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 September 30, 2000 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 November 8, 2000 was
5,581,154.
<PAGE>
Index to Items
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
(Unaudited) - Three and Nine months ended September 30,
2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
2
<PAGE>
EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,256 $ 8,233
Marketable securities 15,502 15,044
Accounts receivable 3,615 3,667
Inventories 5,184 6,031
Deferred income taxes 1,419 1,432
Prepaid expenses and other current assets 912 584
-------- --------
Total current assets 33,888 34,991
-------- --------
PROPERTY AND EQUIPMENT, at cost 6,261 6,213
Less - accumulated depreciation and amortization (3,231) (2,937)
-------- --------
3,030 3,276
-------- --------
$ 36,918 $ 38,267
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,668 $ 1,865
Accrued expenses 1,118 2,148
-------- --------
Total current liabilities 2,786 4,013
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 55 54
Additional paid-in capital 12,160 11,852
Retained earnings 21,978 22,414
Unrealized loss on marketable securities, net of tax (61) (66)
-------- --------
Total shareholders' equity 34,132 34,254
-------- --------
$ 36,918 $ 38,267
======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
EQUINOX SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 5,648 $ 9,021 $ 12,661 $ 26,710
COST OF SALES 2,771 4,071 6,510 12,242
-------- -------- -------- --------
Gross profit 2,877 4,950 6,151 14,468
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 863 870 2,695 2,662
Selling, general and administrative 1,747 1,884 5,053 5,695
-------- -------- -------- --------
Total operating expenses 2,610 2,754 7,748 8,357
-------- -------- -------- --------
Income (loss) from operations 267 2,196 (1,597) 6,111
-------- -------- -------- --------
OTHER INCOME, NET
Interest income 256 236 854 634
Other expense, net (14) (6) (67) (21)
-------- -------- -------- --------
Total other income, net 242 230 787 613
-------- -------- -------- --------
Income (loss) before income taxes 509 2,426 (810) 6,724
BENEFIT (PROVISION) FOR INCOME TAXES 31 (825) 374 (2,286)
-------- -------- -------- --------
Net income (loss) $ 540 1,601 $ (436) $ 4,438
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic $ 0.10 $ 0.30 $ (0.08) $ 0.83
======== ======== ======== ========
Diluted $ 0.10 $ 0.28 $ (0.08) $ 0.78
======== ======== ======== ========
</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>
Nine Months Ended September 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (436) $ 4,438
-------- --------
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 422 367
Provision for doubtful accounts and anticipated sales returns 528 837
Provision for warranty costs -- 136
Unrealized loss on foreign currency transactions 6 --
Realized loss on marketable securities 71 --
Recognition of deferred service contract revenue (124) (291)
Changes in operating assets and liabilities:
Accounts receivable (482) (1,742)
Inventories 847 (249)
Prepaid expenses and other current assets (328) (162)
Accounts payable (197) (354)
Accrued expenses (850) 849
-------- --------
Total adjustments (107) (609)
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (543) 3,829
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net (533) (8,628)
Purchases of property and equipment (154) (309)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (687) (8,937)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 253 573
Repurchases of common stock -- (840)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 253 (267)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (977) (5,375)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,233 12,382
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,256 $ 7,007
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Income taxes paid $ 255 $ 1,644
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2000 and 1999, the Company realized income tax benefits of $56 and
$239, 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.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(1) Basis of Presentation
The condensed consolidated balance sheet as of December 31, 1999, which has been
derived from the audited annual 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 accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations. These financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
In the opinion of the Company, the accompanying condensed consolidated financial
statements contain all material adjustments, consisting of 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 nine
months ended September 30, 2000 are not necessarily indicative of the results to
be expected for the year ending December 31, 2000.
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, 1999, 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 September 30, 2000 and September
30, 1999 represent the 13 and 39-week fiscal periods ended September 30, 2000
and October 2, 1999, respectively.
(3) Earnings (loss) Per Share For the Three and Nine Months Ended September 30,
2000 and 1999
Basic earnings (loss) 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, unless the effect is antidilutive, which it is
then excluded. Shares used in the computations are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average shares used in basic
computation 5,458 5,368 5,445 5,364
Common stock equivalents - options 43 425 -- 315
----- ----- ----- -----
Weighted average shares used in diluted
computation 5,501 5,793 5,445 5,679
===== ===== ===== =====
</TABLE>
Options not included in the computation above, because the exercise of which
would be antidilutive, for the three months ended September 30, 2000 were
1,125,757. As the Company recorded a net loss for the nine months ended
September 30, 2000, all options (1,473,528) are antidilutive and have been
excluded from the computation of diluted shares. Options not included in the
computation above, because the exercise of which would be antidilutive, for the
three and nine months ended September 30, 1999, were 18,750 and 23,750,
respectively.
