SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year ended December 31, 1997 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]
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. Yes [x]
The aggregate market value of shares of Common Stock held by non-affiliates of
the registrant as of March 25, 1998, was approximately $66,646,000 based on the
$21.37 closing sale price for the Common Stock quoted on the Nasdaq National
Market on such date (assuming all executive officers and directors are
affiliates).
The number of shares of Common Stock outstanding as of March 25, 1998 was
3,416,300.
Documents Incorporated by Reference: Portions of the registrant's Proxy
Statement relative to its 1998 Annual Meeting of Shareholders are incorporated
by reference into Part III of this Form 10-K Annual Report.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO ITEMS
PAGE
<S> <C>
PART I
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
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 7A. Market Risk....................................................................................13
Item 8. Financial Statements and Supplementary Data....................................................14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........27
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................27
Item 11. Executive Compensation.........................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................27
Item 13. Certain Relationships and Related Transactions.................................................27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................27
Signatures.....................................................................................................28
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Equinox Systems Inc. ("Equinox" or the "Company") designs and markets
Server-based communications products.
Personal Computers (PCs) used at the center of a network are called "Servers".
PC Servers have dramatically increased in computing power over the last several
years and their operating systems now have much more functionality. These
low-cost Servers have an "Open" architecture allowing the addition of hardware
and software from different vendors to adapt the Server to specific tasks.
Originally, they were used mainly as file servers for LANs (local area
networks), but today's Servers are replacing legacy computer systems at an
increasing rate and are now being used as the central processing unit for a very
wide array of applications, with and without LANs.
Equinox products add high-speed serial communications ports to Servers so that
they can be used for Server-based applications such as remote access, commercial
point-of-sale and industrial automation. The Company's products are all
comprised of a combination of Equinox-designed ASIC (application specific
integrated circuit) hardware, Equinox-designed driver software and
Equinox-designed management software. The driver software integrates the product
into the Server's operating system while the management software provides
configuration, diagnostic and monitoring functions.
The Company primarily sells its products through a worldwide, multi-tiered
distribution channel under the Equinox brand name. The Company's distributors,
including Ingram Micro, Tech Data and Merisel, resell the products to system
integrators and value-added resellers ("VARs"). These integrators and VARs
typically incorporate the Company's products into Servers along with other
hardware and software and sell the combination to end-users. Equinox also sells
its products directly to original equipment manufacturers ("OEMs") such as IBM,
Hewlett Packard, AT&T, NCR and Unisys who incorporate the products into their
own Servers and sell these systems under their "private label" brand name.
PRODUCTS
Equinox categorizes its products by how they are attached to Servers;
"Bus-attached" or "LAN-attached". Bus-attached products plug directly into bus
expansion slots in the Server's motherboard and LAN-attached products connect to
the Server through an Ethernet LAN. The Company's Bus-attached product offerings
consist of the SuperSerial product line and the older generation Megaport and
Megaplex product lines. The Company's ELS Terminal Server and DSS Data Switching
System product lines comprise its LAN attached product offerings.
BUS-ATTACHED PRODUCTS
Using a single bus expansion slot in the Server's motherboard, Equinox
SuperSerial products add from 2 to 128 high-performance serial ports to the
Server. Using multiple bus expansion slots, the number of ports that can be
added is restricted only by the limitations of the software being used. The
low-end members of the SuperSerial product family have a fixed number of ports
per bus expansion slot while the high-end members can be expanded with external
"port modules" to provide up to 128 ports per expansion slot .
SuperSerial products are available for Servers with PCI, ISA or EISA busses and
all models include Equinox driver software for Microsoft Windows NT, Citrix,
Novell NetWare and all popular versions of UNIX. SuperSerial products support
serial port speeds up to 920,000 bits per second and their driver software is
tightly coupled to their ASIC-based hardware to minimize degraded Server
performance even under conditions of heavy communications traffic.
Equinox EquiView management software is included with each of its SuperSerial
products. EquiView is a graphical Windows NT application program that provides
configuration, monitoring and analysis of all user data traffic and
communications port status.
The SuperSerial Modem Pool is specifically targeted at Server-based remote
access applications. It integrates SuperSerial hardware and software with up to
128 standard internal modems of any brand, and efficiently links them into the
Server's operating system through a single bus expansion slot. The Company's
continuing development efforts include further integration of modem/ISDN
functionality and enhanced protocol processing to significantly lower the cost
of implementing Server-based remote access systems.
- 3 -
<PAGE>
LAN-ATTACHED PRODUCTS
Equinox "ELS" Terminal Servers add 8 to 48 high-performance serial ports to
Servers or legacy computers connected to an Ethernet LAN. They are available
with both fixed numbers of ports and in expandable models and they connect to
the Ethernet LAN using either Internet standard TCP/IP or LAT protocols.
