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 June 30, 1999 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 August 11, 1999 was
5,349,675.
<PAGE>
INDEX TO ITEMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income - Three and Six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
</TABLE>
2
<PAGE>
EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,590 $ 12,382
Available-for-sale securities 14,791 6,538
Accounts receivable 6,886 5,403
Inventories 6,104 5,489
Deferred income taxes 1,268 1,184
Prepaid expenses and other current assets 847 584
---------------- ------------------
Total current assets 34,486 31,580
---------------- ------------------
PROPERTY AND EQUIPMENT, at cost 5,990 5,831
Less - accumulated depreciation and amortization (2,669) (2,440)
---------------- ------------------
3,321 3,391
---------------- ------------------
$ 37,807 $ 34,971
================ ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,029 $ 2,679
Accrued expenses 3,001 2,487
---------------- ------------------
Total current liabilities 6,030 5,166
---------------- ------------------
SHAREHOLDERS' EQUITY:
Common stock 53 54
Additional paid-in capital 11,127 11,572
Retained earnings 20,760 18,179
Unrealized loss on securities available-for-sale, net of tax (163) -
---------------- ------------------
Total shareholders' equity 31,777 29,805
---------------- ------------------
$ 37,807 $ 34,971
================ ==================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $ 9,405 $ 6,846 $ 17,689 $ 14,602
COST OF SALES 4,196 3,229 8,171 6,904
--------------- --------------- --------------- ---------------
Gross profit 5,209 3,617 9,518 7,698
--------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Research and development 920 785 1,792 1,553
Selling, general and administrative 2,060 1,737 3,811 3,484
--------------- --------------- --------------- ---------------
Total operating expenses 2,980 2,522 5,603 5,037
--------------- --------------- --------------- ---------------
Income from operations 2,229 1,095 3,915 2,661
--------------- --------------- --------------- ---------------
OTHER INCOME, NET
Interest income 185 150 402 338
Other income (expense), net 3 (5) (19) 14
--------------- --------------- --------------- ---------------
Total other income, net 188 145 383 352
--------------- --------------- --------------- ---------------
Income before income taxes 2,417 1,240 4,298 3,013
PROVISION FOR INCOME TAXES 822 407 1,461 992
--------------- --------------- --------------- ---------------
Net income $ 1,595 833 $ 2,837 $ 2,021
=============== =============== =============== ===============
EARNINGS PER SHARE:
Basic $ 0.30 $ 0.16 $ 0.53 $ 0.40
=============== =============== =============== ===============
Diluted $ 0.29 $ 0.15 $ 0.50 $ 0.36
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,837 $ 2,021
------------------- ------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 229 222
Provision for doubtful accounts and anticipated sales returns 560 419
Provision for warranty costs 91 66
Recognition of deferred service contract revenue (189) (285)
Changes in operating assets and liabilities:
Accounts receivable (2,043) (660)
Inventories (615) (1,748)
Prepaid expenses and other current assets (263) (418)
Accounts payable 350 (280)
Accrued expenses 648 599
------------------- ------------------
Total adjustments (1,232) (2,085)
------------------- ------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,605 (64)
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (25,860) (1,600)
Sales and maturities of available-for-sale securities 17,360 1,200
Purchases of property and equipment (159) (506)
------------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (8,659) (906)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 103 1,204
Repurchases of common stock (841) -
------------------- ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (738) 1,204
------------------- ------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,792) 234
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,382 14,209
------------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,590 $ 14,443
=================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Income taxes paid $ 610 $ 493
=================== ==================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1999 and 1998, the Company realized income tax benefits of $36 and
$1,177, respectively, 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.
During 1999, there was a $163 increase in unrealized losses on
available-for-sale securities, net of tax.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 1998, 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,
1998.
In the opinion of the Company, the accompanying condensed consolidated financial
statements contain all material adjustments, consisting of only normal recurring
accruals, necessary to present fairly the Company's financial position, results
of operations and cash flows. Results of operations for the three and six months
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
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, 1998, included in the Company's Form 10-K.
