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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to_______________
Commission file number 0-21450
EQUINOX SYSTEMS INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2268442
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
ONE EQUINOX WAY
SUNRISE, FLORIDA 33351-6709
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (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)
(Title of Class)
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of shares of Common Stock held by non-affiliates of
the registrant as of March 26, 1997, was approximately $28,962,000 based on a
$9.13 closing sale price for the Common Stock quoted on the Nasdaq National
Market on such date. For purposes of this computation, all executive officers
and directors of the registrant have been deemed to be affiliates.
The number of shares of Common Stock, $.01 par value per share, of the
registrant outstanding as of March 26, 1997, was 3,689,833.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents have been incorporated by reference into the
parts indicated: The registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the fiscal year covered by this report - Part III.
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<PAGE>
<TABLE>
<CAPTION>
INDEX TO ITEMS
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PART I
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PAGE
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<S> <C> <C>
Item 1. Business..........................................................................................3
Item 2. Properties........................................................................................6
Item 3. Legal Proceedings.................................................................................6
Item 4. Submission of Matters to a Vote of Security Holders...............................................6
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................7
Item 6. Selected Financial Data...........................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................9
Item 8. Financial Statements and Supplementary Data......................................................14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................................26
PART III
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Item 10. Directors and Executive Officers of the Registrant...............................................26
Item 11. Executive Compensation...........................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................26
Item 13. Certain Relationships and Related Transactions...................................................26
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................27
Signatures.......................................................................................................28
</TABLE>
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<PAGE>
PART I
ITEM 1. BUSINESS
Equinox Systems Inc. ("Equinox" or the "Company") designs and markets products
which enhance the data communications capabilities of computer systems. The
Company's products include: Serial I/O Products, Terminal Servers and Data
Switching Systems.
The applications served by these products include remote access connectivity for
Internet, Intranet and private corporate LAN connections along with local and
remote connections for multi-user computer systems (such as those used to
perform point-of-sale, data entry and data collection functions).
Each of the products is comprised of custom-designed computer software and
custom-designed ASIC (application specific integrated circuit) hardware
developed by Equinox personnel. Sales, marketing, technical support and service
functions are also performed internally but manufacturing is out-sourced to
full-service suppliers. The Company sells its products through a worldwide
multi-tiered distribution channel, systems integrators and original equipment
manufacturers ("OEMs") such as Hewlett Packard, AT&T, NCR, Unisys, Attachmate
and General DataComm.
PRODUCTS
SERIAL I/O PRODUCTS
The Company's "SuperSerial" serial I/O products provide economical,
high-density, high-performance I/O ports and modem connections for Microsoft
Windows NT, Novell NetWare, and UNIX servers using PCI, ISA, EISA or
MicroChannel busses. Equinox Serial I/O products range from 2 ports to 128 ports
per server bus expansion slot and are available in both fixed configurations and
expandable models. They support speeds up to 920 kbps and include sophisticated
configuration, management and diagnostic software. Equinox's SuperSerial
software drivers are tightly coupled to its ASIC hardware to minimize server
performance degradation even under heavy traffic conditions.
In 1996, Equinox introduced its newest remote access product, the SuperSerial
Modem Pool. This product integrates the Company's SuperSerial hardware and
software with up to 128 standard internal modems of any brand, and efficiently
links them to the server's operating system through one bus expansion slot.
The Company's continuing Serial I/O development efforts include further
integration of modem/ISDN functionality and enhanced protocol processing to
significantly lower the cost and density of bus-based remote access and multi-
user computer systems.
TERMINAL SERVERS
The Company's "ELS" Terminal Servers provide economical, high-density,
high-performance I/O ports for computer systems on Ethernet LANs using either
the Internet standard TCP/IP or LAT protocols. Equinox Terminal Servers range
from 8 to 48 ports and are available in both fixed configurations and expandable
models.
Similar to the Company's Serial I/O products, the Terminal Server's software
features serve both the remote access and multi-user markets and the continuing
development efforts also include integration of modem/ISDN functionality and
enhanced protocol processing to significantly lower the cost and density of
Ethernet-based remote access and multi-user systems.
DATA SWITCHING SYSTEMS
Equinox Data Switching Systems allow interconnectivity among large numbers of
serial I/O devices and host computers. They feature a modular design and easily
expand to many thousands of ports. Ethernet gateways provide access to host
computers on Ethernet networks. High bandwidth T1 links provide wide-area
connectivity and local multiplexers allow for extensive, campus-type networks.
Full on-line redundancy and sophisticated configuration, management, monitoring
and diagnostic software are also included.
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<PAGE>
The following table illustrates the Company's sales mix over the past three
years (certain amounts for 1995 have been reclassified to conform with the
current method of presentation). Dollars are in thousands.
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ----------------------- -----------------------
NET NET NET
SALES % TOTAL SALES % TOTAL SALES %TOTAL
-------- ------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Serial I/O Products................ $ 17,043 69% $ 12,664 63 % $ 12,979 65%
Terminal Servers................... 4,612 19 5,473 27 4,173 21
Data Switching Systems............. 3,124 12 2,085 10 2,892 14
-------- ------ -------- ------- --------- -------
$ 24,779 100% $ 20,222 100 % $ 20,044 100%
======== ====== ======== ======= ========= =======
</TABLE>
PRODUCT DISTRIBUTION AND CUSTOMERS
Equinox distributes the majority of its products through a worldwide network of
distributors, major system integrators and original equipment manufacturers.
Data Switching Systems represent the only product group sold directly to
end-users. The Company's distributors, in turn, resell the Company's products to
VARs and smaller system integrators. As is typical in the computer industry, the
Company's distribution agreements are nonexclusive, and the Company does not
preclude its distributors from selling competitive products.
The Company's distributors may be entitled to return inventory to the Company
for stock rotation purposes and receive credit against other future purchases.
In addition, if the Company reduces its prices, the Company credits its
distributors for the difference between the original purchase price of products
remaining in the distributor's inventory and the Company's reduced prices for
such products. The Company also accepts warranty returns from its distributors.
DOMESTIC DISTRIBUTORS. Equinox currently uses approximately 25 national and
regional distributors to market its Serial I/O Products and Terminal Servers.
