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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 March 31, 2000 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 April 28, 2000, the number of outstanding shares of the
Company's Common Stock was 21,256,242.
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APEX INC.
FORM 10-Q
MARCH 31, 2000
INDEX
PAGE(S)
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Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Income (unaudited) for the Quarters
Ended March 31, 2000 and April 2, 1999 3
Consolidated Balance Sheets (unaudited) at March 31,2000 and
December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Quarters Ended March 31, 2000 and April 2, 1999 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
Part II Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<CAPTION>
APEX INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
MARCH 31, APRIL 2,
2000 1999
---------------- --------------
<S> <C> <C>
Net sales $28,244 $20,678
Cost of sales 14,591 10,904
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Gross profit 13,653 9,774
---------------- --------------
Research and development 1,451 1,611
Sales and marketing 2,385 1,529
General and administrative 1,672 1,301
---------------- --------------
Total operating expenses 5,508 4,441
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Income from operations 8,145 5,333
Interest income 917 736
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Income before income taxes 9,062 6,069
Provision for income taxes 3,061 2,089
---------------- --------------
Net income $6,001 $3,980
================ ==============
Earnings per share:
Basic $ 0.28 $ 0.20
================ ==============
Diluted $ 0.27 $ 0.19
================ ==============
Weighted average shares used in computing earnings per share:
Basic 21,066 20,392
================ ==============
Diluted 22,459 21,194
================ ==============
</TABLE>
See notes accompanying these consolidated financial statements.
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<TABLE>
<CAPTION>
APEX INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
MARCH 31, DECEMBER 31,
2000 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,836 $ 15,786
Investments maturing within one year 46,856 35,716
----------------- -----------------
Total cash and investments 64,692 51,502
Accounts receivable, less allowance for doubtful accounts 23,988 28,168
Inventories 14,946 11,483
Prepaid expenses 721 676
Deferred tax assets 789 777
----------------- -----------------
Total current assets 105,136 92,606
Investments maturing after one year 4,997 9,464
Property and equipment, net 1,905 1,906
Other 1,676 338
----------------- -----------------
Total assets $113,714 $104,314
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,598 $ 3,696
Accrued compensation 1,073 1,546
Income taxes 697 3,107
Other accrued expenses 1,438 1,572
----------------- -----------------
Total current liabilities 4,806 9,921
----------------- -----------------
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 at March 31, 2000 and December 31, 1999;
21,209 and 20,794 shares issued and outstanding,
respectively 75,062 66,583
Deferred compensation - (35)
Retained earnings 33,846 27,845
----------------- -----------------
Total shareholders' equity 108,908 94,393
----------------- -----------------
Total liabilities and shareholders' equity $113,714 $104,314
================= =================
</TABLE>
See notes accompanying these consolidated financial statements.
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<CAPTION>
APEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31, APRIL 2,
2000 1999
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,001 $ 3,980
----------------- ----------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 227 104
Deferred taxes (12) (5)
Changes in:
Accounts receivable, net 4,180 2,144
Inventories, net (3,463) 785
Prepaid expenses (45) (767)
Accounts payable (2,098) 10
Accrued compensation (473) (186)
Income taxes (2,410) 1,173
Other accrued expenses (134) (183)
----------------- ----------------
Total adjustments (4,228) 3,075
----------------- ----------------
Net cash provided by operating activities 1,773 7,055
----------------- ----------------
Cash flows from investing activities:
Purchases of investments (33,820) (9,641)
Maturities of investments 27,147 13,419
Deferred acquisition costs (1,338)
Purchases of property and equipment (191) (346)
----------------- ----------------
Net cash provided by (used in) investing activities (8,202) 3,432
----------------- ----------------
Cash flows from financing activities:
Proceeds from employee stock plans and related tax benefit 8,479 1,105
----------------- ----------------
Net cash provided by financing activities 8,479 1,105
----------------- ----------------
Net increase in cash and cash equivalents 2,050 11,592
Cash and cash equivalents at beginning of period 15,786 34,585
----------------- ----------------
Cash and cash equivalents at end of period $ 17,836 $ 46,177
================= ================
</TABLE>
See notes accompanying these consolidated financial statements.