(2) FISCAL PERIOD
The fiscal periods of the Company end on the first Saturday following the last
calendar day of each month. All references to June 30, 1999 and June 30, 1998
represent the 13 and 26-week fiscal periods ended July 3, 1999 and July 4, 1998,
respectively.
(3) EARNINGS PER SHARE FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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. Shares used in the computations are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares used in basic
computation 5,325 5,201 5,361 5,093
Common stock equivalents - options 222 443 288 463
--------- -------- -------- --------
Weighted average shares used in diluted
computation 5,547 5,644 5,649 5,556
========= ======== ======== ========
</TABLE>
Options not included in the computation above, because the exercise of which
would be antidilutive, for the three months ended June 30, 1999 and 1998 were
24,000 and 0, respectively. Antidilutive options for the six months ended June
30, 1999 and 1998 were 24,000 and 0, respectively.
6
<PAGE>
(4) COMPREHENSIVE INCOME
During 1998, the Company adapted SFAS No. 130 "Reporting Comprehensive Income."
Comprehensive income is the total of net income and all other changes in net
assets arising from non-owner sources. The Company's comprehensive income for
the three months ended June 30, 1999, is as follows (in thousands):
<TABLE>
<CAPTION>
BEFORE-TAX INCOME AFTER-TAX
AMOUNT TAX AMOUNT
---------------- -------------- ---------------
<S> <C> <C> <C>
Net income for the three months ended June 30, 1999 $ 2,417 $ 822 $ 1,595
Unrealized losses on available-for-sale securities (247) (84) (163)
---------------- -------------- ---------------
Comprehensive income for the three months ended June 30, 1999 $ 2,170 $ 738 $ 1,432
</TABLE>
Comprehensive income equaled net income for all other periods presented.
(5) INVENTORIES
Inventories consist of the following as of June 30, 1999 and December 31, 1998
(in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Raw materials $ 1,603 $ 1,869
Work-in-process 769 585
Finished goods 3,732 3,035
----------------- ----------------
$ 6,104 $ 5,489
================= ================
</TABLE>
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, 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.
NET SALES
The Company primarily sells its products through two sales channels:
distribution and original equipment manufacturers ("OEMs"). The Company's
two-tier distribution channel serves the needs of a large number of value-added
resellers ("VARs") and System Integrators and, as a result, that channel of
sales has more quarter-to-quarter predictability than the Company's OEM sales
channel. Sales to OEM customers are difficult to predict as the Company has
limited knowledge of the OEM's inventory levels or the expected customer demand
for the OEM's final product.
Net sales for the three and six month periods ended June 30, 1999 were higher
than net sales for the corresponding periods ended June 30, 1998 by
approximately $2.6 million and $3.1 million or 37% and 21%, respectively.
Bus-attached product sales increased 51% and 35% to $8.8 million and $16.2
million, respectively, for the three and six month periods ended June 30, 1999.
Distributor sales of Bus-attached products increased 38% and 26% respectively,
for the three and six month periods ended June 30, 1999, while OEM sales
increased by 69% and 45%. The Company's largest customer, the Hewlett-Packard
Company, an OEM customer, represented 19% and 17% of the Company's net sales for
the three and six month periods ended June 30, 1999.
LAN-attached product sales decreased 39% and 44% to $0.6 million and $1.5
million, respectively, for the three and six month periods ended June 30, 1999.
This decrease is primarily attributable to a continuing decline in sales of its
original Terminal Servers to distributors as well as a decline in direct sales
of DSS products. Management believes that sales of DSS products and its original
Terminal Server will continue to decline over time. During the first quarter,
the Company introduced a new, lower priced Terminal Server (the "ESP") with
expanded features. Revenues from this product line are expected to somewhat
offset the declining trend in LAN-attached product sales.
7
<PAGE>
GROSS MARGIN
Gross margin for the three and six month periods ended June 30, 1999 was 55% and
54%, respectively, compared to 53% for the comparable periods in 1998. The
improvement in the gross margin compared to the prior year was primarily the
result of reduced product costs and higher production volume.