Most of the Company's national distributors sell primarily to system integrators
and VARs. Regional distributors also serve system integrators and VARs within
their local geographic areas. In addition, regional distributors often focus on
specialized market segments or applications. The Company's domestic distributors
include Tech Data, which represented 15%, 14% and 17% of the Company's total net
sales in 1996, 1995 and 1994, respectively.
INTERNATIONAL DISTRIBUTORS. Equinox currently markets its products
internationally through approximately 50 independent distributors who resell to
customers in over 40 foreign countries. International distributors typically
provide technical support and follow-up service directly to their customers.
Historically, distributors in Europe have constituted the primary source of the
Company's international sales. See Note 11 of Notes to Consolidated Financial
Statements, Item 8, for information concerning the Company's net sales by
geographic region.
International sales are subject to certain risks common to export activities,
including government regulation, trade barriers and fluctuating currency
exchange rates. 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.
OEM CUSTOMERS. The Company's OEM customers typically incorporate the Company's
Serial I/O Products in their own product offerings. Whenever possible, the
Company works with existing and potential OEM customers in their product
development cycles to design and develop product enhancements and new products
to meet the OEMs' product requirements. Sales to OEMs typically involve
extensive product and system evaluations, and the Company's product shipments
are linked to the development cycle and introduction of the OEMs' new systems.
The Company's OEM customers include Hewlett-Packard (HP), AT&T, NCR and Unisys.
Sales to HP represented 15% of the Company's total net sales in 1996.
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<PAGE>
MANUFACTURING
The majority of Equinox products are manufactured by independent contractors.
The Company has formal agreements with these independent contractors, and such
agreements include customary provisions for termination by either party for such
events as bankruptcy, merger or nonperformance. These contractors procure all
necessary parts and components, assemble finished products and perform quality
control testing of finished products. Purchases from these contractors generally
are made on the basis of adjustable quarterly production schedules provided by
the Company. The Company believes that it benefits from the use of contractors
in the manufacture of its products through a reduction of the capital
requirements necessary to maintain facilities and equipment to manufacture its
entire line of products, a reduction of its headcount and the elimination of the
need to stock large inventories of components. Currently, each of the Company's
product lines is manufactured by a separate independent contractor. The Company
continually reviews and evaluates alternative contractors. In the event that any
of its existing contractors were to cease doing business or otherwise become
unable to meet the Company's requirements, management believes that the Company
would be able to develop alternative sources. If such sources were not
immediately available, management believes that the Company could, as it has
done in the past, produce limited amounts of its products in-house.
MARKETING AND SALES
The Company's sales and marketing personnel recruit new distributors, support
the Company's national and international distributors, market the Company's
products to OEMs and major system integrators and participate in trade shows and
vendor-specific events.
Equinox advertises in technical trade publications and distributor catalogs, and
also participates in cooperative advertising efforts with its distributors. A
substantial portion of the Company's marketing efforts and expenditures are
directed toward participation in regional, national and international trade
shows, including Networld+Interop, PC Expo, Comdex, SCO Forum, and CeBIT. The
Company's marketing activities also include distribution of sales and product
literature, qualification of sales leads, distribution of newsletters to
customers and periodic direct mailings to prospective resellers and end users.
BACKLOG
The Company's customers typically place orders for delivery within a short
period of time. As a result, the Company, along with others in the industry, is
required to carry sufficient inventory of finished products to meet its own
forecast of the near-term demand of its customers, and the Company generally is
able to ship within 48 hours. Therefore, the Company does not believe that its
backlog is a good indicator of the level of its future sales. At December 31,
1996, the Company's backlog was $1.5 million, compared to $2.2 million at
December 31, 1995. All of the Company's backlog at December 31, 1996 is expected
to be filled during 1997.
COMPETITION
The remote access and multi-user computer markets are intensely competitive and
characterized by continued and rapid technological advances in both hardware and
software development. These advances may result in short product life cycles and
frequent product performance improvements. Both markets can be significantly
affected by product introductions and marketing activities of industry
participants.
Essential competitive factors in the overall marketplace for I/O communications
products include performance and reliability. Performance of I/O communications
products is often expressed in terms of speed (the rate at which data is sent to
and received from devices) and throughput (the quantity of data which can be
sent to and received from all devices in a given time period). Equinox products
incorporate its custom developed proprietary SuperSerial chipsets to perform I/O
functions, for which most competitive products generally use "off-the-shelf"
components. The Company believes that its SuperSerial chipsets eliminate the
degradation in performance and speed which typically occurs in products
utilizing off-the-shelf components. Currently, the Company's products can send
and receive data at very high transmission rates (up to 920,000 bits per
second).
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<PAGE>
TRADEMARKS AND PATENTS
Due to the rapid pace of innovation in the computer industry, Equinox believes
that factors such as the technological and creative skills of its personnel and
the ability to design, enhance, market and support new products are more
important for establishing and maintaining a leading position within the
industry than patent, copyright or other legal protections for its technology.
The Company does not hold any patents or copyrights relating to its products or
the technology or software incorporated therein. The Company attempts to protect
its trade secrets and other proprietary information primarily through agreements
with certain of its employees and third parties. However, there can be no
assurance that others 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. The Company has
registered the Equinox service mark in the United States and several other
countries.
EMPLOYEES
At December 31, 1996, Equinox had a total of 96 full-time employees, of which 24
were engaged in research and development, 21 were engaged in manufacturing, 19
were engaged in sales and marketing, 13 were engaged in technical support and
service and 19 were in executive, finance and administrative positions. The
Company also employs temporary personnel on an as-needed basis. None of the
Company's employees are represented by a labor union, nor has the Company
experienced any work stoppages. The Company considers its relations with its
employees to be good.
Competition for qualified employees in the Company's industry is intense. To
date, the Company has not experienced any material difficulty in recruiting or
retaining qualified personnel. However, Equinox believes that its future success
will depend in part on its continued ability to recruit, motivate and retain
qualified personnel.
