<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 25, 1998 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from __________ to __________
Commission file number: 000-21959
APEX PC SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-1577634
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
20031 142nd Avenue, N.E.
Woodinville, Washington 98072
(Address of Principal Executive Offices) (Zip Code)
425-402-9393
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant has (1) filed all reports,
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X]Yes [_] No
As of October 31, 1998, the number of outstanding shares of the Company's
Common Stock was 13,531,613.
1
<PAGE>
APEX PC SOLUTIONS, INC.
FORM 10-Q
SEPTEMBER 25, 1998
INDEX
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Quarters and the Nine Months Ended September 25, 1998 and
September 26, 1997 3
Consolidated Balance Sheets at September 25, 1998
(unaudited) and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 25, 1998 and
September 26, 1997 5
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APEX PC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
----------------- ----------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $18,143,662 $15,276,397 $52,149,195 $38,957,763
Cost of sales 9,414,039 8,482,006 27,562,733 21,473,836
----------------- ----------------- ---------------- ----------------
Gross profit 8,729,623 6,794,391 24,586,462 17,483,927
----------------- ----------------- ---------------- ----------------
Research and development 693,703 460,758 2,038,270 1,396,744
Sales and marketing 1,401,117 1,130,695 4,005,722 3,007,223
General and administrative 1,293,936 1,005,128 3,931,299 2,708,448
----------------- ----------------- ---------------- ----------------
Total operating expenses 3,388,756 2,596,581 9,975,291 7,112,415
----------------- ----------------- ---------------- ----------------
Income from operations 5,340,867 4,197,810 14,611,171 10,371,512
Interest income, net 697,508 287,899 1,872,324 164,555
Other income - - - 146,324
----------------- ----------------- ---------------- ----------------
Income from operations before income
taxes and extraordinary item 6,038,375 4,485,709 16,483,495 10,682,391
Provision for income taxes 2,021,340 1,525,820 5,522,816 3,640,774
----------------- ----------------- ---------------- ----------------
Income before extraordinary item 4,017,035 2,959,889 10,960,679 7,041,617
Extraordinary item -- loss on early
extinguishment of debt, net of
applicable income tax benefit of
$72,511 - - - (140,763)
----------------- ----------------- ---------------- ----------------
Net income $ 4,017,035 $ 2,959,889 $ 10,960,679 $ 6,900,854
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Per share amounts:
Basic:
Income before extraordinary item $ 0.30 $ 0.23 $ 0.81 $ 0.62
Extraordinary item - - - (0.01)
----------------- ----------------- ---------------- ----------------
Net income $ 0.30 $ 0.23 $ 0.81 $ 0.61
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Diluted:
Income before extraordinary item $ 0.29 $ 0.22 $ 0.78 $ 0.58
Extraordinary item - - - (0.01)
----------------- ----------------- ---------------- ----------------
Net income $ 0.29 $ 0.22 $ 0.78 $ 0.57
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Weighted average shares used in
computing net income per share:
Basic 13,480,199 12,763,591 13,455,983 11,289,891
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Diluted 13,987,890 13,280,711 13,989,098 12,186,714
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
</TABLE>
See notes accompanying these consolidated financial statements.
3
<PAGE>
APEX PC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 31,
1998 1997
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $23,425,931 $11,824,978
Investments 27,091,857 27,878,683
Accounts receivable, net of allowance for doubtful
accounts 9,436,338 9,843,716
Inventories 3,429,867 2,918,119
Interest receivable 634,780 378,730
Prepaid expenses 345,248 243,741
Deferred tax assets 639,510 554,664
------------------- -------------------
Total current assets 65,003,531 53,642,631
------------------- -------------------
Property and equipment, at cost:
Leasehold improvements 145,937 145,937
Furniture and office equipment 497,935 500,281
Computer and other equipment 708,868 655,581
------------------- -------------------
1,352,740 1,301,799
Less accumulated depreciation 692,352 432,847
------------------- -------------------
660,388 868,952
------------------- -------------------
Investments 1,393,140 741,538
------------------- -------------------
Other assets 110,263 17,672
------------------- -------------------
Total assets $67,167,322 $55,270,793
------------------- -------------------
------------------- -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $404,842 $326,619
Accrued wages and commissions 697,704 791,062
Accrued warranty costs 745,000 745,000
Accrued income taxes 357,626 -
Other accrued expenses 995,951 634,765
------------------- -------------------
Total current liabilities 3,201,123 2,497,446
Deferred taxes 28,000 35,000
------------------- -------------------
Total liabilities 3,229,123 2,532,446
------------------- -------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized; no shares
issued and outstanding - -
Common stock, no par value; 100,000,000 shares
authorized; 13,528,428 and 13,434,384 shares issued and
outstanding, respectively 62,213,064 62,014,406
Deferred compensation (127,616) (168,131)
Retained earnings (deficit) 1,852,751 (9,107,928)
------------------- -------------------
Total shareholders' equity 63,938,199 52,738,347
------------------- -------------------
Total liabilities and shareholders' equity $67,167,322 $55,270,793
------------------- -------------------
------------------- -------------------
</TABLE>
See notes accompanying these consolidated financial statements.