Equinox DSS Systems can perform the same functions as ELS Terminal Servers in
addition to the routing or switching of local serial communications traffic.
Like the ELS, the DSS can connect to Ethernet LANs using either Internet
standard TCP/IP or LAT protocols and it features a modular design that can
easily expand to thousands of ports. DSS Systems can also perform the routing or
switching of communications traffic for computer systems that are not connected
to Ethernet LANs. The DSS includes on-line redundancy and sophisticated
configuration, management, monitoring and diagnostic software tailored to large
data centers, which is where DSS systems are usually deployed.
The following table illustrates the Company's sales of Bus-attached products and
LAN-attached products over the past three years (dollars are in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
NET % OF NET % OF NET % OF
SALES TOTAL SALES TOTAL SALES TOTAL
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Bus-Attached Products..... $ 21,995 78 % $ 17,043 69 % $ 12,664 63 %
LAN-Attached Products..... 6,378 22 % 7,736 31 % 7,558 37 %
--------- ------- --------- ------- --------- --------
$ 28,373 100 % $ 24,779 100 % $ 20,222 100 %
========= ======= ========= ======= ========= ========
</TABLE>
PRODUCT DISTRIBUTION AND CUSTOMERS
Equinox sells the majority of its products through a worldwide network of
distributors and OEM customers.
The Company's distribution agreements are customary for the industry.
Distributors are nonexclusive and the Company does not restrict them from
selling competitive products. Distributors are typically entitled to return a
pre-determined quantity of products from their inventory for stock rotation
purposes provided they place an order for other products of at least the same
value. Additionally, 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 reduced price for such
products.
Domestically, Equinox distributes its products through approximately 25 national
and regional distributors. The Company's national distributors, which sell
primarily to system integrators and VARs, include Ingram Micro, Tech Data and
Merisel. Regional distributors serve system integrators and VARs within their
local geographic areas and often focus on specialized market segments or
applications.
Internationally, Equinox distributes its products 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. See Note 11 of "Notes to Consolidated
Financial Statements", Item 8, for information concerning the Company's export
sales.
International sales are denominated and transacted in U.S. dollars and are
subject to 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.
The Company's OEM customers typically incorporate the Company's Bus-attached
products into their own product offerings and sell them under their private
label. Whenever possible, the Company works with existing and potential OEM
customers in their product development cycles to design product enhancements and
new products to meet the OEMs' requirements. Sales to OEMs typically involve
extensive product and system evaluations and the Company's product shipments are
linked to the OEM's own development cycle, product introduction and market
acceptance of the OEM's systems. The Company's OEM customers include IBM,
Hewlett-Packard, AT&T, NCR and Unisys.
-4-
<PAGE>
MANUFACTURING
Independent contractors manufacture the majority of Equinox products. The
Company has formal agreements with these independent contractors and such
agreements include customary provisions for termination by either party for
events such as bankruptcy, merger or nonperformance. These contractors procure
all necessary parts and components, assemble finished products and perform
quality control testing of finished products. The Company's purchases of
finished products from these contractors generally are made on the basis of
adjustable quarterly production schedules provided by the Company.
The Company believes there are many advantages to using contractors to
manufacture its products, including: reduced capital requirements, reduced need
for facilities and equipment, reduced headcount requirements and reduced
component inventory requirements. Currently, a separate independent contractor
manufactures each product line and 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 quickly
develop alternative sources including internal final assembly and testing, as
the Company has done in the past.
MARKETING AND SALES
The Company's sales and marketing personnel recruit new distributors, support
the Company's existing national and international distributors, market the
Company's products to OEMs and participate in industry trade shows.
Equinox advertises in technical trade publications and distributor catalogs. It
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, such as Networld+Interop, PC Expo, Comdex, SCO Forum, Comnet and CeBIT in
Germany. 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, therefore the Company does not believe that its backlog is a
good indicator of future sales. The Company is required to carry sufficient
inventory of finished products to meet its goal of shipping within one week of
receipt of an order. At December 31, 1997, the Company's backlog was $1.5
million, the same as it was at December 31, 1996. The Company anticipates that
its backlog at December 31, 1997 will be satisfied in 1998.
COMPETITION
The Server-based communications market is 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. The Company's success can be
significantly affected by the product introductions and marketing activities of
other industry participants.
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 patents, copyrights 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 its employees and certain 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.
-5-
<PAGE>
EMPLOYEES
At December 31, 1997, Equinox had a total of 95 full-time employees, of which 26
were engaged in research and development, 19 were engaged in manufacturing, 18
were engaged in sales and marketing, 14 were engaged in technical support and
service and 18 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 of land in Sunrise, Florida. The Company owns this property
debt-free and believes it is more than adequate to support its present
operations. In addition, this site is zoned for the construction of an
additional 45,000 square foot building, which the Company believes would
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, 1997.
-6-
<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 closing sales prices for the Common
Stock for each quarter during the last two fiscal years as reported by the
Nasdaq National Market.
