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, 1999 Commission file No. 0-21450
EQUINOX SYSTEMS INC.
(Exact name of registrant as specified in its charter)
State of incorporation: Florida I.R.S. Employer Identification No. 59-2268442
Address of principal executive offices: One Equinox Way - Sunrise, Florida 33351
Telephone: (954) 746-9000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
(par value $.01 per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x]
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 22, 2000, was approximately $39,435,000 based on the
$8.00 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 22, 2000 was
5,447,239.
Documents Incorporated by Reference: Portions of the registrant's Proxy
Statement relative to its 2000 Annual Meeting of Shareholders are incorporated
by reference into Part III of this Form 10-K Annual Report.
<PAGE>
INDEX TO ITEMS
PAGE
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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 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 28
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28
Signatures 29
<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 ("OSs") 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 primarily as file Servers for local area
networks ("LANs"), 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-performance serial communications ports to Servers so
that they can be used for Server-based applications such as Internet access,
commercial point-of-sale and industrial automation. The Company's products are
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 operates exclusively in a single business segment and sells its
products primarily through a worldwide, two-tier distribution channel under the
Equinox brand name. The Company's distributors, including Ingram Micro and Tech
Data, resell Equinox 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 builds custom versions of its products
for original equipment manufacturers ("OEMs") such as IBM, Hewlett Packard,
AT&T, NCR and Unisys which incorporate the products into their own Servers or
offer the products as options to their Servers and sell them under their
"private label" brand name.
PRODUCTS
Equinox products work under most common Server OS's. The OS is the basic
software instruction set that manages Server functions and enables software
applications to be run. At present, virtually all of the company's products are
UNIX, Linux, Windows 2000 and Windows NT compliant.
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 Modem Pool product line (with
both Analog and Digital models). The Company's ELS Terminal Server and DSS
product lines comprise its LAN-attached product offerings. The Company broadened
its LAN-attached product offerings with the introduction of the Ethernet Serial
Provider (ESP) in 1999.
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.
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.
The Company's Analog Modem Pool targets Server-based Internet 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 modems are
connected to the telephone network through individual analog connections. The
recently introduced Digital Modem Pool also targets Server-based Internet access
applications, but connects to the telephone network through high-density T1 or
E1 channelized or PRI digital connections. The Digital Modem Pool is
field-expandable to up to 120 modems per Server bus expansion slot using
Equinox-designed modem modules, which support V.90 56 kbps and ISDN callers.
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Equinox EquiView management software is included with its SuperSerial products
and Modem Pool products. EquiView is a graphical Windows NT application program
that provides configuration, monitoring and analysis of all user data traffic
and communications port status.
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.
The Equinox DSS performs the same function as the ELS Terminal Server 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. The DSS also performs the routing or
switching of communications traffic for computer systems that are not connected
to Ethernet LANs. It also includes on-line redundancy and sophisticated
configuration, management, monitoring and diagnostic software tailored to large
data centers, which is where the DSS is 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):
1999 1998 1997
---------------- ---------------- ----------------
Net % of Net % of Net % of
Sales Total Sales Total Sales Total
------- ------- ------- ------- ------- -------
Bus-attached products $28,304 89 % $26,504 85 % $21,995 78 %
LAN-attached products 3,431 11 4,823 15 6,378 22
------- ------- ------- ------- ------- -------
$31,735 100 % $31,327 100 % $28,373 100 %
======= ======= ======= ======= ======= =======
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 14 national
and regional distributors. The Company's national distributors, which sell
primarily to system integrators and VARs, include Ingram Micro and Tech Data.
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 10 of "Notes to Consolidated
Financial Statements", Item 8, for information concerning the Company's segment,
geographic and major customer information.
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 or offer them as options to their
systems 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
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development cycle, product introduction and market acceptance of the OEM's
systems. The Company's OEM customers include IBM, NCR, Hewlett-Packard, AT&T,
and Unisys.
During 1999, the following customers represented more than 10% of the Company's
net sales: Hewlett Packard (20%), Ingram Micro (15%) and Tech Data (14%).
MANUFACTURING
Independent contractors manufacture virtually all Equinox products. The Company
has formal agreements with its contractors and its agreements include customary
provisions for termination by either party for events such as bankruptcy, merger
or nonperformance. 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 its contractors
generally are made on the basis of adjustable quarterly production schedules
provided by the Company. In addition, the contracts typically provide a one year
guarantee of the products.
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.
MARKETING AND SALES
The Company's channel sales and marketing efforts are aimed at introducing VARs
and system integrators to the advantages of Equinox products. Orders from these
VARs and system integrators are directed to the Company's two-tier national and
international distributors. The Company's OEM sales and marketing efforts are
aimed at selling directly to new prospective OEM customers or the expansion of
existing relationships with OEM customers. Orders from OEM customers are placed
directly with Equinox under an OEM agreement.
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, Comdex, SCO Forum, Comnet and CeBIT in Germany.
Equinox also advertises in technical trade publications and distributor
catalogs, including participating in cooperative advertising efforts with its
distributors. 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 VARs,
system integrators 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 typical goal of shipping within one
week of receipt of an order. At December 31, 1999, the Company's backlog was
$0.2 million, compared to $1.9 million at December 31, 1998. The Company
anticipates that its backlog at December 31, 1999 will be satisfied in 2000.
