<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 April 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 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 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 April 26, 1998, the number of outstanding shares of the Company's
Common Stock was 20,554,510.
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APEX PC SOLUTIONS, INC.
FORM 10-Q
APRIL 2, 1999
INDEX
<TABLE>
<CAPTION>
Page(s)
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<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Income (unaudited) for the Quarters
Ended April 2, 1999 and March 27, 1998 3
Consolidated Balance Sheets (unaudited) at April 2, 1999 and
December 31, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Quarters Ended April 2 1999 and March 27, 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
Part II Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APEX PC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
APRIL 2, MARCH 27,
1999 1998
---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $20,678 $15,704
Cost of sales 10,904 8,327
---------------- --------------
Gross profit 9,774 7,737
---------------- --------------
Operating expenses:
Research and development 1,611 646
Sales and marketing 1,529 1,210
General and administrative 1,301 1,058
---------------- --------------
Total operating expenses 4,441 2,914
---------------- --------------
Income from operations 5,333 4,463
Interest and other income 736 567
---------------- --------------
Income before income taxes 6,069 5,030
Provision for income taxes 2,089 1,685
---------------- --------------
Net income $3,980 $3,345
---------------- --------------
---------------- --------------
Net income per share:
Basic $ 0.20 $ 0.17
---------------- --------------
---------------- --------------
Diluted $ 0.19 $ 0.16
---------------- --------------
---------------- --------------
Weighted average shares used in computing net income per share:
Basic 20,392 20,157
---------------- --------------
---------------- --------------
Diluted 21,194 20,949
---------------- --------------
---------------- --------------
</TABLE>
See notes accompanying these consolidated financial statements.
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APEX PC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 2, DECEMBER 31,
1999 1998
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $46,177 $34,585
Investments 13,534 17,339
----------------- -----------------
Total cash and investments 59,711 51,924
Accounts receivable, less allowance for doubtful accounts 12,503 14,647
Inventories 2,948 3,733
Prepaid expenses 1,052 285
Deferred tax assets 707 702
----------------- -----------------
Total current assets 76,921 71,291
----------------- -----------------
Property and equipment, at cost 1,731 1,385
Less accumulated depreciation 870 781
----------------- -----------------
861 604
----------------- -----------------
Investments and other 1,530 1,503
----------------- -----------------
Total assets $79,312 $73,398
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,426 $ 1,416
Accrued wages and commissions 628 814
Accrued warranty costs 645 745
Income taxes 1,451 278
Other accrued expenses 632 715
----------------- -----------------
Total current liabilities 4,782 3,968
Deferred taxes 23 23
----------------- -----------------
Total liabilities 4,805 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; 20,545 and 20,315 shares issued and
outstanding, respectively 64,006 62,901
Deferred compensation (81) (96)
Retained earnings 10,582 6,602
----------------- -----------------
Total shareholders' equity 74,507 69,407
----------------- -----------------
Total liabilities and shareholders' equity $79,312 $73,398
----------------- -----------------
----------------- -----------------
</TABLE>
See notes accompanying these consolidated financial statements.
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APEX PC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
APRIL 2, MARCH 27,
1999 1998
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,980 $3,345
---------------- ----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 104 95
Deferred taxes (5) (10)
Changes in:
Accounts receivable, net 2,144 (495)
Inventories 785 (94)
Prepaid expenses (767) (262)
Other assets - (91)
Accounts payable 10 708
Accrued wages and commissions (186) (349)
Accrued warranty costs (100) -
Income taxes 1,173 1,595
Other accrued expenses (83) (96)
---------------- ----------------
Total adjustments 3,075 1,001
---------------- ----------------
Net cash provided by operating activities 7,055 4,346
---------------- ----------------
Cash flows from investing activities:
Purchases of investments (9,641) (16,569)
Maturities of investments 13,419 10,132
Purchases of property and equipment (346) (1)
---------------- ----------------
Net cash provided by (used in) investing activities 3,432 (6,438)
---------------- ----------------
Cash flows from financing activities:
Proceeds from employee stock plans and related tax benefit 1,105 64
---------------- ----------------
Net cash provided by financing activities 1,105 64
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 11,592 (2,028)
Cash and cash equivalents at beginning of period 34,585 11,938
---------------- ----------------
Cash and cash equivalents at end of period $46,177 $9,910
---------------- ----------------
---------------- ----------------
</TABLE>
See notes accompanying these consolidated financial statements.