4
<PAGE>
APEX PC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net cash provided by operating activities $11,318,012 $2,988,384
---------------- ----------------
Cash flows from investing activities:
Purchases of investments (38,080,829) -
Maturities of investments 38,216,053 -
Purchases of property and equipment (50,941) (441,369)
---------------- ----------------
Net cash provided by (used in) investing activities 84,283 (441,369)
---------------- ----------------
Cash flows from financing activities:
Repayments of long-term debt and capital lease - (25,614,898)
Proceeds from Initial Public Offering of common stock - 28,866,741
Proceeds from Secondary Offering of common stock - 30,438,634
Proceeds from issuance of common stock and exercise of
common stock options 198,658 66,326
Redemption of Series B redeemable preferred stock (1,000,000)
---------------- ----------------
Net cash provided by financing activities 198,658 32,756,803
---------------- ----------------
Net increase in cash and cash equivalents 11,600,953 35,303,818
Cash and cash equivalents at beginning of period 11,824,978 2,118,887
---------------- ----------------
Cash and cash equivalents at end of period $23,425,931 $37,422,705
---------------- ----------------
---------------- ----------------
</TABLE>
See notes accompanying these consolidated financial statements.
5
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in conformity with generally accepted accounting
principles and reflect all adjustments consisting of normal recurring
adjustments which, in the opinion of management, are necessary for a
fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
The accompanying unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements of Apex PC Solutions, Inc. ("Apex" or the "Company") for the
year ended December 31, 1997 and the notes thereto contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997, on file with the Securities and Exchange Commission.
The Company reports its annual results based on years ending
December 31. The Company reports its quarterly results for the first
three interim periods ending on the last Friday of March, June and
September and for the fourth interim period ending on December 31.
The financial statements of the Company are consolidated and
include the accounts of the Company and its wholly-owned subsidiary,
Apex PC Solutions, Ltd. (a foreign sales corporation). Significant
intercompany transactions and balances have been eliminated.
The Company is in the process of evaluating the impact of
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," on its financial
statements and does not expect the statement to have a material impact
on its financial position or results of operations. The statement will
be effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
Note 2. Inventories.
Inventories consisted of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 31,
1998 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 964,595 $ 979,438
Work-in-process 838,751 908,815
Finished goods 2,051,521 1,264,866
------------------ -----------------
3,854,867 3,153,119
Less reserve for obsolescence (425,000) (235,000)
------------------ -----------------
$3,429,867 $2,918,119
------------------ -----------------
------------------ -----------------
</TABLE>
Note 3. Leveraged Recapitalization and Initial Public Offering
In December 1995, the Company effected a leveraged
recapitalization (the "Leveraged Recapitalization") pursuant to which
(i) the Company redeemed from one of its shareholders Common Stock
representing a 50% voting interest in the Company prior to the
Leveraged Recapitalization for approximately $12.5 million in cash and
a Class B Subordinated Promissory Note in the principal amount of $10.0
million, and (ii) the Company sold to a group of entities affiliated
with TA Associates, Inc. (the "TA Group") Common Stock and Series A
Redeemable and Convertible Preferred Stock representing a 50% voting
interest in the Company after the Leveraged
6
<PAGE>
Recapitalization for $2.5 million and sold to the TA Group Class A
Subordinated Promissory Notes in the aggregate principal amount of
$10.0 million. The subordinated promissory notes issued by the Company
in connection with the Leveraged Recapitalization were repaid upon
consummation of the Company's initial public offering in February 1997
(the "IPO"). In connection with the Leveraged Recapitalization,
Kevin J. Hafer, the Company's President and Chief Executive Officer,
received 200,000 shares of the Company's Series B Redeemable Preferred
Stock. This Series B Redeemable Preferred Stock was fully vested on
January 1, 1997. The Company redeemed 80,000 shares of such Series B
Redeemable Preferred Stock on January 1, 1997 for $5.00 per share (an
aggregate of $400,000) and redeemed the balance of such shares for
$5.00 per share (an aggregate of $600,000) upon the consummation of the
Company's IPO. In connection with the Leveraged Recapitalization, the
Company incurred approximately $5.6 million of long-term bank
indebtedness in December 1995, which was repaid using the net proceeds
of the Company's IPO.
Note 4. Follow-On Offering
A follow-on public offering of 4.6 million shares of the
Company's common stock (including 600,000 shares sold pursuant to the
underwriters' over-allotment option) was completed in August 1997, at a
price of $26 per share. Of the total, 1,250,000 shares were offered by
the Company and 3,350,000 shares were offered by certain selling
shareholders. The Company plans to use the approximately $30.3 million
in net proceeds for general corporate purposes.
Note 5. Extraordinary Item
Because of the early retirement of the long-term bank
indebtedness and subordinated promissory notes upon consummation of the
Company's IPO, the Company's statement of operations for the nine
months ended September 26, 1997, reflects an extraordinary loss for the
write-off of deferred financing costs of approximately $141,000, net of
applicable income taxes.
Note 6. Other Income
Other income for the nine months ended September 26, 1997,
includes approximately $136,000 received by the Company in 1997 in
connection with the Leveraged Recapitalization.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE INFORMATION CONTAINED IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS RELATING TO FUTURE NET SALES, FUTURE GROSS MARGINS, FUTURE RESEARCH
AND DEVELOPMENT EXPENDITURES, FUTURE SALES AND MARKETING EXPENDITURES, FUTURE
GENERAL AND ADMINISTRATIVE EXPENDITURES, BACKLOG, FUTURE LIQUIDITY AND CAPITAL
RESOURCES, AND YEAR 2000 COMPLIANCE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND IN THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997, AND IN THE COMPANY'S QUARTERLY
REPORT ON FORMS 10-Q FOR THE QUARTERS ENDED MARCH 27, 1998 AND JUNE 26, 1998, ON
FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.
7
<PAGE>
OVERVIEW
The Company designs, manufactures and markets stand-alone switching
systems and integrated server cabinet solutions for the client/server computing
market. The Company's switching products, including OUTLOOK, OUTLOOK(4),
VIEWPOINT, and EL-40LC, enable network administrators to access multiple servers
from one or more centralized keyboard, monitor and mouse configurations
("consoles"), consolidate hardware and provide direct hardwired connections
between the switch and the attached servers to facilitate access to servers even
when the network is down. The Company also offers integrated server cabinet
solutions to consolidate and store heterogeneous servers and related hardware in
one or more cabinets to facilitate more efficient physical access and safer
performance of hardware maintenance tasks.