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. Equinox(R) is a registered
trademark in the United States and several other countries.
EMPLOYEES
At December 31, 1999, Equinox had a total of 110 full-time employees, of which
31 were engaged in research and development, 21 were engaged in manufacturing,
5
<PAGE>
24 were engaged in sales and marketing, 17 were engaged in technical support and
service and 17 were engaged in executive, finance and administration. 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, at this time.
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, 1999.
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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 under the
symbol EQNX. 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
---------- ----------
1998 First Quarter 15.42 10.42
Second Quarter 18.25 7.38
Third Quarter 10.00 7.50
Fourth Quarter 12.00 7.13
1999 First Quarter 14.31 9.38
Second Quarter 10.81 8.13
Third Quarter 14.06 9.88
Fourth Quarter 14.00 7.13
As of March 22, 2000, there were approximately 59 holders of record (and an
estimated 2,600 beneficial owners) of the 5,447,239 outstanding shares of Common
Stock.
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
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data of
the Company as of, and for each of the years in the five-year period ended
December 31, 1999. 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, 1999, 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,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 31,735 $ 31,327 $ 28,373 $ 24,779 $ 20,222
Cost of sales 14,626 15,121 13,951 12,774 10,554
----------- ----------- ----------- ----------- -----------
Gross profit 17,109 16,206 14,422 12,005 9,668
----------- ----------- ----------- ----------- -----------
Research and development 3,473 3,117 2,857 2,640 2,149
Selling, general and administrative 7,410 6,930 6,092 5,569 5,515
----------- ----------- ----------- ----------- -----------
Total operating expenses 10,883 10,047 8,949 8,209 7,664
----------- ----------- ----------- ----------- -----------
Income from operations 6,226 6,159 5,473 3,796 2,004
Other income, net 555 639 555 486 639
----------- ----------- ----------- ----------- -----------
Income before income taxes 6,781 6,798 6,028 4,282 2,643
Provision for income taxes 2,291 2,241 2,121 1,527 1,023
----------- ----------- ----------- ----------- -----------
Net income $ 4,490 $ 4,557 $ 3,907 $ 2,755 $ 1,620
=========== =========== =========== =========== ===========
Income per share:
Basic (1) $ 0.84 $ 0.88 $ 0.76 $ 0.48 $ 0.26
=========== =========== =========== =========== ===========
Diluted (1) $ 0.79 $ 0.82 $ 0.72 $ 0.45 $ 0.26
=========== =========== =========== =========== ===========
<CAPTION>
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA AT END OF
YEAR:
Working capital $ 30,978 $ 26,414 $ 18,810 $ 18,904 $ 17,849
Total assets 38,267 34,971 27,583 26,748 26,828
Long-term debt -- -- -- -- --
Shareholders' equity 34,254 29,805 21,935 22,291 21,285
- ----------------------------------------------------
<FN>
(1) Amounts prior to 1997 have been restated to conform with Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements, which reflect the
current views of the Company with respect to future events that could have an
effect on its future financial performance. These statements may include such
words as "expects," "believes," "estimates," and similar expressions. These
forward-looking statements are subject to various risks and uncertainties,
including those referred to under "Factors That May Affect Future Results" 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
--------------------------------
1999 1998 1997
-------- -------- --------
Net sales 100 % 100 % 100 %
Cost of sales 46 48 49
-------- -------- --------
Gross profit 54 52 51
-------- -------- --------
Research and development 11 10 10
Selling, general and administrative 23 22 22
-------- -------- --------
Total operating expenses 34 32 32
-------- -------- --------
Income from operations 20 20 19
Other income, net 1 2 2
-------- -------- --------
Income before income taxes 21 22 21
Provision for income taxes 7 7 7
-------- -------- --------
Net income 14 % 15 % 14 %
======== ======== ========
RESULTS OF OPERATIONS
Net sales increased 1% to $31.7 million in 1999 from 1998, and by 10% to $31.3
million in 1998 from 1997.
Bus-attached product sales increased 7% to $28.3 million in 1999 from 1998 and
by 21% to $26.5 million in 1998 from 1997. Although Bus-attached sales improved
year over year, the Company experienced a significant slowdown in demand for
these products during the fourth quarter of 1999. The Company believes that this
slowdown was primarily a result of customer delays in large server installations
due to Y2K concerns. While such installations are expected to resume during
2000, the Company is uncertain as to when the demand for its Bus-attached
products will return to historical levels.
Year over year growth for the Bus-attached line was due to higher net sales to
both distributors and original equipment manufacturers ("OEMs"). Distributor
sales of Bus-attached products increased 5% in 1999 from 1998 and by 24% in 1998
from 1997. OEM sales increased by 2% in 1999 from 1998 and by 16% in 1998 from
1997. The Company's largest customer is the Hewlett-Packard Company, an OEM
customer, representing 20%, 17% and 24% of net sales for 1999, 1998 and 1997,
respectively. Although the Company believes there are future growth
opportunities related to this and other existing OEMs, sales to these customers
are difficult to predict as the Company has limited visibility to OEM's
inventory levels and no control over customer demand for the OEM's final
product.