HIGH LOW
----------- ----------
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
1997 First Quarter 10.38 8.50
Second Quarter 11.25 8.50
Third Quarter 14.63 9.88
Fourth Quarter 19.13 13.13
As of March 25, 1998, there were approximately 58 holders of record (and an
estimated 2,000 beneficial owners) of the 3,416,300 outstanding shares of Common
Stock. The closing sale price for the Common Stock on March 25, 1998 was $21.37.
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.
-7-
<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,
1997. The selected consolidated financial data has been derived from the
Company's financial statements (the three most recent years are 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, 1997, 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,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................... $ 28,373 $ 24,779 $ 20,222 $ 20,044 $ 18,500
Cost of sales....................... 13,951 12,774 10,554 9,633 9,029
--------- ---------- --------- ---------- ---------
Gross profit........................ 14,422 12,005 9,668 10,411 9,471
--------- ---------- --------- ---------- ---------
Research and development............ 2,857 2,640 2,149 1,954 2,310
Selling, general and administrative. 6,092 5,569 5,515 5,451 5,681
--------- ---------- --------- ---------- ---------
Total operating expenses............ 8,949 8,209 7,664 7,405 7,991
--------- ---------- --------- ---------- ---------
Income from operations.............. 5,473 3,796 2,004 3,006 1,480
Other income, net .................. 555 486 639 361 369
--------- ---------- --------- ---------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle............... 6,028 4,282 2,643 3,367 1,849
Provision for income taxes.......... 2,121 1,527 1,023 1,283 721
--------- ---------- --------- ---------- ---------
Income before cumulative effect
of change in accounting principle.. 3,907 2,755 1,620 2,084 1,128
Cumulative effect of change in
accounting principle (1)........... -- -- -- -- 500
--------- --------- -------- --------- --------
Net income.......................... $ 3,907 $ 2,755 $ 1,620 $ 2,084 $ 1,628
========= ========= ======== ========= ========
Income per share:
Basic (2) (3)....................... $ 1.15 $ 0.72 $ 0.40 $ 0.53 $ 0.47
========= ========= ======== ========= ========
Diluted (2) (3)..................... $ 1.08 $ 0.68 $ 0.39 $ 0.52 $ 0.43
========= ========= ======== ========= ========
1997 1996 1995 1994 1993
--------- ---------- --------- ---------- ---------
BALANCE SHEET DATA AT END OF YEAR:
Working capital..................... $ 18,810 $ 18,904 $ 17,849 $ 18,582 $ 17,539
Total assets........................ 27,583 26,748 26,828 27,635 22,684
Long-term debt ..................... -- -- -- -- --
Shareholders' equity................ 21,935 22,291 21,285 21,128 18,115
</TABLE>
- ----------------------------------------------------
(1) In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
(2) Amounts prior to 1997 have been restated to conform with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
(3) Basic and diluted earnings per share attributable to the cumulative
effect of change in accounting principle were $ 0.15 and $ 0.13,
respectively, in 1993.
-8-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This 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" and
elsewhere herein, that could cause actual results to differ materially from
historical results or those currently anticipated. Readers are cautioned not to
place undue reliance on these forward-looking statements.
The following table sets forth, for the periods presented, certain income
statement data of the Company, expressed as a percentage of net sales:
PERCENTAGE OF NET SALES
--------------------------------
1997 1996 1995
---- ---- ----
Net sales................................ 100% 100% 100%
Cost of sales............................ 49 52 52
----- ----- ----
Gross profit.......................... 51 48 48
Research and development................. 10 11 11
Selling, general and administrative...... 22 22 27
----- ----- ----
Total operating expenses.............. 32 33 38
----- ----- ----
Income from operations................ 19 15 10
Other income, net........................ 2 2 3
----- ----- ----
Income before income taxes ........... 21 17 13
Provision for income taxes............... 7 6 5
----- ----- ----
Net income............................... 14% 11% 8%
===== ===== ====
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased to $28.4 million in 1997 from $24.8 million in
1996, an increase of $3.6 million, or 15%.
Bus-attached product sales increased 29% to $22.0 million in 1997 from $17.1
million in 1996, due to increased sales through both distributors and OEMs.
Distributor sales of Bus-attached products grew by 8% whereby OEM sales of
Bus-attached products grew by 44%.
The Hewlett-Packard Company, the Company's top OEM customer, represented 24% of
the Company's net sales during 1997 and 15% during 1996. Ingram-Micro, the
Company's top distributor, represented 11% of the Company's total net sales in
1997. Although they represent single-customer sales to Equinox, both
Hewlett-Packard and Ingram-Micro resell Equinox products to a broad base of
customers.