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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 our audited consolidated financial
statements for the year ended December 31, 1999 and the related notes
contained in our Annual Report on Form 10-K for the year ended
December 31, 1999, on file with the Securities and Exchange
Commission.
We report our annual results based on years ending December
31. We report our 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.
Our financial statements of are consolidated and include the
accounts of Apex Inc. (formerly Apex PC Solutions, Inc.) and our
wholly-owned subsidiaries. Significant intercompany transactions and
balances have been eliminated.
Note 2. Inventories
Inventories consisted of the following at:
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
Raw materials $ 1,256 $1,126
Work-in-process 3,013 2,633
Finished goods 10,677 7,724
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$14,946 $11,483
============ ===========
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Note 3. Earnings per share
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<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, APRIL 2,
2000 1999
---- ----
<S> <C> <C>
Net income $ 6,001 $ 3,980
============ ===========
Weighted average shares used in computing basic
earnings per share 21,066 20,392
Dilutive effect of employee stock options after
application of the treasury method 1,393 802
------------ -----------
Weighted average shares used in computing diluted
earnings per share 22,459 21,194
============ ===========
</TABLE>
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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 OUR
REVENUES, EXPENSES, MARGINS, LIQUIDITY AND CAPITAL NEEDS. THESE
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 OUR ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1999, "BUSINESS - RISK FACTORS."
OVERVIEW
We design, manufacture and sell stand-alone switching systems and
remote access products for the client/server computing market. Network
administrators in client/server environments have increasingly complex and
growing server populations, and our switching systems and remote access
products help network administrators manage multiple servers from a single
keyboard, video monitor and mouse configuration (a "console"), which may be
at a remote location. Specifically, our products reduce personnel, space,
energy, depreciation, and maintenance cost that organizations face when
adopting or expanding client/server architecture.
We provide comprehensive "plug and play" switching systems for many
network administration, management and storage problems faced by customers
using client/server architecture. Our switching products, including
OUTLOOK-Registered Trademark-, VIEWPOINT-Registered Trademark- and
EMERGE-TM-, help network administrators access multiple servers from one or
more centralized or remote consoles, consolidate hardware requirements, and
provide direct hardwired connections between the switch and the attached
servers to facilitate access to those servers, even when the network is down.
A substantial portion of our sales are concentrated among a limited
number of original equipment manufacturers who purchase our switching systems
on a private-label basis ("OEMs" and "OEM customers"). Sales to our OEM
customers represented approximately 63% of our net sales for 1999, 60% of our
net sales for 1998 and 65% of our net sales for 1997.
We are 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. We do not have
contracts with any of these customers, who are obligated to purchase products
from us only pursuant to binding purchase orders.
With recent industry-wide initiatives to reduce all channel
inventories and to shorten lead times, trends with our major customers are,
generally, to reduce the number of weeks of forward-committed firm orders.
This factor is currently is affecting our business with certain OEMs and
other server manufacturers, and we believe that it will make our sales more
difficult to predict and inventory levels more difficult to manage.
We are currently experiencing increased price competition in both the
market for stand-alone switching systems and the market for integrated server
cabinet systems, and we expect that pricing pressures will increase in the
future.
On March 8, 1999, we began a five-year lease of approximately
117,000 square feet in an industrial office building in Redmond, Washington.
The initial base rent under the lease, is approximately $90,000 per month,
plus taxes, insurance and maintenance. Portions of the rent are allocated to
cost of sales and to general and administrative expense. The 117,000 square
foot leased premises has approximately 35,000 more square feet than we
currently need, and we have subleased the excess space until we need it for
planned expansion.
