<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 1-13317
BOX HILL SYSTEMS CORP.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
New York 13-3460176
- ---------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
161 Avenue of the Americas, New York, NY 10013
- ---------------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(212) 989-4455
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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. X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value, 14,324,919 shares outstanding as of November 10,
1998.
- --------------------------------------------------------------------------------
<PAGE>
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -September 30, 1998
and December 31, 1997 1
Condensed Consolidated Statements of Income -Three and Nine
months ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. Other Information
Item 6. Exhibits 15
Signatures 16
</TABLE>
<PAGE>
Item 1. Condensed Consolidated Financial Statements
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 45,249 $ 40,897
Short-term investments........................................... 5,500 9,305
Accounts receivable, net......................................... 20,457 13,866
Inventories...................................................... 9,049 7,351
Prepaid expenses and other....................................... 1,301 344
Deferred income taxes............................................ 721 721
--------------- ----------------
Total current assets.................................... 82,277 72,484
Property and equipment, net.......................................... 1,315 1,199
Deferred income taxes................................................ 134 134
--------------- ----------------
$ 83,726 $ 73,817
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 10,412 $ 8,088
Accrued expenses................................................. 4,138 2,000
Customer deposits................................................ 1,888 2,143
Deferred revenues................................................ 2,176 1,829
Income taxes payable............................................. 412 757
Distribution payable............................................. -- 227
--------------- ----------------
Total current liabilities.............................. 19,026 15,044
--------------- ----------------
Deferred rent........................................................ 282 225
--------------- ----------------
Shareholders' equity:................................................
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued........................................ -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 14,314,483 and 14,138,871 shares issued
and outstanding, respectively.................................. 143 141
Additional paid-in capital....................................... 56,758 56,491
Retained earnings................................................ 7,517 1,916
--------------- ----------------
Total shareholders' equity............................. 64,418 58,548
--------------- ----------------
$ 83,726 $ 73,817
=============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
- 1 -
<PAGE>
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues.............................................. $ 21,718 $ 18,096 $ 57,565 $ 50,324
Cost of goods sold........................................ 14,187 11,735 37,215 32,563
------------- ------------- ------------- -------------
Gross profit..................................... 7,531 6,361 20,350 17,761
------------- ------------- ------------- -------------
Operating expenses:
Shareholder officers' compensation.................... 318 2,311 956 7,219
Engineering and product development................... 693 672 2,001 1,754
Sales and marketing................................... 2,297 1,764 6,427 5,049
General and administrative............................ 1,107 859 3,207 2,277
------------- ------------- ------------- -------------
4,415 5,606 12,591 16,299
------------- ------------- ------------- -------------
Operating income................................. 3,116 755 7,759 1,462
Interest income........................................... 455 81 1,440 103
------------- ------------- ------------- -------------
Income before income taxes....................... 3,571 836 9,199 1,565
Income tax provision (benefit)............................ 1,371 (610) 3,598 (450)
------------- ------------- ------------- -------------
Net income................................................ $ 2,200 $ 1,446 $ 5,601 $ 2,015
============= ============= ============= =============
Basic net income per share................................ $ .15 $ .14 $ .39 $ .20
============= ============= ============= =============
Diluted net income per share.............................. $ .15 $ .12 $ .37 $ .18
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE>
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income............................................................ $ 5,601 $ 2,015
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization................................... 270 195
Deferred income taxes........................................... -- (688)
Other........................................................... 57
Changes in assets and liabilities
Accounts receivable......................................... (6,591) (1,755)
Inventories................................................. (1,698) (2,299)
Prepaid expenses and other.................................. (957) 40
Accounts payable............................................ 2,378 3,636
Accrued expenses............................................ 2,138 620
Accrued shareholder officers' compensation.................. -- 3,876
Customer deposits........................................... (255) 409
Deferred revenues........................................... 347 609
Income taxes payable........................................ (354) 79
----------- -----------
Net cash provided by operating activities............. 936 6,737
----------- -----------
Investing activities:
Sale of short-term investments........................................ 3,805 --
Purchases of property and equipment................................... (379) (171)
----------- -----------
Net cash provided by (used in) investing activities... 3,426 (171)
----------- -----------
Financing activities:
Net proceeds from the issuance of common stock....................... -- 56,625
Proceeds from exercise of stock options.............................. 109 84
Proceeds from Employee Stock Purchase Plan........................... 108 --
Distributions to S Corporation shareholders.......................... (227) (10,500)
----------- -----------
Net cash provided by (used in) financing
activities........................................... (10) 46,209
----------- -----------
Net increase in cash and cash equivalents................................. 4,352 52,775
Cash and cash equivalents, beginning of period............................ 40,897 994
----------- -----------
Cash and cash equivalents, end of period.................................. $ 45,249 $ 53,769
=========== ===========
Supplemental cash flow disclosure:
Cash paid for income taxes............................................ $ 3,965 $ 107
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of Box
Hill Systems Corp. and subsidiaries (the "Company"), have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for fair presentation have been
included. Operating results for the three and nine month periods ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. Earnings Per Share:
Basic and diluted net income per share have been computed under the guidelines
of Statement of Financial Accounting Standards No. 128, "Earnings per Share."