LAN-attached product sales decreased 17% to $6.4 million in 1997 from $7.7
million in 1996. This decrease is attributable to a 21% decline in sales of ELS
products to $3.7 million and a 13% decline in sales of DSS products to $2.7
million. Management believes that sales of ELS and DSS products will continue to
decline over time.
Export net sales increased to $5.7 million in 1997 from $5.2 million in 1996, an
increase of $0.5 million or 10% due primarily to higher sales in Europe and the
Pacific Rim. Sales to Asian customers represented 4% of net sales in 1997 and 3%
in 1996. As a percentage of net sales, export net sales decreased to 20% in 1997
from 21% in 1996.
COST OF SALES. Cost of sales increased 9% to $14.0 million in 1997 from $12.8
million in 1996 primarily due to higher sales volume. As a percentage of net
sales, cost of sales declined to 49% in 1997 from 52% in 1996. This improvement
was primarily the result of greater absorption of overhead due to increased
volumes and efficiencies.
The Company's gross margin is dependent in part on product mix, channel mix and
overhead expense which can all fluctuate from year to year. Increased sales to
OEM customers may negatively impact the Company's future gross
-9-
<PAGE>
margin, as OEM sales are typically priced lower than distribution sales.
However, the reduced sales/support requirements of OEM customers typically
result in favorable contributions to operating margins. As a result, management
believes there is little difference in operating margins between distribution
sales and OEM sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
8% to $2.9 million in 1997 from $2.6 in 1996 primarily due to additional
personnel required as a result of expanded development efforts. As a percentage
of net sales, research and development expenses were 10% in 1997 and 11% in
1996. The Company does not capitalize any of its software development expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 9% to $6.1 million in 1997 from $5.6 million
in 1996. As a percentage of net sales, selling, general and administrative
expenses decreased to 21% in 1997 from 22% in 1996 due to continued efficiencies
realized from selling products through OEMs and multi-tiered distribution.
INCOME FROM OPERATIONS. Income from operations increased to $5.5 million in 1997
from $3.8 million in 1996, an increase of $1.7 million primarily due to
increased sales and gross profit partially offset by increased operating
expenses. As a percentage of net sales, income from operations increased to 19%
in 1997 from 15% in 1996.
OTHER INCOME, NET. Other income, net, which includes interest income, increased
to $0.6 million in 1997 from $0.5 million in 1996, an increase of 14% primarily
due to higher interest rates on invested cash balances. As a percentage of net
sales, other income was 2% in 1997 and 1996.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes increased
to $2.1 million in 1997 from $1.5 million in 1996, an increase of $0.6 million
as a result of the Company's increased income from operations. The Company's
effective tax rate decreased to 35% in 1997 from 36% in 1996.
NET INCOME. Net income increased to $3.9 million in 1997 from $2.8 million in
1996, an increase of 42%. As a percentage of net sales, net income increased to
14% in 1997 from 11% in 1996, primarily as a result of increased sales and gross
profit partially offset by increased operating expenses.
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%.
Bus-attached product sales increased 34% to $17.1 million in 1996 from $12.7
million in 1995, due to greater sales volume through both distributors and OEMs.
Distributor sales of Bus-attached products grew by 50% whereby OEM sales of
Bus-attached products grew by 13%.
LAN-attached product sales increased 2% to $7.7 million in 1996 from $7.5
million in 1995. This was due to a 50% increase in sales of DSS products offset
by a 16% decline in sales of ELS products.
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 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.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
23% to $2.6 million in 1996 from $2.1 million 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.
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
-10-
<PAGE>
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 net sales, income from
operations increased to 15% in 1996 from 10% in 1995.
OTHER INCOME, NET. Other income, net, 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 cash 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.
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).
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $18.8 million at December 31, 1997, compared
with $18.9 million at December 31, 1996. Cash and cash equivalents and
marketable securities were $15.7 million at December 31, 1997, compared with
$14.3 million at December 31, 1996. The increase is primarily due to cash
generated from operations partially offset by repurchases of common stock.
Net cash provided by operating activities was $6.4 million for the year ended
December 31, 1997, compared to $2.5 million and $1.2 million for the years ended
December 31, 1996, and 1995, respectively. This was primarily due to higher net
income as well as a decrease in inventories and increases in accounts payable
and accrued expenses. Net cash used in investing activities was $0.5 million for
the year ended December 31, 1997, primarily due to purchases of property and
equipment and net purchases of marketable securities. As of December 31, 1997,
the Company had no material commitments for capital expenditures.
Net cash used in financing activities was $4.8 million for the year ended
December 31, 1997 compared to $1.9 and $1.6 million for the years ended December
31, 1996 and 1995, respectively. Net cash used in investing activities in each
year was used for repurchases of common stock offset by funds received in
connection with employee stock option exercises. 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 and 1996, the Company
repurchased 500,000 shares of its common stock in the open market for an
aggregate purchase price of approximately $3,940,000. 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. During 1997, the
Company repurchased a total of 547,000 shares at a purchase price of
approximately $5,409,000 under its most recent buyback plan. 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 and cash equivalents and marketable securities on
hand together with funds generated from operations will be adequate to meet the
Company's working capital and capital expenditure needs for at least the next 12
months.