LAN-attached product sales decreased 29% to $3.4 million in 1999 from 1998 and
by 24% to $4.8 million in 1998 from 1997. This decrease is primarily
attributable to a significant decline in direct sales of DSS products. Sales of
Terminal Servers to distributors also declined although not as significantly.
Management believes that sales of DSS products and its existing Terminal Servers
will continue to decline over time. The Company has developed a new, lower
priced, Terminal Server with significantly expanded features which it introduced
during mid-1999.
The Company operates in one industry segment. Export net sales increased 11% to
$6.0 million in 1999 from 1998 primarily due to higher sales in Europe and
Middle Eastern countries. Export net sales increased 4% to $5.5 million in 1998
from 1997 due to higher sales in Europe and the Pacific Rim partially offset by
reduced sales in Latin America. As a percentage of net sales, export net sales
represented 19%, 18% and 20% for 1999, 1998 and 1997, respectively.
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GROSS MARGIN
Gross margin in 1999 increased to 54% from 52% in 1998 and 51% in 1997. The
improvement in gross margin for the periods presented was primarily the result
of reduced prices from vendors and design changes that lowered product costs.
The Company's gross margin is dependent in part on product costs, product mix,
channel mix, and overhead expense, all of which fluctuate from year to year. For
example, an increase in future sales to OEM customers may negatively impact the
Company's gross margin, as OEM sales are typically priced lower than
distribution sales. However, the reduced sales/support requirements of OEM
customers result in favorable contributions to operating margins thereby
resulting in similar operating margins between distribution sales and OEM sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 11% to $3.5 million in 1999 from
1998, and 9% to $3.1 million in 1998 from 1997. The increases are 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%, 10% and
10% for 1999, 1998 and 1997, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 7% to $7.4 million in
1999 from 1998, and 14% to $6.9 million in 1998 from 1997. The increases were
primarily due to increased sales personnel and expanded marketing efforts. As a
percentage of net sales, selling, general and administrative expenses were 23%,
22% and 22% for 1999, 1998 and 1997, respectively.
OTHER INCOME, NET
Other income, net, which includes interest income, decreased 13% to $.56 million
in 1999 from 1998. While interest income increased 45% from 1998 to 1999 to
$0.94 million, the Company recognized a loss of $0.35 million on the sale of
securities in 1999. These securities, four series of preferred stock from three
separate issuers, had been acquired for a cost of $1.60 million in 1998 and were
the only such securities in the Company's portfolio. Preferred stocks are tax
advantaged to corporate holders but have no maturity date and trade inversely to
long-term interest rates. The Company determined that these preferred stocks did
not fit into its portfolio and has sold them all. Other income increased 15% to
$0.64 million in 1998 from 1997 primarily due to higher invested cash balances.
As a percentage of net sales, other income was 1%, 2% and 2% for 1999, 1998 and
1997 respectively.
PROVISION FOR INCOME TAXES
Provision for income taxes was $2.3 million, $2.2 million and $2.1 million for
1999, 1998 and 1997 respectively. The Company's effective tax rate was 34% for
1999 as compared to 33% for 1998 and 35% for 1997. The Company anticipates that
its tax rate will increase in 2000 due to a higher effective state tax rate.
NET INCOME
As a result of the factors discussed above the Company recorded net income of
$4.5 million, $4.6 million and $3.9 million for 1999, 1998 and 1997,
respectively. As a percentage of net sales, net income was 14%, 15% and 14% for
1999, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $31.0 million at December 31, 1999, compared
with $26.4 million at December 31, 1998. Cash and cash equivalents and
marketable securities were $23.3 million at December 31, 1999, compared with
$18.9 million at December 31, 1998. This increase is primarily due to cash
generated from operations.
Net cash provided by operating activities was $5.3 million for the year ended
December 31, 1999, compared to $2.1 million and $6.4 million for the years ended
December 31, 1998, and 1997, respectively. The increase in 1999 was primarily
due to a reduction in accounts receivable stemming from more efficient
collection practices.
Net cash used in investing activities was $9.2 million for the year ended
December 31, 1999, compared to $5.7 million and $0.5 million for the years ended
December 31, 1998 and 1997, and was primarily due to purchases of property and
equipment and net purchases of marketable securities. At December 31, 1999, the
Company had no material commitments for capital expenditures.
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Net cash used in financing activities was $0.2 million for the year ended
December 31,1999, compared to cash provided of $1.8 million, and cash used of
$4.8 million for the years ended December 31, 1998 and 1997, respectively, and
was used for repurchases of common stock offset by funds received in connection
with employee stock option exercises.
In March 1997, the Board of Directors authorized the Company to repurchase up to
1,500,000 shares of the Company's issued and outstanding common stock. During
1997, the Company repurchased a total of 821,400 shares at a purchase price of
approximately $5,409,000 under this buyback plan. No purchases were made during
1998. During 1999, the Company repurchased an additional 87,300 shares of its
common stock in the open market for an aggregate purchase price of $840,000. The
Company is still authorized to repurchase an additional 591,300 shares under
this plan. Repurchases may be made from time to time, subject to prevailing
conditions, in the open market or in privately negotiated transactions.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company's accounting policies conform with the
requirements of SOP 98-5. Adoption of this statement did not impact the
Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS 133 cannot be applied retroactively. The FASB issued SFAS 137 which
extends the adoption of SFAS 133 until January 1, 2001. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
YEAR 2000 COMPLIANCE
Until recently, many computer programs were written using two digits rather than
four digits to define the applicable year in the twentieth century. Such
software may recognize "00" as a year other than 2000 and malfunction.