The Company's gross margin is dependent in part on product costs, product mix,
production volume, channel mix, and overhead expense all of which fluctuate from
period to period. For example, an increase in future sales to OEM customers may
negatively impact the Company's gross margin, as OEM sales are typically priced
lower than distribution sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and six month periods ended June
30, 1999 were $0.9 million and $1.8 million, respectively, compared to $0.8
million and $1.6 million for the comparable periods in 1998. The increases were
due to expanded development efforts related to new product offerings. As a
percentage of net sales, research and development expenses were 10% for the
three and six month periods ended June 30, 1999, respectively, compared to 11%
for the comparable periods in 1998. The Company does not capitalize any of its
software development costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three and six month periods
ended June 30, 1999 were $2.1 million and $3.8 million, respectively, compared
to $1.7 million and $3.5 million for the comparable periods in 1998. The
increases were primarily due to higher personnel costs. As a percentage of net
sales, selling general and administrative expenses were 22% for the three and
six month periods ended June 30, 1999, respectively, compared to 25% and 24% for
the comparable periods in 1998.
OTHER INCOME, NET
Other income, net, which includes interest income, for the three and six month
periods ended June 30, 1999, was $188,000 and $383,000, respectively, compared
to $145,000 and $352,000 for the comparable periods in 1998. The increase was
due to higher invested cash balances. As a percentage of net sales, other
income, net was 2% for all periods presented.
PROVISION FOR INCOME TAXES
Provision for income taxes for the three and six month periods ended June 30,
1999, was $0.8 million and $1.5 million, respectively, compared to $0.4 million
and $1.0 million for the comparable periods in 1998. This increase was primarily
the result of increased taxable income. In addition, the Company's effective tax
rate increased to 34% in 1999 compared to 33% for the comparable periods in 1998
based on expected tax rates for the current year.
NET INCOME
As a result of the factors discussed above, the Company recorded net income for
the three and six month periods ended June 30, 1999 of $1.6 million and $2.8
million, respectively, compared to $0.8 million and $2.0 million for the
comparable periods in 1998. As a percentage of net sales, net income was 17% and
16% for the three and six month periods ended June 30, 1999, respectively, as
compared to 12% and 14% for the comparable periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $28.5 million at June 30, 1999, compared with
$26.4 million at December 31, 1998. Cash and cash equivalents and
available-for-sale securities were $19.4 million at June 30, 1999, compared with
$18.9 million at December 31, 1998.
Net cash provided by operating activities was $1.6 million for the six months
ended June 30, 1999, compared to $64,000 used in operations for the six months
ended June 30, 1998. The increase was primarily due to increased net income
partially offset by increases in accounts receivable and inventories.
Net cash used in investing activities for the six months ended June 30, 1999 was
$8.7 million compared to $0.9 million for the six months ended June 30, 1998,
and was due to purchases of property and equipment and net purchases of
available-for-sale securities.
Net cash used in financing activities was $0.8 million for the six months ended
June 30, 1999 and was primarily due to repurchases of the Company's common
stock. Net cash provided by financing activities was $1.2 million in 1998 and
was due to funds received in connection with employee stock option exercises.
8
<PAGE>
In March 1997, the Board of Directors authorized the Company to repurchase up to
1,500,000 shares of the Company's issued and outstanding common stock. During
1997, the Company repurchased a total of 821,400 shares at a purchase price of
approximately $5,409,000 under this buyback plan. No purchases were made during
1998. During the first half of 1999, and through the date of this filing, the
Company has repurchased an additional 87,300 shares of its common stock in the
open market for an aggregate purchase price of $840,000. The Company is still
authorized to repurchase an additional 591,300 shares under this plan.
Repurchases may be made from time to time, subject to prevailing conditions, in
the open market or in privately negotiated transactions.
As of June 30, 1999, the Company had no material commitments for capital
expenditures. Management believes that cash and cash equivalents and
available-for-sale 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.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company adopted SOP 98-5 during the first quarter of
1999. Adoption had no impact on the Company's consolidated financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133 cannot
be applied retroactively and was amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
133." The Company will adopt SFAS 133 beginning January 1, 2001. Adoption of
this statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
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. The Company has established a comprehensive Year 2000 compliance program
designed to (1) identify computer systems (hardware and software) that may fail
at the turn of the century, (2) upgrade or replace non-compliant systems, and
(3) evaluate the Year 2000 readiness of our critical suppliers and service
providers. The progress of the Company's Year 2000 program is as follows:
The Company has completed installation of a new enterprise-wide management
information system that is Year 2000 compliant. In addition to computers and
related systems, the operation of office and facilities equipment, such as
telephone switches, security systems, elevators, and other common devices which
could be affected by the Year 2000 problem were reviewed and non-compliant
systems were upgraded or replaced accordingly.