YEAR 2000 COMPLIANCE
Until recently, many computer programs were written using two digits rather than
four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. Utilizing both internal and external resources, the Company is in the
process of defining, assessing and converting, or replacing various programs,
hardware and instrumentation systems to make them Year 2000 compatible. The
Company's Year 2000 project is comprised of two components - business
applications and equipment. The business applications component consists of the
Company's business computer systems, as well as the computer systems of
third-party suppliers or customers, whose year 2000 problems could potentially
impact the
-11-
<PAGE>
Company. Equipment exposures consist of personal computers, system servers and
telephone equipment whose Year 2000 problems could also impact the Company. The
cost of the Year 2000 initiatives is not expected to be material to the Company'
results of operations, financial position or cash flows. Implementation is
expected to be completed before December 31, 1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is providing the following cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in any forward-looking
statements made by, or on behalf of, the Company.
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's consolidated results
throughout 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
GENERAL BUSINESS AND ECONOMIC CONDITIONS
General business and economic conditions have an impact on the Company's
financial results. The Company's customer base, which is largely distributors,
may be impacted by weak economic conditions and, as a result, may reduce
inventory levels of products purchased from the Company. Although the Company
does not consider its business to be highly seasonal, the historical quarterly
trends reflected over the last three years may, in fact, be adversely affected
by general economic conditions both domestically and abroad and may or may not
continue.
COMPETITION
The markets for the Company's products are intensely competitive. The Company's
products compete both with other technologies as well as similar products
manufactured by other companies, some of which have more extensive research and
development, manufacturing, marketing and product support capabilities as well
as greater financial and technological resources. The Company believes that its
ability to compete depends on a number of factors, including product quality and
reliability, performance, price, product delivery, service and support and name
recognition. There can be no assurance the Company will be able to continue to
compete successfully with respect to these factors.
PRODUCT SHORTAGES
The competitiveness of the industry requires that the Company fulfill many of
its orders within a very short time period (typically within one week after
receipt of order). Should the Company be unable to fulfill orders on a timely
basis due to inaccurate forecasting by the Company or shortages at its
suppliers, orders could be canceled and placed with a competitor.
Additionally, certain important components used in the Company's products
presently are available from one or a limited number of sources. Also, most of
the Company's product lines currently are manufactured for the Company by one
contractor per product line. The inability to obtain sufficient quantities of
limited source components, as required, or to develop alternative sources of
supply for components or alternative sources to manufacture its finished
products, could result in delays or reductions in product shipments which could
have a material adverse effect on the Company's business.
EXPOSURE TO NATURAL DISASTERS
The Company's headquarters facility, as well as certain of its turn-key
manufacturers, are located in areas prone to natural disasters, specifically
hurricanes. In August 1992, Hurricane Andrew caused extensive damage to the
Company's former headquarters facility and the majority of the Company's assets.
While the Company recovered quickly from that disaster, the Company believes
that its operating results and financial condition could be adversely affected
should another natural disaster strike its current facility, any of its turn-key
manufacturers, or any of its major customers.
TECHNOLOGICAL CHANGES
The market for the Company's products is characterized by continued and rapid
technological advances in both hardware and software development requiring
ongoing expenditures for research and development and the timely introduction of
new products. To remain competitive, the Company must respond effectively to
technological changes by continuing to enhance and improve its existing products
and by successfully developing and introducing
-12-
<PAGE>
new products. There can be no assurance that the Company will be able to respond
effectively to technological changes or new product announcements or
introductions by others.
PROPRIETARY RIGHTS
The Company relies primarily upon the technical expertise and creative skills of
its personnel, rather than patents and copyrights, to develop and maintain its
competitive position. However, there can be no assurance that competitors will
not develop products or technology that are equivalent or superior to those of
the Company or that the safeguards on which the Company relies will be adequate
to protect its interests. In addition, it is common in the computer industry for
companies to seek to assert claims for infringement of their patents or
proprietary rights. Although no such claims are pending against the Company,
there can be no assurance that these claims will not be made or that, if made,
any license that might be needed by the Company will be available on
commercially reasonable terms.
DISTRIBUTION AND OEM RISKS
The Company is dependent upon the continued viability and financial stability of
its distributors and OEM customers. (A distributor and an OEM customer
collectively accounted for 35% of the Company's net sales during 1997). 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 7A. MARKET RISK
Management believes the Company's exposure to the impact of interest rate
changes, foreign currency fluctuations and changes in the market value of its
investments is minimal, as the Company does not use any derivative financial
instruments. The Company is also debt-free, transacts all business in U.S.
dollars and utilizes short-term investments which consist of investment grade
corporate obligations, U.S. Treasury obligations and tax-exempt borrowings.