Basic net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding for the period. Diluted
net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding for the period, adjusted
for the dilutive effect of common stock equivalents, consisting of dilutive
common stock options using the treasury stock method. The table below sets
forth the reconciliation of basic to diluted shares used in computing net
income per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares used in computing basic net income per
share........................................ 14,295 10,506 14,259 10,104
Dilutive effect of options....................... 721 1,078 853 1,077
--------------- --------------- --------------- ----------------
Shares used in computing diluted net income per
share........................................ 15,016 11,584 15,112 11,181
=============== =============== =============== ================
</TABLE>
- 4 -
<PAGE>
3. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist principally of purchased components used as raw materials.
4. Initial Public Offering of Common Stock:
The Company completed an initial public offering (the "Offering"), of its
Common Stock effective September 16, 1997. The Offering consisted of the sale
of 5,500,000 shares of Common Stock at an initial public offering price of
$15.00 per share, of which 3,300,000 shares were issued and sold by the
Company and 2,200,000 shares were sold by individuals who were the only
shareholders of the Company prior to the Offering. Additionally, 825,000
shares of Common Stock were purchased from the Company at $15.00 per share by
the underwriters upon the exercise of an over-allotment option. The net
proceeds to the Company , after deducting underwriting discounts and expenses,
were approximately $56.6 million. The Company did not receive any proceeds
from the sale of shares by the selling shareholders.
The Company was subject to taxation under Subchapter S of the Internal Revenue
Code from 1990 until the termination of the S Corporation status concurrent
with the Offering. Subsequent to the Offering, the Company made aggregate
distributions of $11,927,000 to its S Corporation shareholders for taxed, but
previously undistributed, S Corporation earnings.
5. Box Hill Europe:
Box Hill Systems Europe Limited (BHE) was formed in 1995 by the Company's
founding shareholders to provide marketing and technical support services to
the Company in Europe. Effective January 1, 1998, the Company issued 4,959
shares of common stock to the founding shareholders, collectively, in exchange
for 100% of the shares of Box Hill Europe (the "Merger"). The transaction has
been accounted for as a merger between entities under common control in
accordance with APB No. 16, "Accounting for Business Combinations".
After the Merger, BHE became a wholly owned subsidiary of Box Hill. On January
1, 1998, the fair value of the 4,959 shares of Box Hill common stock issued to
the founding shareholders was $51,750; which was equal to the net book value
of Box Hill Europe on that date. No restatement of Box Hill's financial
statements is required as a result of this transaction because the results of
Box Hill Europe, consisting only of sales and marketing expenses, have been
included in Box Hill's statements of operations for all periods prior to the
Merger.
- 5 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Cautionary Statement for Forward-Looking Information
Certain statements contained in this report, including statements regarding
the anticipated development and expansion of the Company's business, the
intent, belief or current expectations of the Company, its directors or its
officers, primarily with respect to the future operating performance of the
Company and the products it expects to offer and other statements contained
herein regarding matters that are not historical facts, are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
(the "Reform Act"). Future filings with the Securities and Exchange
Commission, future press releases and future oral or written statements made
by or with the approval of Box Hill which are not statements of historical
fact, may contain forward-looking statements under the Reform Act. Because
such statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements follow.
The Open Systems storage market in which the Company operates is characterized
by rapid technological change, frequent new product introductions and evolving
industry standards. Customer preferences in that market are difficult to
predict. The introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing
products as well as new products being introduced, obsolete and unmarketable.