ITEM 2. PROPERTIES
The Company's headquarters and operations occupy a 45,000 square foot building
located on 6.5 acres in Sunrise, Florida. The Company owns this facility and
believes it is more than adequate to support its present operations. In
addition, the site is zoned for the construction of an additional 45,000 square
foot facility, which the Company believes should accommodate its growth over the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company is not a
party to any litigation the outcome of which would have a material adverse
effect on its business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended
December 31, 1996.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market. The
following table sets forth the high and low sales prices for the Common Stock
for each quarter during the last two fiscal years as reported by the Nasdaq
National Market.
HIGH LOW
---- ---
1995
----
First Quarter $ 12.00 $ 6.75
Second Quarter 10.00 7.13
Third Quarter 11.50 7.13
Fourth Quarter 8.50 6.00
1996
----
First Quarter $ 9.75 $ 7.38
Second Quarter 15.75 9.25
Third Quarter 14.63 9.75
Fourth Quarter 13.00 8.00
As of March 26, 1997, there were approximately 73 holders of record (and an
estimated 2,200 beneficial owners) of the 3,689,833 outstanding shares of Common
Stock. The closing sale price for the Common Stock on March 26, 1997 was $9.13.
The Company has not paid cash dividends on its Common Stock during the past
three fiscal years, and the Company currently intends to retain any future
earnings to finance its operations and the expansion of its business. Therefore,
the payment of cash dividends on the Common Stock is unlikely in the foreseeable
future. Any future determination to pay cash dividends will be at the discretion
of the Board of Directors and will be dependent upon the Company's earnings,
capital requirements and financial condition and any other factors deemed
relevant by the Board of Directors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data of
the Company for each of the years in the five-year period ended December 31,
1996. The selected consolidated financial data as of December 31, 1996, 1995 and
1994 have been derived from the Company's financial statements included in Item
8, which have been audited by Arthur Andersen LLP, independent certified public
accountants for the Company. The selected consolidated financial data should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto for the three-year period ended December 31, 1996, included in
Item 8, and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................................... $ 24,779 $ 20,222 $ 20,044 $ 18,500 $ 21,282
Cost of sales................................................ 12,774 10,554 9,633 9,029 9,396
--------- -------- --------- -------- --------
Gross profit............................................... 12,005 9,668 10,411 9,471 11,886
--------- -------- --------- -------- --------
Research and development..................................... 2,640 2,149 1,954 2,310 1,883
Selling, general and administrative.......................... 5,569 5,515 5,451 5,681 7,184
--------- -------- --------- -------- --------
Total operating expenses................................... 8,209 7,664 7,405 7,991 9,067
--------- -------- --------- -------- --------
Income from operations..................................... 3,796 2,004 3,006 1,480 2,819
Other income, net (1)........................................ 486 639 361 369 1,088
--------- -------- --------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of change in accounting principle... 4,282 2,643 3,367 1,849 3,907
Provision for income taxes................................... 1,527 1,023 1,283 721 1,440
--------- -------- --------- -------- --------
Income before extraordinary item and cumulative effect of
change in accounting principle............................. 2,755 1,620 2,084 1,128 2,467
Extraordinary item (2)....................................... -- -- -- -- 738
Cumulative effect of change in
accounting principle (3)................................... -- -- -- 500 --
--------- -------- --------- -------- --------
Net Income.............................................. $ 2,755 $ 1,620 $ 2,084 $ 1,628 $ 3,205
========= ======== ========= ======== ========
Income per share:
Income before extraordinary item and cumulative effect of
change in accounting principle (4)......................... $ 0.68 $ 0.39 $ 0.52 $ 0.30 $ 0.72
Extraordinary item......................................... -- -- -- -- 0.23
Cumulative effect of change in accounting principle (3) ... -- -- -- 0.13 --
--------- -------- --------- -------- --------
Net Income................................................. $ 0.68 $ 0.39 $ 0.52 $ 0.43 $ 0.95
Weighted average common and common equivalent shares
outstanding 4,040 4,194 4,037 3,780 3,204
-----------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- --------- -------- --------
BALANCE SHEET DATA:
Working capital.............................................. $ 18,935 $ 17,849 $ 18,582 $ 17,539 $ 5,683
Total assets................................................. 26,779 26,828 27,635 22,684 13,336
Long-term debt .............................................. -- -- -- -- --
Redeemable preferred stock................................... -- -- -- -- 825
Shareholders' equity......................................... 22,291 21,285 21,128 18,115 5,282
</TABLE>
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(1) Other income, net in 1992 includes $0.9 million of business
interruption insurance related to Hurricane Andrew, which caused
extensive damage to the Company's leased facility and certain of its
assets.
(2) The extraordinary item in 1992 represents the excess of insurance
proceeds received with respect to certain assets destroyed by Hurricane
Andrew over the Company's carrying value of such assets, net of income
taxes and certain other related reserves.
(3) In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
(4) In 1992, dividends of $154,000 paid to preferred shareholders were
subtracted from net income applicable to common shareholders.
Redeemable preferred stock was not considered converted for weighted
average common and common equivalent shares outstanding.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth, for the periods presented, certain income
statement data of the Company, expressed as a percentage of net sales:
PERCENTAGE OF NET SALES
-------------------------------
1996 1995 1994
---- ---- ----
Net sales............................. 100% 100% 100%
Cost of sales......................... 52 52 48
----- ---- -----
Gross profit.................... 48 48 52
----- ---- -----
Research and development.............. 11 11 10
Selling, general and administrative... 22 27 27
----- ---- -----
Total operating expenses........ 33 38 37
----- ---- -----
Income from operations.......... 15 10 15
Other income, net..................... 2 3 2
----- ---- -----
Income before income taxes ..... 17 13 17
Provision for income taxes............ 6 5 7
----- ---- -----
Net income...................... 11% 8% 10%
===== ==== =====
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales increased to $24.8 million in 1996 from $20.2 million in
1995, an increase of $4.6 million, or 23%. Serial I/O product sales increased
34% to $17.0 million in 1996 from $12.7 million in 1995, due to greater sales
volume through both of the Company's sales channels (distribution and OEM).
Distributor sales of Serial I/O grew by 50% whereby OEM sales grew by 13%.
During 1995, the Company entered into an OEM agreement with Hewlett-Packard
Company (HP) and began supplying its SST products for use in the new HP9000
D-Class servers. HP represented 15% of the Company's net sales during 1996.
