SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Three Months ended March 31, 1998 Commission file No. 0-21450
EQUINOX SYSTEMS INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
State of incorporation: Florida I.R.S. Employer Identification No. 59-2268442
Address of principal executive offices: One Equinox Way - Sunrise, Florida 33351
Telephone: (954) 746-9000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock (par
value $.01 per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. Yes [x]
The number of shares of Common Stock outstanding as of April 29, 1998 was
3,461,606.
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INDEX TO ITEMS
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1998 and December 31, 1997...............................3
Condensed Consolidated Statements of Income - Three Months ended March 31, 1998 and 1997...................4
Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997...............5
Notes to Condensed Consolidated Financial Statements.......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation...................7
PART II - OTHER INFORMATION
Item 5. Other Information.....................................................................................9
Item 6. Exhibits and Reports on Form 8-K.....................................................................11
Signature Page.................................................................................................12
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2
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<TABLE>
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EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents ...................... $ 14,995 $ 14,209
Marketable securities .......................... 1,300 1,500
Accounts receivable ............................ 4,469 3,881
Inventories .................................... 4,524 3,295
Deferred income taxes .......................... 1,132 1,132
Prepaid expenses and other current assets ...... 677 441
-------- --------
Total current assets ......................... 27,097 24,458
-------- --------
PROPERTY AND EQUIPMENT, at cost ..................... 5,718 5,513
Less - accumulated depreciation and amortization (2,507) (2,388)
-------- --------
3,211 3,125
-------- --------
$ 30,308 $ 27,583
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 3,806 $ 3,058
Accrued expenses ............................... 1,574 1,948
Deferred service contract revenue .............. 155 143
Accrued income taxes ........................... 17 499
-------- --------
Total current liabilities .................... 5,552 5,648
-------- --------
SHAREHOLDERS' EQUITY:
Common stock ................................... 34 33
Additional paid-in capital ..................... 9,912 8,280
Retained earnings .............................. 14,810 13,622
-------- --------
Total shareholders' equity ................. 24,756 21,935
-------- --------
$ 30,308 $ 27,583
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------
1998 1997
------- -------
NET SALES ............................ $ 7,756 $ 6,364
COST OF SALES ........................ 3,675 3,241
------- -------
Gross profit ...................... 4,081 3,123
------- -------
OPERATING EXPENSES:
Research and development .......... 768 754
Selling, general and administrative 1,747 1,348
------- -------
Total operating expenses .... 2,515 2,102
------- -------
Income from operations ...... 1,566 1,021
------- -------
OTHER INCOME, NET:
Interest income ................... 190 141
Other, net ........................ 17 (13)
------- -------
Total other income, net ......... 207 128
------- -------
Income before income taxes ...... 1,773 1,149
PROVISION FOR INCOME TAXES ........... 585 414
------- -------
Net income ...................... $ 1,188 $ 735
======= =======
EARNINGS PER SHARE:
Basic ........................... $ 0.36 $ 0.20
======= =======
Diluted ......................... $ 0.33 $ 0.19
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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<CAPTION>
EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- --------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 1,188 $ 735
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ..................................................... 119 160
Provision for doubtful accounts and anticipated sales returns .... 195 225
Provision for warranty costs ..................................... 23 29
Recognition of deferred service contract revenue ................. (143) (159)
Changes in operating assets and liabilities:
Accounts receivable .......................................... (783) 92
Inventories .................................................. (1,229) (417)
Prepaid expenses and other current assets .................... (236) (316)
Accounts payable ............................................. 748 114
Accrued expenses ............................................. (397) (222)
Deferred service contract revenue ............................ 155 119
Income taxes ................................................. 361 410
-------- --------
Total adjustments ................................................... (1,187) 35
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 1 770
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities (purchases) of marketable securities .................. 200 (2,000)
Purchases of property and equipment .............................. (205) (54)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................... (5) (2,054)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised .......................................... 790 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 790 --
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 786 (1,284)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 14,209 12,998
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................... $ 14,995 $ 11,714
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Income taxes paid ................................................... $ 223 $ 5
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During 1998 the Company realized income tax benefits of $843 in connection with
the exercise of stock options by certain current and former employees and
directors. Such amounts represent deductible compensation expense not required
to be recognized for financial statement purposes.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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EQUINOX SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 1997, which has been
derived from the annual audited financial statements, and the unaudited interim
condensed consolidated financial statements included herein, have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
In the opinion of the Company, its financial statements contain all material
adjustments, consisting of only normal recurring accruals, necessary to present
fairly the Company's financial position and results of operations. Results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the year ending December 31, 1998.
The accounting policies followed for quarterly financial reporting purposes are
the same as those disclosed in the Company's audited financial statements for
the year ended December 31, 1997, included in the Company's Form 10-K.
