<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 October 1, 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)
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 15, 1999, the number of outstanding shares of the
Company's Common Stock was 20,784,034.
1
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APEX INC.
FORM 10-Q
OCTOBER 1, 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
nine months ended October 1, 1999 and September 25, 1998 3
Consolidated Balance Sheets (unaudited) at October 1, 1999 and December 31,
1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine
months ended October 1, 1999 and September 25, 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 NINE MONTHS ENDED
OCTOBER 1, SEPTEMBER 25, OCTOBER 1, SEPTEMBER 25,
1999 1998 1999 1998
------------------------------- ------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $24,898 $18,144 $72,159 $52,150
Cost of sales 13,040 9,414 38,122 27,563
------------------------------- ------------------------------
Gross profit 11,858 8,730 34,037 24,587
------------------------------- ------------------------------
Operating expenses:
Research and development 1,283 694 4,631 2,038
Sales and marketing 2,044 1,401 5,580 4,006
General and administrative 1,482 1,294 4,454 3,931
------------------------------- ------------------------------
Total operating expenses 4,809 3,389 14,665 9,975
------------------------------- ------------------------------
Income from operations 7,049 5,341 19,372 14,612
Interest and other income 770 697 2,234 1,872
------------------------------- ------------------------------
Income before income taxes 7,819 6,038 21,606 16,484
Provision for income taxes 2,690 2,021 7,436 5,523
------------------------------- ------------------------------
Net income $ 5,129 $ 4,017 $14,170 $10,961
------------------------------- ------------------------------
------------------------------- ------------------------------
Earnings per share:
Basic $ 0.25 $ 0.20 $ 0.69 $ 0.54
------------------------------- ------------------------------
------------------------------- ------------------------------
Diluted $ 0.23 $ 0.19 $ 0.66 $ 0.52
------------------------------- ------------------------------
------------------------------- ------------------------------
Weighted average shares used in
computing earnings per share:
Basic 20,714 20,220 20,561 20,184
------------------------------- ------------------------------
------------------------------- ------------------------------
Diluted 21,894 20,981 21,504 20,984
------------------------------- ------------------------------
------------------------------- ------------------------------
</TABLE>
See notes accompanying these consolidated financial statements.
3
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APEX INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,260 $ 34,585
Investments 51,740 17,339
-------- --------
Total cash and investments 60,000 51,924
Accounts receivable, less allowance
for doubtful accounts 20,254 14,647
Inventories 7,321 3,733
Prepaid expenses 1,023 285
Deferred tax assets 717 702
-------- --------
Total current assets 89,315 71,291
-------- --------
Property and equipment, at cost 2,069 1,385
Less accumulated depreciation 761 781
-------- --------
1,308 604
-------- --------
Investments and other 1,493 1,503
-------- --------
Total assets $ 92,116 $ 73,398
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,086 $ 1,416
Accrued wages and commissions 904 814
Accrued warranty costs 645 745
Income taxes 624 278
Other accrued expenses 666 715
-------- --------
Total current liabilities 4,925 3,968
Deferred taxes 23 23
-------- --------
Total liabilities 4,948 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; 20,784 and 20,315 shares
issued and outstanding, respectively 66,447 62,901
Deferred compensation (51) (96)
Retained earnings 20,772 6,602
-------- --------
Total shareholders' equity 87,168 69,407
-------- --------
Total liabilities and shareholders' equity $ 92,116 $ 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 NINE MONTHS ENDED
OCTOBER 1, SEPTEMBER 25,
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,170 $ 10,961
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 499 301
Deferred taxes (15) (92)
Changes in:
Accounts receivable, net (5,607) 407
Inventories (3,588) (512)
Prepaid expenses (738) (102)
Other assets 20 (93)
Accounts payable 670 78
Accrued wages and commissions 90 (93)
Accrued warranty costs (100) -
Income taxes 346 358
Other accrued expenses (49) 361
-------- --------
Total adjustments (8,472) 613
-------- --------
Net cash provided by operating activities 5,698 11,574
-------- --------
Cash flows from investing activities:
Purchases of investments (74,952) (38,337)
Maturities of investments 40,541 38,216
-------- --------
Net change in investments (34,411) (121)
Purchases of property and equipment (1,158) (51)
-------- --------
Net cash used in investing activities (35,569) (172)
-------- --------
Cash flows from financing activities:
Proceeds from employee stock plans and related tax benefit 3,546 199
-------- --------
Net cash provided by financing activities 3,546 199
-------- --------
Net (decrease) increase in cash and cash equivalents (26,325) 11,601
Cash and cash equivalents at beginning of period 34,585 11,825
-------- --------
Cash and cash equivalents at end of period $ 8,260 $ 23,426
-------- --------
-------- --------
</TABLE>
See notes accompanying these consolidated financial statements.