Although the Company believes there is future growth opportunities related to
existing and potential OEMs, sales to OEM customers are difficult to predict as
they fluctuate along with the demand for the OEM's final product, which Equinox
has little or no control over.
Sales of Terminal Servers and Data Switching Systems collectively increased 2%
to $7.7 million in 1996 from $7.5 million in 1995. This increase is attributable
to higher direct sales of Data Switching Systems (particularly to one customer
which accounted for 55% of Data Switching Systems revenues) partially offset by
a 16% decline in sales of Terminal Servers to distributors. Management does not
expect Data Switching Systems sales to that customer to continue at comparable
levels and believes that the market for Data Switching Systems will decline over
time. Additionally, management believes that sales of its current Terminal
Server products may continue to decline until such time as an enhanced version
is developed and introduced.
Export net sales decreased to $5.2 million in 1996 from $5.4 million in 1995, a
decrease of $0.2 million or 4% due primarily to reduced sales in Latin America.
As a percentage of net sales, export net sales decreased to 21% in 1996 from 27%
in 1995.
COST OF SALES. Cost of sales increased 21% to $12.8 million in 1996 from $10.6
million in 1995 primarily due to higher net sales. As a percentage of net sales,
cost of sales were 52% in 1996 and 1995.
The Company's gross margin is dependent in part on product and channel mix which
can fluctuate from year to year. Increased sales to OEM's may negatively impact
the Company's future gross margin, as OEM sales are typically priced lower due
to volume expectations as well as limited sales/support requirements. However,
volume efficiencies, if any, could result in potential overhead savings and
improved gross margins.
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<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
23% to $2.6 million in 1996 from $2.1 in 1995 primarily due to additional
personnel required as a result of expanded development efforts. As a percentage
of net sales, research and development expenses were 11% in 1996 and 1995.
Research and development costs are charged to expense as incurred.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 1% to approximately $5.6 million from $5.5
million in 1995. As a percentage of net sales, selling, general and
administrative expenses decreased to 22% in 1996 from 27% in 1995 due to
continued efficiencies realized from selling products through OEM's and
multi-tiered distribution.
INCOME FROM OPERATIONS. Income from operations increased to $3.8 million in 1996
from $2.0 million in 1995, an increase of $1.8 million primarily due to
increased sales and gross profit partially offset by increased operating
expenses (primarily R&D related). As a percentage of sales, income from
operations increased to 15% in 1996 from 10% in 1995.
OTHER INCOME, NET. Other income, which includes interest income, decreased to
$0.5 million in 1996 from $0.6 million in 1995, a decrease of 24% primarily due
to lower interest rates on invested balances. As a percentage of net sales,
other income decreased to 2% in 1996 from 3% in 1995.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes increased
to $1.5 million in 1996 from $1.0 million in 1995, an increase of $0.5 million
as a result of the Company's increased income from operations. The Company's
effective tax rate decreased to 36% in 1996 from 39% in 1995 primarily due to a
reduction in state taxes (as a percentage of the total provision) due to reduced
state filing requirements.
NET INCOME. Net income increased to $2.8 million in 1996 from $1.6 million in
1995, an increase of 70%. As a percentage of net sales, net income increased to
11% in 1996 from 8% in 1995, primarily as a result of increased sales and gross
profit partially offset by increased operating expenses (primarily R&D related).
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
NET SALES. Net sales increased to $20.2 million in 1995 from $20.0 million in
1994, an increase of $0.2 million, or 1%. Serial I/O product sales decreased 2%
in 1995 compared to 1994, primarily due to reduced demand from the Company's
distributors which was partially offset by an increase in sales to OEMs.
Sales of Data Switching Systems and Terminal Servers, collectively increased 7%
in 1995 compared to 1994. This increase was attributable to increased sales
volume of Terminal Servers through the Company's distributors as well as an
increase in direct sales of Data Switching Systems.
Export net sales increased to $5.4 million in 1995 from $4.8 million in 1994, an
increase of $0.6 million or 12% due primarily to increased sales to Europe and
the Pacific Rim. As a percentage of net sales, export net sales increased to 27%
in 1995 from 24% in 1994.
COST OF SALES. Cost of sales increased to $10.6 million in 1995 from $9.6
million in 1994, an increase of $1.0 million or 10%. As a percentage of net
sales, cost of sales increased to 52% in 1995 from 48% in 1994. This was
primarily the result of changes in product mix as well as increased warranty
costs and manufacturing overhead.
During 1995, sales of the Company's SST products (which were introduced in June
1994) significantly increased. The manufacturing costs of these products, in the
aggregate, are higher than the Company's more established Serial I/O products as
they have yet to fully realize savings from volume purchase discounts as well as
other production efficiencies.
The provision for warranty costs during 1995 increased primarily due to the
increased sales of SST products which offer a 5-year warranty period (as
compared to the Company's standard 3-year warranty period).
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<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
to $2.1 million in 1995 from $2.0 million in 1994, an increase of $0.1 million
or 10%. As a percentage of net sales, research and development expenses
increased to 11% in 1995 from 10% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $5.5 million in 1995 and 1994. As a percentage of
net sales, selling, general and administrative expenses were 27% in 1995 and
1994.
INCOME FROM OPERATIONS. Income from operations decreased to $2.0 million in 1995
from $3.0 million in 1994, a decrease of $1.0 million or 33% primarily as a
result of reduced gross profit as well as increased operating expenses. As a
percentage of sales, income from operations decreased to 10% in 1995 from 15% in
1994.
OTHER INCOME, NET. Other income increased to $0.6 million in 1995 from $0.4 in
1994, an increase of 77%. The increase was primarily due to increased
investments of cash as well as higher interest rates on invested balances. As a
percentage of net sales, other income increased to 3% in 1995 from 2% in 1994.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes decreased
to $1.0 million in 1995 from $1.3 million in 1994, a decrease of 20%. The
Company's effective tax rate increased to 39% in 1995 from 38% in 1994.
