-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L/vlb7f+rsHgDHCUpLGlU7FwPOJsH7HhK1V3BmOw0W6uIGJVN/E/cBh/TrJVVTfA MsHksF2gwkSLuiIyR7jz7w== 0000950170-99-001234.txt : 19990813 0000950170-99-001234.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950170-99-001234 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUINOX SYSTEMS INC CENTRAL INDEX KEY: 0000772465 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 592268442 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21450 FILM NUMBER: 99684977 BUSINESS ADDRESS: STREET 1: ONE EQUINOX WAY CITY: SUNRISE STATE: FL ZIP: 33351-6709 BUSINESS PHONE: 9547469000 10-Q 1 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. INDEX TO ITEMS
PAGE ---- 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
2 EQUINOX SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
JUNE 30, DECEMBER 31, 1999 1998 ---------------- ------------------ 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 ================ ==================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 EQUINOX SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 --------------- --------------- --------------- --------------- 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 =============== =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 EQUINOX SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------------------------------- 1999 1998 ------------------- ------------------ 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 =================== ==================
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 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):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ----------- ----------- ----------- 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 ========= ======== ======== ========
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 (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):
BEFORE-TAX INCOME AFTER-TAX AMOUNT TAX AMOUNT ---------------- -------------- --------------- 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
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):
1999 1998 ----------------- ---------------- Raw materials $ 1,603 $ 1,869 Work-in-process 769 585 Finished goods 3,732 3,035 ----------------- ---------------- $ 6,104 $ 5,489 ================= ================
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 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 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 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:
DIRECTORS WITHHOLD NAME FOR AUTHORITY ---- --------- --------- 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
AMENDMENT TO 1993 STOCK OPTION PLAN FOR AGAINST ABSTENTIONS BROKER NON-VOTES --------- --------- ----------- ---------------- 2,682,993 2,396,150 15,833 --
(d) Not applicable 10 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 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 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 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule EX-27 2
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 12,840 6,541 7,766 (880) 6,104 34,486 5,990 (2,669) 37,807 6,030 0 0 0 53 31,724 37,807 17,689 17,689 8,171 8,171 5,603 0 0 4,298 1,461 2,837 0 0 0 2,837 0.53 0.50
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