanding
Pro forma common stock equivalents -
Series A redeemable and convertible
preferred stock 2,155,000 -- 2,155,000 415,671
Pro forma common stock equivalents -
stock options 1,336,932 790,134 1,336,932 704,608
------------- ------------- ------------- -------------
Pro forma weighted average shares used in
computing net income per share 9,091,932 13,553,725 9,091,932 12,410,213
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma income per share $0.15 $0.22 $0.31 $0.56
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 26, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-26-1997
<CASH> 37,422,705
<SECURITIES> 0
<RECEIVABLES> 10,545,969
<ALLOWANCES> 335,903
<INVENTORY> 2,512,007
<CURRENT-ASSETS> 51,180,277
<PP&E> 1,100,211
<DEPRECIATION> 350,340
<TOTAL-ASSETS> 51,947,820
<CURRENT-LIABILITIES> 2,766,298
<BONDS> 0
0
0
<COMMON> 61,863,071
<OTHER-SE> (12,708,499)
<TOTAL-LIABILITY-AND-EQUITY> 51,947,820
<SALES> 38,957,763
<TOTAL-REVENUES> 38,957,763
<CGS> 21,473,836
<TOTAL-COSTS> 21,473,836
<OTHER-EXPENSES> 7,112,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (164,555)
<INCOME-PRETAX> 10,682,391
<INCOME-TAX> 3,640,774
<INCOME-CONTINUING> 7,041,617
<DISCONTINUED> 0
<EXTRAORDINARY> (140,763)
<CHANGES> 0
<NET-INCOME> 6,900,854
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