NET INCOME. Net income decreased to $1.6 million in 1995 from $2.1 million in
1994, a decrease of $0.5 million or 22%. As a percentage of net sales, net
income decreased to 8% in 1995 from 10% in 1994, primarily as a result of
reduced gross profit as well as increased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $18.9 million at December 31, 1996, compared
with $17.8 million at December 31, 1995. Cash and cash equivalents were $13.0
million at December 31, 1996, compared with $13.6 million at December 31, 1995.
Net cash provided by operating activities was $2.5 million during the year ended
December 31, 1996, compared to $1.2 million for the year ended December 31,
1995. This was primarily due to increased net income offset by increased
accounts receivable and reductions in accounts payable and accrued expenses. Net
cash used in investing activities was $1.2 million during the year, primarily
due to net purchases of marketable securities and purchases of capital assets.
Net cash used in financing was $1.9 million primarily due to repurchases of
common stock (see below for further discussion). As of December 31, 1996, the
Company had no material commitments for capital expenditures.
In November 1994, the Board of Directors authorized the Company to repurchase up
to 500,000 shares of the Company's issued and outstanding common stock. During
1995, the Company repurchased 254,100 shares of its common stock in the open
market for an aggregate purchase price of approximately $1,918,000. During 1996,
the Company repurchased an additional 245,900 shares of its common stock for an
aggregate purchase price of approximately $2,022,000. In March 1997, the Board
of Directors authorized the Company to repurchase up to an additional 1,000,000
shares of the Company's issued and outstanding common stock. Repurchases, if
any, may be made from time to time subject to prevailing conditions, in the open
market or in privately negotiated transactions.
Management believes that cash on hand and investments 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.
- 11 -
<PAGE>
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 1997 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 turn-key
manufacturers, are located in areas prone to natural disasters, specifically
hurricanes. In August 1992, Hurricane Andrew caused extensive damage to the
Company's former headquarters facility and the majority of the Company's assets.
While the Company recovered quickly from this disaster, the Company believes
that its operating results and financial condition could be adversely affected
should another natural disaster strike its current facility, any of its turn-key
manufacturers, or any of its major customers.
- 12 -
<PAGE>
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. The loss or ineffectiveness of certain of
the Company's distributors and/or OEM 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 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 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.
- 13 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants.............. 15
Consolidated Balance Sheets as of
December 31, 1996 and 1995................................. 16
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994....... 17
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994....... 18
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994....... 19
Notes to Consolidated Financial Statements...................... 20
- 14-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Equinox Systems Inc.:
We have audited the accompanying consolidated balance sheets of Equinox Systems
Inc. (a Florida corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equinox Systems Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 18, 1997.
- 15 -
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
----------------------------
1996 1995
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 12,998 $ 13,607
Marketable securities.............................................. 1,350 507
Accounts receivable ............................................... 3,480 3,401
Inventories........................................................ 4,073 4,139
Deferred income taxes.............................................. 1,068 1,166
Prepaid expenses and other current assets.......................... 423 404
---------- ------------
Total current assets............................................. 23,392 23,224
---------- ------------
PROPERTY AND EQUIPMENT, at cost....................................... 5,212 4,824
Less - accumulated depreciation and amortization................... (1,825) (1,220)
---------- ------------
3,387 3,604
---------- ------------
$ 26,779 $ 26,828
========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 2,294 $ 2,721
Accrued expenses.................................................. 1,588 1,873
Deferred service contract revenue................................. 192 227
Accrued income taxes.............................................. 383 554
---------- ------------
Total current liabilities....................................... 4,457 5,375
---------- ------------
DEFERRED INCOME TAXES................................................ 31 168
---------- ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding................................. -- --
Common stock, $0.01 par value, 15,000,000 shares authorized;
3,689,833 and 3,899,598 shares issued and outstanding in 1996 and
1995, respectively.............................................. 37 39
Additional paid-in capital........................................ 12,030 13,777
Retained earnings................................................. 10,224 7,469
---------- ------------
Total shareholders' equity.......................................... 22,291 21,285
---------- ------------
$ 26,779 $ 26,828
========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- 16 -
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
----------- ------- ---------
<S> <C> <C> <C>
NET SALES.......................................................... $ 24,779 $ 20,222 $ 20,044
COST OF SALES...................................................... 12,774 10,554 9,633
----------- --------- ---------
Gross profit.................................................... 12,005 9,668 10,411
----------- --------- ---------
OPERATING EXPENSES:
Research and development........................................ 2,640 2,149 1,954
Selling, general and administrative ............................ 5,569 5,515 5,451
----------- --------- ---------
Total operating expenses................................... 8,209 7,664 7,405
----------- --------- ---------
Income from operations..................................... 3,796 2,004 3,006
----------- --------- ---------
OTHER INCOME:
Interest income................................................. 566 646 392
Other, net...................................................... (80) (7) (31)
----------- --------- ---------
486 639 361
----------- --------- ---------
Income before income taxes ................................ 4,282 2,643 3,367
PROVISION FOR INCOME TAXES......................................... 1,527 1,023 1,283
----------- --------- ---------
Net income............................................... $ 2,755 $ 1,620 $ 2,084
=========== ========= =========
NET INCOME PER SHARE............................................... $ 0.68 $ 0.39 $ 0.52
=========== ========= =========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING.......................... 4,040 4,194 4,037
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- 17 -
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Common Stock
----------------------------
Number Additional Total
of Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
------------- ---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.............. 3,810,763 $ 38 $ 14,312 $ 3,765 $ 18,115
Stock options exercised................... 273,897 3 852 -- 855
Imputed compensation on
stock options granted (Note 8)........... -- -- 74 -- 74
Net income................................ -- -- -- 2,084 2,084
------------- ---------- ------------- ------------- ---------------
Balance at December 31, 1994.............. 4,084,660 41 15,238 5,849 21,128
Stock options exercised................... 69,038 1 388 -- 389
Imputed compensation on
stock options granted (Note 8)........... -- -- 66 -- 66
Repurchases of common stock............... (254,100) (3) (1,915) -- (1,918)
Net income................................ -- -- -- 1,620 1,620
------------- ---------- ------------- ------------- ---------------
Balance at December 31, 1995.............. 3,899,598 39 13,777 7,469 21,285
Stock options exercised................... 36,135 -- 257 -- 257