5
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APEX PC SOLUTIONS, 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 PC Solutions, Inc. ("Apex" or the "Company") 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 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>
APRIL 2, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 898 $ 922
Work-in-process 968 1,139
Finished goods 1,082 1,672
------------------ ------------------
$2,948 $3,733
------------------ ------------------
------------------ ------------------
</TABLE>
Note 3. Net Income Per Share
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
APRIL 2, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Net income $ 3,980 $ 3,345
------------------ ------------------
------------------ ------------------
Weighted average shares for computing basic
net income per share 20,392 20,157
Dilutive effect of employee stock options after
application of the treasury method 802 792
------------------ ------------------
Weighted average shares for computing diluted
net income per share 21,194 20,949
------------------ ------------------
------------------ ------------------
</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, 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.
In February 1998, the Company signed an agreement for a five-year lease
of approximately 117,000 square feet in an industrial office building in
Redmond, Washington. The Company began occupying this facility in April 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, an increase of
approximately $75,000 over the Company's current monthly rent. Consequently,
beginning in April 1999, the Company's gross margin and net income may be
adversely affected by the Company's increased rent expense.
7
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Kevin J. Hafer, the Company's President and Chief Executive Officer,
has exercised stock options for Company Common Stock, and he now holds 414,115
shares of the Company's Common Stock as of April 26, 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.
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
APRIL 2, MARCH 27,
1999 1998
----------------- ----------------
<S> <C> <C>
Net sales................................................. 100.0% 100.0%
Cost of sales............................................. 52.7 53.0
----- -----
Gross margin.............................................. 47.3 47.0
----- -----
Operating expenses:
Research and development.............................. 7.8 4.1
Sales and marketing................................... 7.4 7.7
General and administrative............................ 6.3 6.8
----- -----
Total operating expenses............................ 21.5 18.6
----- -----
Income from operations.................................... 25.8 28.4
Interest income (expense) and other, net.................. 3.5 3.6
----- -----
Income before income taxes................................ 29.3 32.0
Provision for income taxes................................ 10.1 10.7
----- -----
Net income ............................................... 19.2% 21.3%
----- -----
----- -----
</TABLE>
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet solutions. Net sales increased 32% to
$20.7 million for the first quarter of 1999 from $15.7 million for the first
quarter of 1998, due to increased demand for private-label products. Apex-brand
product sales increased 11% to $7.8 million in the first quarter of 1999 from
$7.0 million a year ago. Private-label OEM sales and sales of Apex-brand
products represented 62% and 38%, respectively, of net sales for the first
quarter of 1999, compared to 55% and 45%, respectively, of net sales for the
first quarter of 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.
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 $1.6 million for
the first quarter of 1999 from $646,000 for the first 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. 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
8
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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 $1.5 million for the first quarter of 1999 from $1.2
million for the first 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. 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 $1.3 million for the first quarter of 1999
from $1.1 million for the first quarter of 1998. 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 April 2, 1999, the Company's backlog was $12.9 million, compared
to $10.1 million at December 31, 1998 and $10.6 million at the end of the first
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'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 April 2, 1999, the Company's principal sources of liquidity
consisted of approximately $59.7 million in cash, cash equivalents and current
investments, an increase of $7.8 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 $7.1
million for first quarter of 1999. The increase in cash flow from operations in
1999, when compared with the first quarter of 1998, resulted primarily from
reduced accounts receivable and inventories. At April 2, 1999, the Company's OEM
customers accounted for approximately 67% 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
9
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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 not 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 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 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.