The Company relies on other companies to supply certain key components of its
products and certain products which it resells that are available only from
limited sources in the quantities and quality demanded by the Company. The
Company has historically targeted industries requiring high-end storage
products, and a material portion of the Company's net revenues to date has
been derived from sales to customers in the financial services industry and
the telecommunications industry. In addition, historically, a material
percentage of the Company's net revenues in each year has been derived from a
limited number of customers. The Company's growth and expansion may place a
significant strain on its administrative, operational and financial resources
and increased demands on its manufacturing, sales and customer service
functions, especially as the Company attempts to expand its geographic reach
and becomes less reliant on the financial services and train, retain and
motivate qualified management, technical, manufacturing, sales and support
personnel for its operations. The Company has no patent protection for its
products and has attempted to protect its proprietary software and other
intellectual property rights through copyrights, trade secrets and other
measures which may prove to be inadequate.
All forward-looking statements speak only as of the date on which they are
made. Box Hill undertakes no obligation to update such statements to reflect
events which occur or circumstances which exist after the date on which they
are made.
- 6 -
<PAGE>
Overview
Box Hill designs, manufactures, markets and supports high performance data
storage systems for the Open Systems computing environment. The Company
employs a direct marketing strategy aimed at data-intensive industries which,
to date, include financial services, telecommunications, health care,
government/defense and academia. Since its inception, Box Hill has focused
exclusively on providing storage solutions for high-end customers, primarily
in the UNIX environment. The Company initially focused on the financial
services industry in response to that industry's need for high-availability,
high- performance, fault-tolerant storage systems and high levels of customer
and technical support. Box Hill leveraged its position as a company focused
exclusively on storage solutions to bring new products to market faster than
its competitors. Box Hill has historically financed its growth primarily with
cash generated from operations.
Box Hill's manufacturing operations consist primarily of assembly and
integration of components and subassemblies into the Company's products with
certain of those subassemblies manufactured by independent contractors. The
Company's cost of goods sold consists primarily of direct material costs. The
Company generally extends to its customers the warranties provided to the
Company by its suppliers. To date, the Company's suppliers have covered the
majority of the Company's warranty costs. On a quarterly and annual basis the
Company's gross margins have been and will continue to be affected by a
variety of factors, including competition, product configuration, product mix,
the availability of new products and product enhancements, and the cost and
availability of components. The Company's long-term strategy includes
maintaining or improving existing gross margins.
Results of Operations
The following table sets forth certain items from the Company's income
statements as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------
1998 1997 1998 1997
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Net revenues...................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................ 65.3 64.8 64.6 64.7
------- ------- -------- -------
Gross profit............................. 34.7 35.2 35.4 35.3
------- ------- -------- -------
Operating expenses:
Shareholder officers' compensation........... 1.5 12.8 1.7 14.3
Engineering and product development.......... 3.2 3.7 3.5 3.5
Sales and marketing.......................... 10.6 9.7 11.2 10.0
General and administrative................... 5.1 4.8 5.5 4.6
------- ------- -------- -------
Total operating expenses................. 20.4 31.0 21.9 32.4
------- ------- -------- -------
Operating income............................. 14.3% 4.2% 13.5% 2.9%
======= ======= ======== =======
</TABLE>
- 7 -
<PAGE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997:
Net revenues - Net revenues increased 19.9% to $21.7 million for the three
months ended September 30, 1998, from $18.1 million for the three months ended
September 30, 1997. The increase resulted from an increase in volume, which
was partially offset by price reductions of RAID and legacy (SCSI-JBOD) disk
storage systems. Net revenues from sales of Fibre Channel and RAID products
increased while net revenues from sales of legacy storage and back-up products
decreased.
Net revenues from sales of RAID products increased by $4.2 million to $8.8
million for the three months ended September 30, 1998, compared to $4.6
million for the three months ended September 30, 1997. The increase is the
result of the fulfillment of several large RAID orders in the third quarter.
Net revenues from sales of Fibre Channel products increased to $.9 million for
the three months ended September 30, 1998, compared to $32,000 for the three
months ended September 30, 1997. The increase is due to growing market
acceptance of the new technology. Net revenues from sales of back-up products
decreased slightly to $3.6 million for the three months ended September 30,
1998, compared to $3.7 million for the comparable period of 1997. The Company
generated $250,000 of net revenues and operating income from the application
of pre-1998 customer credits and deposits against advanced shipments of spares
that customers did not return. Net revenues from sales of legacy storage
products and services decreased $1.6 million, to $8.1 million for the three
months ended September 30, 1998, compared to $9.7 million for the comparable
period of 1997, due to price reductions for these systems.