Imputed compensation on
stock options granted (Note 8)........... -- -- 16 -- 16
Repurchases of common stock............... (245,900) (2) (2,020) -- (2,022)
Net income................................ -- -- -- 2,755 2,755
------------- ---------- ------------- ------------- ---------------
Balance at December 31, 1996.............. 3,689,833 $ 37 $ 12,030 $ 10,224 $ 22,291
============= ========== ============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994
-------------- ---------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 2,755 $ 1,620 $ 2,084
-------------- ---------------- --------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation............................................ 605 425 253
Provision for doubtful accounts and anticipated sales
returns 708 974 1,418
Provision for warranty costs............................ 129 181 89
Provision for deferred income taxes .................... (39) 308 (45)
Recognition of deferred service contract revenue........ (756) (717) (576)
Imputed compensation on stock options................... 16 66 74
(Increase) decrease in assets:
Accounts receivable.................................. (787) (1,329) (472)
Inventories.......................................... 66 (153) (1,531)
Prepaid expenses and other current assets............ (19) (41) (58)
Increase (decrease) in liabilities:
Accounts payable..................................... (427) (294) 1,722
Accrued expenses..................................... (414) (736) (246)
Deferred service contract revenue.................... 721 711 541
Accrued income taxes................................. (80) 229 816
----------- ------------ -----------
Total adjustments.................................... (277) (376) 1,985
----------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................... 2,478 1,244 4,069
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities.................. (1,550) (1,000) (5,013)
Maturities of marketable securities................. 707 3,506 5,100
Purchases of property and equipment................. (388) (1,267) (2,168)
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.......... (1,231) 1,239 (2,081)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised, net of tax benefit.......... 166 298 444
Repurchases of common stock ......................... (2,022) (1,918) --
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.......... (1,856) (1,620) 444
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. (609) 863 2,432
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................. 13,607 12,744 10,312
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $12,998 $ 13,607 $ 12,744
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Income taxes paid............................................ $ 1,646 $ 493 $ 510
=========== ============ ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During 1996, 1995 and 1994, the Company realized income tax benefits of $91,000,
$91,000 and $410,000, respectively, in connection with the exercise of stock
options by certain current and former employees and directors. (Amounts are
included in the Consolidated Statements of Shareholders' Equity within "stock
options exercised.") Such amounts represent deductible compensation expense not
required to be recognized for financial statement purposes.
The accompanying notes are an integral part of these consolidated
financial statements.
- 19 -
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Equinox Systems Inc. (the "Company") designs and markets input/output
communications products for remote access and multi-user computer systems.
The Company markets its products to a worldwide network of distributors, value
added resellers ("VARs"), system integrators and original equipment
manufacturers ("OEMs").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly-liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include investments in
repurchase agreements, short-term Treasury bills and notes, and tax-exempt bond
instruments. These securities mature within three months and, therefore, bear
minimal risk.
MARKETABLE SECURITIES
Marketable securities consist of investment grade corporate obligations, U.S.
Treasury obligations and tax-exempt bond instruments which will be held to their
maturity and are carried at their net amortized cost. At December 31, 1996 and
1995, the aggregate market value of the securities approximated their cost.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of investments and trade receivables. The
Company has policies that limit investments as to maturity, liquidity, credit
quality, concentration and diversification of issuers and types of investments.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across many different industries and geographical areas.
The Company sells its products primarily to distributors, VARs, system
integrators and OEMs in North America, Europe, Latin America and the Pacific
Rim. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains allowances for
potential credit losses. See Note 11 for discussion of export sales and Note 12
for discussion of significant customers.
INVENTORIES
Inventories consist of parts and assembly components to be used in the
production of finished goods and are stated at the lower of cost or market.
Cost, which includes raw materials, manufacturing labor and overhead, is
determined on a first-in, first-out basis. Inventories consist of the following
as of December 31 (in thousands):
1996 1995
---------- -----------
Raw materials................. $ 1,022 $ 1,258
Work-in-process............... 318 503
Finished goods................ 2,733 2,378
---------- -----------
$ 4,073 $ 4,139
========== ===========
- 20 -
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated on a straight-line
basis over the following estimated useful lives:
Buildings and improvements 5 to 30 years
Furniture, fixtures and equipment 3 to 5 years
Expenditures for maintenance and repairs are charged to operations as incurred,
while major renewals and betterments are capitalized. The assets and related
accumulated depreciation accounts are adjusted for asset retirements and
disposals with the resulting gain or loss included in operations.
WARRANTY COSTS
The Company offers a three to five-year warranty on its products. Costs
associated with the warranty program are accrued in the period in which the
related sales are recognized on the basis of estimated net future costs (See
Note 5).
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment,
adjusted by a provision for anticipated sales returns and allowances granted to
customers.
Revenues derived from sales of service contracts are recognized on a
straight-line basis over the term of the service contracts.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of common shares
and common equivalent shares outstanding which include, where appropriate, the
assumed exercise of options. In computing net income per common and common
equivalent share, the Company currently utilizes the modified treasury stock
method and, in the prior years, used the treasury stock method.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year presentation.
(3) ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowances for doubtful accounts and
anticipated sales returns of $822,000 and $1,123,000 at December 31, 1996 and
1995, respectively, in the accompanying consolidated balance sheets.
- 21 -
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(4) PROPERTY AND EQUIPMENT
The following is a summary of major classifications of property and equipment,
at cost, as of December 31 (in thousands):
1996 1995
------------- --------------
Computer equipment..................... $ 1,580 $ 1,295
Furniture and fixtures ................ 919 854
Building, land and improvements........ 2,713 2,675
------------- --------------
$ 5,212 $ 4,824
============= ==============
(5) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31 (in thousands):
1996 1995
------------- -------------
Compensation related.......... $ 730 $ 692
Warranty costs................ 645 636
Licensing fees (See Note 9)... 48 230
Other......................... 165 315
------------- -------------
$ 1,588 $ 1,873
============= =============
(6) RETIREMENT PLAN
The Company maintains a defined contribution benefit plan (401(k) salary
deferral program) covering substantially all employees. Employees may elect to
contribute to the plan amounts not to exceed a specified percentage of annual
compensation, subject to the current limit imposed by Internal Revenue Service
guidelines. The Company, at its discretion, may match the participants'
contributions at a specified percentage, limited by a stated maximum amount.