The Company markets and sells its products through a direct sales force
and various distribution channels. A substantial portion of the Company's sales
are concentrated among a limited number of original equipment manufacturers
which purchase the Company's switching systems on a private-label basis and
integrate and sell these systems with their own products. For the quarter ended
September 25, 1998, sales to the Company's private-label OEM customers
represented 56.9% of the Company's net sales. The Company's private-label OEM
business is subject to risks such as contract termination, reduced or delayed
orders, adoption of competing products developed by third parties for the OEM or
by the OEM's internal development team, and change in corporate ownership,
financial condition, business direction or product mix by the OEM, any of which
could have a material adverse effect on the Company's results of operations. The
Company has experienced, and may continue to experience, significant reductions
or delays in orders from its private-label OEM customers which have had and may
in the future have a material adverse effect on the Company's quarterly sales
and operating results. For example, sales for the quarter ended September 25,
1998, were affected by a change in the terms of the Company's agreement with its
largest OEM customer. During the third quarter, the Company implemented a
change requested by this customer in the terms of the Company's shipments to
the customer from "FOB Origin" to "FOB Destination." This change required the
Company to change its revenue recognition policies for sales to the customer.
As a result of this change, and because during the transition period the
customer also worked down its existing inventory of the Company's products,
orders from - and sales to - the customer were lower in the quarter. The
failure of any of the Company's private-label OEMs to continue to place orders
at current or anticipated levels would likely have a material adverse effect
on the Company's business, financial condition, and results of operations.
The Company's business and results of operations are becoming more
dependent upon the Company's sales of branded switching products to other
manufacturers of servers and related networking products, who integrate and sell
Apex-brand switches with their own products ("Apex-brand OEMs"). Apex-brand OEMs
are obligated to purchase products from the Company only pursuant to binding
purchase orders, and the Company does not have contracts with any of these
customers. Consequently, any of these customers could cease doing business with
the Company at any time. The Company's business with its Apex-brand OEM
customers is subject to risks such as short order cycles and difficulty in
predicting sales, reductions or delays in orders, adoption of competing products
developed by third parties of the customer or by the customer's own internal
development team, and change in corporate ownership, financial condition,
business direction, or product mix of the customer. The loss of, or material
decline in orders from, certain of these customers could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from private-label OEM and other large customers; the timing of
shipments; the timing of new product introductions and enhancements by the
Company and its competitors; changes in product or distribution channel mixes;
changes in pricing policies or price reductions by the Company; competition and
price reductions by the Company's competitors; the availability and cost of
supplies and components to the Company, to its suppliers, and to its customers
(to the extent sales of the Company's products by the Company's customers are
dependent on having the components necessary to manufacture network servers);
sales and marketing expenses related to entering into new markets, introducing
new products and retaining current OEM and other large customers; seasonal
customer demand; and fluctuations in sales of servers due to changes in economic
conditions and capital spending levels in both the private and public sectors.
8
<PAGE>
The Company is currently experiencing increased price competition in
both the market for stand-alone switching systems and the market for integrated
server cabinet solutions and expects that pricing pressures will increase in the
future. Increased competition could result in price reduction and loss of market
share which would adversely affect the Company's business, financial condition
and results of operations.
In general, the Company's sales cycle varies substantially and may be
lengthy, making revenues difficult to forecast. The Company has experienced
period-to-period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders or provide forecasts for products up to several months
prior to scheduled shipment dates, these orders or forecasts are subject to
cancellation up to four to six weeks prior to the scheduled shipment date. The
Company generally must plan production, order components, and undertake its
manufacturing activities prior to the time that these orders become firm. In
addition, the Company's OEM customers have in the past requested, and will
likely continue to request from time to time, that the Company delay shipment
dates or cancel orders for products that are subject to firm orders.
Accordingly, sales to OEMs for future quarters are difficult to predict.
Moreover, any cancellation, rescheduling, or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales (i.e.,
sales to customers other than private-label OEMs) as a percentage of net
sales, the Company's quarterly sales and operating results will become more
dependent upon the volume and timing of branded product orders received during
the quarter. Because many of the Company's branded product customers
(including resellers) typically place orders shortly before their requested
shipment date, revenues from branded sales are difficult to forecast. The
failure of the Company to accurately forecast the timing and volume of orders
for branded products during any given quarter could adversely affect the
Company's operating results for such quarter and, potentially, for future
periods.
With recent industry-wide initiatives to reduce all channel inventories
and to shorten lead times, trends with Apex's major customers are, generally, to
reduce the number of weeks of forward-committed firm orders. As a result of
these initiatives, which currently are affecting the Company's business with
certain private-label and Apex-brand OEMs, the Company believes that its sales
are becoming more difficult to predict.
Gross margins may vary significantly from period to period depending on
a number of factors, including: the ratio of private-label OEM sales to branded
sales, as private-label OEM sales typically have lower gross margins than
branded sales; product mix, including the percentage of integrated server
cabinet solution sales, which generally have lower gross margins than sales of
stand-alone switching systems; raw materials and labor costs; new product
introductions by the Company and its competitors; and the level of outsourcing
of manufacturing and assembly services by the Company. The Company expects that
its gross margins will decline in the future primarily due to increased
competition and the introduction of new technologies that may affect the prices
of the Company's products. The Company expects that its operating results will
be affected by seasonal trends and by general conditions in the server market.