In 1997 the Company established a comprehensive Year 2000 compliance program
designed to (1) identify computer systems (hardware and software) that might
have failed at the turn of the century, (2) upgraded or replaced non-compliant
systems, and (3) evaluated the Year 2000 readiness of our critical suppliers and
service providers. The Company also thoroughly reviewed its own products for
Year 2000 compliance.
For the Company's internal systems, the Company implemented a new
enterprise-wide management information system that was Year 2000 compliant. In
addition, the Company checked, and updated where necessary, the operation of
office and facilities equipment, such as telephone switches, security systems,
elevators, and other common devices which could have been affected by the Year
2000 problem.
The Company received input from its key suppliers and service providers
including subcontractors, financial service firms, communications providers and
others regarding their Year 2000 status. The Company determined that these firms
did not pose a material threat to the uninterrupted operation of Equinox'
business in the event that they experienced system errors or failures.
The Company capitalized approximately $325,000 in connection with the
implementation of its new management information system. All Company
expenditures related to the Year 2000 issue were made from cash and cash
equivalents. Costs related to the Year 2000 issue that did not involve the
replacement of systems were charged to expense.
For the Company's products, expenditures related to repairs or upgrades for Year
2000 compliance were not material.
11
<PAGE>
Subsequent to December 31, 1999, the Company closely monitored both the systems
that it used for its own operations and customer complaints about its products.
As of the date of this filing, the Company has not experienced any material Year
2000 claims or problems.
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 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
GENERAL BUSINESS AND ECONOMIC CONDITIONS
General business and economic conditions have an impact on the Company's
financial results. The Company's customer base, which is largely distributors,
may be impacted by weak economic conditions and, as a result, may reduce
inventory levels of products purchased from the Company. Although the Company
does not consider its business to be highly seasonal, the historical quarterly
trends reflected over the last three years may, in fact, be adversely affected
by general economic conditions both domestically and abroad and may or may not
continue.
The Company experienced a significant slowdown in demand for its products during
the fourth quarter of 1999. The Company believes that this slowdown was
primarily a result of delays in large server installations due to Y2K concerns.
While these installations are expected to resume during 2000, the Company is
uncertain as to when the demand for its products will return to historical
levels.
COMPETITION
The markets for the Company's products are intensely competitive. The Company's
products compete both with other technologies as well as similar products
manufactured by other companies, some of which have more extensive research and
development, manufacturing, marketing and product support capabilities as well
as greater financial and technological resources. The Company believes that its
ability to compete depends on a number of factors including product quality and
reliability, performance, price, product delivery, service and support and name
recognition. There can be no assurance the Company will be able to continue to
compete successfully with respect to these factors.
PRODUCT SHORTAGES
The competitiveness of the industry requires that the Company fulfill many of
its orders within a very short time period (typically within one week after
receipt of order). Should the Company be unable to fulfill orders on a timely
basis due to inaccurate forecasting by the Company, shortages at its suppliers,
or other reasons, 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. The inability
to obtain sufficient quantities of limited source components or alternative
sources to manufacture its finished products, could result in delays or
reductions in product shipments which could have a material adverse effect on
the Company's business.
EXPOSURE TO NATURAL DISASTERS
The Company's headquarters facility, as well as certain of its turnkey
manufacturers, are located in areas prone to natural disasters, specifically
hurricanes. In August 1992, Hurricane Andrew caused extensive damage to the
Company's former headquarters facility and the majority of the Company's assets.
While the Company recovered quickly from that disaster, the Company believes
that its operating results and financial condition could be adversely affected
should another natural disaster strike its current facility, any of its turnkey
manufacturers, or any of its major customers.
TECHNOLOGICAL CHANGES
The market for the Company's products is characterized by continued and rapid
technological advances in both hardware and software development requiring
ongoing expenditures for research and development and the timely introduction of
new products. To remain competitive, the Company must respond effectively to
12
<PAGE>
technological changes by continuing to enhance and improve its existing products
and by successfully developing and introducing new products. There can be no
assurance that the Company will be able to respond effectively to technological
changes or new product announcements or introductions by others.
PROPRIETARY RIGHTS
The Company relies primarily upon the technical expertise and creative skills of
its personnel, rather than patents and copyrights, to develop and maintain its
competitive position. However, there can be no assurance that competitors will
not develop products or technology that are equivalent or superior to those of
the Company or that the safeguards on which the Company relies will be adequate
to protect its interests. In addition, it is common in the computer industry for
companies to seek to assert claims for infringement of their patents or
proprietary rights. Although no such claims are pending against the Company,
there can be no assurance that these claims will not be made or that, if made,
any license that might be needed by the Company will be available on
commercially reasonable terms.
DISTRIBUTION AND OEM RISKS
The Company is dependent upon the continued viability and financial stability of
its distributors and OEM customers. (Two distributors and an OEM customer
collectively accounted for 51% of the Company's net sales during 1999. In all of
these cases, the customers resold substantially all of the Company's products to
numerous unrelated third parties.) The loss or ineffectiveness of these
customers or other certain customers could have a material adverse effect on the
Company's operating results.