Gross profit - Gross profit increased 17.2% to $7.5 million for the three
months ended September 30 1998, from $6.4 million for the comparable period of
1997. As a percentage of net revenues, gross profit decreased from 35.2% to
34.7%, principally as a result of a different product mix.
Shareholder officers' compensation - Shareholder officers' compensation
consists of salaries and bonuses paid to three of the Company's officers who
were the only shareholders of the Company prior to the Offering. Shareholder
officers' compensation decreased $2.0 million to $.3 million for the three
months ended September 30, 1998 as compared to $2.3 million for the three
months ended September 30, 1997. The decrease in shareholder officers'
compensation is attributable to new employment agreements entered into with
the shareholder officers in connection with the Company's initial public
offering.
Engineering and product development - Engineering and product development
expenses consist primarily of employee compensation, engineering equipment and
supply expenses and fees paid for third-party design services. To date, no
software development expenses have been capitalized since the period between
achieving technological feasibility and completion of such software is
relatively short and software development costs qualifying for such
capitalization have been relatively insignificant. Engineering and product
development expenses remained constant at $.7 million for the three months
ended September 30, 1998 and 1997 due to a decrease in research and
development equipment purchases offset by an increase in the number of
employees engaged in research and development activities. As a percentage of
net revenues, engineering and product
- 8 -
<PAGE>
development expenses decreased to 3.2% for the three months ended September 30,
1998 from 3.7% for the comparable period of 1997.
Sales and marketing - Sales and marketing expenses consist primarily of
salaries and commissions, advertising and promotional costs and travel
expenses. Sales and marketing expenses increased 27.8% to $2.3 million for the
three months ended September 30, 1998 from $1.8 million for the three months
ended September 30, 1997. As a percentage of net revenues, sales and marketing
expenses increased to 10.6% for the three months ended September 30, 1998 from
9.7% for the comparable period of 1997. The increase was primarily due to an
increase in the direct sales force and field service staff and increased
commissions based on the increase in sales.
General and administrative - General and administrative expenses consist
primarily of compensation to employees performing the Company's administrative
functions and expenditures for the Company's administrative facilities.
General and administrative expenses increased 22.2% to $1.1 million for the
three months ended September 30, 1998 from $.9 million for the three months
ended September 30, 1997. As a percentage of net revenues, general and
administrative expenses increased slightly to 5.1% for the three months ended
September 30, 1998 from 4.7% for the comparable period of 1997. The increase
is primarily due to the costs associated with being a public company,
increased receivable allowances and additional rents resulting from an
expanded facility.
Interest income - Interest income, the majority of which is exempt from
federal tax, consists primarily of income earned on the Company's cash and
cash equivalents and short-term investments. Interest income increased $.4
million to $.5 million for the three months ended September 30, 1998 from
$81,000 for the three months ended September 30, 1997. The increase is due to
the investment of the net proceeds of the September 1997 initial public
offering.
Income tax provision - For the three months ended September 30, 1998, the
Company's effective income tax rate was 38.4%, reflecting federal, state and
local taxes, partially offset by anticipated research and development credits
and a favorable tax benefit expected from the Company's foreign sales
corporation. The Company operated as a Subchapter "S" Corporation under the
Internal Revenue Code and the New York State Tax Code from 1990 until the
termination of its S Corporation status concurrent with its initial public
offering. Accordingly, the provision for income taxes for the three months
ended September 30, 1997 consists mainly of the C Corporation's pro rata share
of federal taxes calculated from the initial public offering to September 30
1997 and New York City and state franchise taxes, offset by a one time tax
benefit of $688,000 related to the recognition of the net deferred tax asset
recorded by the Company upon terminating it's S Corporation status.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997:
Net revenues - Net revenues increased 14.5% to $57.6 million for the nine
months ended September 30, 1998, from $50.3 million for the nine months ended
September 30, 1997. The increase resulted from an increase in volume, which
was partially offset by price reductions of RAID and legacy disk systems. For
the nine months ended September 30, 1998,
- 9 -
<PAGE>
increases in sales of Fibre Channel, RAID and back-up products were offset by a
decrease in net revenues from sales of legacy storage products.