5
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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 reports 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>
OCTOBER 1, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials $1,083 $ 922
Work-in-process 1,840 1,139
Finished goods 4,398 1,672
------ ------
$7,321 $3,733
------ ------
------ ------
</TABLE>
Note 3. Earnings Per Share
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 1, SEPTEMBER 25, OCTOBER 1, SEPTEMBER 25,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,129 $ 4,017 $14,170 $10,961
--------------------------- ---------------------------
Weighted average shares for computing basic
earnings per share 20,714 20,220 20,561 20,184
Dilutive effect of employee stock options after
application of the treasury method 1,180 761 943 800
--------------------------- ---------------------------
Weighted average shares for computing diluted
earnings per share 21,894 20,981 21,504 20,984
--------------------------- ---------------------------
--------------------------- ---------------------------
</TABLE>
6
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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 AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE INCLUDE STATEMENTS REGARDING APEX'S FUTURE REVENUE, EXPENSES, AND NET
INCOME, THE AVAILABILITY OF COMPONENTS AND COMPONENT SUPPLY TRENDS, APEX'S
ENGINEERING DESIGN, RESEARCH, AND DEVELOPMENT ACTIVITIES, APEX'S FUTURE BUSINESS
WITH ITS OEM CUSTOMERS, ESTIMATES OF FUTURE SALES GROWTH, AND Y2K COMPLIANCE.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE
A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING THE RISKS RELATED TO SALES IN AN INTENSELY COMPETITIVE
INDUSTRY WITH INCREASING PRICE COMPETITION, DEPENDENCE ON A LIMITED NUMBER OF
CUSTOMERS, RISKS ASSOCIATED WITH RELIANCE ON A LIMITED NUMBER OF COMPONENT
SUPPLIERS AND SINGLE SOURCE COMPONENTS, RISKS ASSOCIATED WITH PRODUCT DESIGN
EFFORTS AND THE ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS,
FUTURE GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE RESEARCH AND DEVELOPMENT
EXPENSES, FUTURE SALES AND MARKETING EXPENSES, AND RISKS RELATED TO OEM AND
BRANDED SALES. OTHER FACTORS THAT COULD CAUSE APEX'S OPERATING AND FINANCIAL
RESULTS TO DIFFER 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, remote access products, 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
first nine months of 1999 and the full years 1998, 1997, and 1996, sales to the
Company's OEM customers represented approximately 62%, 60%, 65%, and 71% of the
Company's net sales, respectively. The Company recently announced that sales to
one private-label OEM customer, Hewlett-Packard Company, would cease on or about
October 31, 1999. Hewlett-Packard represented 11.6 % of sales in the first nine
months of 1999.
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
7
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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 from
a number of its competitors in the markets for stand-alone switching systems,
remote access products, and integrated server cabinet systems, and the Company
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. 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. The Company has experienced and may in the future experience shortages
and delays in the delivery of such components, and these shortages and delays
have caused and may in the future cause the Company to delay product launches
and redesign its products. Qualifying a replacement supplier and obtaining
components from alternate suppliers can take several months and can require
significant additional redesign efforts by the Company, resulting 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
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 384,265
shares of the Company's Common Stock as of October 15, 1999. Since November,
1997, Mr. Hafer has been selling (and/or making gifts of) approximately 30,000
to 39,500 shares of Apex Common Stock each quarter. Mr. Hafer has informed the
Company that he intends to continue this disciplined selling (and/or gifting)
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 have sold and may sell additional shares of Apex
Common Stock to provide liquidity and diversify their respective portfolios.
8
<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 THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 1, SEPTEMBER 25, OCTOBER 1, SEPTEMBER 25,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 52.4 51.9 52.8 52.9
----- ----- ----- -----
Gross margin.................................. 47.6 48.1 47.2 47.1
----- ----- ----- -----
Operating expenses:
Research and development.................. 5.2 3.8 6.5 3.9
Sales and marketing....................... 8.2 7.7 7.7 7.7
General and administrative................ 5.9 7.2 6.2 7.5
----- ----- ----- -----
Total operating expenses............... 19.3 18.7 20.4 19.1
----- ----- ----- -----
Income from operations........................ 28.3 29.4 26.8 28.0
Interest and other income..................... 3.1 3.8 3.1 3.6
----- ----- ----- -----
Income before income taxes.................... 31.4 33.2 29.9 31.6
Provision for income taxes.................... 10.8 11.1 10.3 10.6
----- ----- ----- -----
Net income ................................... 20.6% 22.1% 19.6% 21.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet solutions. Net sales increased 37% to
$24.9 million for the third quarter of 1999 from $18.1 million for the third
quarter of 1998, due primarily to increased demand for private-label products.