6
<PAGE>
(4) Comprehensive Income (Loss)
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 (loss)
for the three and nine months ended September 30, 2000 and 1999, is as follows
(in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
Before-Tax Income After-Tax Before-Tax Income After-Tax
Amount Tax Amount Amount Tax Amount
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) for the three months $ 509 $ 31 $ 540 $ 2,426 $ (825) $ 1,601
ended September 30
Unrealized holding losses on 56 (12) 44 (37) 12 (25)
marketable securities arising during
the period
------- ------- ------- ------- ------- -------
Comprehensive income (loss) for the $ 565 $ 19 $ 584 $ 2,389 $ (813) $ 1,576
Three months ended September 30
======= ======= ======= ======= ======= =======
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
Before-Tax Income After-Tax Before-Tax Income After-Tax
Amount Tax Amount Amount Tax Amount
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) for the nine months $ (810) $ 374 $ (436) $ 6,724 $(2,286) $ 4,438
ended September 30
Unrealized holding losses on (18) 13 (5) (284) 96 (188)
marketable securities arising during
the period
------- ------- ------- ------- ------- -------
Comprehensive income (loss) for the $ (828) $ 387 $ (441) $ 6,440 $(2,190) $ 4,250
nine months ended September 30
======= ======= ======= ======= ======= =======
</TABLE>
(5) Inventories
Inventories consist of the following as of September 30, 2000 and December 31,
1999 (in thousands):
2000 1999
------ ------
Raw materials $1,729 $1,409
Work-in-process 312 240
Finished goods 3,143 4,382
------ ------
$5,184 $6,031
====== ======
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements that reflect the
current views of the Company with respect to 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 any forward-looking statement.
Net Sales
The Company sells its products primarily through two sales channels,
distribution and original equipment manufacturers ("OEMs"). In addition, the
Company has a small amount of direct sales to end-users. Distributors and OEMs
resell substantially all the Company's products to a variety of end-users.
Because the Company has little control over the timing or volume of the
"sell-through" of its products, the Company has difficulty predicting its future
revenues. The Company's distribution channel, which primarily serves the needs
of a large number of value-added resellers ("VARs") and System Integrators,
reports "sell-through" and inventory levels to the Company. As a result,
distribution sales are somewhat more predictable than OEM sales. Sales to OEM
customers are very difficult to predict because the Company has limited
knowledge of the OEM's inventory levels and sell-through.
Net sales decreased 37% to $5.6 million for the three months ended September 30,
2000 compared to $9.0 million for the third quarter of 1999. For the nine months
ended September 30, 2000, net sales decreased by 53% to $12.7 million compared
to $26.7 million for the same period last year. The Company believes this
significant decrease in sales was caused primarily by the residual effect of the
Y2K lockdown that began in the fourth quarter of 1999 (the Company also
experienced a significant decline in fourth quarter 1999 and first and second
quarter 2000 sales). End-users, concerned with the potential threat of the Year
2000 software bug, rushed projects to completion during 1999 and halted the
installation of new systems and limited equipment installations until after
January 1, 2000. Although many projects delayed by Y2K concerns may have been
restarted, the Company believes that it's sales have not returned to historical
levels because distribution and OEM customers have been drawing down existing
inventories to fill the slowly increasing demand of end-users. In addition, the
industry-wide component shortage delayed 10% of our scheduled third quarter
shipments into October 2000. The Company is taking special steps to assure that
this problem will not affect deliveries in the fourth quarter.
o Distribution sales decreased 40% to $3.5 million from $5.9 million for the
third quarter of 1999 and by 50% to $8.4 million from $16.8 million year to
date 1999. The Company recognizes revenues when the product is shipped to
the distributor less reserves for returns and stock rotations. The Company
believes domestic distributor inventories fell about $0.2 million in the
three months ended September 30, 2000 and by $1.8 million year to date.
o OEM sales decreased 37% to $1.7 million from $2.7 million for the third
quarter of 1999, and by 61% to $3.5 million from $8.9 million year to date
1999. The Company recognizes revenues when the product is shipped to the
OEM. OEM accounts generally do not have a right to rotate stock and do not
report inventory levels or sell-through to the Company. Therefore, as noted
above, sales to OEM customers are difficult to predict.
o Direct sales were approximately the same for both the third quarter of 2000
and 1999, but decreased by 19% to $0.8 million from $1.0 million year to
date 1999.
