<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 July 2, 1999 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 INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-1577634
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
9911 Willows Road N.E.
Redmond, Washington 98052
(Address of Principal Executive Offices) (Zip Code)
425-861-5858
(Registrant's Telephone Number, Including Area Code)
Formerly:
APEX PC SOLUTIONS, INC.
20031 142nd Ave NE
Woodinville, Washington 98072
(Former name, former address, and former fiscal year,
if changed from last report.)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X]Yes [_] No
As of July 16, 1999, the number of outstanding shares of the Company's
Common Stock was 20,597,495.
1
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APEX INC.
FORM 10-Q
JULY 2, 1999
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Income (unaudited) for the three
months and the six months ended July 2, 1999 and June 26, 1998 3
Consolidated Balance Sheets (unaudited) at July 2, 1999 and
December 31, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the six months ended July 2, 1999 and June 26, 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-12
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
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PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APEX INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 2, JUNE 26, JULY 2, JUNE 26,
1999 1998 1999 1998
------------------------------- --------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $26,583 $18,302 $47,261 $34,006
Cost of sales 14,178 9,821 25,082 18,149
------------------------------- --------------------------------
Gross profit 12,405 8,481 22,179 15,857
------------------------------- --------------------------------
Operating expenses:
Research and development 1,737 698 3,348 1,345
Sales and marketing 2,007 1,394 3,536 2,605
General and administrative 1,671 1,580 2,972 2,637
------------------------------- --------------------------------
Total operating expenses 5,415 3,672 9,856 6,587
------------------------------- --------------------------------
Income from operations 6,990 4,809 12,323 9,270
Interest and other income 728 608 1,464 1,175
------------------------------- --------------------------------
Income before income taxes 7,718 5,417 13,787 10,445
Provision for income taxes 2,657 1,817 4,746 3,501
------------------------------- --------------------------------
Net income $5,061 $3,600 $9,041 $6,944
=============================== ================================
Net income per share:
Basic $ 0.25 $ 0.18 $ 0.44 $ 0.34
=============================== ================================
Diluted $ 0.24 $ 0.17 $ 0.43 $ 0.33
=============================== ================================
Weighted average shares used in
computing net income per share:
Basic 20,579 20,173 20,485 20,165
=============================== ================================
Diluted 21,298 21,020 21,249 20,981
=============================== ================================
</TABLE>
See notes accompanying these consolidated financial statements.
3
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APEX INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 2, DECEMBER 31,
1999 1998
----------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $46,445 $34,585
Investments 14,890 17,339
----------------- ------------------
Total cash and investments 61,335 51,924
Accounts receivable, less allowance for doubtful accounts 15,779 14,647
Inventories 3,624 3,733
Prepaid expenses 958 285
Deferred tax assets 711 702
----------------- ------------------
Total current assets 82,407 71,291
----------------- ------------------
Property and equipment, at cost 1,987 1,385
Less accumulated depreciation 621 781
----------------- ------------------
1,366 604
----------------- ------------------
Investments and other 1,493 1,503
----------------- ------------------
Total assets $85,266 $73,398
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,253 $ 1,416
Accrued wages and commissions 588 814
Accrued warranty costs 645 745
Income taxes 1,893 278
Other accrued expenses 970 715
----------------- ------------------
Total current liabilities 5,349 3,968
Deferred taxes 23 23
----------------- ------------------
Total liabilities 5,372 3,991
----------------- ------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000 shares authorized; no shares issued
and outstanding - -
Common stock, no par value; 100,000 shares
authorized; 20,593 and 20,315 shares issued and
outstanding, respectively 64,317 62,901
Deferred compensation (66) (96)
Retained earnings 15,643 6,602
----------------- ------------------
Total shareholders' equity 79,894 69,407
----------------- ------------------
Total liabilities and shareholders' equity $85,266 $73,398
================= ==================
</TABLE>
See notes accompanying these consolidated financial statements.
4
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APEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JULY 2, JUNE 26,
1999 1998
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,041 $6,944
---------------- ----------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 344 194
Deferred taxes (9) (51)
Changes in:
Accounts receivable, net (1,132) 44
Inventories 109 (17)
Prepaid expenses (673) (152)
Other assets 111 (90)
Accounts payable (163) 272
Accrued wages and commissions (226) (81)
Accrued warranty costs (100) -
Income taxes 1,615 26
Other accrued expenses 255 204
---------------- ----------------
Total adjustments 131 349
---------------- ----------------
Net cash provided by operating activities 9,172 7,293
---------------- ----------------
Cash flows from investing activities:
Purchases of investments (38,929) (36,582)
Maturities of investments 41,277 26,950
---------------- ----------------
Net change in investments 2,348 (9,632)
Purchases of property and equipment (1,076) (19)
---------------- ----------------
Net cash provided by (used in) investing activities 1,272 (9,651)
---------------- ----------------
Cash flows from financing activities:
Proceeds from employee stock plans and related tax benefit 1,416 127
---------------- ----------------
Net cash provided by financing activities 1,416 127
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 11,860 (2,231)
Cash and cash equivalents at beginning of period 34,585 11,938
---------------- ----------------
Cash and cash equivalents at end of period $46,445 $9,707
================ ================
</TABLE>
See notes accompanying these consolidated financial statements.