Net revenues from sales of back-up products increased $4.9 million to $15.4
million for the nine months ended September 30, 1998, compared to $10.5
million for the comparable period of 1997. The increase in net revenues from
sales of back-up products is the result of the additional focus on backing-up
mission critical data by the Company's traditional customer base, and the
successful sales efforts in obtaining new customers requiring the Company's
knowledge and experience in back-up integration. Net revenues from sales of
RAID products increased $2.5 million, to $15.5 million for the nine months
ended September 30, 1998, compared to $13.0 million for the nine months ended
September 30, 1997. The increase is the result of the successful expansion of
the Company's direct sales force and the growth of the storage market. Net
revenues from sales of legacy storage products and services decreased $2.4
million to $24.2 million for the nine months ended September 30, 1998,
compared to $26.6 million for the comparable period of 1997 primarily as a
result of price reductions for SCSI-JBOD disk storage systems. The Company
generated $250,000 of net revenues and operating income from the application
of pre-1998 customer credits and deposits against advanced shipments of spares
that customers did not return. Net revenues from sales of Fibre Channel
products increased $2.0 million to $2.2 million for the nine months ended
September 30, 1998, compared to $.2 million for the nine months ended
September 30, 1997. The increase is due to growing market acceptance of the
new technology.
Gross profit - Gross profit increased 14.6% to $20.4 million for the nine
months ended September 30, 1998, from $17.8 million for the comparable period
of 1997. As a percentage of net revenues, gross profit increased slightly from
35.3% to 35.4%, principally as a result of a more favorable product mix.
Shareholder officers' compensation - Shareholder officers' compensation
decreased $6.2 million to $1.0 million for the nine months ended September 30,
1998 as compared to $7.2 million for the nine months ended September 30, 1997.
The decrease in shareholder officers' compensation is attributable to new
employment agreements entered into with the shareholder officers in connection
with the Company's initial public offering.
Engineering and product development - Engineering and product development
increased 11.1% to $2.0 million for the nine months ended September 30, 1998
from $1.8 million for the comparable period of 1997. The increase is due to an
increase in the number of employees engaged in research and development
activities. As a percentage of net revenues, engineering and product
development remained constant at 3.5% for the nine months ended September 30,
1998 and 1997.
Sales and marketing - Sales and marketing expenses increased 28.0% to $6.4
million for the nine months ended September 30, 1998 from $5.0 million for the
nine months ended September 30, 1997. As a percentage of net revenues, sales
and marketing expenses increased to 11.2% for the nine months ended September
30, 1998 from 10.0% for the comparable period of 1997. The increase is
primarily due to an increase in the direct sales force and field service staff
and increased commissions based on the increase in sales.
- 10 -
<PAGE>
General and administrative - General and administrative expenses increased
39.1% to $3.2 million for the nine months ended September 30, 1998 from $2.3
million for the nine months ended September 30, 1997. As a percentage of net
revenues, general and administrative expenses increased to 5.5% for the nine
months ended September 30, 1998 from 4.6% for the comparable period of 1997.
The increase is primarily due to the costs associated with being a public
company, increased receivables allowances and additional rents resulting from
an expanded facility.
Interest income - Interest income, the majority of which is exempt from
federal tax, consists primarily of income earned on the Company's cash and
cash equivalents and short-term investments. Interest income increased $1.3
million to $1.4 million for the nine months ended September 30, 1998 from $.1
million for the nine months ended September 30, 1997. The increase is due to
the investment of the net proceeds of the September 1997 initial public
offering.
Income tax provision - For the nine months ended September 30, 1998, the
Company's effective income tax rate was 39.1%, reflecting federal, state and
local taxes, and a one-time charge for prior years' state taxes as a result of
a voluntary disclosure agreement entered into with one state; partially offset
by anticipated research and development credits and a favorable tax benefit
expected from the Company's foreign sales corporation. The Company operated as
a Subchapter "S" Corporation under the Internal Revenue Code and the New York
State Tax Code from 1990 until the termination of its S Corporation status
concurrent with its initial public offering. Accordingly, the provision for
income taxes for the nine months ended September 30, 1997, consists mainly of
the C Corporation's pro rata share of federal taxes calculated from the
initial public offering to September 30, 1997, and New York City and state
franchise taxes, offset by a one time tax benefit of $688,000 related to the
recognition of the net deferred tax asset recorded by the Company upon
terminating it's S Corporation status.