(2) EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the weighted
average number of common shares outstanding during the period. On a diluted
basis, shares outstanding are adjusted to assume the exercise of options under
the treasury stock method. Amounts for 1997 were restated to conform with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Shares used in the computations for the three months ended March 31, 1998 and
1997 are as follows (in thousands):
1998 1997
----- -----
Weighted average shares used in basic
computation 3,323 3,690
Common stock equivalents - options .... 323 160
----- -----
Weighted average shares used in diluted
computation......................... 3,646 3,850
===== =====
(3) INVENTORIES
Inventories consist of parts and assembly components to be used in the
production of finished goods and are stated at the lower of cost or market.
Cost, which includes raw materials, manufacturing labor and overhead, is
determined on a first-in, first-out basis. Inventories consist of the following
as of March 31, 1998 and December 31, 1997 (in thousands):
1998 1997
------ ------
Raw materials ........................ $1,359 $ 630
Work-in-process ...................... 419 461
Finished goods ....................... 2,746 2,204
------ ------
$4,524 $3,295
====== ======
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements which reflect the
current views of the Company with respect to future events that could have an
effect on its future financial performance. These statements may include such
words as "expects," "believes," "estimates," and similar expressions. These
forward-looking statements are subject to various risks and uncertainties,
including those referred to under "Factors That May Affect Future Results" in
Item 5, below, and elsewhere herein, that could cause actual results to differ
materially from historical results or those currently anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements.
The following table sets forth, for the periods presented, certain income
statement data of the Company, expressed as a percentage of net sales:
1998 1997
---- ----
Net sales ......................... 100% 100%
Cost of sales ..................... 47 51
-- --
Gross profit ...................... 53 49
Research and development .......... 10 12
Selling, general and administrative 23 21
-- --
Total operating expenses .......... 33 33
-- --
Income from operations ............ 20 16
Other income, net ................. 3 2
-- --
Income before income taxes ........ 23 18
Provision for income taxes ........ 8 6
-- --
Net income ........................ 15% 12%
== ==
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NET SALES
Net sales increased to $7.8 million in 1998 from $6.4 million in 1997, an
increase of $1.4 million, or 22%.
Bus-attached product sales increased 35% to $6.2 million in 1998 from $4.6
million in 1997, due to increased sales through both distributors and OEMs.
Distributor sales of Bus-attached products grew by 36% whereby OEM sales of
Bus-attached products grew by 30%.
The Hewlett-Packard Company, the Company's leading OEM customer, represented 22%
of the Company's net sales during the first quarter of 1998 and 23% in 1997.
Although it represents single-customer sales to Equinox, Hewlett-Packard resells
Equinox products to a broad base of customers.
LAN-attached product sales decreased 9% to $1.6 million in 1998 from $1.8
million in 1997. This decrease is attributable to a 16% decline in sales of ELS
Terminal Servers to $0.9 million. Management believes that sales of ELS Terminal
Servers and DSS Data Switching System products will continue to decline over
time.
COST OF SALES
Cost of sales increased 13% to $3.7 million in 1997 from $3.2 million in 1997
primarily due to higher sales volume. As a percentage of net sales, cost of
sales declined to 47% in 1997 from 51% in 1997. This improvement was primarily
the result of greater absorption of overhead due to increased volumes and
efficiencies.
The Company's gross margin is dependent in part on product mix, channel mix and
overhead expense all of which fluctuate from year to year. Increased sales to
OEM customers may negatively impact the Company's future gross margin, as OEM
sales are typically priced lower than distribution sales. However, the reduced
sales/support requirements of OEM customers typically result in favorable
contributions to operating margins. As a result, management believes there is
little difference in operating margins between distribution sales and OEM sales.
7
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RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $0.8 million in 1998 and 1997. As a
percentage of net sales, research and development expenses were 10% in 1998 and
12% in 1997. The Company does not capitalize any of its software development
expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 30% to $1.7 million in
1998 from $1.3 million in 1997. As a percentage of net sales, selling, general
and administrative expenses increased to 23% in 1998 from 21% in 1997 due to
higher marketing and selling costs.
INCOME FROM OPERATIONS
Income from operations increased to $1.6 million in 1998 from $1.0 million in
1997, an increase of $0.6 million primarily due to increased sales and gross
profit partially offset by increased operating expenses. As a percentage of net
sales, income from operations increased to 20% in 1998 from 16% in 1997.
OTHER INCOME, NET
Other income, net, which includes interest income, increased to $0.2 million in
1998 from $0.1 million in 1997, an increase of 62% primarily due to higher
average invested cash balances. As a percentage of net sales, other income was
3% in 1998 and 2% 1997.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes increased to $0.6 million in 1998 from
$0.4 million in 1997, an increase of $0.2 million as a result of the Company's
increased income from operations. The Company's effective tax rate decreased to
33% in 1998 from 36% in 1997.