The Company believes that it has experienced and will continue to experience
some degree of seasonality due to customer buying cycles. The Company believes
that the fourth quarter generally has a higher net sales level 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, component availability, or other factors
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
On February 24, 1998, the Company signed an agreement for a five-year
lease of approximately 117,000 square feet in an industrial office building
being built in Redmond, Washington for scheduled occupancy in March 1999. The
initial base rent under the lease, portions of which will be allocable to cost
of sales and to general and administrative expense, is approximately $90,000 per
month, plus taxes, insurance, and maintenance. Consequently, beginning in 1999,
the Company's gross margin and net income may be adversely affected by the
Company's increased rent expense. The 117,000 square foot leased premises has
approximately 40,000 more square feet than the company currently projects it
will need in March 1999, and the Company intends to sublease the excess space
until needed for planned expansion. There can be no assurance, however, that the
Company will be successful in subleasing that excess space. If the Company is
unable to sublease the excess space, it will bear full responsibility for all
rent due under the Redmond lease.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected unaudited statement of
operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 51.9 55.5 52.9 55.1
----- ----- ----- -----
Gross margin.............................. 48.1 44.5 47.1 44.9
----- ----- ----- -----
Operating expenses:
Research and development............ 3.8 3.0 3.9 3.6
Sales and marketing................. 7.7 7.4 7.7 7.7
General and administrative.......... 7.2 6.6 7.5 7.0
----- ----- ----- -----
Total operating expenses....... 18.7 17.0 19.1 18.3
----- ----- ----- -----
Income from operations.................... 29.4 27.5 28.0 26.6
Interest income (expense), net............ 3.8 1.9 3.6 0.4
Other income.............................. - - - 0.4
----- ----- ----- -----
Income before income taxes and
extraordinary item.................. 33.2 29.4 31.6 27.4
Provision for income taxes................ 11.1 10.0 10.6 9.3
----- ----- ----- -----
Income before extraordinary item.......... 22.1 19.4 21.0 18.1
Extraordinary item -- loss on early
extinguishment of debt, net of
applicable income tax benefit....... - - - (0.4)
----- ----- ----- ------
Net income ............................... 22.1% 19.4% 21.0% 17.7%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet solutions. Net sales increased 18.8% to
$18.1 million for the third quarter of 1998 from $15.3 million for the third
quarter of 1997, due to increased demand for Apex-brand products. Private-label
OEM product sales decreased 0.8% to $10.3 million in the third quarter of 1998
from $10.4 million a year ago. Sales to the Company's largest private-label OEM
customer decreased 26.6% in the third quarter of 1998 compared to the third
quarter of 1997. This decline was due in part to a change in the Company's
revenue recognition policy for sales to this customer necessitated by a
modification in shipment terms initiated by the customer during the quarter
from "FOB Origin" to "FOB Destination" and in part to a decline in shipments
to this customer during the quarter as it worked down its existing inventories
of the Company's products. The decline in sales to this customer was nearly
offset by a 100.2% increase in sales to the Company's other private-label OEM
customers over the same periods. Apex-brand product sales increased 60.6% to
$7.8 million in the third quarter of 1998 from $4.9 million a year ago.
Private-label OEM sales and sales of Apex-brand products represented 56.9% and
43.1%, respectively, of net sales for the third quarter of 1998, compared to
68.1% and 31.9%, respectively, of net sales for the third quarter of 1997.
1998 year-to-date net sales increased 34% to $52.1 million from $39.0 million
year-to-date in 1997 due primarily to growth in sales of Apex-brand products
and, to a lesser extent, increased sales to private-label OEM customers. 1998
year-to-date private-label OEM sales and sales of Apex-brand products
represented 58.0% and 42.0%, respectively, of net sales, compared to 66.9% and
33.1%, respectively, year-to-date in 1997. Any cancellation, rescheduling or
reduction of orders by certain of the Company's private-label OEM customers or
other major customers could materially adversely affect the Company's future
operating results.
GROSS MARGIN. Gross margin is affected by a variety of factors,
including: the ratio of OEM sales to branded sales, as OEM sales typically have
lower gross margins than branded sales; product mix, including the percentage of
integrated server cabinet solution sales, which generally have lower gross
margins than sales of stand-alone switching systems; raw materials and labor
costs; new product introductions by the Company and its competitors; and the
level of outsourcing of manufacturing and assembly services by the Company.
Gross margin increased to 48.1% for the third quarter of 1998 from 44.5% for the
third quarter of 1997 due to a higher percentage of Apex-brand products in the
Company's product mix, higher margins resulting from increased sales volume and
to a higher percentage of stand-alone switch sales in the Company's product mix.
1998 year-to-date gross margin increased to 47.1% from 44.9% due to the same
reasons. Increased competition may affect pricing and therefore erode the
Company's gross margins in the future.
10
<PAGE>
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 $694,000 for the
third quarter of 1998 from $461,000 for the third quarter of 1997. As a
percentage of net sales, research and development expenses increased to 3.8% for
the third quarter of 1998 from 3.0% for the third quarter of 1997. The increase
was due primarily to increased project spending and, to a lesser extent,
increased compensation expense associated with increased staffing levels. 1998
year-to-date research and development expenses increased to $2.0 million from
$1.4 million year-to-date in 1997, due to the same reasons noted for the third
quarter. As a percentage of net sales, year-to-date research and development
expenses increased to 3.9% from 3.6% in 1997. During the quarter ended September
25, 1998, the Company introduced several new products and product enhancements.