International distributor sales are denominated and transacted in U.S. dollars
and are subject to risks common to export activities, including governmental
regulation, trade barriers and fluctuating currency exchange rates (which
affects the competitiveness of U.S. products sold abroad). In addition, the
Company's international sales must be licensed by the Office of Export
Administration of the U.S. Department of Commerce. To date, the Company has not
experienced any difficulty in conducting export sales, including obtaining
necessary export licenses. There can be no assurance, however, that these or
other factors affecting international sales will not adversely affect the
Company's future operating results.
PRODUCT RETURNS, PRICE PROTECTION AND WARRANTIES
As is typical in the computer industry, the Company's distributors may be
entitled to return inventory to the Company for stock rotation purposes and
receive credit against other purchases on terms relating to price and volume
negotiated with the Company. In addition, if the Company reduces its prices, the
Company credits its distributors for the difference between the purchase price
of products remaining in their inventory and the Company's reduced price for
such products. The Company's 3-5 year limited warranty permits customers to
return any product for repair or replacement if the product does not perform as
warranted. There can be no assurance that product returns, price protection and
warranty claims will not have a material adverse effect on the Company's future
operating results. The Company seeks to continually introduce new and enhanced
products which could result in higher product returns and warranty claims due to
risks inherent in the introduction of such products.
DEPENDENCE ON KEY PERSONNEL
William A. Dambrackas, the Company's Founder, Chairman and Chief Executive
Officer, Robert F. Williamson, Jr., the Company's CFO and Vice President,
Finance and Administration, Robert F. Gintz, the Company's Vice President,
Development, Mark Kacer, the Company's Vice President, Operations, Thomas E.
Garrett, the Company's Vice President, Sales, and Robert S. Sowell, the
Company's Vice President, Technical Support, 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.
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 and transacts all business in U.S.
dollars.
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, 1999 and 1998 16
Consolidated Statements of Income For the Year Ended 17
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity For the Year Ended 18
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows For the Year Ended 19
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 20
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Equinox Systems Inc.:
We have audited the accompanying consolidated balance sheets of Equinox Systems
Inc. (a Florida corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
February 8, 2000.
15
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,233 $ 12,382
Marketable securities 15,044 6,538
Accounts receivable 3,667 5,403
Inventories 6,031 5,489
Deferred income taxes 1,432 1,184
Prepaid expenses and other current assets 584 584
-------- --------
Total current assets 34,991 31,580
-------- --------
PROPERTY AND EQUIPMENT 6,213 5,831
Less - accumulated depreciation and amortization (2,937) (2,440)
-------- --------
3,276 3,391
-------- --------
$ 38,267 $ 34,971
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,865 $ 2,679
Accrued expenses 1,686 2,215
Accrued income taxes 462 272
-------- --------
Total current liabilities 4,013 5,166
-------- --------
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 54 54
authorized; 5,411,705 and 5,395,009 shares issued and
outstanding in 1999 and 1998, respectively
Additional paid-in capital 11,852 11,572
Unrealized loss on marketable securities, net of tax (66) --
Retained earnings 22,414 18,179
-------- --------
Total shareholder's equity 34,254 29,805
-------- --------
$ 38,267 $ 34,971
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
16
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES $ 31,735 $ 31,327 $ 28,373
COST OF SALES 14,626 15,121 13,951
-------- -------- --------
Gross profit 17,109 16,206 14,422
-------- -------- --------
OPERATING EXPENSES:
Research and development 3,473 3,117 2,857
Selling, general and administrative 7,410 6,930 6,092
-------- -------- --------
Total operating expenses 10,883 10,047 8,949
-------- -------- --------
Income from operations 6,226 6,159 5,473
-------- -------- --------
OTHER INCOME, NET:
Interest income 937 647 547
Loss on investments (351) -- --
Other income (expense), net (31) (8) 8
-------- -------- --------
Total other income, net 555 639 555
-------- -------- --------
Income before income taxes 6,781 6,798 6,028
PROVISION FOR INCOME TAXES 2,291 2,241 2,121
-------- -------- --------
Net income $ 4,490 $ 4,557 $ 3,907
======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.84 $ 0.88 $ 0.76
======== ======== ========
Diluted $ 0.79 $ 0.82 $ 0.72
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 5,375 5,194 5,108
======== ======== ========
Diluted 5,678 5,560 5,424
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
17
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
------------------------ Additional Accumulated Total
Number Paid-In Other Compre- Retained Shareholders'
of Shares Amount Capital hensive Income Earnings Equity
---------- ---------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 5,534,750 $ 55 $ 12,012 $ -- $ 10,224 $ 22,291
Stock options exercised 175,815 2 1,144 -- -- 1,146
Repurchases and retirements
of common stock (821,400) (8) (4,892) -- (509) (5,409)
Net income -- -- -- -- 3,907 3,907
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
1997 4,889,165 49 8,264 -- 13,622 21,935
Stock options exercised 505,844 5 3,308 -- -- 3,313
Net income -- -- -- -- 4,557 4,557
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
1998 5,395,009 54 11,572 -- 18,179 29,805
Net income -- -- -- -- 4,490 4,490
Unrealized loss on -- -- -- (66) -- (66)
marketable securities, net
of tax
Comprehensive Income ---------
(note 2) 4,424
Stock options exercised 103,996 1 864 -- -- 865