NET INCOME
Net income increased to $1.2 million in 1998 from $0.7 million in 1997, an
increase of 62%. As a percentage of net sales, net income increased to 15% in
1998 from 12% in 1997, primarily as a result of increased sales and gross profit
partially offset by increased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $21.5 million at March 31, 1998, compared with
$18.8 million at December 31, 1997. Cash and cash equivalents and marketable
securities were $16.3 million at March 31, 1998, compared with $15.7 million at
December 31, 1997.
Net cash provided by operating activities was $1,000 for the three months ended
March 31, 1998, compared to $800,000 for the three months ended March 31, 1997.
During the first quarter of 1998 the Company's increase in net income was offset
by increases in accounts receivable and inventories.
Net cash used in investing activities for the three months ended March 31, 1998
was $5,000 compared to $2.1 million for the three months ended March 31, 1997.
Net cash used in investing activities in 1997 primarily represented purchases of
marketable securities.
Net cash provided by financing activities was $0.8 million for the three months
ended March 31, 1998 due to funds received in connection with employee stock
option exercises. Net cash provided by financing activities was $0 in 1997.
As of March 31, 1998, the Company had no material commitments for capital
expenditures. Management believes that cash and cash equivalents and marketable
securities on hand together with funds generated from operations will be
adequate to meet the Company's working capital and capital expenditure needs for
at least the next 12 months.
8
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YEAR 2000 COMPLIANCE
Until recently, many computer programs were written using two digits rather than
four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. Utilizing both internal and external resources, the Company is in the
process of defining, assessing and converting, or replacing various programs,
hardware and instrumentation systems to make them Year 2000 compatible. The
Company's Year 2000 project is comprised of two components - business
applications and equipment. The business applications component consists of the
Company's business computer systems, as well as the computer systems of
third-party suppliers or customers, whose year 2000 problems could potentially
impact the Company. Equipment exposures consist of personal computers, system
servers and telephone equipment whose Year 2000 problems could also impact the
Company. The cost of the Year 2000 initiatives is not expected to be material to
the Company's results of operations, financial position or cash flows.
Implementation is expected to be completed before December 31, 1998.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
FACTORS THAT MAY AFFECT FUTURE RESULTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is providing the following cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in any forward-looking
statements made by, or on behalf of, the Company.
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's consolidated results
throughout 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
GENERAL BUSINESS AND ECONOMIC CONDITIONS
General business and economic conditions have an impact on the Company's
financial results. The Company's customer base, which is largely distributors,
may be impacted by weak economic conditions and, as a result, may reduce
inventory levels of products purchased from the Company. Although the Company
does not consider its business to be highly seasonal, the historical quarterly
trends reflected over the last three years may, in fact, be adversely affected
by general economic conditions both domestically and abroad and may or may not
continue.
COMPETITION
The markets for the Company's products are intensely competitive. The Company's
products compete both with other technologies as well as similar products
manufactured by other companies, some of which have more extensive research and
development, manufacturing, marketing and product support capabilities as well
as greater financial and technological resources. The Company believes that its
ability to compete depends on a number of factors, including product quality and
reliability, performance, price, product delivery, service and support and name
recognition. There can be no assurance the Company will be able to continue to
compete successfully with respect to these factors.
PRODUCT SHORTAGES
The competitiveness of the industry requires that the Company fulfill many of
its orders within a very short time period (typically within one week after
receipt of order). Should the Company be unable to fulfill orders on a timely
basis due to inaccurate forecasting by the Company or shortages at its
suppliers, orders could be canceled and placed with a competitor.
9
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Additionally, certain important components used in the Company's products
presently are available from one or a limited number of sources. Also, most of
the Company's product lines currently are manufactured for the Company by one
contractor per product line. The inability to obtain sufficient quantities of
limited source components, as required, or to develop alternative sources of
supply for components or alternative sources to manufacture its finished
products, could result in delays or reductions in product shipments which could
have a material adverse effect on the Company's business.
EXPOSURE TO NATURAL DISASTERS
The Company's headquarters facility, as well as certain of its turn-key
manufacturers, are located in areas prone to natural disasters, specifically
hurricanes. In August 1992, Hurricane Andrew caused extensive damage to the
Company's former headquarters facility and the majority of the Company's assets.
While the Company recovered quickly from that disaster, the Company believes
that its operating results and financial condition could be adversely affected
should another natural disaster strike its current facility, any of its turn-key
manufacturers, or any of its major customers.