The Company believes that the timely development of innovative products and
enhancements to existing products is essential to maintaining its competitive
position and therefore expects research and development expenditures to
continue to increase in absolute dollars.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
advertising, promotional material, trade show expenses and sales and marketing
personnel costs, including sales commissions and travel. Sales and marketing
expenses increased to $1.4 million for the third quarter of 1998 from $1.1 for
the third quarter of 1997. As a percentage of net sales, sales and marketing
expenses increased to 7.7% for the third quarter of 1998 from 7.4% for the third
quarter of 1997. The increase was due primarily to increased expenses relating
to advertising strategies for the launch of new products and to increased
compensation expense associated with increased staffing levels. 1998
year-to-date sales and marketing expenses increased to $4.0 million from $3.0
million year-to-date in 1997. As a percentage of net sales, year-to-date sales
and marketing expenses remained constant at 7.7%. The increase in absolute
dollars was due to increased compensation expense associated with increased
staffing levels, increased costs associated with advertising strategies for the
launch of new products, and increased advertising expenses. The Company expects
sales and marketing expenditures to increase in absolute dollars as it continues
its efforts to increase branded sales and international sales. In connection
with those efforts, in early 1998 the Company hired a new Vice President of
Marketing and plans to restructure its sales and marketing staff (including the
addition of a Vice President of Sales) as part of its strategy to expand its
reseller channel both domestically and internationally. As part of this
restructuring and the Company's expansion of its reseller channel, the Company
expects to enhance and expand the management of its sales and marketing efforts
and its sales and marketing staff both domestically and internationally, and the
Company has also engaged an executive search firm to assist the Company in
recruiting a senior level executive to head the Company's sales and marketing
efforts in Europe. The Company will be required to invest significant resources
in its domestic and international sales and marketing efforts, and there can be
no assurance that the Company will be successful in expanding its reseller
channel or its international sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include personnel costs for administration, finance, human resources
and general management, as well as rent, utilities, legal and accounting
expenses, and provision for Washington State's gross receipts tax. General and
administrative expenses increased to $1.3 million for the third quarter of 1998
from $1.0 million for the third quarter of 1997. As a percentage of net sales,
general and administrative expenses increased to 7.2% for the third quarter of
1998 from 6.6% for the third quarter of 1997. The increase was due primarily to
increased costs associated with the Company's patent infringement lawsuits
against certain competitors and to increased personnel related costs associated
with increased staffing levels. 1998 year-to-date general and administrative
expenses increased to $3.9 million from $2.7 million year-to-date in 1997. As a
percentage of net sales, year-to-date general and administrative expenses
increased to 7.5% from 7.0%. The increase in absolute dollars and as a
percentage of net sales is due primarily to the factors described above for the
third quarter, and to increased occupancy costs associated with the expansion of
facilities in mid-1997, increased costs associated with being a public company
(i.e. the preparation and printing of the Annual Report and the proxy materials
for the annual meeting of the Company's shareholders), and to a lesser extent,
costs associated with engaging an executive search firm to assist in the
recruitment of a new Chief Financial Officer. The Company has traditionally
operated with a very lean management structure and a very small management
staff. In recent periods, the Company has experienced rapid revenue and customer
growth and expansion in its product offerings, its sales and marketing efforts,
and its operations and logistical needs in dealing with suppliers. The Company's
rapid growth has put a significant strain on the Company's management,
operational, and financial personnel, and the Company is actively seeking to
expand and enhance its executive and management team and to increase the
11
<PAGE>
size of its operational and financial departments. The Company has not yet
filled the position of Vice President and Chief Financial Officer, and at
present, the Company's President and Chief Executive Officer is serving as
Acting Chief Financial Officer. As a result, some aspects of the Company's
strategic plan have been deferred or implemented at a slower rate than
management would have desired. The Company expects general and administrative
expenses to increase in absolute dollars to support the growth of the
management, operational, and financial functions, and the Company plans to
manage general and administrative expenses at a constant or decreasing rate
relative to sales. There can be no assurance, however, that the Company's
efforts will be successful or that the Company's general and administrative
expenses as a percentage of net sales will decline.
INTEREST INCOME, NET. Net interest income was $698,000 for the third
quarter of 1998, compared to net interest income of $288,000 for the third
quarter of 1997. This increase resulted from the interest earned on the
approximately $30.3 million of net proceeds from the Company's follow-on
offering completed in August 1997. 1998 year-to-date net interest income of $1.9
million compares to net interest income of $165,000 for 1997. This $1.7 million
increase was due to the same reason noted for the third quarter and to reduced
interest expense 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.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$2.0 million for the third quarter of 1998, from $1.5 million for the third
quarter of 1997. The effective federal tax rate declined to approximately 33.5%
for the third quarter of 1998 from approximately 34% for the third quarter of
1997 due primarily to the benefits associated with implementing a foreign sales
corporation. 1998 year-to-date provision for income taxes increased to $5.5
million from $3.6 million year-to-date in 1997. The 1998 year-to-date effective
federal tax rate declined to approximately 33.5% from approximately 34% for the
year-to-date 1997 for the same reason.
NET INCOME. Net income increased 35.7% to $4.0 million for the third
quarter of 1998 from $3.0 million for the third quarter of 1997. As a percentage
of net sales, net income increased to 22.1% for the third quarter of 1998 from
19.4% for the third quarter of 1997. 1998 year-to-date net income increased
58.8% to $11.0 million from $6.9 million year-to-date in 1997. As a percentage
of net sales, 1998 year-to-date net income increased to 21.0% from 17.7%
year-to-date in 1997. The increases in net income and net income as a percentage
of net sales for the third quarter and for 1998 year-to-date were due primarily
to increased net sales and related gross profits and, to a lesser extent, to
increased net interest income, partially offset by increased operating expenses.