-13-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants................................................... 15
Consolidated Balance Sheets as of December 31, 1997 and 1996......................................... 16
Consolidated Statements of Income For the Years Ended December 31, 1997, 1996 and 1995............... 17
Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 1997, 1996 and 1995. 18
Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995........... 19
Notes to Consolidated Financial Statements........................................................... 20
</TABLE>
-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, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
January 27, 1998.
-15-
<PAGE>
EQUINOX SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. 14,209 12,998
Marketable securities...................................... 1,500 1,350
Accounts receivable ....................................... 3,881 3,708
Inventories................................................ 3,295 3,845
Deferred income taxes...................................... 1,132 1,037
Prepaid expenses and other current assets.................. 441 423
---------- --------
Total current assets..................................... 24,458 23,361
---------- --------
PROPERTY AND EQUIPMENT, at cost................................. 5,513 5,212
Less - accumulated depreciation and amortization........... (2,388) (1,825)
---------- --------
3,125 3,387
---------- --------
27,583 26,748
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... 3,058 2,294
Accrued expenses........................................... 1,948 1,588
Deferred service contract revenue.......................... 143 192
Accrued income taxes....................................... 499 383
---------- --------
Total current liabilities................................ 5,648 4,457
---------- --------
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; 3,259,443 and 3,689,833 shares issued
and outstanding in 1997 and 1996, respectively 33 37
Additional paid-in capital................................. 8,280 12,030
Retained earnings.......................................... 13,622 10,224
---------- --------
Total shareholders' equity............................. 21,935 22,291
---------- --------
27,583 26,748
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-16-
<PAGE>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET SALES....................................... $ 28,373 $ 24,779 $ 20,222
COST OF SALES................................... 13,951 12,774 10,554
--------- --------- ---------
Gross profit............................... 14,422 12,005 9,668
--------- --------- ---------
OPERATING EXPENSES:
Research and development..................... 2,857 2,640 2,149
Selling, general and administrative.......... 6,092 5,569 5,515
--------- --------- ---------
Total operating expenses................... 8,949 8,209 7,664
Income from operations..................... 5,473 3,796 2,004
--------- --------- ---------
OTHER INCOME, NET:
Interest income.............................. 547 566 646
Other, net................................... 8 (80) (7)
--------- --------- ---------
Total other income, net.................... 555 486 639
--------- ---------- ----------
Income before income taxes................. 6,028 4,282 2,643
PROVISION FOR INCOME TAXES...................... 2,121 1,527 1,023
---------- ---------- ----------
Net income................................. $ 3,907 $ 2,755 $ 1,620
========== ========== ==========
EARNINGS PER SHARE (See Note 2):
Basic...................................... $ 1.15 $ 0.72 $ 0.40
========== ========== ==========
Diluted.................................... $ 1.08 $ 0.68 $ 0.39
========== ========== ==========
</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
----------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
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 ....................................... -- -- 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 ....................................... -- -- 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
Stock options exercised ......................... 117,210 1 1,145 -- 1,146
Repurchases of common stock ..................... (547,600) (5) (4,895) (509) (5,409)
Net income ...................................... -- -- -- 3,907 3,907
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997..................... 3,259,443 $ 33 $ 8,280 $ 13,622 $ 21,935
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-18-
<PAGE>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
------------ ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 3,907 $ 2,755 $ 1,620
----------- --------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation............................................... 563 605 425
Provision for doubtful accounts and anticipated sales
returns.................................................. 905 708 974
Provision for warranty costs............................... 99 129 181
Provision (benefit) for deferred income taxes ............. (95) (39) 308
Recognition of deferred service contract revenue........... (691) (756) (717)
Imputed compensation on stock options...................... -- 16 66
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,078) (787) (1,329)
Inventories............................................ 550 66 (153)
Prepaid expenses and other current assets.............. (18) (19) (41)
Accounts payable....................................... 764 (427) (294)
Accrued expenses....................................... 261 (414) (736)
Deferred service contract revenue...................... 642 721 711
Income taxes........................................... 632 (80) 229
------ ------ ------
Total adjustments............................................. 2,534 (277) (376)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 6,441 2,478 1,244
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities......................... (2,300) (1,550) (1,000)
Maturities of marketable securities........................ 2,150 707 3,506
Purchases of property and equipment........................ (301) (388) (1,267)
------ ------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........... (451) (1,231) 1,239
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised.................................... 630 166 298
Repurchases of common stock................................ (5,409) (2,022) (1,918)
------ ------ ------
NET CASH USED IN FINANCING ACTIVITIES......................... (4,779) (1,856) (1,620)
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 1,211 (609) 863
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................. 12,998 13,607 12,744
------ ------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR....................... $14,209 $12,998 $13,607
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Income taxes paid............................................. $ 1,586 $ 1,646 $ 493
======== ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During 1997, 1996 and 1995, the Company realized income tax benefits of
$516,000, $91,000 and $91,000, 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 designs and markets Server-based communications products, which are
primarily sold through the Company's distribution channel under the Equinox
brand name. Distributors resell the products to system integrators and
value-added resellers ("VARs"). The resellers typically incorporate the products
into Servers along with other hardware and software and sell the combination to
end-users. Equinox also sells its products directly to original equipment
manufacturers ("OEMs") that incorporate the products into their own Servers and
sell these systems under their "private label" brand name.
