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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 March 31, 1999
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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.
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(Exact name of registrant as specified in its charter)
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<S> <C>
New York 13-3460176
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
161 Avenue of the Americas, New York, NY 10013
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(Address of principal executive offices) (Zip Code)
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(212) 989-4455
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(Registrant's telephone number, including area code)
N/A
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(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, 14,361,328 shares outstanding as of May 4, 1999.
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BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
INDEX
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Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -- March 31, 1999
and December 31, 1998 1
Condensed Consolidated Statements of Income -- Three
months ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows --
Three months ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon senior securities 14
Item 4. Submission of matters to a vote of security holders 14
Item 5. Other information 14
Item 6. Exhibits and reports on Form 8-K 15
Signatures 16
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Item 1. Condensed Consolidated Financial Statements
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
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<CAPTION>
March 31, December 31,
1999 1998
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $56,603 $54,214
Short-term investments .............................. 6,000 3,500
Accounts receivable, net ............................ 11,207 13,601
Inventories ......................................... 7,648 8,091
Prepaid expenses and other .......................... 1,428 1,220
Prepaid income taxes ................................ 389 737
Deferred income taxes ............................... 984 984
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Total current assets ....................... 84,259 82,347
Property and equipment, net ............................. 1,275 1,331
Deferred income taxes ................................... 191 191
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$85,725 $83,869
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $10,921 $ 9,796
Accrued expenses .................................... 3,765 4,008
Customer deposits ................................... 2,053 2,173
Deferred revenue .................................... 2,938 2,455
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Total current liabilities ................. 19,677 18,432
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Deferred rent ........................................... 292 287
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Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued ........................... -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 14,358,761 and 14,327,081 shares issued
and outstanding ................................... 144 143
Additional paid-in capital .......................... 57,198 57,157
Retained earnings ................................... 8,414 7,850
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Total shareholders' equity ................ 65,756 65,150
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$85,725 $83,869
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The accompanying notes are an integral part of these statements.
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BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share information)
(unaudited)
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Three Months Ended
March 31,
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1999 1998
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Net revenue................................................. $ 14,285 $16,045
Cost of goods sold ......................................... 9,393 10,519
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Gross profit ...................................... 4,892 5,526
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Operating expenses:
Engineering and product development .................... 673 646
Sales and marketing .................................... 2,118 1,999
General and administrative ............................. 1,626 1,282
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4,417 3,927
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Operating income .................................. 475 1,599
Interest income ............................................ 442 506
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Income before income taxes ........................ 917 2,105
Income tax provision ....................................... 353 810
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Net income.................................................. $ 564 $ 1,295
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Basic net income per share.................................. $ .04 $ .09
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Diluted net income per share................................ $ .04 $ .09
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</TABLE>
The accompanying notes are an integral part of these statements.
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BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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<CAPTION>
Three Months Ended
March 31,
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1999 1998
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Operating activities:
Net income .......................................................... $ 564 $ 1,295
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization ................................. 90 79
Other ......................................................... 3 5
Changes in assets and liabilities--
Accounts receivable ....................................... 2,394 158
Inventories ............................................... 443 (877)
Prepaid expenses and other ................................ (208) (74)
Prepaid income taxes ...................................... 348 --
Accounts payable .......................................... 1,125 512
Accrued expenses .......................................... (243) (193)
Customer deposits ......................................... (120) 282
Deferred revenue .......................................... 483 133
Income taxes payable ...................................... -- 61
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Net cash provided by operating activities ........... 4,879 1,381
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Investing activities:
(Purchase) sale of short-term investments ........................... (2,500) 4,405
Purchases of property and equipment ................................. (34) (172)
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Net cash (used in) provided by investing
activities ...................................... (2,534) 4,233
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Financing activities:
Proceeds from exercise of stock options ............................. 19 57
Proceeds from Employee Stock Purchase Plan .......................... 25 75
Distributions to S Corporation shareholders ......................... -- (227)
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Net cash provided by (used in) financing
activities ...................................... 44 (95)
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Net increase in cash and cash equivalents ............................... 2,389 5,519
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Cash and cash equivalents, beginning of period .......................... 54,214 40,897
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Cash and cash equivalents, end of period ................................ $ 56,603 $ 46,416
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Supplemental cash flow disclosure:
Cash paid for income taxes .......................................... $ -- $ 751
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</TABLE>
The accompanying notes are an integral part of these statements.