The assets of the plan are administered by an unrelated investment company. The
total employer contributions charged to expense were approximately $60,000,
$63,000 and $35,000 in 1996, 1995 and 1994, respectively.
(7) COMMON STOCK - STOCK REPURCHASE PROGRAM
In November 1994, the Board of Directors authorized the repurchase of up to
500,000 shares of the Company's common stock. During 1995, the Company
repurchased 254,100 shares of its common stock in the open market for an
aggregate purchase price of approximately $1,918,000. During 1996, the Company
repurchased an additional 245,900 shares of its common stock for an aggregate
purchase price of approximately $2,022,000.
- 22 -
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(8) STOCK OPTION PLANS
The Company maintains four non-qualified stock option plans which cover
officers, employees and directors. During 1996, a total of 329,000 stock options
were granted pursuant to these plans at prices ranging from $8.56 to $11.44 per
share which was the fair market value of the Company's common stock at the date
of the grants.
The Company also maintains another plan (the "Directors' Plan") which provides
for an automatic grant of options to purchase 10,000 shares of common stock at
fair market value at the date of grant to each non-employee director of the
Company upon election as director. The Directors' Plan also provides for an
automatic grant of options to purchase 2,500 shares of common stock at fair
market value upon re-election as a director. During 1996, stock options to
purchase 12,500 shares were granted at a price of $11.44 per share pursuant to
the Directors' Plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced by approximately $304,000, or $.08 per share in 1996 and $37,000, or
$.01 per share in 1995. The weighted average fair value of the options granted
during 1996 and 1995 is estimated at $5.75 and $3.47, respectively. The Company
uses the Black-Scholes option-pricing model and has used assumed risk free
interest rates of 6.52% and 5.44% in 1996 and 1995, respectively and the
following additional assumptions in both years: dividend yield 0%, volatility
46% and an expected life of six years.
As of December 31, 1996, a total of 1,467,157 shares of common stock were
reserved for issuance pursuant to options granted under all plans. Options to
purchase 943,256 shares were outstanding at December 31, 1996, and options to
purchase 474,552 shares had been exercised as of such date.
Information with respect to the stock option plans in effect as of December 31,
1996 is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available Options Exercise
For Grant Outstanding Price
--------------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993................ 193,750 632,611 $ 3.13
Options granted............................. (134,500) 134,500 4.69
Options exercised........................... -- (273,897) 1.62
Options canceled............................ 31,983 (34,733) 6.10
--------------- ----------------
Balance at December 31, 1994................ 91,233 458,481 4.26
Options authorized.......................... 400,000 -- --
Options granted............................. (302,500) 302,500 6.68
Options exercised........................... -- (69,038) 4.31
Options canceled............................ 14,307 (15,807) 5.63
--------------- ----------------
Balance at December 31, 1995................ 203,040 676,136 5.31
Options authorized.......................... 150,000 -- --
Options granted............................. (341,500) 341,500 10.72
Options exercised........................... -- (36,135) 4.59
Options canceled............................ 37,809 (38,245) 5.37
--------------- ----------------
Balance at December 31, 1996................ 49,349 943,256 7.19
=============== ================
</TABLE>
- 23 -
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Options are exercisable within ten years from the date of grant with specific
vesting periods, currently four years, set by the Board of Directors. Options
granted to officers and employees expire three months after termination of
employment.
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- --------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$1.50-$ 2.25 125,896 4.51 $1.82 125,896 $1.82
$4.63-$ 6.19 404,173 8.01 5.69 202,863 5.50
$7.88-$11.44 413,187 9.40 10.28 54,073 9.03
-------------- -------------- ------------ -------------- ------------
943,256 8.15 $7.19 382,832 $4.79
============== ============== ============ ============== ============
</TABLE>
Options granted during 1992 were deemed to include compensation based on the
excess of the then-fair market value of the vested options over their exercise
prices. Compensation expense relating to these options of approximately $16,000,
$66,000 and $74,000 were charged to earnings and credited to additional paid-in
capital in 1996, 1995 and 1994, respectively.
(9) COMMITMENTS AND CONTINGENCIES
The Company is subject to licensing fees for software designed by third parties
which is incorporated in certain of the Company's products. Amounts due for
licensing fees have been accrued in the accompanying consolidated financial
statements (See Note 5).
Rental expenses, primarily associated with the Company's former temporary
facilities, totaled approximately $5,000, $151,000 and $136,000 in 1996, 1995
and 1994, respectively.
(10) INCOME TAXES
The components of the deferred income tax asset are as follows at December 31,
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Allowances for doubtful accounts and anticipated sales returns.......... $ 329 $ 449
Inventory allowances.................................................... 303 215
Deferred revenue........................................................ 77 91
Accrued compensation.................................................... 41 36
Accrued warranty costs.................................................. 258 254
Other, net.............................................................. 60 121
---------------- ----------------
$ 1,068 $ 1,166
---------------- ----------------
</TABLE>
- 24 -
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company's deferred income tax liability, which consists of excess of book
value over tax bases for property and equipment, was $31,000 and $168,000 at
December 31, 1996 and 1995, respectively.
Based on the Company's financial position and results of operations for the
current and preceding years, and the availability of sufficient taxable income
within the carry back period available under the tax law, no valuation allowance
has been provided against the deferred tax asset.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
Federal 1996 1995 1994
----------- --------- -----------
<S> <C> <C> <C>
Current............. $ 1,389 $ 608 $ 1,149
Deferred............ (33) 262 (31)
----------- --------- -----------
1,356 870 1,118
----------- --------- -----------
State
Current............. 177 107 179
Deferred............ (6) 46 (14)
---------- --------- ----------
171 153 165
---------- --------- ----------
$ 1,527 $ 1,023 $ 1,283
========== ========= ==========
</TABLE>
A reconciliation of the difference between the expected provision for income
taxes using the statutory Federal tax rate and the Company's actual provision is
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1996 1995 1994
---------------- ----------------- -----------------
<S> <C> <C> <C>
Provision using statutory Federal tax
rate (34%)....................................... $ 1,456 $ 898 $ 1,145
State income taxes, net of Federal income
tax benefit...................................... 113 83 109
Tax-exempt interest............................... (97) (96) (62)
Other, net........................................ 55 138 91
---------------- ----------------- -----------------
$ 1,527 $ 1,023 $ 1,283
================ ================= =================
</TABLE>
(11) EXPORT SALES
Export sales, primarily to Europe, Latin America and the Pacific Rim, comprised
21%, 27% and 24% of net sales for the years ended December 31, 1996, 1995 and
1994, respectively.