Apex-brand product sales increased 25% to $9.7 million in the third quarter of
1999 from $7.8 million a year ago. Private-label OEM sales and sales of
Apex-brand products represented 61% and 39%, respectively, of net sales for
the third quarter of 1999, compared to 57% and 43%, respectively, of net sales
for the third quarter of 1998. 1999 year-to-date net sales increased 38% to
$72.2 million from $52.2 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 62% and 38%, 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 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 decreased slightly in the third quarter of 1999 compared to the
third quarter of 1998 due to the increased percentage of private-label OEM
products in the sales mix partially offset by 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 $1.3 million for
the third quarter of 1999 from $694,000 for the third quarter of 1998. As a
percentage of net sales, research and development expenses increased to 5.2%
from 3.8% for the third 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 $4.6 million from $2.0 million year-to-date in 1998, 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 6.5% from 3.9%. 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.
9
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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 third quarter of 1999 from $1.4
million for the third quarter of 1998. The increase in absolute dollars and as a
percentage of net sales was due primarily to increased advertising and tradeshow
expenses, including expenses relating to market entry strategies for Europe and
increased compensation expense associated with increased sales volumes and
staffing levels. 1999 year-to-date sales and marketing expenses increased to
$5.6 million from $4.0 million year-to-date in 1998, due to the same reasons
noted for the third 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 $1.5 million for the third quarter of 1999
from $1.3 million for the third quarter of 1998. The increase in absolute
dollars was due primarily to increased occupancy expenses at the Company's new
facilities in Redmond, Washington, and increased compensation expense, 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 5.9% for the third quarter of 1999 from
7.2% 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
$4.5 million from $3.9 million year-to-date in 1998, due to the same reasons
noted for the third quarter, and to approximately $300,000 in non-recurring
costs associated with the Company's move to new facilities in the second
quarter. As a percentage of net sales, year-to-date general and administrative
expenses decreased to 6.2% from 7.5%. 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 October 1, 1999, the Company's backlog was $19.5 million,
compared to $10.1 million at December 31, 1998 and $11.5 million at the end of
the third 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.
LIQUIDITY AND CAPITAL RESOURCES
As of October 1, 1999, the Company's principal sources of liquidity
consisted of approximately $60.0 million in cash, cash equivalents and current
investments, an increase of $8.1 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 $5.7
million for the first nine months of 1999, compared to $11.6 million for the
same period a year ago. The decrease in cash flow from operations in 1999, when
compared with the first nine months of 1998, resulted primarily from increased
net
10
<PAGE>
income, partially offset by increases in accounts receivable and inventory. At
October 1, 1999, the Company's OEM customers accounted for approximately 65% 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 2000.
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, 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.
11
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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 currently
believes 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 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
October 1, 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1.1 Articles of Amendment, changing the corporate name to Apex Inc.,
effective July 1, 1999
27.1 Financial Data Schedule
ITEMS 1, 2, 3, 4 and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
APEX INC.
(Registrant)
Date: November 4, 1999 /s/ Kevin J. Hafer
------------------------------
Kevin J. Hafer
President and Chief Executive Officer
Date: November 4, 1999 /s/ Barry L. Harmon
------------------------------
Barry L. Harmon
Vice President, Chief Financial Officer and
Treasurer
14
<PAGE>
ARTICLES OF AMENDMENT
Pursuant to RCW 23B.10.060 of the Washington Business Corporation
Act, the following Articles of Amendment to Articles of Incorporation are
herewith submitted for filing.
ARTICLE 1. The name of record of the corporation is Apex PC
Solutions, Inc.
ARTICLE 2. The text of each amendment as adopted is as follows:
Article I is amended as follows:
ARTICLE I
NAME
The name of this corporation is Apex Inc.
ARTICLE 3. The amendment was adopted on June 14, 1999, by the Board
of Directors. Shareholder action was not required.
ARTICLE 4. These Articles will be effective on July 1, 1999, at 12:01
a.m., Pacific Daylight Time.
Dated June 15, 1999.
/s/ Samuel F. Saracino
------------------------------------
Samuel F. Saracino
------------------------------------
VP, General Counsel & Secretary
<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 OCTOBER 1, 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> JUL-03-1999
<PERIOD-END> OCT-01-1999
<CASH> 8,260
<SECURITIES> 51,740
<RECEIVABLES> 20,654
<ALLOWANCES> 400
<INVENTORY> 7,321
<CURRENT-ASSETS> 89,315
<PP&E> 2,069
<DEPRECIATION> 761
<TOTAL-ASSETS> 92,116
<CURRENT-LIABILITIES> 4,925
<BONDS> 0
0
0
<COMMON> 66,447
<OTHER-SE> 20,721
<TOTAL-LIABILITY-AND-EQUITY> 92,116
<SALES> 24,898
<TOTAL-REVENUES> 24,898
<CGS> 13,040
<TOTAL-COSTS> 13,040
<OTHER-EXPENSES> 4,809
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,819
<INCOME-TAX> 2,690
<INCOME-CONTINUING> 5,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,129
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.23
</TABLE>