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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 ("Box Hill" or 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. Certain reclassifications have been made to prior year
financial statements to conform with current year financial statement
presentation.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
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):
Three Months Ended
March 31,
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1999 1998
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Shares used in computing basic net income per
share .............................................. 14,341 14,221
Dilutive effect of options ............................. 657 844
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Shares used in computing diluted net income per
share .............................................. 14,998 15,065
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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 of 1986, as amended, 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. Subsequent Event:
On April 30, 1999, Box Hill announced that it had signed a merger agreement with
Artecon, Inc. ("Artecon") for a tax-free, stock-for-stock transaction, which is
intended to be accounted for as a pooling of interests. Under the terms of the
agreement and plan of merger dated April 29, 1999, each outstanding share of
Artecon common stock will be converted into 0.40 (the "Exchange Rate") of a
share of Box Hill common stock (the "Merger"). Outstanding options to purchase
Artecon common stock will be exchanged for options to purchase Box Hill common
stock, and the exercise price and number of shares underlying such options will
be adjusted to give effect to the Exchange Rate. Unless converted in accordance
with its terms prior to the consummation of the Merger, each outstanding share
of Artecon preferred stock will be converted into the right to receive that
number of shares of Box Hill common stock equal to the quotient obtained by
dividing (i) (1) $4,988,318, divided by (2) the closing sales price of Box Hill
common stock on the last trading day immediately prior to the closing of the
merger, by (ii) 2,494,159. Based on Artecon's current number of outstanding
common and preferred shares, Box Hill will issue approximately 9.5 million new
shares to Artecon shareholders to complete the transaction. The Merger is
subject to customary closing conditions as well as certain regulatory approval
and approval by the shareholders of both Box Hill and Artecon. The Merger has
been approved unanimously by the Boards of Directors of both Box Hill and
Artecon and a majority of the shareholders of both companies have agreed to vote
in favor of the Merger. The parties anticipate the transaction to close during
the third quarter of 1999.
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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, any future
results of the Merger or the anticipated consummation of the Merger, 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, increasing
competition 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 its new products, including Fibre
Channel and Storage Area Network (SAN) technologies, obsolete and unmarketable.
Such constant technological changes also make accurate market predictions
difficult. In recent periods, the Company's revenue and earnings results have
fallen short of market projections; in this period, although earnings results
fell within the market projections, the Company's revenue fell short of market
projections, and such shortfalls could occur again in the future. The Company
relies on other companies to supply components of its products, and certain
products that it resells, which 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 revenue to date has been derived from sales to customers in
the financial services industry and the telecommunications industry.
Historically, a majority of the Company's net revenue 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 telecommunications
industries. The Company's future operating results depend in part upon its
ability to attract, 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 measures may prove to be inadequate.
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Although the majority of the shareholders of both Box Hill and Artecon have
consented to the Merger, there are certain risks involved with the anticipated
consummation of the Merger, including, among others, the receipt and timing of
regulatory approvals, the occurrence or non-occurrence of other required closing
conditions, and the combined company's ability to integrate the combined
businesses following the Merger.
In the course of business, the Company is subject to legal proceedings and
claims, both asserted or unasserted. The Company and its principal officers and
directors were named defendants in shareholder lawsuits filed on and after
December 4, 1998, which allege various securities law violations and seek
monetary damages. See "Part II Item 1. Legal Proceedings".