TECHNOLOGICAL CHANGES
The market for the Company's products is characterized by continued and rapid
technological advances in both hardware and software development requiring
ongoing expenditures for research and development and the timely introduction of
new products. To remain competitive, the Company must respond effectively to
technological changes by continuing to enhance and improve its existing products
and by successfully developing and introducing new products. There can be no
assurance that the Company will be able to respond effectively to technological
changes or new product announcements or introductions by others.
PROPRIETARY RIGHTS
The Company relies primarily upon the technical expertise and creative skills of
its personnel, rather than patents and copyrights, to develop and maintain its
competitive position. However, there can be no assurance that competitors will
not develop products or technology that are equivalent or superior to those of
the Company or that the safeguards on which the Company relies will be adequate
to protect its interests. In addition, it is common in the computer industry for
companies to seek to assert claims for infringement of their patents or
proprietary RIGHTS. Although no such claims are pending against the Company,
there can be no assurance that these claims will not be made or that, if made,
any license that might be needed by the Company will be available on
commercially reasonable terms.
DISTRIBUTION AND OEM RISKS
The Company is dependent upon the continued viability and financial stability of
its distributors and OEM customers. (A distributor and an OEM customer
collectively accounted for 35% of the Company's net sales during 1998). The loss
or ineffectiveness of these customers or other certain customers could have a
material adverse effect on the Company's operating results.
International distributor sales are denominated and transacted in U.S. dollars
and are subject to risks common to export activities, including governmental
regulation, trade barriers and fluctuating currency exchange rates (which
affects the competitiveness of U.S. products sold abroad). In addition, the
Company's international sales must be licensed by the Office of Export
Administration of the U.S. Department of Commerce. To date, the Company has not
experienced any difficulty in conducting export sales, including obtaining
necessary export licenses. There can be no assurance, however, that these or
other factors affecting international sales will not adversely affect the
Company's future operating results.
PRODUCT RETURNS, PRICE PROTECTION AND WARRANTIES
As is typical in the computer industry, the Company's distributors may be
entitled to return inventory to the Company for stock rotation purposes and
receive credit against other purchases on terms relating to price and volume
negotiated with the Company. In addition, if the Company reduces its prices, the
Company credits its distributors for the difference between the purchase price
of products remaining in their inventory and the Company's reduced price for
such products. The Company's 3-5 year limited warranty permits customers to
return any product for repair or replacement if the product does not perform as
warranted. There can be no assurance that product returns, price protection and
warranty claims will not have a material adverse effect on the Company's future
operating results. The Company seeks to continually introduce new and enhanced
products which could result in higher product returns and warranty claims due to
risks inherent in the introduction of such products.
10
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DEPENDENCE ON KEY PERSONNEL
William A. Dambrackas, the Company's Founder, Chairman and Chief Executive
Officer, Robert F. Gintz, the Company's Vice President, Development, Mark Kacer,
the Company's Vice President, Finance and Administration, Thomas E. Garrett, the
Company's Vice President, Sales, and Robert S. Sowell, the Company's Vice
President, Technical Operations, have been primarily responsible for the
development and expansion of the Company's business, and the loss of the
services of one or more of these individuals could adversely affect the Company.
In addition, the Company believes that its future success will be dependent in
part on its continued ability to recruit, motivate and retain qualified
personnel. There can be no assurance that the Company will be successful in this
regard.
MARKET RISK
Management believes the Company's exposure to the impact of interest rate
changes, foreign currency fluctuations and changes in the market value of its
investments is minimal, as the Company does not use any derivative financial
instruments. The Company is also debt-free, transacts all business in U.S.
dollars and utilizes short-term investments which consist of investment grade
corporate obligations, U.S. Treasury obligations and tax-exempt borrowings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) During the three months ended March 31, 1998 the Company did not file any
reports on Form 8-K.
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUINOX SYSTEMS INC.
/s/ MARK KACER
------------------------------
MARK KACER, Chief Financial Officer
(Principal Financial Officer)
DATE: April 29, 1998
12
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,995
<SECURITIES> 1,300
<RECEIVABLES> 5,237
<ALLOWANCES> 768
<INVENTORY> 4,524
<CURRENT-ASSETS> 27,097
<PP&E> 5,718
<DEPRECIATION> 2,507
<TOTAL-ASSETS> 30,308
<CURRENT-LIABILITIES> 5,552
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 24,722
<TOTAL-LIABILITY-AND-EQUITY> 27,756
<SALES> 7,756
<TOTAL-REVENUES> 7,756
<CGS> 3,675
<TOTAL-COSTS> 3,675
<OTHER-EXPENSES> 2,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,773
<INCOME-TAX> 585
<INCOME-CONTINUING> 1,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,188
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.33
</TABLE>