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Kevin J. Hafer, our Chairman, President and Chief Executive Officer,
has exercised stock options for our Common Stock, and as of April 28, 2000 he
holds 304,104 shares of, and has vested and unexercised options totaling
305,678 shares of, our Common Stock. Since November 1997, Mr. Hafer has been
selling (and/or making gifts of) approximately 30,000 to 100,000 shares of
our Common Stock each quarter. Mr. Hafer has informed us that he intends to
continue this disciplined selling program on a regular quarterly basis. Mr.
Hafer has also informed us 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 our Common Stock
that he sells over and above the number he sells on a regular quarterly
basis. Other executive officers have vested in significant amounts of our
Common Stock and continue to vest in additional shares on a monthly basis.
These officers have informed us that they have sold and may sell additional
shares of our Common Stock to provide liquidity and diversify their portfolios.
On March 8, 2000, we entered into a merger agreement with Cybex
Computer Products Corporation, a leading manufacturer of console switching
equipment. The agreement calls for each share of Apex Common Stock to be
converted into 1.0905 shares of a newly formed company, and for each share of
Cybex Common Stock to be converted into one share of that newly formed
company. Cybex has approximately 21 million shares of Common Stock
outstanding on a diluted basis. The transaction will be accounted for as a
purchase of Cybex with an expected cost of approximately $728 million. We
expect this transaction to close by the end of the third quarter of 2000,
subject to customary conditions including approval by various regulatory
agencies and approval by shareholders of both companies.
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
MARCH 31, APRIL 2,
2000 1999
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<S> <C> <C>
Net sales................................................. 100.0% 100.0%
Cost of sales............................................. 51.7 52.7
----- -----
Gross margin.............................................. 48.3 47.3
----- -----
Research and development.................................. 5.1 7.8
Sales and marketing....................................... 8.5 7.4
General and administrative................................ 5.9 6.3
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Total operating expenses............................ 19.5 21.5
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Income from operations.................................... 28.8 25.8
Interest income........................................... 3.2 3.5
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Income before income taxes................................ 32.0 29.3
Provision for income taxes................................ 10.8 10.1
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Net income ............................................... 21.2% 19.2%
===== =====
</TABLE>
NET SALES. Our net sales consist of sales of stand-alone switching
systems, remote-access products and integrated cabinet solutions. Our net
sales increased 37% to $28.2 million for the first quarter of 2000 from $20.7
million for the first quarter of 1999, due primarily to increased demand for
private-label products. Apex-brand product sales increased 59% to $12.4
million in the first quarter of 2000 from $7.8 million a year ago.
Private-label OEM sales represented 56% of our net sales for the first
quarter of 2000 compared to 62% of our net sales for the first quarter of
1999. Apex-brand products represented 44% of our net sales for the first
quarter of 2000 compared to 38% of our net sales for the first quarter of
1999.
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 us and by our
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competitors; and the level of our outsourcing of manufacturing and assembly
services. The gross margin percentage increased to 48.3% for the first
quarter of 2000, compared to 47.3% for the first quarter of 1999, primarily
relating to the increased percentage of Apex-brand product in the sales mix
in the current quarter.
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 were $1.5 million, or
5.1% of net sales, in the first quarter of 2000 compared to $1.6 million, or
7.8% of net sales, for the first quarter of 1999. The decrease in absolute
dollars and as a percentage of net sales was due primarily to significant
project spending related to new products introduced in the first half of
1999, partially offset by increased compensation expense associated with
increased staffing levels. We believe that the timely development of
innovative products and enhancements to existing products is essential to
maintaining our competitive position and we expect 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 were $2.4 million, or 8.5% of net sales, for the first
quarter of 2000 compared to $1.5 million, or 7.4% of net sales, for the first
quarter of 1999. The increase in absolute dollars and as a percentage of
sales was due primarily to increased advertising and promotional expenses,
and to increased compensation expense associated with increased staffing
levels. We expect sales and marketing expenditures to increase in absolute
dollars and possibly as a percentage of net sales as we continue our 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 were $1.7 million, or 5.9% of net sales, for the
first quarter of 2000 compared to $1.3 million, or 6.3% of net sales, for the
first quarter of 1999. The increase in absolute dollars was due to increased
compensation expense associated with increased staffing levels, and increased
rent related to our new facilities, which were partially offset by a decrease
in legal expenses associated with patent litigation. We expect 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, our principal sources of liquidity consisted
of approximately $69.7 million in cash, cash equivalents and investments, an
increase of $8.7 million from $61.0 million at December 31, 1999. In
addition, we have 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, we may borrow up to a specified amount based upon our
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.