(12) SIGNIFICANT CUSTOMERS
One customer represented 15%, 14% and 17% of net sales for the years ended
December 31, 1996, 1995 and 1994, respectively. A second customer represented
15% of net sales during 1996 while a third customer represented 11% of net sales
in 1994. In all of these cases, the customers resold substantially all of the
Company's products to numerous unrelated third parties.
- 25 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors and executive officers of the Company
is incorporated by reference to the registrant's Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
- 26 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements of the Company are set forth in
Part II, Item 8.
(2) Financial Statement Schedule II, Valuation and Qualifying
Accounts for the Year Ended December 31, 1996, 1995 and
1994 is submitted herewith.
(3) Exhibits (An asterisk to the left of an exhibit number
denotes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
Annual Report on Form 10-K.)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Registrant's Amended and Restated Articles of Incorporation (1)
3.2 Registrant's Bylaws (1)
10.1 Form of Indemnification Agreement between the Registrant and each
of its Executive Officers and Directors (1)
*10.2 Registrant's 1993 Stock Option Plan (1)
*10.3 Registrant's Directors Stock Option Plan (1)
*10.4 Registrant's 1983 Stock Option Plan (1)
*10.5 Registrant's 1988 Stock Option Plan (1)
*10.6 Registrant's 1992 Stock Option Plan (1)
11.0 Computation of Income Per Share (2)
22.1 Registrant's Subsidiaries (1)
23.0 Consent of Arthur Andersen LLP (2)
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the
last quarter of the period covered by this Report.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The exhibits that are listed in Item 14(a)(3) of this report
and not incorporated by reference follows the 'Signatures'
section hereof and is incorporated herein by reference.
(d) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X
Reference is made to Item 14(a)(2).
(1) Incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (No. 33-50138).
(2) Filed herewith.
- 27 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 26, 1997 By:/S/ WILLIAM A. DAMBRACKAS
--------------------------------------------
William A. Dambrackas
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President
Chief Executive Officer
and Director
(Principal Executive
/S/ WILLIAM A. DAMBRACKAS Officer) March 26, 1997
- --------------------------------------------
William A. Dambrackas
Vice President,
Chief Financial Officer
and Director
(Principal Financial and
/S/ MARK KACER Accounting Officer) March 26, 1997
- --------------------------------------------
Mark Kacer
/S/ ROBERT F. WILLIAMSON, JR. Director March 26, 1997
- --------------------------------------------
Robert F. Williamson, Jr.
/S/ CHARLES A. REID Director March 26, 1997
- --------------------------------------------
Charles A. Reid
- 28 -
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders of
Equinox Systems Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Equinox Systems Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated February 18,
1997. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) of
this Form 10-K is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 18, 1997.
S-1
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(in thousands)
Charged
Balance at (Credited) to
Year Ended Beginning of Costs and Accounts Balance at
December 31, Description Period Expenses Written-Off End of Period
- -------------- ------------------------------------- -------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
1996 Allowance for Doubtful Accounts......... $ 396 $ (39) $ (13) $ 344
============== ================ ================ ==================
1995 Allowance for Doubtful Accounts......... $ 521 $ (112) $ (13) $ 396
============== ================ ================ ==================
1994 Allowance for Doubtful Accounts......... $ 444 $ 145 $ (68) $ 521
============== ================ ================ ==================
Balance at
Year Ended Beginning of Charged to Costs Balance at
December 31, Description Period and Expenses Returns End of Period
- -------------- ------------------------------------- ------------- ----------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
1996 Allowance for Sales Returns..............$ 727 $ 747 $ (996) $ 478
============== ================ ================ ==================
1995 Allowance for Sales Returns..............$ 981 $ 1,086 $ (1,340) $ 727
============== ================ ================ ==================
1994 Allowance for Sales Returns..............$ 684 $ 1,273 $ (976) $ 981
============== ================ ================ ==================
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.0 Computation of Income Per Share
23.0 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 11.0
EQUINOX SYSTEMS INC.
COMPUTATION OF INCOME PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands, except per share amounts)
1996 1995 1994
-------------- ------------ --------------
<S> <C> <C> <C>
Net income as reported............................................ $ 2,755 $ 1,620 $ 2,084
============== ============ ==============
Weighted average common and common equivalent shares outstanding:
Common stock................................................... 3,835 4,076 3,905
Common stock equivalents - options............................. 205 118 132
-------------- ------------ --------------
Weighted average common and common equivalent shares
outstanding.................................................... 4,040 4,194 4,037
============== ============ ==============
Net income per share.............................................. $ 0.68 $ 0.39 $ 0.52
============== ============ ==============
</TABLE>
EXHIBIT 23.0
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statements (File Nos. 33-66280, 33-96014
and 333-09955).
ARTHUR ANDERSEN LLP
Miami, Florida,
March 26, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,998
<SECURITIES> 1,350
<RECEIVABLES> 4,302
<ALLOWANCES> 822
<INVENTORY> 4,073
<CURRENT-ASSETS> 23,392
<PP&E> 5,212
<DEPRECIATION> 1,825
<TOTAL-ASSETS> 26,779
<CURRENT-LIABILITIES> 4,457
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> 22,254
<TOTAL-LIABILITY-AND-EQUITY> 26,779
<SALES> 24,779
<TOTAL-REVENUES> 24,779
<CGS> 12,774
<TOTAL-COSTS> 12,774
<OTHER-EXPENSES> 8,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,282
<INCOME-TAX> 1,527
<INCOME-CONTINUING> 2,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,755
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
</TABLE>