Repurchases and retirements
of common stock (87,300) (1) (584) -- (255) (840)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
1999 5,411,705 $ 54 $ 11,852 $ (66) $ 22,414 $ 34,254
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
18
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,490 $ 4,557 $ 3,907
-------- -------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 497 434 563
Provision for doubtful accounts and anticipated sales 979 968 905
returns
Provision for warranty costs 165 173 99
Benefit for deferred income taxes (214) (52) (95)
Recognition of deferred service contract revenue (257) (551) (691)
Recognition of loss on marketable securities 214 -- --
Changes in operating assets and liabilities:
Accounts receivable 757 (2,490) (1,078)
Inventories (542) (2,194) 550
Prepaid expenses and other current assets -- (143) (18)
Accounts payable (814) (379) 764
Accrued expenses (436) 502 903
Accrued income taxes 438 1,244 632
-------- -------- --------
Total adjustments 787 (2,488) 2,534
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,277 2,069 6,441
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (39,777) (12,354) (2,300)
Sales and maturities of marketable securities 30,957 7,316 2,150
Purchases of property and equipment (382) (700) (301)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (9,202) (5,738) (451)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 616 1,842 630
Repurchases and retirements of common stock (840) -- (5,409)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING (224) 1,842 (4,779)
ACTIVITIES
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH (4,149) (1,827) 1,211
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 12,382 14,209 12,998
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,233 $ 12,382 $ 14,209
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ 2,054 $ 1,052 $ 1,586
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITY:
Deferred income tax on marketable securities $ 34 $ -- $ --
======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During 1999, 1998 and 1997, the Company realized income tax benefits of $249,
$1,471 and $516, 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 for income
tax reporting purposes that are not required to be recognized for financial
statement purposes.
The accompanying notes are an integral part of these
consolidated statements.
19
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Equinox (the "Company") 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 intercompany transactions and
balances have been eliminated in consolidation.
FISCAL YEAR
The fiscal year of the Company ends on the Saturday nearest to December 31. All
references to "December 31, 1999," "December 31, 1998" and "December 31, 1997"
represent the 52-week fiscal years ended January 1, 2000, January 2, 1999 and
January 3, 1998, respectively.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
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 consist of investment grade corporate securities, U.S.
Treasury obligations and tax-exempt bond instruments. The Company's marketable
securities are considered available-for-sale and are carried at fair value with
the corresponding unrealized loss being charged to shareholders' equity in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." The Company acquired four series of preferred stock from
three separate issuers for a cost of approximately $1,600,000 in 1998 and sold
them in 1999 and early 2000.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of marketable securities and trade receivables.
The Company has policies that limit its 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.
SEGMENT DISCLOSURES
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for
reporting information about operating segments and related disclosures about
products, geographic areas and major customers (see Note 10).
20
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 are shown in the
accompanying consolidated balance sheets net of reserves of approximately
$1,683,000 and $1,151,000 as of December 31, 1999 and 1998, respectively, and
consist of the following as of December 31 (in thousands):
1999 1998
-------- ---------
Raw materials $ 1,409 $ 1,869
Work-in-process 240 585
Finished goods 4,382 3,035
-------- ---------
$ 6,031 $ 5,489
======== =========
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated on a straight-line
basis over the following estimated useful lives:
Building and improvements 5 to 30 years
Furniture, fixtures and computer 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 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.
Revenues derived from sales of service contracts are recognized on a
straight-line basis over the term of the service contracts.
EARNINGS PER SHARE
On May 1, 1998 the Board of Directors declared a three-for-two stock split (the
"split") effected in the form of a 50% stock dividend on the Company's common
stock. On June 10, 1998, the Company's shareholders received one additional
share of common stock for each two shares held. Earnings per share, weighted
average shares outstanding, common stock and additional paid-in capital for all
periods presented have been restated to retroactively reflect the split.
21
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Basic earnings per share are calculated by dividing net income by the weighted
average number of common shares outstanding during the period. On a diluted
basis, shares outstanding are adjusted to assume the exercise of options under
the treasury stock method. Shares used in the computations for the years ended
December 31, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
----- ----- -----
Weighted average shares used in basic
computation 5,374 5,194 5,108
Common stock equivalents - options 304 366 316
----- ----- -----
Weighted average shares used in diluted 5,678 5,560 5,424
computation ===== ===== =====
Options not included in the computation above, because the exercise of which
would be antidilutive, for the years ended December 31, 1999, 1998 and 1997 were
23,750, 9,000 and 285,000, respectively.
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income."