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
that occur or circumstances that exist after the date on which they are made.
Overview
Box Hill is an independent provider of high performance data storage and Storage
Area Network ("SAN") solutions. The Company designs, manufactures, markets and
supports data storage systems, and markets and supports data storage back-up
systems for the Open Systems computing environment. For financial reporting
purposes, the Company operates in one business segment. In the United States,
the Company employs a direct marketing strategy aimed at data-intensive
industries. Targeted industries, to date, include financial services,
telecommunications, health care, government/defense and academia. The Company's
international strategy is to use distributors located outside of the United
States for product distribution. 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 believes that it has been able to leverage its
position as a company focused exclusively on storage solutions to bring new
products to market faster than its competitors. Box Hill has financed its growth
primarily with cash generated from operations and from the Offering.
Box Hill's manufacturing operations consist primarily of assembly and
integration of components and subassemblies into the Company's products, with
certain of those components and subassemblies manufactured by independent
contractors. Generally the Company 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.
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Results of Operations
The following table sets forth certain items from the Company's income
statements as a percentage of net revenue for the periods indicated:
Three Months Ended
March 31,
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1999 1998
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Net revenue ............................ 100.0% 100.0%
Cost of goods sold ..................... 65.8 65.6
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Gross profit .................. 34.2 34.4
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Operating expenses:
Engineering and product
development ................... 4.7 4.0
Sales and marketing ............... 14.8 12.5
General and administrative ........ 11.4 7.9
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Total operating expenses ...... 30.9 24.4
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Operating income .................. 3.3% 10.0%
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Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998:
Net revenue - Net revenue of approximately $14.3 million for the three months
ended March 31, 1999, decreased 10.6% from approximately $16.0 million for the
three months ended March 31, 1998. The decrease primarily resulted from a
decrease in volume of back-up products and overall price reductions of RAID and
legacy (SCSI-JBOD) disk storage systems, partially offset by a slight overall
increase in volume for these systems. Net revenue from sales of Fibre Channel
and Storage Area Network (SAN) Networking equipment increased, while net revenue
from sales of legacy storage products, RAID products and back-up products
decreased.
Net revenue from sales of Fibre Channel and SAN Networking equipment increased
400% to $1.0 million for the three months ended March 31, 1999, compared to $0.2
million for the comparable period of 1998. The increase is due to the
introduction of SAN's and growing market acceptance of the new technology,
partially offset by price reductions. Net revenue from sales of RAID products
decreased by $0.3 million to $2.4 million for the three months ended March 31,
1999, compared to $2.7 million for the three months ended March 31, 1998, due to
price reductions and slower than anticipated growth, particularly in the
financial services sector and in the Northeast region of the country. Net
revenue from sales of legacy storage products and services decreased $1.0
million to $6.4 million for the three months ended March 31, 1999, compared to
$7.4 million for the comparable period of 1998, also due to price reductions and
slower than anticipated growth, particularly in the financial services sector
and in the Northeast region of the country. Net revenue from back-up products
decreased by $1.2 million, to $4.5 million for the three months ended March 31,
1999, compared to $5.7 million for the three months ended March 31, 1998. The
decrease is due to a decrease in volume for these systems.
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Gross profit - Gross profit decreased 10.9% to $4.9 million for the three months
ended March 31 1999, from $5.5 million for the comparable period of 1998. As a
percentage of net revenue, gross profit decreased slightly from 34.4% to 34.2%.
The decrease was a result of a different product mix.
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. Due to an increase in the
number of employees engaged in research and development, partially offset by a
decrease in research and development equipment purchases, engineering and
product development expenses increased 16.7% to $0.7 million for the three
months ended March 31, 1999, from $0.6 million for the same period in 1998. As a
percentage of net revenue, engineering and product development expenses
increased to 4.7% for the three months ended March 31, 1999 from 4.0% for the
comparable period of 1998.