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,
10
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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 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 April
2, 1999. The Company holds investments until maturity and carries the securities
at amortized cost, which approximates fair market value.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company filed complaints for infringement of U.S. Patent Number 5,721,842 in
United States District Court for the Western District of Washington at Seattle
against Cybex Computer Products Corporation ("Cybex") and Rose Electronics on
February 25, 1998, and against C-C-C Group plc and its subsidiaries ("CCC") on
June 1, 1998. The complaints allege that the products manufactured and sold by
each defendant embody the inventions claimed in U.S. Patent Number 5,721,842 and
sought injunctive relief, damages, attorneys' fees and costs.
The defendants in the Cybex and Rose lawsuits each filed counterclaims
seeking to recover the expenses of the litigation (including fees and costs) and
to obtain a declaratory judgment that their respective products do not infringe
the 5,721,842 patent and that the 5,721,842 patent was invalid and
unenforceable. The Cybex and Rose lawsuits were consolidated for discovery but
not for trial, and trial dates in the Cybex and Rose lawsuits were set for
November, 1999. In early 1999, Cybex filed multiple motions for partial summary
judgment, and brought a patent interference proceeding with the U.S. Patent and
Trademark Office ("PTO") seeking to invalidate the 5,721,842 patent and claim
ownership of the invention claimed by the 5,721,842 patent as a result of a
prior patent, United States Patent No. 5,732,212, which was formerly owned by
Fox Network Systems Corporation, a company Cybex recently acquired.
Rather than proceeding simultaneously in two different forums (with the
attendant duplicative expenses), the Company agreed with Cybex to seek expedited
consideration by the PTO of the patent issues raised in the District Court
litigation, reserving its right to reinstate the District Court lawsuit at the
conclusion of that process. Pursuant to a mutual agreement and stipulation
between the Company and Cybex, the District Court lawsuit was dismissed without
prejudice, and the parties agreed that the patent issues raised in connection
with the District Court lawsuit should be initially determined by the Board of
Appeals and Interpretations of the PTO. The Company and Cybex also jointly
requested the District Court to urge accelerated consideration of these issues
by the PTO. The Company also entered into a mutual agreement and stipulation
with Rose dismissing the Rose lawsuit without prejudice pending the PTO's
decision. At the conclusion of the PTO proceeding, the District Court lawsuits
can be reinstated upon the request of any party.
The complaint in the CCC lawsuit was filed but has not been formally
served on CCC. In view of the PTO's consideration of the patent issues raised
in the Cybex and Rose litigation, the District Court stayed the CCC litigation
pending the PTO's decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
ITEMS 2, 3, 4 and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
12
<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: May 14, 1999 /s/ Kevin J. Hafer
---------------------------
Kevin J. Hafer
President and Chief Executive Officer
Date: May 14, 1999 /s/ Barry L. Harmon
---------------------------
Barry L. Harmon
Vice President, Chief Financial Officer and
Treasurer
13
<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 APRIL 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> JAN-01-1999
<PERIOD-END> APR-02-1999
<CASH> 46,177
<SECURITIES> 13,534
<RECEIVABLES> 12,924
<ALLOWANCES> 421
<INVENTORY> 2,948
<CURRENT-ASSETS> 76,921
<PP&E> 1,731
<DEPRECIATION> 870
<TOTAL-ASSETS> 79,312
<CURRENT-LIABILITIES> 4,782
<BONDS> 0
0
0
<COMMON> 64,006
<OTHER-SE> 10,501
<TOTAL-LIABILITY-AND-EQUITY> 79,312
<SALES> 20,678
<TOTAL-REVENUES> 20,678
<CGS> 10,904
<TOTAL-COSTS> 10,904
<OTHER-EXPENSES> 4,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (736)
<INCOME-PRETAX> 6,069
<INCOME-TAX> 2,089
<INCOME-CONTINUING> 3,980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,980
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