Comprehensive income is the total of net income and all other changes in net
assets arising from non-owner sources. Comprehensive income equaled net income
for 1998 and 1997. The Company's comprehensive income for 1999, is as follows
(in thousands):
<TABLE>
<CAPTION>
Before-Tax After-Tax
Amount Income Tax Amount
------- ------- -------
<S> <C> <C> <C>
Net income for the year ended December 31, 1999 $ 6,781 $ 2,291 $ 4,490
Unrealized losses on available-for-sale securities (100) (34) (66)
------- ------- -------
Comprehensive income for year ended December 31, 1999 $ 6,681 $ 2,257 $ 4,424
======= ======= =======
</TABLE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company's accounting policies conform with the
requirements of SOP 98-5. Adoption of this statement did not impact the
Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS 133 cannot be applied retroactively. The FASB issued SFAS 137 which
extends the adoption of SFAS 133 until January 1, 2001. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
22
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3) ACCOUNTS RECEIVABLE
Accounts receivable are shown in the accompanying consolidated balance sheets
net of allowances for doubtful accounts and anticipated sales returns of
$994,000 and $833,000 as of December 31, 1999 and 1998, respectively.
(4) PROPERTY AND EQUIPMENT
The following is a summary of major classifications of property and equipment,
at cost, as of December 31 (in thousands):
1999 1998
------ ------
Computer equipment $1,848 $1,668
Furniture and fixtures 1,306 1,256
Building, land and improvements 3,059 2,907
------ ------
$6,213 $5,831
====== ======
(5) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31 (in thousands):
1999 1998
------ ------
Compensation related $1,196 $1,197
Warranty costs 260 645
Other 230 373
------ ------
$1,686 $2,215
====== ======
(6) EMPLOYEE BENEFIT 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 $50,000, $75,000
and $65,000 in 1999, 1998 and 1997, respectively.
23
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(7) COMMON STOCK - STOCK REPURCHASE PROGRAM
In March 1997, the Board of Directors authorized the Company to repurchase up to
1,500,000 shares of the Company's issued and outstanding common stock. During
1997, the Company repurchased and retired a total of 821,400 shares at a
purchase price of approximately $5,409,000 under its most recent buyback plan.
The Company did not repurchase any shares during 1998. During 1999, the Company
repurchased 87,300 shares of its common stock in the open market for an
aggregate purchase price of approximately $840,000. The Company is still
authorized to repurchase an additional 591,300 shares under this plan.
Repurchases may be made from time to time, subject to prevailing conditions, in
the open market or in privately negotiated transactions.
(8) STOCK OPTION PLANS
The Company maintains three non-qualified stock option plans which cover
officers and employees. During 1999, a total of 336,000 stock options were
granted pursuant to these plans at prices ranging from $8.09 to $10.97 per
share; the fair market value of the Company's common stock at the dates of the
grants.
The Company also maintains another plan (the "Directors' Plan") which provides
for an automatic grant of options to purchase 15,000 shares of common stock at
fair market value at the date of grant to each non-employee director of the
Company upon initial election as a director. The Directors' Plan also provides
for an automatic grant of options to purchase 3,750 shares of common stock at
fair market value upon re-election as a director. During 1999, stock options to
purchase 7,500 shares were granted at a price of $8.94 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 SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's pro forma net income, pro forma diluted
earnings per share and pro forma weighted average fair value of options granted
(with related assumptions using the Black-Scholes option pricing model) would
have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Pro forma net income (000's) $ 3,65 $ 3,770 $ 3,353
Pro forma diluted earnings per share $ 0.67 $ 0.70 $ 0.62
Pro forma weighted average fair value of
options granted $ 4.08 $ 3.92 $ 5.03
Expected life (years) 6.00 6.00 6.00
Risk-free interest rate 5.88% 5.63% 6.32%
Expected volatility 42.30% 43.00% 44.00%
Dividend yield 0.00% 0.00% 0.00%
</TABLE>
As of December 31, 1999, a total of 3,274,332 shares of common stock have been
authorized for issuance under all stock option plans. Options to purchase
1,508,842 shares were outstanding as of December 31, 1999, and options to
purchase 1,497,530 shares had been exercised as of such date.
24
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Information with respect to the stock option plans in effect as of December 31,
1999 is summarized as follows:
Shares Weighted
Available Options Average
For Grant Outstanding Exercise Price
---------- ----------- --------------
Balance at December 31, 1996 74,023 1,414,884 4.79
Options authorized 375,000 -- --
Options granted (241,500) 241,500 6.49
Options exercised -- (175,815) 3.58
Options canceled 15,546 (15,546) 5.75
---------- ----------
Balance at December 31, 1997 223,069 1,465,023 5.21
Options authorized 450,000 -- --
Options granted (352,750) 352,750 8.29
Options exercised -- (505,844) 3.67
Options canceled 13,416 (14,865) 7.19
---------- ----------
Balance at December 31, 1998 333,735 1,297,064 6.63
Options authorized 250,000 -- --
Options granted (343,500) 343,500 8.15
Options exercised -- (103,996) 5.93
Options canceled 27,726 (27,726) 7.79
---------- ----------
Balance at December 31, 1999 267,961 1,508,842 7.00
========== ==========
Options are exercisable within ten years from the date of grant with specific
vesting periods, primarily four years, set by the Board of Directors. Options
granted to Directors are exercisable within five years from the date of grant
with full vesting six months after the grant date. 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 Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
----------------- ------------ ------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.50 - $ 3.36 32,250 3.79 $ 2.62 32,250 $ 2.62
$ 4.12 - $ 5.87 327,529 5.92 4.70 298,661 4.60
$ 6.00 - $10.97 1,130,313 7.69 7.64 474,874 7.42
$16.00 18,750 3.42 16.00 18,750 16.00
------------ ------------
1,508,842 7.17 $ 7.00 824,535 $ 6.41
============ ============
</TABLE>
25
<PAGE>
EQUINOX SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(9) INCOME TAXES
The components of the net deferred income tax asset are as follows as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
Allowances for doubtful accounts and anticipated sales returns $ 275 $ 317
Inventory allowances 639 437
Deferred revenue 39 44
Accrued compensation 64 40
Accrued warranty costs 98 245
Other, net 317 101
--------- --------
$ 1,432 $ 1,184
========= ========
</TABLE>
Based on the Company's consolidated financial position and results of operations
for the current and preceding years, and the availability of sufficient taxable
income within the carryback period available under the tax laws, no valuation
allowance needs to be provided against the net deferred tax asset.