(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 inter-company 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 interest rate 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, 1997 and
1996, 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):
1997 1996
--------- --------
Raw materials............................. $ 630 $ 1,022
Work-in-process........................... 461 318
Finished goods............................ 2,204 2,505
--------- --------
$ 3,295 $ 3,845
========= ========
-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.
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.
Revenues derived from sales of service contracts are recognized on a
straight-line basis over the term of the service contracts.
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the weighted
average number of common shares outstanding during the period. On a diluted
basis, shares outstanding are adjusted to assume the exercise of options under
the treasury stock method. Amounts prior to 1997 were restated to conform with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
Shares used in the computations for the years ended December 31, 1997, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Weighted average shares used in basic computation 3,405 3,835 4,076
Common stock equivalents - options 211 205 118
----- ----- -----
Weighted average shares used in diluted computation 3,616 4,040 4,194
===== ===== =====
</TABLE>
-21-
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $762,000 and $594,000 at December 31, 1997 and
1996, respectively, in the accompanying consolidated balance sheets.
(4) PROPERTY AND EQUIPMENT
The following is a summary of major classifications of property and equipment,
at cost, as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Computer equipment.......................... $1,586 $1,580
Furniture and fixtures ..................... 1,211 919
Building, land and improvements............. 2,716 2,713
------ -----
$5,513 $5,212
====== ======
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Compensation related........................ $1,103 $ 730
Warranty costs.............................. 645 645
Other....................................... 200 213
------ -----
$1,948 $1,588
====== ======
</TABLE>
(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.
An unrelated investment company administers the assets of the plan. The total
employer contributions charged to expense were approximately $65,000, $60,000
and $63,000 in 1997, 1996 and 1995, respectively.
-22-
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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 and 1996, the Company
repurchased a total of 500,000 shares of its common stock in the open market for
an aggregate purchase price of approximately $3,940,000. 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. During
1997, the Company repurchased a total of 547,600 shares at a purchase price of
approximately $5,409,000 under its most recent buyback plan. Repurchases may be
made from time to time, subject to prevailing conditions, in the open market or
in privately negotiated transactions.
(8) STOCK OPTION PLANS
The Company maintains four non-qualified stock option plans which cover
officers, employees and directors. During 1997, a total of 156,000 stock options
were granted pursuant to these plans at prices ranging from $8.81 to $9.75 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 a 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 1997, stock options to
purchase 5,000 shares were granted at a price of $9.75 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 diluted earnings per share would
have been reduced by approximately $554,000, or $.16 per share in 1997,
$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 1997, 1996 and 1995 is
estimated at $5.03, $5.75 and $3.47 respectively. The Company uses the
Black-Scholes option-pricing model and has used assumed risk free interest rates
of 6.32% in 1997, 6.52% in 1996 and 5.44% in 1995. Additional assumptions
include: expected volatility of 44% in 1997 and 46% in 1996 and 1995, dividend
yield of 0% for all years and an expected option holding period of six years.
As of December 31, 1997, a total of 1,717,157 shares of common stock have been
authorized for issuance under all stock option plans. Options to purchase
976,682 shares were outstanding at December 31, 1997, and options to purchase
591,762 shares had been exercised as of such date.
-23-
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Information with respect to the stock option plans in effect as of December 31,
1997 is summarized as follows:
<TABLE>
<CAPTION>
Shares Weighted
Available Options Average
For Grant Outstanding Exercise Price
--------- ----------- --------------
<S> <C> <C> <C>
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
Options authorized................... 250,000 -- --
Options granted...................... (161,000) 161,000 9.73
Options exercised.................... -- (117,210) 5.37
Options canceled..................... 10,364 (10,364) 8.62
--------- --------
Balance at December 31, 1997......... 148,713 976,682 7.80
========= ========
</TABLE>
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
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.50 - $ 2.25 80,400 3.68 $ 1.84 80,400 $ 1.84
$ 4.63 - $ 6.19 365,177 7.02 5.69 263,946 5.54
$ 7.88 - $11.44 531,105 8.75 10.16 148,130 6.57
--------- -----------
976,682 7.68 7.80 492,476 5.25
========= ===========
</TABLE>
-24-
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(9) COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be subject to legal proceedings and other
claims in the ordinary course of its business. The Company is not party to any
litigation the outcome of which would have material adverse effect on its
business or operations.