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 5.0% to $2.1 million for the three months ended
March 31, 1999 from $2.0 million for the three months ended March 31, 1998. As a
percentage of net revenue, sales and marketing expenses increased to 14.8% for
the three months ended March 31, 1999 from 12.5% for the comparable period of
1998. The increase was primarily due to an increase in the direct sales force
and field service staff offset by decreased commissions based on the decrease in
revenue.
General and administrative - General and administrative expenses consist
primarily of compensation to the officers and employees performing the Company's
administrative functions and expenditures for the Company's administrative
facilities. General and administrative expenses increased 23.1% to $1.6 million
for the three months ended March 31, 1999 from $1.3 million for the three months
ended March 31, 1998. As a percentage of net revenue, general and administrative
expenses increased to 11.4% for the three months ended March 31, 1999 from 7.9%
for the comparable period of 1998. The increase is primarily due to additional
rents and office expenses from expanded facilities, professional fees related to
the shareholder class action lawsuit described herein, insurance associated with
being a public company, payroll increases and additional staff seminars and
training.
Interest income - Interest income, the majority of which is exempt from federal
income taxes, consists primarily of income earned on the Company's cash and cash
equivalents and short-term investments. Interest income decreased $0.1 million
to $0.4 million for the three months ended March 31, 1999 from $0.5 million for
the three months ended March 31, 1998 as a result of general short-term interest
rate fluctuations.
Income tax provision - The Company's effective income tax rate was 38.5% for the
three months ended March 31, 1999 and 1998, reflecting federal, state and local
taxes, partially
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offset by research and development credits and a favorable tax benefit from the
Company's foreign sales corporation.
Liquidity and Capital Resources
As of March 31, 1999, the Company had $62.6 million of cash and cash equivalents
and short-term investments and no bank indebtedness. As of March 31, 1999,
working capital was $64.6 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 three months ended March 31, 1999, cash provided by operating activities
was $4.9 million compared to cash provided by operating activities of $1.4
million for the same period in 1998. The increase in net cash provided by
operating activities is mainly due to decreases in accounts receivable,
inventory, prepaid taxes, and increases in accounts payable and deferred
revenue, offset by decreases in net income and customer deposits.
Cash used in investing activities of $2.5 million primarily consists of the
purchase of short-term investments. Short-term investments generally consist of
variable rate securities that provide for early redemption within twelve months.
Proceeds from the exercise of stock options under the Company's 1995 Stock
Incentive Plan and from the Company's 1997 Employee Stock Purchase Plan produced
$44 thousand for the three months ended March 31, 1999.
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. Borrowings under the facility will be collateralized by a pledge
of substantially all of the Company's assets and borrowings greater than $5
million will also be required to be secured by short-term investments.
Additionally, the Company is required to comply with certain financial
covenants. The line of credit was renewed May 1998.
The Company currently 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 for the next twelve months. However, the Company may need
additional capital to pursue acquisitions, other than the Merger, or significant
capital improvements, neither of which is currently contemplated.
Competitive pricing pressures exist in the data storage market, and have had and
may in the future have an adverse effect on the Company's revenues and earnings.
Box Hill believes that pricing pressures are likely to continue as competitors
of the Company develop more competitive product offerings.
Many of the Company's current and potential competitors are significantly larger
than Box Hill and have significantly greater financial, technical, marketing,
purchasing, and other resources than the Company, and, as a result, may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements, or devote greater
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resources to the development, promotion and sale of products than the Company,
or to deliver competitive products at a lower end-user price. The Company also
expects that competition will increase as a result of industry consolidations.
Current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Increased competition is likely to result in price reduction, reduced operating
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results or financial condition.
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
Evaluations concerning the Year 2000 problem are periodically evolving.