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
FEDERAL
Current $ 2,175 $ 1,989 $ 2,027
Deferred (128) 28 (95)
------- ------- -------
2,047 2,017 1,932
------- ------- -------
STATE
Current 330 304 189
Deferred (86) (80) --
------- ------- -------
244 224 189
------- ------- -------
$ 2,291 $ 2,241 $ 2,121
======= ======= =======
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,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Provision using statutory Federal tax rate (34%) $ 2,306 $ 2,311 $ 2,050
State income taxes, net of Federal income tax benefit 161 148 125
Tax-exempt interest income (104) (117) (100)
Other, net (72) (101) 46
------- ------- -------
$ 2,291 $ 2,241 $ 2,121
======= ======= =======
</TABLE>
26
<PAGE>
EQUINOX SYSTEMS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(10) SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company operates exclusively in a single business segment that designs,
markets and sells Server-based communications products. Net sales, based on
shipments of products to customers located in the various geographic areas
served, are as follows (in thousands):
YEAR ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
United States $ 25,690 $ 25,872 $ 22,649
Europe 2,939 2,601 2,273
Pacific Rim 916 1,421 1,548
Latin America 752 932 1,382
Other (primarily the Middle East) 1,438 501 521
------------ ----------- -----------
$ 31,735 $ 31,327 $ 28,373
============ =========== ===========
The following customers amounted to 10% or more of net sales:
YEAR ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
Customer A (an OEM) 20% 17% 24%
Customer B (a distributor) 15% 17% 11%
Customer C (a distributor) 14% 9% 8%
27
<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
Same as Item 11. above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Same as Item 11. above.
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, 1999, 1998 and 1997 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)
*10.5 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
(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, 333-29665, 333-56131, and 333-81289).
(2) Filed herewith.
28
<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 30, 2000 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 30, 2000
- --------------------------------------------
William A. Dambrackas
Vice President and
Chief Financial Officer
(Principal Financial and
/S/ ROBERT F. WILLIAMSON, JR. Accounting Officer) March 30, 2000
- --------------------------------------------
Robert F. Williamson, Jr.
/S/ JAMES J. FELCYN, JR. Director March 30, 2000
- --------------------------------------------
James J. Felcyn, Jr.
/S/ JAMES W. DAVIDSON Director March 30, 2000
- ----------------------
James W. Davidson
/S/ CHARLES A. REID Director March 30, 2000
- --------------------------------------------
Charles A. Reid
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To Equinox Systems Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Equinox Systems Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
February 8, 2000. Our audits were 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 audits 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
Fort Lauderdale, Florida,
February 8, 2000.
<PAGE>
<TABLE>
<CAPTION>
EQUINOX SYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(in thousands)
Charged
Balance at (Credited) to
Year Ended Beginning Costs and Balance at
December 31, Description of Year Expenses Deductions End of Year
- -------------- --------------------------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1999 Allowance for Doubtful
Accounts $ 316 $ (77) $ (27) $ 266
============ ============== =========== ===========
1998 Allowance for Doubtful
Accounts $ 353 $ 6 $ (43) $ 316
============ ============== =========== ===========
1997 Allowance for Doubtful
Accounts $ 344 $ 2 $ 7 $ 353
============ ============== =========== ===========
1999 Allowance for Sales Returns $ 517 $ 1,056 $ (1,115) $ 458
============ ============== =========== ===========
1998 Allowance for Sales Returns $ 409 $ 962 $ (854) $ 517
============ ============== =========== ===========
1997 Allowance for Sales Returns $ 250 $ 903 $ (744) $ 409
============ ============== =========== ===========
</TABLE>
<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, 333-29665, 333-56131 and 333-81289).
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
March 27, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,233
<SECURITIES> 15,044
<RECEIVABLES> 4,661
<ALLOWANCES> 994
<INVENTORY> 6,031
<CURRENT-ASSETS> 34,991
<PP&E> 6,213
<DEPRECIATION> 2,937
<TOTAL-ASSETS> 38,267
<CURRENT-LIABILITIES> 4,013
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 34,200
<TOTAL-LIABILITY-AND-EQUITY> 38,267
<SALES> 31,735
<TOTAL-REVENUES> 31,735
<CGS> 14,626
<TOTAL-COSTS> 14,626
<OTHER-EXPENSES> 11,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,781
<INCOME-TAX> 2,291
<INCOME-CONTINUING> 4,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,490
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.79
</TABLE>