BACKLOG
As of September 25, 1998, the Company's backlog was $11.5 million,
compared to $9.5 million at the end of the third quarter of 1997. Backlog
consists of purchase orders with delivery dates scheduled within the next six
months. None of the Company's customers is obligated to purchase products from
the Company except pursuant to binding purchase orders. Generally, purchase
orders are subject to cancellation up to eight weeks prior to the scheduled
shipment date. Because of the timing of orders and the possibility of customer
changes to delivery schedules, the Company's backlog as of any particular date
may not be representative of actual sales for any succeeding period. Moreover,
with recent industry-wide initiatives to reduce all channel inventories and
shorten lead times, the Company views backlog as a less important indicator of
future results than may have been the case in prior years.
LIQUIDITY AND CAPITAL RESOURCES
As of September 25, 1998, the Company's principal sources of liquidity
consisted of approximately $50.5 million in cash, cash equivalents and current
investments, an increase of $10.8 million from the December 31, 1997 balances.
In addition, the Company has a combined line of credit and letter of credit
facility with a bank with aggregate borrowing capacity of $5.0 million at prime.
Under the line of credit, the Company may borrow up to a specified amount based
upon its accounts receivable. Under the letter of credit arrangement, the bank
will issue commercial letters of credit up to an aggregate of $5.0 million (less
any amounts outstanding under the line of credit). The combined line of credit
and letter of credit facility was renewed in April 1998, with an aggregate
borrowing capacity of $5.0 million, under the same terms and provides a final
maturity date of
12
<PAGE>
April 30, 1999. There were no borrowings under the line of credit and the letter
of credit facility from January 1, 1996 through October 31, 1998, and all
$5.0 million was available at that time.
Cash generated from operating activities increased to $11.3 million for
the first nine months of 1998 compared to $3.0 million for the first nine months
of 1997. This increase in cash flow was primarily due to increased net income,
and to collections of accounts receivable.
In February 1997, the Company consummated its IPO. The net proceeds to
the Company from the IPO were approximately $28.4 million, after deducting
approximately $315,979 in prepaid offering expenses and $190,000 of directors
and officers insurance premium. Of that amount, $20.0 million was used to repay
the indebtedness evidenced by the Class A and Class B Subordinated Promissory
Notes issued in the Leveraged Recapitalization, approximately $5.6 million was
used to repay long-term bank debt incurred by the Company in December 1995, and
$600,000 was used to redeem shares of Series B Redeemable Preferred Stock. See
Note 3 to Consolidated Financial Statements. After application of the net
proceeds of the IPO to the foregoing items, and payment of IPO expenses
(including $190,000 of directors and officers insurance premium which was
expensed in 1997 as a period cost), the remaining proceeds from the IPO were
approximately $2.2 million. Further, in August 1997 the Company completed a
follow-on offering, which yielded net proceeds of approximately $30.3 million.
The Company believes that existing cash and investment balances, cash
generated from operations and the funds available to it under credit facilities,
together with the remaining proceeds from the IPO and the follow-on offering,
will be sufficient to fund its operations for at least the next 12 months.
YEAR 2000 COMPLIANCE
THE YEAR 2000 PROBLEM. The Year 2000 Problem, also known as the
"millennium bug" or simply "Y2K," had its origin earlier in this century when
programmers writing software code employed two digits instead of four to
represent the year in date fields. As a result, some computer systems and
programs could fail or make miscalculations due to interpreting a date including
"00" to mean the year 1900 rather than the year 2000. In addition, the Year 2000
Problem affects machines, equipment, and other systems that contain embedded
technology (such as microcontrollers). Compounding the problem are two
additional problems. First, some computer systems or programs may not recognize
that the year 2000 is a leap year because the year 1900 was not a leap year.
Second, some computer systems or programs make use of the digits "99" in the
number portion of a date field to represent unknown values, and these systems or
programs may not be able to interpret or calculate certain dates in the year
1999 (for example, 9/9/99).
THE COMPANY'S PRODUCTS. The Company's products (other than EMERGE) are
network switching devices that consolidate keyboard, video, and mouse functions
from many computers or networks into one physical keyboard, video, and mouse.
Since the Company's switching products function to pass on the information
presented to them in the keyboard, video, and mouse signals and do not perform
date calculations, the Company believes that its products (other than EMERGE)
are year 2000 compliant. EMERGE, the Company's recently-introduced remote access
device, uses Microsoft Windows NT-Registered Trademark- as an operating system,
and Microsoft has indicated that Windows NT is not yet fully year 2000
compliant. The Company is monitoring EMERGE'S year 2000 compliance, but
believes there is some risk that the product may not be fully compliant by the
year 2000. In the event that EMERGE does not successfully and timely achieve
year 2000 compliance, there could be a material adverse effect on the Company's
business, financial condition, and results of operation.
THE COMPANY'S INTERNAL SYSTEMS. The Year 2000 Problem could affect
computers, software programs, equipment, and other systems used by the Company.
Accordingly, the Company is reviewing its internal computers, software programs,
equipment, and other systems to ensure that they will be year 2000 compliant.
The Company believes that it has identified substantially all of the major
computers, software applications, equipment, and systems used in connection with
its internal operations that must be modified, upgraded, or replaced to minimize
the possibility of a material disruption to its business. The Company presently
believes that these internal computer systems will be year 2000 compliant by
mid-1999. The Company has received informal assurance from the provider of its
MRP (materials resource planning) software that this software is year 2000
compliant. In addition to computers and related systems, the operation of the
Company's office and facilities equipment, such as fax machines, photocopiers,
telephone switches, security
13
<PAGE>
systems, and other common devices may be affected by the Year 2000 Problem.
The Company is currently assessing the potential effect of, and costs of
remediating, the Year 2000 Problem on this equipment. The Company is in the
process of formulating contingency plans in those areas where the Company
feels there is some risk that a particular system will not be implemented
before the year 2000. While the historical costs of these efforts have not
been, and estimated cost of these future efforts are not presently expected
to be, material to the Company's financial condition or any year's results of
operations, there can be no assurance that this is the case.