Liquidity and Capital Resources
As of September 30, 1998, the Company had $50.7 million of cash and cash
equivalents and short-term investments and no bank indebtedness. Short-term
investments generally consist of variable rate securities that provide for
early redemption within twelve months. As of September 30, 1998, working
capital was $63.3 million. In September 1997, the Company completed an initial
public offering of its Common Stock. Proceeds of the offering, after expenses,
were approximately $56.6 million.
For the nine months ended September 30, 1998, cash provided by operating
activities was $.9 million compared to cash provided by operating activities
of $6.7 million for the same period in 1997. The decrease in net cash provided
by operating activities is mainly due to the increase in accounts receivable
during the 1998 nine month period.
Cash provided by investing activities of $3.4 million consists of the sale of
short-term investments of $3.8 million, offset partially by purchases of
property and equipment.
Cash used in financing activities for the nine months ended September 30, 1998
consists of $227,000 of distributions to the S Corporation shareholders,
representing the final
- 11 -
<PAGE>
distribution for taxed, but previously undistributed, S Corporation earnings;
offset by proceeds from the exercise of stock options and from the Company's
Employee Stock Purchase Plan.
In October 1997, the Company obtained a $10 million revolving line of credit
facility from a commercial bank. The Company has not made any borrowings under
this facility. The line of credit was renewed in May 1998 for one year.
The Company presently expects that cash and cash equivalents and short-term
investments, cash generated from operations and availability under its
revolving line of credit, will be sufficient to meet its foreseeable operating
and capital requirements. However, the Company may need additional capital to
pursue acquisitions or significant capital improvements, neither of which is
currently contemplated.
Year 2000
The "Year 2000 problem" describes the world-wide concern that certain computer
applications, which use two digits rather than four to represent dates, will
interpret the year 2000 as the year 1900 and malfunction on January 1, 2000 or
thereafter. In this section, Box Hill summarizes the anticipated impact of the
Year 2000 on the Company.
About this Statement
- --------------------
To the extent that this statement contradicts earlier statements made by Box
Hill, this statement supercedes those earlier statements. Further, this
statement is subject to change. Readers should also be aware that Box Hill's
evaluation of certain aspects of its Year 2000 readiness is based on
statements by other parties. Box Hill often cannot verify the veracity of
those statements, which may have been made in error.
Box Hill's Products
- -------------------
The Company believes the current revision of all products manufactured by Box
Hill will function normally after the Year 2000.
Most of Box Hill's products do not keep track of dates as part of their normal
operation and therefore are Year 2000 compliant by nature. Products currently
manufactured by Box Hill that use dates are Box Hill's RAID Box 5300 Turbo +
and RAID Box 5300 Turbo HS systems. While these products keep track of dates
for system management purposes, their normal function is not affected by
dates. The systems only note the date when it sends a message (usually read by
a member of a MIS department) about the system. That message displays the
date, for informational purposes only, in a two-digit form. After the year
2000, that two digit number will read 00, 01, and so on. By October 1999, Box
Hill expects to have available a new version of Firmware which customers can
download themselves, free of charge. Firmware allows the system to display the
year in a four-digit format. Customers, and not Box Hill, are responsible for
implementation of the new version of Firmware.
Box Hill does not know of any earlier products it has manufactured that will
not operate normally after the year 2000. However, the Company has not
evaluated all such products.
- 12 -
<PAGE>
The Company continues to answer Year 2000 questions about specific products
previously manufactured by Box Hill. Box Hill does not warrant or represent that
obsolete, unsupported Box Hill products are Year 2000 compliant, and Box Hill
will not support such products for Year 2000 purposes.
The rights and remedies of customers as to Year 2000 date data functionality
as to any Box Hill products are governed by applicable law and agreements
between customers and Box Hill. The statements made herein by Box Hill do not
enlarge the rights and remedies of any customers as to Year 2000 date data
functionality and Box Hill makes no warranties or representations by virtue of
this disclosure or otherwise regarding Year 2000 date data functionality.
Box Hill's Internal Systems
- ---------------------------
Box Hill has evaluated its information technology infrastructure, made
modifications and identified necessary upgrades. Box Hill expects that its
infrastructure will be Year 2000 compliant by the third quarter of 1999. Box
Hill also has evaluated or received information regarding its non-information
technology infrastructure (office building systems, copiers, telephone system,
etc.) for Year 2000 readiness and believes those systems are Year 2000
compliant. The machinery used by Box Hill to manufacture its products does not
use dates, and is Year 2000 compliant by nature.