The chart below summarizes the above information and, additionally, shows the
percentage of sales by channel.
<TABLE>
<CAPTION>
($000) Third Quarter Third Quarter Year to Date Year to Date
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution $ 3,529 62% $ 5,906 66% $ 8,383 66% $16,796 63%
OEM 1,721 31% 2,729 30% 3,467 27% 8,911 33%
Direct 398 7% 386 4% 811 7% 1,003 4%
------- ------- ------- ------- ------- ------- ------- -------
Total Sales $ 5,648 100% $ 9,021 100% $12,661 100% $26,710 100%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company's products are installed directly into the server ("bus attached")
or are attached to a network ("Network attached"). The chart below summarizes
sales information by how the Company's products are deployed and their
percentage of total sales. Because of the Y2K problem discussed above, the
Company does not believe this limited data can be used to draw the conclusion
that either bus attached products are becoming less important or Network
attached products are gaining market share.
<TABLE>
<CAPTION>
($000) Third Quarter Third Quarter Year to Date Year to Date
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bus attached $ 4,720 84% $ 7,359 82% $ 9,951 79% $22,306 84%
Network attached and other 928 16% 1,662 18% 2,710 21% 4,404 16%
------- ------- ------- ------- ------- ------- ------- -------
Total Sales $ 5,648 100% $ 9,021 100% $12,661 100% $26,710 100%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
8
<PAGE>
Gross margin
Gross margin for the three and nine month periods ended September 30, 2000 was
51% and 49%, respectively, compared to 55% and 54% for the comparable periods of
1999. The Company's gross margin is dependent on product costs, product mix,
channel mix, and overhead expense, all of which fluctuate from period to period.
For example, an increase in future sales to OEM customers may result in a lower
gross margin because OEM sales are typically priced lower than distribution
sales.
Research and development expenses
Research and development expenses for the three and nine month periods ended
September 30, 2000 were approximately $0.9 million and $2.7 million,
respectively, and were approximately the same for the comparable periods in
1999. As a percentage of net sales, research and development expenses were 15%
and 21% for the three and nine month periods ended September 30, 2000,
respectively, compared to 10% for the same periods of 1999. This increase in
research and development expenses as a percentage of net sales was due to the
significant decrease in net sales in 2000.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses were $1.7 million and $5.1
million for the three and nine month periods ended September 30, 2000,
respectively. This is 7% less than the $1.9 million recorded for the third
quarter of 1999 and 11% less than the $5.7 million recorded for the comparable
nine month period. The decrease was primarily due to lower compensation
expenses. As a percentage of net sales, selling general and administrative
expenses were 31% and 40% for the three and nine months ended September 30, 2000
compared to 21% for the comparable periods of 1999. This increase was due to the
significant decrease in sales in 2000.
Other income, net
Other income, net, which includes interest income, was $0.2 million and $0.8
million for the three and nine months ended September 30, 2000, respectively,
compared to $0.2 million and $0.6 million for the comparable periods in 1999.
The increase for 2000 year to date was primarily due to higher invested cash
balances. As a percentage of net sales, other income, net, was 4% and 6% for the
three and nine months ended September 30, 2000, respectively, compared to 3% and
2% for the comparable periods in 1999.
The Company recognized a loss of approximately $69,000 on the sale of securities
during the first quarter of 2000. These securities, four series of preferred
stock from three separate issuers, had been acquired for a cost of $1.6 million
in 1998 and were the only such securities in the Company's portfolio. Preferred
stocks are tax advantaged to corporate holders but have no maturity date and
trade inversely to long-term interest rates. The Company determined that these
preferred stocks did not fit into its portfolio and has sold them all.
Benefit (provision) for income taxes
The benefit for income taxes for the third quarter of 2000 of $31,000 resulted
from a "true-up" of the effective tax rate for the year from 26% to 46% based on
estimated tax rates for the current year, compared to a provision of
approximately $0.8 million or an effective rate of 34% for the same period last
year. For the nine months ended September 30, 2000, income taxes were a benefit
of approximately $0.4 million, a 46% effective rate, compared to a provision of
$2.3 million, a 34% effective rate, for the same period in 1999. The reason the
benefit is higher than the statutory rate of 34% is that a portion of the
Company's interest income is tax free for federal income tax purposes.
Net income (loss)
As a result of the factors discussed above, the Company recorded net income of
$0.5 million and a net loss of $0.4 million for the three and nine months ended
September 30, 2000, respectively, compared to net income of $1.6 million and
$4.4 million for the comparable periods of 1999. Diluted net income (loss) per
share was $0.10 and $(0.08) for the three and nine months ended September 30,
2000 compared to diluted net income per share of $0.28 and $0.78 for the
comparable periods of 1999.