(10) INCOME TAXES
The components of the net deferred income tax asset are as follows as of
December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Allowances for doubtful accounts and anticipated sales returns.... $ 289 $ 329
Inventory allowances.............................................. 556 303
Deferred revenue.................................................. 55 77
Accrued compensation.............................................. 42 41
Accrued warranty costs............................................ 245 258
Other, net........................................................ (55) 29
------- ------
$1,132 $1,037
======= ======
</TABLE>
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 net deferred tax asset.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal
Current............... $2,027 $1,389 $ 608
Deferred.............. (95) (33) 262
------ ------ ----
$1,932 $1,356 $ 870
State
Current............... 189 177 107
Deferred.............. -- (6) 46
------ ------ ----
189 171 153
------ ------ ----
$2,121 $1,527 $1,023
====== ====== ======
</TABLE>
-25-
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision using statutory Federal tax rate (34%)......... $2,050 $1,456 $ 899
State income taxes, net of Federal income tax benefit.... 125 113 101
Tax-exempt interest...................................... (100) (97) (96)
Other, net............................................... 46 55 119
------ ------ ------
$2,121 $1,527 $1,023
====== ====== ======
</TABLE>
(11) EXPORT SALES
Export sales, primarily to Europe, the Pacific Rim and Latin America, comprised
20%, 21% and 27% of net sales for the years ended December 31, 1997, 1996 and
1995, respectively. Sales to Asian customers represented 4%, 3% and 2% of net
sales for the years ended December 31, 1997, 1996 and 1995, respectively.
(12) SIGNIFICANT CUSTOMERS
One customer represented 24%, and 15% of net sales for the years ended December
31, 1997 and 1996, while a second customer represented 11% of net sales for the
year ended December 31, 1997. A third customer represented 15% and 14% for the
years ended December 31, 1996 and 1995. In all of these cases, the customers
resold substantially all of the Company's products to numerous unrelated third
parties.
-26-
<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.
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, 1997, 1996 and 1995 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.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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)
22.1 Registrant's Subsidiaries (1)
23.0 Consent of Arthur Andersen LLP (2)
27.1 Financial Data Schedule
</TABLE>
(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 statements on Form S-1 (No. 33-50138) and Form S-8 (Nos.
33-66280, 33-96014, 333-09955 and 333-29665).
(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 25, 1998 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 25, 1998
- --------------------------------------------
William A. Dambrackas
Vice President,
Chief Financial Officer
and Director
(Principal Financial and
/S/ MARK KACER Accounting Officer) March 25, 1998
- ---------------------------------------------
Mark Kacer
/S/ CHARLES A. REID Director March 25, 1998
- ---------------------------------------------
Charles A. Reid
/S/ ROBERT F. WILLIAMSON, JR. Director March 25, 1998
- ---------------------------------------------
Robert F. Williamson, Jr.
</TABLE>
- 28 -
<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 January 27,
1998. 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.
/s/ ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
January 27, 1998.
- S-1 -
<PAGE>
EQUINOX SYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(in thousands)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT (CREDITED) BALANCE
BEGINNING TO COSTS AT END
YEAR ENDED OF AND OF
DECEMBER 31, DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------ ------------------------------ --------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
1997 Allowance for Doubtful Accounts... $ 344 $ 2 $ 7 $ 353
====== ======= ======= ======
1996 Allowance for Doubtful Accounts... $ 396 $ (39) $ (13) $ 344
====== ======= ======= ======
1995 Allowance for Doubtful Accounts... $ 521 $ (112) $ (13) $ 396
====== ======= ======= ======
1997 Allowance for Sales Returns....... $ 250 $ 903 $ (744) $ 409
====== ======= ======= ======
1996 Allowance for Sales Returns....... $ 375 $ 747 $ (872) $ 250
====== ======= ======= ======
1995 Allowance for Sales Returns....... $ 546 $ 1,086 $(1,257) $ 375
====== ======= ======= ======
</TABLE>
- S-2 -
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
23.0 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
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,
333-09955 and 333-29665).
/s/ ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
March 25, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,209
<SECURITIES> 1,500
<RECEIVABLES> 3,881
<ALLOWANCES> 762
<INVENTORY> 3,295
<CURRENT-ASSETS> 24,458
<PP&E> 5,513
<DEPRECIATION> 2,388
<TOTAL-ASSETS> 27,583
<CURRENT-LIABILITIES> 5,648
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> 21,902
<TOTAL-LIABILITY-AND-EQUITY> 27,583
<SALES> 28,373
<TOTAL-REVENUES> 28,373
<CGS> 13,951
<TOTAL-COSTS> 13,951
<OTHER-EXPENSES> 8,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,028
<INCOME-TAX> 2,121
<INCOME-CONTINUING> 3,907
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,907
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.08
</TABLE>