The Company is also soliciting input from its key suppliers and service
providers including subcontractors, financial service firms, communications
providers and others regarding their Year 2000 status. The Company will
determine which, if any, pose a threat to the uninterrupted operation of
Equinox' business in the event that they experience system errors or failures.
The worst case scenario related to the failure of key vendors and/or suppliers
to have corrected their own Year 2000 issues would be to cause disruption of the
Company's operations and have a material adverse effect on the Company's
financial condition. The impact of such disruption cannot be estimated at this
time. In the event that any key suppliers are unlikely to resolve their Year
2000 issues, the Company's contingency plans include seeking an alternative
source of supply.
The Company has capitalized approximately $325,000 in connection with the
implementation of its new management information system. The Company does not
anticipate capitalizing any additional costs for this system. All Company
expenditures related to the Year 2000 issue were made from cash and cash
equivalents. Costs related to the Year 2000 issue that do not involve the
replacement of systems are charged to expense. Such other costs are not expected
to be material.
The Company believes it has no material exposure to contingencies related to the
Year 2000 issue for the products it has sold and also believes that all current
versions of its product lines are Year 2000 compliant.
While the Company believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner, there can be no assurance that the failure
of the Company or of the third parties with whom the Company transacts business
to adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 10, 1999, the Company held its Annual Meeting of the
Shareholders.
(b) Not required.
(c) At the Annual Meeting, shareholders voted for the election of directors
and the approval of an amendment to the Company's 1993 Stock Option
Plan (the "Plan"). The amendment was to increase the number of shares
of the Company's common stock reserved for issuance under the Plan from
2,025,000 to 2,275,000.
The shareholders elected all nominated directors in an uncontested
election and also approved the amendment to the Plan by the following
votes:
<TABLE>
<CAPTION>
DIRECTORS
WITHHOLD
NAME FOR AUTHORITY
---- --------- ---------
<S> <C> <C>
William A. Dambrackas 4,803,401 291,575
Mark Kacer 4,803,401 291,575
James J. Felcyn, Jr. 4,803,401 291,575
Robert F. Williamson, Jr. 4,803,401 291,575
</TABLE>
<TABLE>
<CAPTION>
AMENDMENT TO 1993 STOCK OPTION PLAN
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--------- --------- ----------- ----------------
<S> <C> <C> <C> <C>
2,682,993 2,396,150 15,833 --
</TABLE>
(d) Not applicable
10
<PAGE>
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 the remainder of 1999 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.
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 turnkey
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 turnkey
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.
11
<PAGE>
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. (Two distributors and two OEM customers
collectively accounted for 56% of the Company's net sales during the first six
months of 1999. In all of these cases, the customers resold substantially all of
the Company's products to numerous unrelated third parties.) 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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule (EDGAR filing only)
(b) During the three months ended June 30, 1999, the Company did not file any
reports on Form 8-K.
12
<PAGE>
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: August 11, 1999
13
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,840
<SECURITIES> 6,541
<RECEIVABLES> 7,766
<ALLOWANCES> (880)
<INVENTORY> 6,104
<CURRENT-ASSETS> 34,486
<PP&E> 5,990
<DEPRECIATION> (2,669)
<TOTAL-ASSETS> 37,807
<CURRENT-LIABILITIES> 6,030
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 31,724
<TOTAL-LIABILITY-AND-EQUITY> 37,807
<SALES> 17,689
<TOTAL-REVENUES> 17,689
<CGS> 8,171
<TOTAL-COSTS> 8,171
<OTHER-EXPENSES> 5,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,298
<INCOME-TAX> 1,461
<INCOME-CONTINUING> 2,837
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,837
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.50
</TABLE>