5
<PAGE>
APEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
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
Inc. ("Apex" or the "Company," formerly "Apex PC Solutions, Inc.") for the year
ended December 31, 1998 and the notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, on file with the
Securities and Exchange Commission.
The Company reports its annual results based on years ending
December 31. The Company is reporting its quarterly results for the first
three interim periods ending on the Friday closest to the calendar month ends
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 subsidiaries. Significant
intercompany transactions and balances have been eliminated.
Note 2. Inventories
Inventories consisted of the following at:
<TABLE>
<CAPTION>
JULY 2, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 1,161 $ 922
Work-in-process 1,183 1,139
Finished goods 1,280 1,672
------------- --------------
$ 3,624 $3,733
============= ==============
</TABLE>
Note 3. Net Income Per Share
<TABLE>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 2, JUNE 26, JULY 2, JUNE 26,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,061 $ 3,600 $ 9,041 $ 6,944
============== ============= ============== =============
Weighted average shares for computing basic
net income per share 20,579 20,173 20,485 20,165
Dilutive effect of employee stock options
after application of the treasury method 719 847 764 816
-------------- ------------- -------------- -------------
Weighted average shares for computing
diluted net income per share 21,298 21,020 21,249 20,981
-------------- ------------- -------------- -------------
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE INFORMATION IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING
STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO THE COMPANY'S
REVENUES, EXPENSES, MARGINS, LIQUIDITY AND CAPITAL NEEDS. 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 THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998, "DESCRIPTION OF BUSINESS - RISK
FACTORS."
OVERVIEW
The Company designs, manufactures and markets stand-alone switching
systems and integrated server cabinet solutions for the client/server computing
market. The Company operated as a division of Apex Computer Company (the
"Predecessor") through January 1993, providing computer maintenance services to
Microsoft and selling integrated server cabinets and, to a limited extent,
stand-alone switching systems, primarily to Microsoft. In February 1993, the
assets of that division were spun off as a dividend to the sole shareholder of
the Predecessor, who contributed those assets as the initial capital of the
Company. Throughout 1993, the Company derived revenue primarily from the
provision of computer maintenance services to Microsoft. In May 1994, the
Company began selling stand-alone switching systems to Compaq for integration
into server cabinets. In June 1994, the Company discontinued its computer
maintenance service business and determined to concentrate on sales of
stand-alone switching products and server cabinets, including server cabinets
with integrated switching systems.
A substantial portion of the Company's sales are concentrated among a
limited number of original equipment manufacturers that purchase the Company's
switching systems on a private-label basis ("OEMs" and "OEM customers"). For the
full year 1998, 1997, and 1996, sales to the Company's OEM customers represented
approximately 60%, 65%, and 71% of the Company's net sales, respectively.
The Company is increasing the mix of sales of branded switching
products to other manufacturers of servers and related networking products, who
integrate and sell Apex-brand switches with their own products. The Company does
not have contracts with any of these customers, who are obligated to purchase
products from the Company only pursuant to binding purchase orders.
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 this
factor, which currently is affecting the Company's business with certain OEMs
and certain other server manufacturers purchasing Apex-brand switches, the
Company believes that its sales are becoming more difficult to predict and will
increasingly reflect the sales patterns of its server manufacturer customers.
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.
The Company purchases a number of the components for its switching
products from sole or a limited number of suppliers. The Company has
occasionally experienced and may in the future experience delays in delivery
of such components. Although alternate suppliers are available for most of
the components and services needed to produce the Company's products, the
number of suppliers of some components is limited. Qualifying a replacement
supplier and receiving components from alternate suppliers could take several
months, and could require significant additional redesign. Any interruptions
would result in higher operating expenses and reductions in revenue. The
Company depends upon its suppliers to deliver components that are free from
defects, competitive in functionality and cost and in compliance with the
Company's specifications and delivery schedules. Disruption in supply, delays
in delivery, a significant increase in the cost of one or more components,
failure of a third
7
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party supplier to remain competitive in functionality or price, or the failure
of a supplier to comply with any of the Company's procurement needs could delay
or interrupt the Company's ability to manufacture and deliver its products to
customers on a timely basis, thereby adversely affecting the Company's business
and results of operations.