Readiness of Third Parties and Third Party Products Resold or Licensed by Box
- -----------------------------------------------------------------------------
Hill
- ----
Box Hill is in the process of evaluating, for Year 2000 compliance, the
products manufactured by third parties that Box Hill either resells or
licenses or uses to manufacture its own products. However, Box Hill does not
and will not take responsibility for Year 2000 compliance of such products,
and continues to direct customers to the respective manufacturers of those
products for final Year 2000 compliance information and assurances.
Box Hill has not evaluated other third party products which are not resold or
licensed by Box Hill but which may, in some way, interface or interconnect
with Box Hill products or products manufactured by third parties that Box Hill
either resells or licenses. Box Hill does not, and will not, take
responsibility for Year 2000 compliance of such products.
Box Hill is in the process of requesting information about the internal Year
2000 readiness of those third parties that supply Box Hill with key products
and services. To date, all third parties contacted have stated they believe
their products will be compliant. However, Box Hill is incapable of testing or
knowing the accuracy of such statements and has not received information from
all such third parties.
- 13 -
<PAGE>
Costs Associated with Year 2000 Compliance
- ------------------------------------------
To date, Box Hill has not hired any additional employees or made any
significant purchases to carry out its Year 2000 compliance program. At this
time, the Company is not aware of any material future expenses that will be
required to enable Year 2000 compliance.
Risks Associated with the Year 2000
- -----------------------------------
The full impact of the Year 2000 will not be known until January 1, 2000.
Again, the Company is not aware, at this time, of any Year 2000 non-compliance
that will not be substantially corrected by the Year 2000 and that will
materially affect the Company. However, some risks that the Company may
encounter include: the failure of its internal information system, limitations
in its work environment, a slow down in orders due to customers' business
failures, a slow down in customers' ability to make payments, the inability of
suppliers to provide necessary materials, the inability to receive heat,
electricity, water treatment services or other products or services, and the
inability of carriers to ship Box Hill's products to customers. Even if Box
Hill and its products are ready for the Year 2000, Box Hill still may be
unable to conduct business after January 1, 2000 due to failures beyond it's
control; such as failures of transportation, local and nationwide, banking
systems, municipal services and other parties.
Contingency Plans
- -----------------
Box Hill has certain contingency plans in place to conduct business in the
event of Year 2000 malfunctions when Box Hill cannot make any representation
or warranty as to at this point. If certain third party suppliers become
unable to provide materials or services, Box Hill will utilize substitute
providers who have been identified to provide the necessary materials and
services. Should Box Hill's internal information systems fail, Box Hill plans
to manually perform the paperwork necessary to conduct business.
- 14 -
<PAGE>
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings
The Company is involved in certain legal actions and claims arising
in the ordinary course of business. Management believes that the
outcome of such litigation and claims will not have a material
adverse effect on the Company's financial position or results of
operations.
Item 2. Changes in Securities
None.
Item 3. Defaults upon senior securities
None.
Item 4. Submission of matters to a vote of security holders
None.
Item 5. Other information
None.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
- 15 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on behalf by the undersigned, thereunto duly authorized.
BOX HILL SYSTEMS
Date: November 13, 1998 By /s/ Philip Black
-----------------------------
Philip Black
Chief Executive Officer
Pursuant to the requirments of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Date: November 13, 1998 By /s/ Philip Black
-----------------------------
Philip Black
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 By /s/ R. Robert Rebmann, Jr.
-----------------------------
R. Robert Rebmann, Jr.
Chief Financial Officer and Treasurer
(Principal Financial Officer)
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 45,249
<SECURITIES> 5,500
<RECEIVABLES> 20,994
<ALLOWANCES> (537)
<INVENTORY> 9,049
<CURRENT-ASSETS> 82,277
<PP&E> 2,765
<DEPRECIATION> (1,450)
<TOTAL-ASSETS> 83,726
<CURRENT-LIABILITIES> 19,026
<BONDS> 0
0
0
<COMMON> 143
<OTHER-SE> 64,275
<TOTAL-LIABILITY-AND-EQUITY> 83,726
<SALES> 57,565
<TOTAL-REVENUES> 57,565
<CGS> 37,215
<TOTAL-COSTS> 49,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,440)
<INCOME-PRETAX> 9,199
<INCOME-TAX> 3,598
<INCOME-CONTINUING> 5,601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,601
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.37
</TABLE>