Our operating activities generated cash of approximately $1.8
million in the first quarter of 2000, compared to $7.1 million in the first
quarter of 1999. The decrease in cash flow from operations in 2000, when
compared with the first quarter of 1999, resulted primarily from increased
net income, partially offset by increased inventory, and decreases in
accounts payable and accrued income taxes.
Inventory levels were increased in the first quarter of 2000 because
we were required to stock additional customer-mandated warehouse locations
near the manufacturing locations of these customers. Also, long lead-times
for certain inventory items led us to order significant quantities to protect
against potential shortages. In February 2000, our inventory levels began to
decline from their highest level during the first quarter, and as of May 5,
2000, were $11.8 million. The decrease in receivables from December 31, 1999,
is a result of the timing of sales and of our collections. At March 31, 2000,
our OEM customers accounted for approximately 48% of the accounts receivable.
We believe that existing cash balances, cash generated from operations
and the funds available to us under credit facilities will be sufficient to fund
our operations through 2001.
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YEAR 2000
We experienced no material impact from the Year 2000 problem. Our
products performed without fault with respect to the Year 2000 problem, and we
experienced no issues with our internal computing and IT systems. We are also
not aware of any Year 2000 issues experience by our customers, suppliers,
vendors or service providers that may have a material effect on us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The market risk inherent in our financial instruments represents the
potential loss arising from adverse changes in interest rates. We are exposed to
market risk in the area of interest rate changes impacting the fair value of our
investment securities. Our investment policy is to manage our investment
portfolio to preserve principal and liquidity while maximizing the return on the
portfolio through the investment of available funds. We diversify the investment
portfolio by investing in a variety of highly-rated investment-grade securities
and through the use of different investment managers. Our 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 March
31, 2000. We generally hold investments until maturity and carry the securities
at amortized cost, which approximates fair market value.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See description of legal proceedings in our Annual Report on Form 10-K
for the year ended December 31, 1999, on file with the Securities and Exchange
Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On March 13, 2000, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission relating to our merger with Cybex Computer
Products Corporation, which was announced on March 8, 2000.
ITEMS 2, 3, 4 and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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 12, 2000 /s/ Kevin J. Hafer
-----------------------
Kevin J. Hafer
Chairman of the Board,
President and Chief
Executive Officer
Date: May 12, 2000 /s/ Barry L. Harmon
-----------------------
Barry L. Harmon
Chief Operating Officer,
Chief Financial Officer
and Treasurer
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<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 MARCH 31, 2000, 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,386
<SECURITIES> 46,856
<RECEIVABLES> 24,523
<ALLOWANCES> 535
<INVENTORY> 14,946
<CURRENT-ASSETS> 105,136
<PP&E> 3,030
<DEPRECIATION> 1,125
<TOTAL-ASSETS> 113,714
<CURRENT-LIABILITIES> 4,806
<BONDS> 0
0
0
<COMMON> 75,062
<OTHER-SE> 33,846
<TOTAL-LIABILITY-AND-EQUITY> 113,714
<SALES> 28,244
<TOTAL-REVENUES> 28,244
<CGS> 14,591
<TOTAL-COSTS> 14,591
<OTHER-EXPENSES> 5,508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,062
<INCOME-TAX> 3,061
<INCOME-CONTINUING> 6,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,001
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</TABLE>