Kevin J. Hafer, the Company's President and Chief Executive Officer,
has exercised stock options for Apex Common Stock, and he now holds 405,015
shares of the Company's Common Stock as of July 16, 1999. Since November,
1997, Mr. Hafer has been selling (and/or making gifts of) approximately
30,000 to 37,500 shares of Apex Common Stock each quarter. Mr. Hafer has
informed the Company that he intends to continue this disciplined selling
program on a regular quarterly basis. Mr. Hafer has also informed the Company
that, in order to diversify his investments and to provide liquidity, on one
or more occasions over the next year or two he is likely to substantially
increase the number of shares of Apex Common Stock that he sells over and
above the number he sells on a regular quarterly basis. Other executive
officers of the Company recently vested in significant amounts of the
Company's Common Stock and continue to vest in additional shares on a monthly
basis. These officers have informed the Company that they may also sell Apex
Common Stock to provide liquidity and diversify their respective portfolios.
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 THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 2, JUNE 26, JULY 2, JUNE 26,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 53.3 53.7 53.1 53.4
------ ------ ------ ------
Gross margin............................. 46.7 46.3 46.9 46.6
------ ------ ------ ------
Operating expenses:
Research and development............. 6.5 3.8 7.1 4.0
Sales and marketing.................. 7.6 7.6 7.4 7.6
General and administrative........... 6.3 8.6 6.3 7.8
------ ------ ------ ------
Total operating expenses........... 20.4 20.0 20.8 19.4
------ ------ ------ ------
Income from operations................... 26.3 26.3 26.1 27.2
Interest and other income................ 2.7 3.3 3.1 3.5
------ ------ ------ ------
Income before income taxes............... 29.0 29.6 29.2 30.7
Provision for income taxes............... 10.0 9.9 10.1 10.3
------ ------ ------ ------
Net income .............................. 19.0% 19.7% 19.1% 20.4%
====== ====== ====== ======
</TABLE>
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet solutions. Net sales increased 45% to
$26.6 million for the second quarter of 1999 from $18.3 million for the second
quarter of 1998, due primarily to increased demand for private-label products.
Apex-brand product sales increased 37% to $9.6 million in the second quarter of
1999 from $7.1 million a year ago. Private-label OEM sales and sales of
Apex-brand products represented 64% and 36%, respectively, of net sales for the
second quarter of 1999, compared to 61% and 39%, respectively, of net sales for
the second quarter of 1998. 1999 year-to-date net sales increased 39% to $47.3
million from $34.0 million year-to-date in 1998 primarily due to growth in sales
to private-label OEM customers and, to a lesser extent, increased sales of
Apex-brand products. 1999 year-to-date private-label OEM sales and sales of
Apex-brand products represented 63% and 37%, respectively, of net sales compared
to 58% and 42%, respectively, year-to-date in 1998
GROSS MARGIN. Gross margin is affected by a variety of factors,
including: the ratio of OEM sales to branded sales, as OEM sales typically have
lower gross margins than branded sales; product mix, including the percentage of
integrated server cabinet solution sales, which generally have lower gross
margins than sales
8
<PAGE>
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 improved
slightly in 1999 due to the overall increase in sales spreading fixed costs
over greater levels of production.
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 $1.7 million for
the second quarter of 1999 from $698,000 for the second quarter of 1998. As a
percentage of net sales, research and development expenses increased to 6.5%
from 3.8% for the second quarter of 1998. The increase in absolute dollars and
as a percentage of net sales was due primarily to increased project spending
and, to a lesser extent, increased compensation expense associated with
increased staffing levels. 1999 year-to-date research and development expenses
increased to $3.3 million from $1.3 million year-to-date in 1998, due to the
same reasons noted for the second quarter. As a percentage of net sales,
year-to-date research and development expenses increased to 7.1% from 4.0%. The
Company believes that the timely development of innovative products and
enhancements to existing products is essential to maintaining its competitive
position and, therefore, expects research and development expenditures to
increase in absolute dollars and possibly as a percentage of net sales.
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 $2.0 million for the second quarter of 1999 from $1.4
million for the second quarter of 1998. The increase in absolute dollars was due
primarily to increased advertising and trade show expenses, including expenses
relating to market entry strategies for Europe and increased compensation
expense associated with increased staffing levels. 1999 year-to-date sales and
marketing expenses increased to $3.5 million from $2.6 million year-to-date in
1998, due to the same reasons noted for the second quarter. The Company expects
sales and marketing expenditures to increase in absolute dollars and possibly as
a percentage of net sales as it continues its efforts to increase branded sales
and international sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include personnel costs for administration, finance, human resources
and general management, as well as rent, utilities and legal and accounting
expenses, and provision for Washington State's gross receipts tax. General and
administrative expenses increased to $1.7 million for the second quarter of 1999
from $1.6 million for the second quarter of 1998. In the second quarter of 1999,
general and administrative expenses included approximately $300,000 in
non-recurring costs associated with the Company's move to new facilities in
Redmond, Washington, partially offset by reduced expenses associated with the
Company's patent infringement lawsuits against certain competitors. As a
percentage of net sales, general and administrative expenses decreased to 6.3%
for the second quarter of 1999 from 8.6% in the same period a year ago, as the
Company was able to limit spending increases. 1999 year-to-date general and
administrative expenses increased to $3.0 million from $2.6 million year-to-date
in 1998, due to the same reasons noted for the second quarter. As a percentage
of net sales, year-to-date general and administrative expenses decreased to 6.3%
from 7.8%. The Company expects general and administrative expenses to increase
in absolute dollars and possibly as a percentage of net sales to support the
growth of the operations and sales functions.