THE COMPANY'S CUSTOMERS. The Company is also currently in the process
of assessing the readiness of the Company's major customers for the year 2000.
The Company currently has information concerning the year 2000 compliance status
of some of its customers, and the Company has received informal indications that
most of its customers are working on year 2000 compliance. The Company, however,
has limited or no control over the actions of these customers, and thus, there
can be no assurance that these customers will resolve any or all Year 2000
Problems with their own systems (and with their other suppliers and vendors)
before the occurrence of a material disruption or slowdown in their business
which could, in turn, have a material adverse effect on their demand for the
Company's products. In the event that any of the Company's significant customers
do not successfully and timely achieve year 2000 compliance, there could be a
material adverse effect on the Company's business, financial condition, and
results of operation.
THE COMPANY'S SUPPLIERS, VENDORS, AND SERVICE PROVIDERS. The Company is
currently in the process of identifying those suppliers, vendors, and service
providers (including governmental agencies and utility providers) that are
believed to be critical to the Company's business operations after December 31,
1999, and the Company is attempting to ascertain their stage of readiness
through questionnaires, interviews, on-site visits, and other available means.
To the extent that responses to year 2000 readiness are unsatisfactory, the
Company's contingency plan involves changing suppliers, vendors, or service
providers to those who have demonstrated year 2000 readiness. There can be no
assurance, however, that the Company will be successful in finding such
alternative suppliers, vendors, or service providers. In the event that any of
the Company's significant suppliers, vendors, or service providers do not
successfully and timely achieve year 2000 compliance, and the Company is unable
to replace them with new or alternate suppliers, vendors, and service partners,
the Company's business or operations could be materially adversely affected.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to
identify those Year 2000 Problems that could materially adversely affect its
business operations by mid-1999. Management currently believes, however, that it
is not possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been or can be identified or corrected. The devices
that could be affected, and the interactions among these devices, are simply too
numerous, and the Company cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these failures. In the year 2000, management therefore expects
(i) a significant number of operational inconveniences and inefficiencies for
the Company and its customers, suppliers, vendors, and service providers that
may divert management's time and attention and financial and human resources
from its ordinary business activities, and (ii) a lesser number of serious
system failures that may require significant efforts by the Company to prevent
or alleviate material business disruptions.
RISKS. The failure to correct a material year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the Year 2000 Problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party customers and suppliers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity, or financial condition.
THE ESTIMATES AND CONCLUSIONS CONTAINED IN THIS SECTION ARE FORWARD-LOOKING
STATEMENTS, AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS
TO COMPLETING THE PLAN INCLUDE THE AVAILABILITY OF RESOURCES, THE COMPANY'S
ABILITY TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH
COULD HAVE A SERIOUS IMPACT ON SPECIFIC FACILITIES, AND THE ABILITY OF
CUSTOMERS, SUPPLIERS, VENDORS, AND SERVICE PROVIDERS TO BRING THEIR SYSTEMS INTO
YEAR 2000 COMPLIANCE.
14
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The statement will be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This statement
should not be applied retroactively to financial statements for prior periods.
The Company is currently evaluating the impact SFAS No. 133 will have on its
financial statements; however the Company does not expect the statement to have
a material impact on its financial position or results of operations.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.6.1 Purchase Agreement dated September 19, 1994, by and between the
Company and Compaq Computer Corporation, as amended (incorporated by
reference to the Company's Registration statement on Form SB-2
(Registration No. 333-31697)). +
10.6.2 Amendment to Purchase Agreement effective as of August 6, 1998, by
and between the Company and Compaq Computer Corporation. ++
11.1 Statement re: Computation of Net Income Per Share
27.1 Financial Data Schedule
+ Portions of this agreement are subject to confidential treatment.
++ Confidential treatment has been requested for portions of this
agreement.
ITEMS 1, 2, 3, 4 and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
16
<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 9, 1998 /s/ Kevin J. Hafer
-------------------------
Kevin J. Hafer
President and Chief Executive Officer
and Acting Chief Financial Officer
17
<PAGE>
This Amendment to Purchase Agreement ("Amendment") is effective as of
August 6, 1998, and amends that certain Compaq Computer Corporation Purchase
Agreement by and between Compaq Computer Corporation and Apex PC Solutions,
Inc. as originally executed on September 19, 1994 and subsequently amended
(the "Agreement").
1. Section 2. The first two sentences of Section 2.A of the Agreement
are amended by deleting the existing two sentences and substituting the
following two new sentences:
Buyer will purchase Products only by issuing "blanket" purchase
orders ("Order or Orders") to Seller. Orders shall contain such
things as price and part number.
Exhibit A. Exhibit A to the Agreement is replaced in its entirety by the
attached Exhibit A.
3. Exhibit D (Flexibility Agreement). The "Schedule Decrease/
Cancellation" portion of the Flexibility Agreement attached as Exhibit D to
the Agreement is amended by deleting the existing language and substituting
the following new language:
Based on our current * lead time, the following table
establishes Compaq's commitment to accept finished inventory
(including all safety or buffer stock) and work in process in the
event of cancellation. In such event, for each separate part
number, Apex shall select from all EDI Forecasts delivered by
Compaq to Apex during the previous * and the EDI
Forecast with * for such part number over the *
life of the EDI Forecast, and the EDI Forecast selected for each
part number is referred to as the Designated EDI Forecast. *
On this basis, Compaq agrees to accept all safety/buffer stock
and all product for such part number * prior to the
scheduled ship date. In addition, * prior to the
scheduled ship date, Apex WIP becomes subject to assembly and
acceptance by Compaq according to the Designated EDI Forecast for
the part number.