Liquidity and Capital Resources
The Company's working capital was $31.1 million at September 30, 2000, compared
with $31.0 million at December 31, 1999. Cash and cash equivalents and
marketable securities were $22.8 million at September 30, 2000, compared with
$23.3 million at December 31, 1999.
Net cash used in operating activities was $0.5 million for the nine months ended
September 30, 2000, compared to cash provided by operating activities of $3.8
million for the nine months ended September 30, 1999. The decrease was primarily
due to the net loss and decreases in accounts payable and accrued expenses.
Net cash used in investing activities for the nine months ended September 30,
2000 was $0.7 million compared to $8.9 million for the nine months ended
September 30, 1999. Net cash used in investing activities in both periods was
due primarily to purchases of marketable securities and property and equipment.
9
<PAGE>
Net cash provided by financing activities was $0.3 million for the nine months
ended September 30, 2000 and represented funds received in connection with
employee stock option exercises. Net cash used in financing activities was $0.3
million for the comparable period in 1999 and primarily represented repurchases
of the Company's common stock offset by funds received in connection with
employee stock option exercises.
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 repurchases were made
during 1998. During 1999, the Company repurchased an additional 87,300 shares of
its common stock in the open market for an aggregate purchase price of $840,000.
During 2000, and through the date of this filing, no repurchases were made. 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 September 30, 2000, the Company had no material commitments for capital
expenditures. Management believes that cash and cash equivalents and marketable
securities on hand together will be adequate to meet the Company's working
capital and capital expenditure needs for at least the next 12 months.
Recent 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. The FASB issued SFAS 137 which defers the adoption of
SFAS 133 until January 1, 2001, and SFAS 138 which includes additional guidance
on specific transactions. The Company does not expect the adoption of this
statement to have a material impact on the Company's consolidated financial
position or results of operations.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. In June 2000, the SEC issued SAB
101B to defer for six months the effective date of implementation of SAB 101.
The Company is required to adopt SAB 101 in the fourth quarter of 2000. The
Company does not expect the adoption of SAB 101 to have a material effect on its
financial position or result of operations.
10
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
Merger Agreement with Avocent
On November 3, 2000, the Company signed a definitive merger agreement under
which the Company will be acquired by Avocent Corp., the leading worldwide
supplier of equipment that helps data center operators manage their
ever-expanding server farms. Pursuant to the merger agreement, a wholly owned
subsidiary of Avocent will be merged into the Company and each share of Equinox
common stock issued and outstanding at the effective time of the merger will be
converted into the right to receive $9.75 per share in cash, without interest.
The merger has been unanimously approved by the Company's Board of Directors.
Consummation of the merger is subject to various conditions, including approval
of the holders of a majority of the outstanding shares of the Company's common
stock and expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The merger
agreement will be submitted for approval at a special meeting of the Company's
shareholders, which is expected to be held in December 2000 or January 2001.
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 2000 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.
The Company experienced a significant slowdown in demand for its products during
the fourth quarter of 1999 and the first three quarters of 2000. The Company
believes that this slowdown was primarily a result of delays in large server
installations due to Y2K concerns. While these installations are expected to
resume, the Company is uncertain as to when and if the demand for its products
will return to historical levels.
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.
Certain important components used in the Company's products presently are
available from one or a limited number of sources and 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.
11
<PAGE>
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.
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 44% of the Company's net sales during the first nine
months of 2000. 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 customers could have a material
adverse effect on the Company's operating results.
International distributor sales are denominated and transacted in both U.S.
dollars and, beginning July 1, 2000, in euros, the currency of the European
Currency Union. These sales are subject to risks common to export activities,
including governmental regulation, trade barriers and fluctuating currency
exchange rates. Fluctuating currency exchange rates can not only affect the
competitiveness of the Company's products sold abroad but also subject the
Company to exchange rate losses. At present, the Company does not plan to hedge
its euro denominated sales. 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. Williamson, Jr., the Company's CFO and Vice President,
Finance and Administration, Thomas E. Garrett, the Company's Vice President,
Sales, Steven T. Geffin, the Company's Vice President, Engineering 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 at all levels. There can be no assurance that the Company
will be successful in this regard.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule (EDGAR filing only)
(b) During the three months ended September 30, 2000, the Company did not file
any reports on Form 8-K.
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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/ ROBERT F. WILLIAMSON, JR.
----------------------------------------------
ROBERT F. WILLIAMSON, JR., Chief Financial
Officer
(Principal Financial Officer)
DATE: November 8, 2000
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