BACKLOG
As of July 2, 1999, the Company's backlog was $17.9 million, compared
to $10.1 million at December 31, 1998 and $10.5 million at the end of the second
quarter of 1998. 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 does not believe that its backlog as of any particular date is
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.
9
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LIQUIDITY AND CAPITAL RESOURCES
As of July 2, 1999, the Company's principal sources of liquidity
consisted of approximately $61.3 million in cash, cash equivalents and current
investments, an increase of $9.4 million from the December 31, 1998 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 has a maturity date in September, 2000.
The Company's operating activities generated cash of approximately $9.2
million for the first six months of 1999, compared to $7.3 million for the same
period a year ago. The increase in cash flow from operations in 1999, when
compared with the first six months of 1998, resulted primarily from increased
net income and an increased liability for income taxes due to timing of
payments, partially offset by increased accounts receivable. At July 2, 1999,
the Company's OEM customers accounted for approximately 62% of the accounts
receivable.
The Company believes that existing cash balances, cash generated from
operations and the funds available to it under credit facilities will be
sufficient to fund its operations through 1999.
YEAR 2000
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 issues. 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 remote access device, uses
Microsoft Windows NT as an operating system. The Company believes that, with the
implementation of Microsoft Windows NT Workstation 4.0 with SP4, Emerge is now
year 2000 compliant.
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 reviewed 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 are 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 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,
10
<PAGE>
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 may not be year 2000 compliant 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The market risk inherent in the Company's financial instruments
represents the potential loss arising from adverse changes in interest rates.
The Company is exposed to market risk in the area of
11
<PAGE>
interest rate changes impacting the fair value of its investment securities.
The Company's investment policy is to manage its investment portfolio to
preserve principal and liquidity while maximizing the return on the investment
portfolio through the investment of available funds. The Company diversifies
the investment portfolio by investing in a variety of highly-rated
investment-grade securities and through the use of different investment
managers. The Company's marketable securities portfolio is primarily invested
in short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Market risk is estimated as the potential change in fair value in the
investment portfolio resulting from a hypothetical 10 percent change in
interest rates, which is not material at July 2, 1999. The Company holds
investments until maturity and carries the securities at amortized cost, which
approximates fair market value.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 24,
1999. At the Annual Meeting, the shareholders elected each of the four
nominees for director by the following votes:
<TABLE>
<CAPTION>
Director: Votes for: Votes Against:
- --------- ---------- --------------
<S> <C> <C>
Franz Fichtner 18,459,940 17,110
Kevin J. Hafer 18,459,940 17,110
Edwin L. Harper 18,456,115 20,935
William McAleer 18,456,190 20,860
</TABLE>
The shareholders voted to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
current fiscal year with 18,464,299 votes in favor, 5,000 votes against, and
7,751 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
ITEMS 1, 2, 3 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, INC.
(Registrant)
Date: July 29, 1999 /s/ KEVIN J. HAFER
---------------------------
Kevin J. Hafer
President and Chief Executive Officer
Date: July 29, 1999 /s/ BARRY L. HARMON
---------------------------
Barry L. Harmon
Vice President, Chief Financial Officer and
Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE QUARTER ENDED JULY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-03-1999
<PERIOD-END> JUL-02-1999
<CASH> 46,445
<SECURITIES> 14,890
<RECEIVABLES> 16,183
<ALLOWANCES> 404
<INVENTORY> 3,624
<CURRENT-ASSETS> 82,407
<PP&E> 1,987
<DEPRECIATION> 621
<TOTAL-ASSETS> 85,266
<CURRENT-LIABILITIES> 5,349
<BONDS> 0
0
0
<COMMON> 64,317
<OTHER-SE> 15,577
<TOTAL-LIABILITY-AND-EQUITY> 85,266
<SALES> 26,583
<TOTAL-REVENUES> 26,583
<CGS> 14,178
<TOTAL-COSTS> 14,178
<OTHER-EXPENSES> 5,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (728)
<INCOME-PRETAX> 7,718
<INCOME-TAX> 2,657
<INCOME-CONTINUING> 5,061
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,061
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.24
</TABLE>