Apex WIP ( * ) for each part number determined to be
* complete shall be completed and delivered to Apex for
assembly and subsequent acceptance by Compaq. Apex WIP for each
part number determined to be less than * complete
( * ) will be scrapped and invoiced to Compaq at Apex cost.
Also Apex raw materials ( * ) that can not be absorbed by
Apex will be subject to a restocking charge.
**The "Q394" and "Q494" Tables headings are deleted but the
Tables remain unchanged from Flexibility Agreement.**
In addition, the "Schedule Decrease/Reschedule" portion of the
Flexibility Agreement attached as Exhibit D to the Agreement is
amended by deleting the existing language and substituting the
following new language:
EDI Forecasts and/or individual scheduled releases are *
prior to shipment. Any EDI Forecast ( * ) may be
rescheduled one (1) time for a period not to exceed *
without penalty to Compaq.
If schedule delays exceed * , Compaq has the option to
purchase * .
*SUBJECT TO CONFIDENTIAL TREATMENT REQUEST; FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
**Table remains unchanged from Flexibility Agreement**
4. Remaining Terms Unchanged. Except as expressly amended by this
Agreement, all of the remaining terms and conditions in the Agreement shall
remain unchanged and in full force and effect.
COMPAQ COMPUTER CORP APEX PC SOLUTIONS, INC.
/s/ Stephanie A. Araujo /s/ Samuel F. Saracino
- ------------------------------------- -------------------------------------
By: Stephanie A. Araujo By: Samuel F. Saracino
Name: Stephanie A. Araujo Name: Samuel F. Saracino
Title: Corporate Connectivity Manager VP Bus. Development & General Counsel
Date: August 4, 1998 Date: August 6, 1998
*SUBJECT TO CONFIDENTIAL TREATMENT REQUEST; FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
2
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Compaq Houston Scotland
Item Seller Reference Reference Lead-time Price* Price**
- ---- ----------------------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
1 242694-001
(4-port switchbox) 242694-001 8 weeks * *
2 242695-001 242695-001 8 weeks * *
(8-port switchbox)
3 242778-001 242778-001 8 weeks * *
(switchbox interconnect
kit)`
4 242691-001 242691-001 8 weeks * *
(115 Domestic front
connect panel)
5 242691-002 242691-002 8 weeks * *
(230 Domestic front
connect panel)
6 242691-B33 242691-B33 8 weeks * *
(240 International front
connect panel)
*F.O.B. Customized **F.O.B.: Furness Logistics
Transportation Inc. warehouse- Roosendaal, The
warehouse-Houston, Netherlands
Texas
</TABLE>
/s/ Stephanie Araujo /s/ Samuel F. Saracino
- ---------------------------------- -----------------------------------
Stephanie Araujo Samuel F. Saracino
Compaq Computer Corporation Apex PC Solutions, Inc.
*SUBJECT TO CONFIDENTIAL TREATMENT REQUEST; FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
APEX PC SOLUTIONS, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Income before extraordinary
item $ 4,017,035 $ 2,959,889 $ 10,960,679 $ 7,041,617
Extraordinary item - loss on
early extinguishment of debt,
net of applicable income tax
benefit of $72,511 - - - (140,763)
------------ ------------ ------------- ------------
Net income $ 4,017,035 $ 2,959,889 $ 10,960,679 $ 6,900,854
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Per share amounts:
Basic:
Income before
extraordinary item $ 0.30 $ 0.23 $ 0.81 $ 0.62
Extraordinary item - - - (0.01)
------------ ------------ ------------- ------------
Net income $ 0.30 $ 0.23 $ 0.81 $ 0.61
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Diluted:
Income before
extraordinary item $ 0.29 $ 0.22 $ 0.78 $ 0.58
Extraordinary item - - - (0.01)
------------ ------------ ------------- ------------
Net income $ 0.29 $ 0.22 $ 0.78 $ 0.57
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Weighted average shares used in
computing net income per
share:
Basic:
Weighted average
common shares 13,480,199 12,763,591 13,455,983 11,289,891
Effect of nominal shares - - - -
------------ ------------ ------------- ------------
Weighted average shares
used in computing basic
net income per share 13,480,199 12,763,591 13,455,983 11,289,891
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Diluted:
Weighted average
common shares 13,480,199 12,763,591 13,455,983 11,289,891
Potential additional
common shares:
Stock options
(treasury stock
method) 507,691 517,120 533,115 459,649
Series A preferred
stock - - - 437,174
Effect of nominal shares - - - -
------------ ------------ ------------- ------------
Weighted average shares
used in computing diluted
net income per share 13,987,890 13,280,711 13,989,098 12,186,714
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10Q FOR THE QUARTER ENDED SEPTEMBER 25, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-25-1998
<CASH> 23,425,931
<SECURITIES> 27,091,857
<RECEIVABLES> 9,802,241
<ALLOWANCES> 365,903
<INVENTORY> 3,429,867
<CURRENT-ASSETS> 65,003,531
<PP&E> 1,352,740
<DEPRECIATION> 692,352
<TOTAL-ASSETS> 67,167,322
<CURRENT-LIABILITIES> 3,201,123
<BONDS> 0
0
0
<COMMON> 62,213,064
<OTHER-SE> 1,725,135
<TOTAL-LIABILITY-AND-EQUITY> 67,167,322
<SALES> 52,149,195
<TOTAL-REVENUES> 52,149,195
<CGS> 27,562,733
<TOTAL-COSTS> 27,562,733
<OTHER-EXPENSES> 9,975,291
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> (1,872,324)
<INCOME-PRETAX> 16,483,495
<INCOME-TAX> 5,522,816
<INCOME-CONTINUING> 10,960,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,960,679
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.78
</TABLE>