Accordingly, to the extent that this statement contradicts earlier statements
made by Box Hill, this statement supersedes those prior statements. Readers
should also be aware the 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 version 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 not expected to pose a Year 2000 problem. 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 system only notes 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. Box Hill offers a new version of
Firmware that customers can download themselves, free of charge, which 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 of material significance that it
has manufactured that will not operate normally after the year 2000. However,
the Company has not evaluated all such products. 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.
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<PAGE>
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 to its customers and
suppliers by virtue of this disclosure or otherwise regarding Year 2000 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 therefore, is Year 2000 compliant by nature.
Readiness of Third Parties and Third Party Products Resold or Licensed by Box
Hill
Box Hill has requested confirmation of the Year 2000 readiness of third party
products of material significance to Box Hill which Box Hill currently resells,
licenses or uses to manufacture its own products. However, Box Hill does not and
will not take responsibility for the 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 confirmed the readiness of all third party products resold or
integrated by Box Hill and has not confirmed the readiness of products which are
not resold or licensed by Box Hill but which may, in some way, interface or
interconnect with Box Hill products. 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 third parties that supply Box Hill with key products and
services. To date, all third parties contacted have stated they believe they
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.
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.
- 12 -
<PAGE>
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 systems, 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 its control, such as failures of
transportation, local and nationwide, banking systems and municipal services.
Contingency Plans
Box Hill has certain contingency plans in place to conduct business in the event
of Year 2000 malfunctions. 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk:
There have been no significant changes to the quantitative and qualitative
information disclosed in the Company's Form 10-K for the fiscal year ended
December 31, 1998. However, the average interest rate earned on the Company's
cash equivalents and short-term investments decreased from 3.6% for the year
1998 to 3.0% during the three months ended March 31, 1999, resulting in a
decrease in interest income of approximately $42 thousand for the three months
ended March 31, 1999 compared to the three months ended December 31, 1998. The
Company does not believe these changes will have a significant impact on its
liquidity and capital resources.
- 13 -
<PAGE>
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings
Four putative shareholder class action law suits were filed, and have since been
consolidated into a single action, against Box Hill Systems Corp., Philip Black,
Carol Turchin, Benjamin Monderer, Mark Mays, and the underwriters of the
Company's September 16, 1997 initial public offering (the "Offering") in the
United States District Court for the Southern District of New York. The putative
class actions were filed on behalf of purchasers of the stock of the Company
during the period between September 16, 1997 and April 14, 1998. Plaintiffs
allege that, in violation of federal securities laws, defendants made
misrepresentations of material fact and omitted material facts required to be
disclosed in the Company's registration statement and prospectus issued in
connection with the Offering and in statements allegedly made by the Company and
certain of its officers and directors subsequent to the Offering.
On May 3, 1999, the Company filed a motion to dismiss the consolidated
complaint. The motion has not yet been ruled upon. The Company believes that it
has meritorious defenses to plaintiff's claims and intends to vigorously defend
against those claims. However, the Company expects to incur significant legal
expense in 1999 defending this litigation. Such defense costs, and other amounts
incurred in connection with this litigation, will be expensed as incurred and
will reduce the Company's 1999 results.
In addition to the complaints discussed above, the Company is subject to various
legal proceedings and claims against the Company, asserted or unasserted, which
arise in the ordinary course of business. While the outcome of the claims
against the Company cannot be predicted with certainty, management believes that
such other 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.
- 14 -
<PAGE>
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on May 7, 1999 describing the Merger Agreement
executed among Box Hill, BH Acquisition Corp. and Artecon.
- 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 CORP.
Date: May 14, 1999 By /s/ Philip Black
-------------------------------------
Philip Black
Chief Executive Officer
Pursuant to the requirements 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: May 14, 1999 By /s/ Philip Black
-------------------------------------
Philip Black
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By /s/ R. Robert Rebmann, Jr.
-------------------------------------
R. Robert Rebmann, Jr.
Chief Financial Officer and Treasurer
(Principal Financial Officer)
- 16 -
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